Document ID: SEC-2016-2058-0001
Agency: sec
Document Type: Notice
Title: Joint Industry Plans: National Market System Plan Governing the Consolidated Audit Trail
Posted Date: 2016-11-23T05:00Z

[Federal Register Volume 81, Number 226 (Wednesday, November 23, 2016)]
[Notices]
[Pages 84696-85035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27919]

[[Page 84695]]

Vol. 81

Wednesday,

No. 226

November 23, 2016

Part II

Book 2 of 2 Books

Pages 84695-85104

 Securities and Exchange Commission

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 Joint Industry Plan; Order Approving the National Market System Plan 
Governing the Consolidated Audit Trail; Notice

  Federal Register / Vol. 81 , No. 226 / Wednesday, November 23, 2016 / 
Notices  

[[Page 84696]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79318; File No. 4-698]

Joint Industry Plan; Order Approving the National Market System 
Plan Governing the Consolidated Audit Trail

November 15, 2016.

SUPPLEMENTARY INFORMATION: 

Table of Contents

Supplementary Information
I. Introduction
II. Background
III. Description of the Proposed Plan
    1. LLC Agreement
    2. Participants
    3. Management
    4. Initial Plan Processor Selection
    5. Functions and Activities of the CAT System
    6. Financial Matters
    7. Amendments
    8. Compliance Rule Applicable to Industry Members
    9. Plan Appendices
    10. Reporting Procedures
    11. Timeliness of Data Reporting
    12. Uniform Format
    13. Symbology
    14. CAT-Reporter-ID
    15. Customer-ID
    16. Order Allocation Information
    17. Options Market Maker Quotes
    18. Primary Market Transactions, Debt Securities and Futures
    19. Error Rates
    20. Retirement of Existing Trade and Order Data Rules and 
Systems
    21. Regulatory Access
    22. Upgrades and New Functionalities
    23. Business Continuity and Disaster Recovery
    24. Records and Accounting and Dissolution and Termination of 
the Company
    25. Security of Data
    26. Governing or Constituent Documents
    27. Development and Implementation Phases
    28. Written Understanding or Agreements Relating To 
Interpretation of, or Participation in, the Plan
    29. Dispute Resolution
IV. Discussion and Commission Findings
    A. Definitions, Effectiveness of Agreement, and Participation 
(Articles I, II, and III)
    B. Management of the Company (Article IV)
    1. Operating Committee
    2. Advisory Committee
    3. Officers of the Company
    4. Additional Governance Provisions
    C. Plan Processor Selection (Article V)
    D. Functions and Activities of the CAT System (Article VI)
    1. Data Recording and Reporting Requirements
    2. Format
    3. Reporting Timelines
    4. Data Elements
    5. Symbology
    6. Security of CAT Data
    7. Personally Identifiable Information
    8. Implementation Schedule
    9. Retirement of Existing Trade and Order Data Rules and Systems
    10. Primary Market Transactions and Futures
    11. Error Rate
    12. Business Continuity and Disaster Recovery
    13. Business Clock Synchronization and Timestamp Granularity
    14. Upgrades and New Functionalities
    15. Technical Specifications
    E. Capital Accounts, Allocations of Income and Loss, and 
Distributions (Articles VII and VIII)
    F. Funding of the Company (Article XI)
    1. Funding Model Generally
    2. Funding Model's Allocation of Costs
    3. Message Traffic and Market Share Distinction
    4. Transparency and Alternatives to the Funding Model
    5. Miscellaneous
    G. Dispute Resolution
    H. Written Assessments, Audits and Reports
V. Economic Analysis
    A. Introduction
    B. Summary of Expected Economic Effects
    C. Framework for Economic Analysis
    1. Economic Framework
    2. Existing Uncertainties
    D. Baseline
    1. Current State of Regulatory Activities
    2. Current State of Trade and Order Data
    E. Benefits
    1. Improvements in Data Qualities
    2. Improvements to Regulatory Activities
    3. Other Provisions of the CAT NMS Plan
    F. Costs
    1. Analysis of Expected Costs
    2. Aggregate Costs to Industry
    3. Further Analysis of Costs
    4. Expected Costs of Security Breaches
    5. Second Order Effects
    G. Efficiency, Competition, and Capital Formation
    1. Competition
    2. Efficiency
    3. Capital Formation
    4. Related Considerations Affecting Competition, Efficiency and 
Capital Formation
    H. Alternatives
    1. Timestamp Granularity
    2. Error Rate
    3. Error Correction Timeline
    4. Requiring Listing Exchange Symbology
    5. Clock Synchronization Logging Procedures
    6. Data Accessibility Standards
    7. Clock Synchronization Hours
    8. Primary Market Transactions
    9. Periodic Updates to Customer Information
    10. Bulk Data Downloads by CAT Reporters
    11. Alternatives to the CAT NMS Plan
    12. Alternatives Discussed in the CAT NMS Plan
VI. Paperwork Reduction Act
    A. Summary of Collection of Information Under Rule 613
    1. Central Repository
    2. Data Collection and Reporting
    3. Collection and Retention of National Best Bid and National 
Best Offer, Last Sale Data and Transaction Reports
    4. Surveillance
    5. Participant Rule Filings
    6. Document on Expansion to Other Securities
    7. Written Assessment of Operation of the Consolidated Audit 
Trail
    B. Proposed Use of Information
    1. Central Repository
    2. Data Collection and Reporting
    3. Collection and Retention of NBBO, Last Sale Data and 
Transaction Reports
    4. Surveillance
    5. Document on Expansion to Other Securities
    6. Written Assessment of Operation of the Consolidated Audit 
Trail
    C. Respondents
    1. National Securities Exchanges and National Securities 
Associations
    2. Members of National Securities Exchanges and National 
Securities Association
    D. Total Initial and Annual Reporting and Recordkeeping Burden
    1. Burden on National Securities Exchanges and National 
Securities Associations
    2. Burden on Members of National Securities Exchanges and 
National Securities Associations
    E. Summary of Collection of Information Under the CAT NMS Plan, 
as Amended by the Commission
    1. One-Time Reports
    2. Non-Report Commission-Created Information Collections
    F. Proposed Use of Information Under the CAT NMS Plan, as 
Amended by the Commission
    1. Independent Audit of Expenses Incurred Prior to the Effective 
Date
    2. Review of Clock Synchronization Standards
    3. Coordinated Surveillance Report
    4. Assessment of Industry Member Bulk Access to Reported Data
    5. Assessment of Errors in Customer Information Fields
    6. Report on Impact of Tiered Fees on Market Liquidity
    7. Assessment of Material Systems Change on Error Rate
    8. Financial Statements
    9. Background Checks
    G. Total Initial and Annual Reporting and Recordkeeping Burden 
of Information Collection Under the CAT NMS Plan, as Amended by the 
Commission
    1. Burden on National Securities Exchanges and National 
Securities Associations
    2. Request for Comment
    H. Collection of Information Is Mandatory
    I. Confidentiality
    J. Recordkeeping Requirements
VII. Conclusion

I. Introduction

    On February 27, 2015, pursuant to Section 11A of the Securities 
Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\

[[Page 84697]]

and Rules 608 and 613 of Regulation NMS thereunder,\2\ BATS Exchange, 
Inc. (n/k/a Bats BZX Exchange, Inc.), BATS-Y Exchange, Inc. (n/k/a Bats 
BYX Exchange, Inc.), BOX Options Exchange LLC, C2 Options Exchange, 
Incorporated, Chicago Board Options Exchange, Incorporated, Chicago 
Stock Exchange, Inc., EDGA Exchange, Inc. (n/k/a Bats EDGA Exchange, 
Inc.), EDGX Exchange, Inc. (n/k/a Bats EDGX Exchange, Inc.), Financial 
Industry Regulatory Authority, Inc. (``FINRA''), International 
Securities Exchange, LLC, ISE Gemini, LLC, Miami International 
Securities Exchange LLC, NASDAQ OMX BX, Inc. (n/k/a NASDAQ BX, Inc.), 
NASDAQ OMX PHLX LLC (n/k/a NASDAQ PHLX LLC), The NASDAQ Stock Market 
LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE 
MKT LLC, and NYSE Arca, Inc. (collectively, ``self-regulatory 
organizations'', ``SROs'' or ``Participants''), filed with the 
Securities and Exchange Commission (``Commission'' or ``SEC'') a 
National Market System (``NMS'') Plan Governing the Consolidated Audit 
Trail (the ``CAT NMS Plan,'' ``CAT Plan'' or ``Plan'').\3\ The SROs 
filed amendments to the CAT NMS Plan on December 24, 2015, and on 
February 8, 2016.\4\ The CAT NMS Plan, as amended, was published for 
comment in the Federal Register on May 17, 2016.\5\
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    \1\ 15 U.S.C. 78k-1.
    \2\ 17 CFR 242.608.
    \3\ See Letter from Participants to Brent J. Fields, Secretary, 
Commission, dated February 27, 2015. Pursuant to Rule 613, the SROs 
were required to file the CAT NMS Plan on or before April 28, 2013. 
At the SROs' request, the Commission granted exemptions to extend 
the deadline for filing the CAT NMS Plan to December 6, 2013, and 
then to September 30, 2014. See Securities Exchange Act Release Nos. 
69060 (March 7, 2013), 78 FR 15771 (March 12, 2013); 71018 (December 
6, 2013), 78 FR 75669 (December 12, 2013). The SROs filed the CAT 
NMS Plan on September 30, 2014 (the ``Initial CAT NMS Plan''). See 
Letter from the SROs, to Brent J. Fields, Secretary, Commission, 
dated September 30, 2014. The CAT NMS Plan filed on February 27, 
2015, was an amendment to and replacement of the Initial CAT NMS 
Plan.
    \4\ On December 24, 2015, the SROs submitted an Amendment to the 
CAT NMS Plan. See Letter from Participants to Brent J. Fields, 
Secretary, Commission, dated December 23, 2015. On February 9, 2016, 
the Participants filed with the Commission an identical, but 
unmarked, version of the February 27, 2015 CAT NMS Plan, as modified 
by the December 24, 2015 Amendment, as well as a copy of the request 
for proposal issued by the Participants to solicit Bids from parties 
interested in serving as the Plan Processor for the consolidated 
audit trail. See Letter from Participants to Brent J. Fields, 
Secretary, Commission, dated February 8, 2016.
    \5\ The Commission voted to publish the February 9, 2016 version 
of the CAT NMS Plan for public comment on April 27, 2016, and this 
version of the Plan was published in the Federal Register on May 17, 
2016. See Securities Exchange Act Release No. 77724, 81 FR 30614 
(the ``Notice''). Unless the context otherwise requires, the ``CAT 
NMS Plan'' shall refer to the February 27, 2015 CAT NMS Plan, as 
modified by the December 24, 2015 Amendment and published for 
comment on May 17, 2016. The Commission notes that the application 
of ISE Mercury, LLC (``ISE Mercury'') for registration as a national 
securities exchange was granted on January 29, 2016. See Securities 
Exchange Act Release No. 76998 (January 29, 2016), 81 FR 6066 
(February 4, 2016). In addition, the application of the Investors 
Exchange LLC (``IEX'') for registration as a national securities 
exchange was granted on June 17, 2016. See Securities Exchange Act 
Release No. 78101 (June 17, 2016), 81 FR 41142 (June 23, 2016). ISE 
Mercury and IEX will become Participants in the CAT NMS Plan and are 
thus accounted for as Participants for purposes of this Order.
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    The Commission received 24 comment letters in response to the CAT 
NMS Plan.\6\ On July 29, 2016, the Commission extended the deadline for 
Commission action on the CAT NMS Plan and designated November 10, 2016 
as the new date by which the Commission would be required to take 
action.\7\ On September 2, 2016, the Participants submitted a response 
to the comment letters that the Commission received in response to the 
CAT NMS Plan.\8\ The Participants submitted additional response letters 
on September 23, 2016 and October 7, 2016.\9\ On November 2 and 14, 
2016, the Participants submitted additional letters.\10\ This Order 
approves the CAT NMS Plan, with limited changes as described in detail 
below. The Commission concludes that the Plan, as amended, 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. A copy of the CAT 
NMS Plan, as adopted, is attached as Exhibit A hereto.
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    \6\ See Letters to Brent J. Fields, Secretary, Commission, from 
Kathleen Weiss Hanley, Bolton-Perella Chair in Finance, Lehigh 
University, et al., dated July 12, 2016 (``Hanley Letter''); 
Courtney Doyle McGuinn, FIX Operations Director, FIX Trading 
Community, dated July 14, 2016 (``FIX Trading Letter''); Kelvin To, 
Founder and President, Data Boiler Technologies, LLC, dated July 15, 
2016 (``Data Boiler Letter''); Richard Foster, Senior Vice President 
and Senior Counsel for Regulatory and Legal Affairs, Financial 
Services Roundtable, dated July 15, 2016 (``FSR Letter''); David T. 
Bellaire, Executive Vice President & General Counsel, Financial 
Services Institute, dated July 18, 2016 (``FSI Letter''); Stuart J. 
Kaswell, Executive Vice President & Managing Director, General 
Counsel, Managed Funds Association, dated July 18, 2016 (``MFA 
Letter''); David W. Blass, General Counsel, Investment Company 
Institute, dated July 18, 2016 (``ICI Letter''); Larry E. Thompson, 
Vice Chairman and General Counsel, Depository Trust & Clearing 
Corporation, dated July 18, 2016 (``DTCC Letter''); Manisha Kimmel, 
Chief Regulatory Officer, Wealth Management, Thomson Reuters, dated 
July 18, 2016 (``TR Letter''); Theodore R. Lazo, Managing Director 
and Associate General Counsel, and Ellen Greene, Managing Director, 
Financial Services Operations, Securities Industry and Financial 
Markets Association, dated July 18, 2016 (``SIFMA Letter''); 
Anonymous, received July 18, 2016 (``Anonymous Letter I''); Mary Lou 
Von Kaenel, Managing Director, Financial Information Forum, dated 
July 18, 2016 (``FIF Letter''); Marc R. Bryant, Senior Vice 
President, Deputy General Counsel, Fidelity Investments, dated July 
18, 2016 (``Fidelity Letter''); Mark Husler, CEO, UnaVista, and 
Jonathan Jachym, Head of North America Regulatory Strategy & 
Government Relations, London Stock Exchange Group, dated July 18, 
2016 (``UnaVista Letter''); Gary Stone, Chief Strategy Officer for 
Trading Solutions and Global Regulatory and Policy Group, Bloomberg, 
L.P., dated July 18, 2016 (``Bloomberg Letter''); Bonnie K. Wachtel, 
Wachtel Co Inc., dated July 18, 2016 (``Wachtel Letter''); Dennis M. 
Kelleher, President & CEO, Stephen W. Hall, Legal Director & 
Securities Specialist, Lev Bagramian, Senior Securities Policy 
Advisor, Better Markets, dated July 18, 2016 (``Better Markets 
Letter''); John A. McCarthy, General Counsel, KCG Holdings, Inc., 
dated July 20, 2016 (``KCG Letter''); Industry Members of the 
Development Advisory Group (``DAG'') (including Financial 
Information Forum, Securities Industry and Financial Markets 
Association and Securities Traders Association), dated July 20, 2016 
(``DAG Letter''); Joanne Moffic-Silver, EVP, General Counsel & 
Corporate Secretary, Chicago Board Options Exchange, Incorporated, 
dated July 21, 2016 (``CBOE Letter''); Elizabeth K. King, NYSE 
Group, Inc., dated July 21, 2016 (``NYSE Letter''); James Toes, 
Securities President & CEO, Securities Traders Association, dated 
July 25, 2016 (``STA Letter''); Anonymous, received August 12, 2016 
(``Anonymous Letter II''); Scott Garrett, Member of Congress, et 
al., dated October 14, 2016 (``Garrett Letter''). See Exhibit B for 
a citation key to the comment letters received by the Commission on 
the proposed CAT NMS Plan.
    \7\ See Securities Exchange Act Release No. 78441 (July 29, 
2016), 81 FR 51527 (August 4, 2016).
    \8\ See Letter from Participants to Brent J. Fields, Secretary, 
Commission, dated September 2, 2016 (``Response Letter I'').
    \9\ See Letters from Participants to Brent J. Fields, Secretary, 
Commission, dated September 23, 2016 (``Response Letter II'') and 
October 7, 2016 (``Response Letter III'').
    \10\ See Letter from Participants to Brent J. Fields, Secretary, 
Commission, dated November 2, 2016 (``Participants' Letter I''); 
Letter from Participants to Brent J. Fields, Secretary, Commission, 
dated November 14, 2016 (``Participants' Letter II'').
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II. Background

    The Commission believes that the regulatory data infrastructure on 
which the SROs and the Commission currently must rely generally is 
outdated and inadequate to effectively oversee a complex, dispersed, 
and highly automated national market system. In performing their 
oversight responsibilities, regulators today must attempt to pull 
together disparate data from a variety of existing information systems 
lacking in completeness, accuracy, accessibility, and/or timeliness 
\11\--a model that neither

[[Page 84698]]

supports the efficient aggregation of data from multiple trading venues 
nor yields the type of complete and accurate market activity data 
needed for robust market oversight.
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    \11\ Completeness refers to whether a data source represents all 
market activity of interest to regulators, and whether the data is 
sufficiently detailed to provide the information regulators require. 
While current data sources provide the trade and order data required 
by existing rules and regulations, those sources generally do not 
provide all of the information of interest to regulators in one 
consolidated audit trail. Accuracy refers to whether the data about 
a particular order or trade is correct and reliable. Accessibility 
refers to how the data is stored, how practical it is to assemble, 
aggregate, and process the data, and whether all appropriate 
regulators could acquire the data they need. Timeliness refers to 
when the data is available to regulators and how long it would take 
to process before it could be used for regulatory analysis. See 
Adopting Release, infra note 14, at 45727.
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    Currently, FINRA and the exchanges maintain their own separate 
audit trail systems for trading activity, which vary in scope, required 
data elements and format. In performing their market oversight 
responsibilities, SRO and Commission Staffs must rely heavily on data 
from these various SRO audit trails. However, each of these systems has 
shortcomings in completeness, accuracy, accessibility, or timeliness. 
Some of these shortcomings are a result of the disparate nature of the 
systems, which makes it impractical, for example, to follow orders 
through their entire lifecycle as they may be routed, aggregated, re-
routed, and disaggregated across multiple markets. These systems also 
lack key information useful for regulatory oversight, such as the 
identity of the customers who originate orders, or that two sets of 
orders may have been originated by the same customer.\12\ Although SRO 
and Commission Staffs also have access to sources of market activity 
data other than SRO audit trails, these sources likewise suffer from 
their own drawbacks.\13\
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    \12\ The Commission notes that the SROs have taken steps in 
recent years to update their audit trail requirements. For example, 
NYSE, NYSE Amex LLC (n/k/a ``NYSE MKT LLC'') (``NYSE Amex''), and 
NYSE ARCA, Inc. (``NYSE Arca'') have adopted audit trail rules that 
coordinate with FINRA's Order Audit Trail System (``OATS'') 
requirements. See Securities Exchange Act Release No. 65523 (October 
7, 2011), 76 FR 64154 (October 17, 2011) (concerning NYSE); 
Securities Exchange Act Release No. 65524 (October 7, 2011), 76 FR 
64151 (October 17, 2011) (concerning NYSE Amex); Securities Exchange 
Act Release No. 65544 (October 12, 2011), 76 FR 64406 (October 18, 
2011) (concerning NYSE Arca). This allows the SROs to submit their 
data to FINRA pursuant to a Regulatory Service Agreement (``RSA''), 
which FINRA can then reformat and combine with OATS data. Despite 
these efforts, however, significant deficiencies remain. See Notice, 
supra note 5, at Section IV.D.2.b.
    \13\ See Notice, supra note 5, at Section IV.D.2.b (discussing 
the limitations of current trade and order data systems).
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    Recognizing these shortcomings, on July 11, 2012, the Commission 
adopted Rule 613 of Regulation NMS under the Act,\14\ which requires 
the SROs to submit an NMS plan to create, implement, and maintain a 
consolidated audit trail (``CAT'') 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 in a single, consolidated data 
source.\15\ Specifically, Rule 613 requires the Participants to 
``jointly file . . . a national market system plan to govern the 
creation, implementation, and maintenance of a consolidated audit trail 
and Central Repository.'' \16\ The purpose of the Plan, and the 
creation, implementation and maintenance of a comprehensive audit trail 
for the U.S. securities markets described therein, is to 
``substantially enhance the ability of the SROs and the Commission to 
oversee today's securities markets and fulfill their responsibilities 
under the federal securities laws.'' \17\ As contemplated by Rule 613, 
the CAT ``will allow for the prompt and accurate recording of material 
information about all orders in NMS securities, including the identity 
of customers, as these orders are generated and then routed throughout 
the U.S. markets until execution, cancellation, or modification. This 
information will be consolidated and made readily available to 
regulators in a uniform electronic format.'' \18\
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    \14\ See Securities Exchange Act Release No. 67457 (July 18, 
2012), 77 FR 45722 (August 1, 2012) (``Adopting Release''); see also 
Securities Exchange Act Release No. 62174 (May 26, 2010), 75 FR 
32556 (June 8, 2010) (``Proposing Release'').
    \15\ 17 CFR 242.613(a)(1), (c)(1), (c)(7).
    \16\ 17 CFR 242.613(a)(1).
    \17\ See Adopting Release, supra note 14, at 45726.
    \18\ Id. The Plan also includes certain recording and reporting 
obligations for OTC Equity Securities.
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    The SROs filed the CAT NMS Plan pursuant to Rule 613,\19\ as 
modified by exemptive relief granted by the Commission, pursuant to 
Rule 0-12 under the Act,\20\ from certain requirements of Rule 613.\21\
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    \19\ See supra note 4.
    \20\ 17 CFR 240.0-12.
    \21\ See Securities Exchange Act Release No. 77265 (March 1, 
2016), 81 FR 11856 (March 7, 2016) (``Exemption Order''); Letter 
from Participants to Brent J. Fields, Secretary, Commission, dated 
January 30, 2015 (``Exemptive Request Letter''). Specifically, the 
SROs requested exemptive relief from the Rule's requirements related 
to: (i) The reporting of Options Market Maker quotations, as 
required under Rule 613(c)(7)(ii) and (iv); (ii) the reporting and 
use of the Customer-ID under Rule 613(c)(7)(i)(A), (iv)(F), 
(viii)(B) and 613(c)(8); (iii) the reporting of the CAT-Reporter-ID, 
as required under Rule 613(c)(7)(i)(C), (ii)(D), (ii)(E), (iii)(D), 
(iii)(E), (iv)(F), (v)(F), (vi)(B), and (c)(8); (iv) the linking of 
executions to specific subaccount allocations, as required under 
Rule 613(c)(7)(vi)(A); and (v) the timestamp granularity requirement 
of Rule 613(d)(3) for certain manual order events subject to 
reporting under Rule 613(c)(7)(i)(E), (ii)(C), (iii)(C) and (iv)(C). 
On April 3, 2015, the SROs filed a supplement related to the 
requested exemption for Rule 613(c)(7)(vi)(A). See Letter from 
Robert Colby, FINRA, on behalf of the SROs, to Brent J. Fields, 
Secretary, Commission, dated April 3, 2015 (``April 2015 
Supplement''). This supplement provided examples of how the proposed 
relief related to allocations would operate. On September 2, 2015, 
the SROs filed a second supplement to the Exemptive Request Letter. 
See Letter from the SROs to Brent J. Fields, Secretary, Commission, 
dated September 2, 2015 (``September 2015 Supplement''). This 
supplement to the Exemptive Request Letter further addressed the use 
of an ``effective date'' in lieu of a ``date account opened.'' 
Unless the context otherwise requires, the ``Exemption Request'' 
shall refer to the Exemptive Request Letter, as supplemented by the 
April 2015 Supplement and the September 2015 Supplement.
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    The CAT NMS Plan filed by the SROs incorporates the SROs' NMS plan 
approval process for reviewing, evaluating and ultimately selecting the 
Plan Processor,\22\ as set forth in a separate NMS plan submitted by 
the SROs and approved by the Commission (the ``Selection Plan'').\23\ 
On February 26, 2013, the Participants published a request for proposal 
(``RFP'') soliciting Bids from parties interested in serving as the 
Plan Processor.\24\ As of the publication date of this Order, the 
Participants, through the process described in the Selection Plan, have 
narrowed the pool of Bidders to three remaining Shortlisted 
Bidders.\25\
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    \22\ As set forth in Section 1.1 of the CAT NMS Plan, supra note 
5, the Plan Processor ``means the Initial Plan Processor or any 
other Person selected by the Operating Committee pursuant to SEC 
Rule 613 and Sections 4.3(b)(i) and 6.1 [to] perform the CAT 
processing functions required by SEC Rule 613 and set forth in [the 
CAT NMS Plan].'' All capitalized terms not otherwise defined herein 
shall have the meaning ascribed to them in Rule 613, the Adopting 
Release, or the CAT NMS Plan, as applicable.
    \23\ See Securities Exchange Act Release Nos. 70892 (November 
15, 2013), 78 FR 69910 (November 21, 2013) (``Selection Plan 
Notice''); 75192 (June 17, 2015), 80 FR 36028 (June 23, 2015) (Order 
Approving Amendment No. 1 to the Selection Plan); 75980 (September 
24, 2015), 80 FR 58796 (September 30, 2015) (Order Approving 
Amendment No. 2 to the Selection Plan); 77917 (May 25, 2016), 81 FR 
35072 (June 1, 2016) (Notice of Filing and Immediate Effectiveness 
of Amendment No. 3 to the Selection Plan); 78477 (August 4, 2016), 
81 FR 52917 (August 10, 2016) (Notice of Filing and Immediate 
Effectiveness of Amendment No. 4 to the Selection Plan); see also 
Securities Exchange Act Release Nos. 71596 (February 21, 2014), 79 
FR 11152 (February 27, 2014) (``Selection Plan Approval Order''); 
74223 (February 6, 2015), 80 FR 7654 (February 11, 2015) (Notice of 
Amendment No. 1 to the Selection Plan); 75193 (June 17, 2015), 80 FR 
36006 (June 23, 2015) (Notice of Amendment No. 2 to the Selection 
Plan).
    \24\ See Notice, supra note 5, at 30885-30952 for a complete 
version of the Consolidated Audit Trail National Market System Plan 
Request for Proposal (issued February 26, 2013, version 3.0 updated 
March 4, 2014). Other materials related to the RFP are available at 
http://catnmsplan.com/process/. Among other things, the RFP 
describes the technical, business, and operational requirements for 
CAT and outlines the information that must be submitted by Bidders 
in response to the RFP.
    \25\ ``Shortlisted Bidders'' were selected by the Selection 
Committee through the voting and scoring processes described in 
Section 5.2 of the CAT NMS Plan. See CAT NMS Plan, supra note 5, at 
Section 1.1; see also Section III.4, infra (describing the selection 
of the Plan Processor).
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    The CAT NMS Plan also includes an economic analysis that, as 
required by Rule 613, was conducted by the SROs.

[[Page 84699]]

The Commission notes that, in the Adopting Release for Rule 613, the 
Commission considered the economic effects of the actions the SROs were 
required to undertake pursuant to Rule 613, specifically the 
requirement that the SROs develop an NMS plan, utilizing their own 
resources and undertaking their own research, that addresses the 
specific details, cost estimates, considerations, and other 
requirements of the Rule.\26\ The Commission noted in the Adopting 
Release that Rule 613 provided the SROs with ``flexibility in how they 
[chose] to meet the requirements of the adopted Rule,'' \27\ allowing 
the SROs to consider a number of different approaches in developing the 
CAT NMS Plan. The Commission also noted that ``the costs and benefits 
of creating a consolidated audit trail, and the consideration of 
specific costs as related to specific benefits, is more appropriately 
analyzed once the SROs narrow the expanded array of choices they have 
under the adopted Rule and develop a detailed NMS plan.'' \28\ 
Accordingly, the Commission required the SROs to conduct an economic 
analysis and deferred the Commission's own economic analysis of the 
actual creation, implementation, and maintenance of the CAT until after 
submission of the required NMS plan. In accordance with this approach, 
the Commission included its preliminary analysis and conclusions 
regarding the economic effects of the CAT NMS Plan when it published 
the CAT NMS Plan for public comment.
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    \26\ See Adopting Release, supra note 14, at 45726.
    \27\ Id. at 45725.
    \28\ See Adopting Release, supra note 14, at 45725.
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III. Description of the Proposed Plan

    The Commission notes that this Section III describes the CAT NMS 
Plan, as filed by the Participants pursuant to Rule 613 and modified by 
the Exemption Order,\29\ that was published for public comment by the 
Commission.\30\ Section IV, below, discusses the comments received as 
well as amendments that the Commission is making to the Plan in light 
of some of the comments; these amendments are marked against the 
proposed Plan in Exhibit A to this Order.
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    \29\ See Exemption Order, supra note 21.
    \30\ See Notice, supra note 5.
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1. LLC Agreement

    The Participants propose to conduct the activities related to the 
CAT in a Delaware limited liability company pursuant to a limited 
liability company agreement, entitled the Limited Liability Company 
Agreement (``LLC Agreement'') of CAT NMS, LLC (``Company'' or ``CAT 
LLC'').\31\ The Participants will jointly own on an equal basis the 
Company.\32\ The Company will create, implement and maintain the 
CAT.\33\ The LLC Agreement, itself, including its appendices, is the 
proposed Plan, which would be a national market system plan as defined 
in Rule 600(b)(43) of NMS.\34\
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    \31\ Id.
    \32\ See CAT NMS Plan, supra note 5, at Section 3.2(d).
    \33\ Id. at Section 2.6.
    \34\ See Notice, supra note 5, at 30618.
---------------------------------------------------------------------------

2. Participants

    Each national securities exchange and national securities 
association currently registered with the Commission would be a 
Participant in the Plan.\35\ The names and addresses of each 
Participant are set forth in Exhibit A to the Plan.\36\ Article III of 
the Plan provides that any entity approved by the Commission as a 
national securities exchange or national securities association under 
the Exchange Act after the Effective Date may become a Participant by 
submitting to the Company a completed application in the form provided 
by the Company and satisfying each of the following requirements: (1) 
Executing a counterpart of the LLC Agreement as then in effect; and (2) 
paying a fee to the Company in an amount determined by a Majority Vote 
\37\ of the Operating Committee as fairly and reasonably compensating 
the Company and the Participants for costs incurred in creating, 
implementing and maintaining the CAT (including such costs incurred in 
evaluating and selecting the Initial Plan Processor \38\ and any 
subsequent Plan Processor) and for costs the Company incurs in 
providing for the prospective Participant's participation in the 
Company, including after consideration of certain factors identified in 
Section 3.3(b) of the Agreement (``Participation Fee'').\39\ Amendment 
of the Plan reflecting the admission of a new Participant will be 
effective only when: (1) It is approved by the SEC in accordance with 
Rule 608 or otherwise becomes effective pursuant to Rule 608; and (2) 
the prospective Participant pays the Participation Fee.\40\
---------------------------------------------------------------------------

    \35\ Id.
    \36\ See CAT NMS Plan, supra note 5, at Section 3.1.
    \37\ ``Majority Vote'' means the affirmative vote of at least a 
majority of all of the members of the Operating Committee or any 
Subcommittee, as applicable, authorized to cast a vote with respect 
to a matter presented for a vote (whether or not such a member is 
present at any meeting at which a vote is taken) by the Operating 
Committee or any Subcommittee, as applicable (excluding, for the 
avoidance of doubt, any member of the Operating Committee or any 
Subcommittee, as applicable, that is recused or subject to a vote to 
recuse from such matter pursuant to Section 4.3(d) of the CAT NMS 
Plan). See CAT NMS Plan, supra note 5, at Section 1.1.
    \38\ The ``Initial Plan Processor'' means the first Plan 
Processor selected by the Operating Committee in accordance with 
Rule 613, Section 6.1 and the Selection Plan. See CAT NMS Plan, 
supra note 5, at Section 1.1.
    \39\ Id. at Section 3.3(a).
    \40\ Id. at Section 3.3(a)-(b).
---------------------------------------------------------------------------

    A number of factors are relevant to the determination of a 
Participation Fee.\41\ Such factors are: (1) The portion of costs 
previously paid by the Company for the development, expansion and 
maintenance of the CAT which, under generally accepted accounting 
principles (``GAAP''), would have been treated as capital expenditures 
and would have been amortized over the five years preceding the 
admission of the prospective Participant; (2) an assessment of costs 
incurred and to be incurred by the Company for modifying the CAT or any 
part thereof to accommodate the prospective Participant, which costs 
are not otherwise required to be paid or reimbursed by the prospective 
Participant; (3) Participation Fees paid by other Participants admitted 
as such after the Effective Date; (4) elapsed time from the Effective 
Date to the anticipated date of admittance of the prospective 
Participant; and (5) such other factors, if any, as may be determined 
to be appropriate by the Operating Committee and approved by the 
Commission.\42\ In the event that the Company and a prospective 
Participant do not agree on the amount of the Participation Fee, such 
amount will be subject to review by the SEC pursuant to Section 
11A(b)(5) of the Exchange Act.\43\
---------------------------------------------------------------------------

    \41\ See Notice, supra note 5, at 30618.
    \42\ See CAT NMS Plan, supra note 5, at Section 3.3(b).
    \43\ Id.; see also Exchange Act Section 11A(b)(2), 15 U.S.C. 
78k-l(b)(5) (which provides that a prohibition or limitation on 
access to services by a registered securities information processor 
must be reviewed by the Commission upon application by an aggrieved 
person).
---------------------------------------------------------------------------

    An applicant for participation in the Company may apply for limited 
access to the CAT System \44\ for planning and testing purposes pending 
its admission as a Participant by submitting to the Company a completed 
Application for Limited Access to the CAT System in a

[[Page 84700]]

form provided by the Company, accompanied by payment of a deposit in 
the amount established by the Company, which will be applied or 
refunded as described in such application.\45\ To be eligible to apply 
for such limited access, the applicant must have been approved by the 
SEC as a national securities exchange or national securities 
association under the Exchange Act but the applicant has not yet become 
a Participant of the Plan, or the SEC must have published such 
applicant's Form 1 Application or Form X-15AA-1 Application to become a 
national securities exchange or a national securities association, 
respectively.\46\
---------------------------------------------------------------------------

    \44\ ``CAT System'' means all data processing equipment, 
communications facilities, and other facilities, including 
equipment, utilized by the Company or any third parties acting on 
the Company's behalf in connection with operation of the CAT and any 
related information or relevant systems pursuant to the LLC 
Agreement. See CAT NMS Plan, supra note 5, at Section 1.1.
    \45\ Id. at Section 3.3(c).
    \46\ Id.
---------------------------------------------------------------------------

    All Company Interests will have the same rights, powers, 
preferences and privileges and be subject to the same restrictions, 
qualifications and limitations.\47\ Once admitted, each Participant 
will be entitled to one vote on any matter presented to Participants 
for their consideration and to participate equally in any distribution 
made by the Company (other than a distribution made pursuant to Section 
10.2 of the Plan).\48\ Each Participant will have a Company Interest 
equal to that of each other Participant.\49\
---------------------------------------------------------------------------

    \47\ Id. at Section 3.2(a).
    \48\ Id. at Sections 3.2(b), 10.2.
    \49\ Id. at Section 3.2(d).
---------------------------------------------------------------------------

    Article III also describes a Participant's ability to Transfer a 
Company Interest. A Participant may only Transfer any Company Interest 
to a national securities exchange or national securities association 
that succeeds to the business of such Participant as a result of a 
merger or consolidation with such Participant or the Transfer of all or 
substantially all of the assets or equity of such Participant 
(``Permitted Transferee'').\50\ A Participant may not Transfer any 
Company Interest to a Permitted Transferee unless: (1) Such Permitted 
Transferee executes a counterpart of the Plan; and (2) the amendment to 
the Plan reflecting the Transfer is approved by the SEC in accordance 
with Rule 608 or otherwise becomes effective pursuant to Rule 608.\51\
---------------------------------------------------------------------------

    \50\ Id. at Section 3.4(b).
    \51\ Id. at Section 3.4(c).
---------------------------------------------------------------------------

    In addition, Article III addresses the voluntary resignation and 
termination of participation in the Plan. Any Participant may 
voluntarily resign from the Company, and thereby withdraw from and 
terminate its right to any Company Interest, only if: (1) A Permitted 
Legal Basis \52\ for such action exists; and (2) such Participant 
provides to the Company and each other Participant no less than thirty 
days prior to the effective date of such action written notice 
specifying such Permitted Legal Basis, including appropriate 
documentation evidencing the existence of such Permitted Legal Basis, 
and, to the extent applicable, evidence reasonably satisfactory to the 
Company and other Participants that any orders or approvals required 
from the SEC in connection with such action have been obtained.\53\ A 
validly withdrawing Participant will have the rights and obligations 
discussed below with regard to termination of participation.\54\
---------------------------------------------------------------------------

    \52\ ``Permitted Legal Basis'' means the Participant has become 
exempt from, or otherwise has ceased to be subject to, Rule 613 or 
has arranged to comply with Rule 613 in some manner other than 
through participation in the LLC Agreement, in each instance subject 
to the approval of the Commission. See CAT NMS Plan, supra note 5, 
at Section 1.1.
    \53\ Id. at Section 3.6.
    \54\ Id. at Sections 3.6, 3.7.
---------------------------------------------------------------------------

    A Participant's participation in the Company, and its right to any 
Company Interest, will terminate as of the earliest of: (1) The 
effective date specified in a valid resignation notice; (2) such time 
as such Participant is no longer registered as a national securities 
exchange or national securities association; or (3) the date of 
termination for failure to pay fees.\55\ With regard to the payment of 
fees, each Participant is required to pay all fees or other amounts 
required to be paid under the Plan within thirty days after receipt of 
an invoice or other notice indicating payment is due (unless a longer 
payment period is otherwise indicated) (the ``Payment Date'').\56\ If a 
Participant fails to make such a required payment by the Payment Date, 
any balance in the Participant's Capital Account will be applied to the 
outstanding balance.\57\ If a balance still remains with respect to any 
such required payment, the Participant will pay interest on the 
outstanding balance from the Payment Date until such fee or amount is 
paid at a per annum rate equal to the lesser of: (1) The Prime Rate 
plus 300 basis points; or (2) the maximum rate permitted by applicable 
law.\58\ If any such remaining outstanding balance is not paid within 
thirty days after the Payment Date, the Participants will file an 
amendment to the Plan requesting the termination of the participation 
in the Company of such Participant, and its right to any Company 
Interest, with the SEC.\59\ Such amendment will be effective only when 
it is approved by the SEC in accordance with Rule 608 or otherwise 
becomes effective pursuant to Rule 608.\60\
---------------------------------------------------------------------------

    \55\ Id. at Section 3.7(a).
    \56\ Id. at Section 3.7(b).
    \57\ Id.
    \58\ Id.
    \59\ Id.
    \60\ Id.
---------------------------------------------------------------------------

    From and after the effective date of termination of a Participant's 
participation in the Company, profits and losses of the Company will 
cease to be allocated to the Capital Account of the Participant.\61\ A 
terminated Participant will be entitled to receive the balance in its 
Capital Account as of the effective date of termination adjusted for 
profits and losses through that date, payable within ninety days of the 
effective date of termination, and will remain liable for its 
proportionate share of costs and expenses allocated to it for the 
period during which it was a Participant, for obligations under Section 
3.8(c) regarding the return of amounts previously distributed (if 
required by a court of competent jurisdiction), for its indemnification 
obligations pursuant to Section 4.1, and for obligations under Section 
9.6 regarding confidentiality, but it will have no other obligations 
under the Plan following the effective date of termination.\62\ The 
Plan will be amended to reflect any termination of participation in the 
Company of a Participant, provided that such amendment will be 
effective only when it is approved by the SEC in accordance with Rule 
608 or otherwise becomes effective pursuant to Rule 608.\63\
---------------------------------------------------------------------------

    \61\ Id. at Section 3.7(c).
    \62\ Id.
    \63\ Id.
---------------------------------------------------------------------------

3. Management

    Article IV of the Plan establishes the overall governance structure 
for the management of the Company. Specifically, the Participants 
propose that the Company be managed by an Operating Committee.\64\
---------------------------------------------------------------------------

    \64\ The Operating Committee will manage the Company except for 
situations in which the approval of the Participants is required by 
the Plan or by non-waivable provisions of applicable law. See CAT 
NMS Plan, supra note 5, at Article IV.
---------------------------------------------------------------------------

    The Operating Committee will consist of one voting member 
representing each Participant and one alternate voting member 
representing each Participant who will have a right to vote only in the 
absence of the Participant's voting member of the Operating 
Committee.\65\ Each of the voting and alternate voting members of the 
Operating Committee will be appointed by the Participant that he or she 
represents, will serve at the will of the Participant appointing such 
member and will be subject to the confidentiality obligations of the

[[Page 84701]]

Participant that he or she represents as set forth in Section 9.6.\66\ 
One individual may serve as the voting member of the Operating 
Committee for multiple Affiliated Participants, and such individual 
will have the right to vote on behalf of each such Affiliated 
Participant.\67\
---------------------------------------------------------------------------

    \65\ Id. at Section 4.2(a).
    \66\ Id. at Sections 4.2(a), 9.6.
    \67\ Id. at Section 4.2(a). An ``Affiliated Participant'' means 
any Participant controlling, controlled by, or under common control 
with another Participant. Id. at Section 1.1.
---------------------------------------------------------------------------

    The Operating Committee will elect, by Majority Vote, one of its 
members to act as Chair for a term of two years.\68\ No Person may 
serve as Chair for more than two successive full terms, and no Person 
then appointed to the Operating Committee by a Participant that then 
serves, or whose Affiliate then serves, as the Plan Processor will be 
eligible to serve as the Chair.\69\ The Chair will preside at all 
meetings of the Operating Committee, designate a Person to act as 
Secretary, and perform such other duties and possess such other powers 
as the Operating Committee may from time to time prescribe.\70\ The 
Chair will not be entitled to a tie-breaking vote at any meeting of the 
Operating Committee.\71\
---------------------------------------------------------------------------

    \68\ Id. at Section 4.2(b).
    \69\ Id.
    \70\ Id.
    \71\ Id.
---------------------------------------------------------------------------

    Each of the members of the Operating Committee, including the 
Chair, will be authorized to cast one vote for each Participant that he 
or she represents on all matters voted upon by the Operating 
Committee.\72\ Action of the Operating Committee will be authorized by 
Majority Vote (except under certain designated circumstances), subject 
to the approval of the SEC whenever such approval is required under the 
Exchange Act and the rules thereunder.\73\ For example, the Plan 
specifically notes that a Majority Vote of the Operating Committee is 
required to: (1) Select the Chair; (2) select the members of the 
Advisory Committee (as described below); (3) interpret the Plan (unless 
otherwise noted therein); (4) approve any recommendation by the Chief 
Compliance Officer (``CCO'') pursuant to Section 6.2(a)(v)(A); (5) 
determine to hold an Executive Session of the Operating Committee; (6) 
determine the appropriate funding-related policies, procedures and 
practices consistent with Article XI; and (7) act upon any other matter 
specified elsewhere in the Plan (which includes the Appendices to the 
Plan) as requiring a vote, approval or other action of the Operating 
Committee (other than those matters expressly requiring a Supermajority 
Vote or a different vote of the Operating Committee).\74\
---------------------------------------------------------------------------

    \72\ Id. at Section 4.3(a).
    \73\ Id.
    \74\ Id.
---------------------------------------------------------------------------

    Article IV requires a Supermajority Vote \75\ of the Operating 
Committee, subject to the approval of the SEC when required, for the 
following: (1) Selecting a Plan Processor, other than the Initial Plan 
Processor selected in accordance with Article V of the Plan; (2) 
terminating the Plan Processor without cause in accordance with Section 
6.1(q); (3) approving the Plan Processor's appointment or removal of 
the Chief Information Security Officer (``CISO''), CCO, or any 
Independent Auditor in accordance with Section 6.1(b); (4) entering 
into, modifying or terminating any Material Contract (if the Material 
Contract is with a Participant or an Affiliate of a Participant, such 
Participant and Affiliated Participant will be recused from any vote); 
(5) making any Material Systems Change; (6) approving the initial 
Technical Specifications or any Material Amendment to the Technical 
Specifications proposed by the Plan Processor; (7) amending the 
Technical Specifications on its own motion; and (8) acting upon any 
other matter specified elsewhere in the Plan (which includes the 
Appendices to the Plan) as requiring a vote, approval or other action 
of the Operating Committee by a Supermajority Vote.\76\
---------------------------------------------------------------------------

    \75\ ``Supermajority Vote'' means the affirmative vote of at 
least two-thirds of all of the members of the Operating Committee or 
any Subcommittee, as applicable, authorized to cast a vote with 
respect to a matter presented for a vote (whether or not such a 
member is present at any meeting at which a vote is taken) by the 
Operating Committee or any Subcommittee, as applicable (excluding, 
for the avoidance of doubt, any member of the Operating Committee or 
any Subcommittee, as applicable, that is recused or subject to a 
vote to recuse from such matter pursuant to Section 4.3(d)); 
provided that if two-thirds of all of such members authorized to 
cast a vote is not a whole number then that number shall be rounded 
up to the nearest whole number. Id. at Section 1.1.
    \76\ Id. at Section 4.3(b).
---------------------------------------------------------------------------

    A member of the Operating Committee or any Subcommittee thereof (as 
discussed below) shall recuse himself or herself from voting on any 
matter under consideration by the Operating Committee or such 
Subcommittee if such member determines that voting on such matter 
raises a Conflict of Interest.\77\ In addition, if the members of the 
Operating Committee or any Subcommittee (excluding the member thereof 
proposed to be recused) determine by Supermajority Vote that any member 
voting on a matter under consideration by the Operating Committee or 
such Subcommittee raises a Conflict of Interest, such member shall be 
recused from voting on such matter.\78\ No member of the Operating 
Committee or any Subcommittee will be automatically recused from voting 
on any matter except matters involving Material Contracts as discussed 
in the prior paragraph, as otherwise specified in the Plan, and as 
follows: (1) If a Participant is a Bidding Participant \79\ whose Bid 
remains under consideration, members appointed to the Operating 
Committee or any Subcommittee by such Participant or any of its 
Affiliated Participants will be recused from any vote concerning: (a) 
Whether another Bidder may revise its Bid; (b) the selection of a 
Bidder; or (c) any contract to which such Participant or any of its 
Affiliates would be a party in its capacity as Plan Processor; and (2) 
if a Participant is then serving as Plan Processor, is an Affiliate of 
the Person then serving as Plan Processor, or is an Affiliate of an 
entity that is a Material Subcontractor to the Plan Processor, then in 
each case members appointed to the Operating Committee or any 
Subcommittee by such Participant or any of its Affiliated Participants 
shall be recused from any vote concerning: (a) The proposed removal of 
such Plan Processor; or (b) any contract between the Company and such 
Plan Processor.\80\
---------------------------------------------------------------------------

    \77\ Id. at Section 4.3(d).
    \78\ Id.
    \79\ ``Bidding Participant'' means a Participant that: (a) 
Submits a Bid; (b) is an Affiliate of an entity that submits a Bid; 
or (c) is included, or is an Affiliate of an entity that is 
included, as a Material Subcontractor as part of a Bid. Id. at 
Section 1.1.
    \80\ Id. at Section 4.3(d).
---------------------------------------------------------------------------

    Article IV also addresses meetings of the Operating Committee.\81\ 
Meetings of the Operating Committee may be attended by each 
Participant's voting Representative and its alternate voting 
Representative and by a maximum of two nonvoting Representatives of 
each Participant, by members of the Advisory Committee, by the CCO, by 
other Representatives of the Company and the Plan Processor, by 
Representatives of the SEC and by such other Persons that the Operating 
Committee may invite to attend.\82\ The Operating Committee, however, 
may, where appropriate, determine to meet in Executive Session during 
which only voting members of the Operating Committee will be 
present.\83\ The Operating Committee,

[[Page 84702]]

however, may invite other Representatives of the Participants, of the 
Company, of the Plan Processor (including the CCO and the CISO) or the 
SEC, or such other Persons that the Operating Committee may invite to 
attend, to be present during an Executive Session.\84\ Any 
determination of the Operating Committee to meet in an Executive 
Session will be made upon a Majority Vote and will be reflected in the 
minutes of the meeting.\85\ In addition, any Person that is not a 
Participant but for which the SEC has published a Form 1 Application or 
Form X-15AA-1 to become a national securities exchange or national 
securities association, respectively, will be permitted to appoint one 
primary Representative and one alternate Representative to attend 
regularly scheduled Operating Committee meetings in the capacity of a 
non-voting observer, but will not be permitted to have any 
Representative attend a special meeting, emergency meeting or meeting 
held in Executive Session of the Operating Committee.\86\
---------------------------------------------------------------------------

    \81\ Article IV also addresses, among other things, different 
types of Operating Committee meetings (regular, special and 
emergency), frequency of such meetings, how to call such meetings, 
the location of the meetings, the role of the Chair, and notice 
regarding such meetings. Id. at Section 4.4.
    \82\ Id. at Section 4.4(a).
    \83\ Id.
    \84\ Id.
    \85\ Id.
    \86\ Id. at Section 4.4(b).
---------------------------------------------------------------------------

    The Operating Committee may, by Majority Vote, designate by 
resolution one or more Subcommittees it deems necessary or desirable in 
furtherance of the management of the business and affairs of the 
Company.\87\ For any Subcommittee, any member of the Operating 
Committee who wants to serve thereon may so serve.\88\ If Affiliated 
Participants have collectively appointed one member to the Operating 
Committee to represent them, then such Affiliated Participants may have 
only that member serve on the Subcommittee or may decide not to have 
only that collectively appointed member serve on the Subcommittee.\89\ 
Such member may designate an individual other than himself or herself 
who is also an employee of the Participant or Affiliated Participants 
that appointed such member to serve on a Subcommittee in lieu of the 
particular member.\90\ Subject to the requirements of the Plan and non-
waivable provisions of Delaware law, a Subcommittee may exercise all 
the powers and authority of the Operating Committee in the management 
of the business and affairs of the Company as so specified in the 
resolution of the Operating Committee designating such 
Subcommittee.\91\
---------------------------------------------------------------------------

    \87\ Id. at Section 4.12(a).
    \88\ Id.
    \89\ Id.
    \90\ Id.
    \91\ Id.
---------------------------------------------------------------------------

    Article IV requires that the Operating Committee maintain a 
Compliance Subcommittee for the purpose of aiding the CCO as necessary, 
including with respect to issues involving: (1) The maintenance of the 
confidentiality of information submitted to the Plan Processor or 
Central Repository pursuant to Rule 613, applicable law, or the Plan by 
Participants and Industry Members; (2) the timeliness, accuracy, and 
completeness of information submitted pursuant to Rule 613, applicable 
law or the Plan by Participants and Industry Members; and (3) the 
manner and extent to which each Participant is meeting its obligations 
under Rule 613, Section 3.11, and as set forth elsewhere in the Plan 
and ensuring the consistency of the Plan's enforcement as to all 
Participants.\92\
---------------------------------------------------------------------------

    \92\ Id. at Section 4.12(b).
---------------------------------------------------------------------------

    Article IV also sets forth the requirements for the formation and 
functioning of an Advisory Committee, which will advise the 
Participants on the implementation, operation and administration of the 
Central Repository, including possible expansion of the Central 
Repository to other securities and other types of transactions.\93\
---------------------------------------------------------------------------

    \93\ Id. at Section 4.13(a), (d).
---------------------------------------------------------------------------

    Article IV describes the composition of the Advisory Committee. No 
member of the Advisory Committee may be employed by or affiliated with 
any Participant or any of its Affiliates or facilities.\94\ The 
Operating Committee will select one member from representatives of each 
of the following categories to serve on the Advisory Committee on 
behalf of himself or herself individually and not on behalf of the 
entity for which the individual is then currently employed: (1) A 
broker-dealer with no more than 150 Registered Persons; (2) a broker-
dealer with at least 151 and no more than 499 Registered Persons; (3) a 
broker-dealer with 500 or more Registered Persons; (4) a broker-dealer 
with a substantial wholesale customer base; (5) a broker-dealer that is 
approved by a national securities exchange: (a) To effect transactions 
on an exchange as a specialist, market maker or floor broker; or (b) to 
act as an institutional broker on an exchange; (6) a proprietary-
trading broker-dealer; (7) a clearing firm; (8) an individual who 
maintains a securities account with a registered broker or dealer but 
who otherwise has no material business relationship with a broker or 
dealer or with a Participant; (9) a member of academia with expertise 
in the securities industry or any other industry relevant to the 
operation of the CAT System; (10) an institutional investor trading on 
behalf of a public entity or entities; (11) an institutional investor 
trading on behalf of a private entity or entities; and (12) an 
individual with significant and reputable regulatory expertise.\95\ The 
individuals selected to represent categories (1) through (12) above 
must include, in the aggregate, representatives of no fewer than three 
broker-dealers that are active in the options business and 
representatives of no fewer than three broker-dealers that are active 
in the equities business.\96\ In addition, upon a change in employment 
of any such Advisory Committee member, a Majority Vote of the Operating 
Committee will be required for such member to be eligible to continue 
to serve on the Advisory Committee.\97\ Furthermore, the SEC's Chief 
Technology Officer (or the individual then currently employed in a 
comparable position providing equivalent services) will serve as an 
observer of the Advisory Committee (but not be a member).\98\ The 
members of the Advisory Committee will have a term of three years.\99\
---------------------------------------------------------------------------

    \94\ Id. at Section 4.13(b).
    \95\ Id.
    \96\ Id.
    \97\ Id.
    \98\ Id.
    \99\ Four of the initial twelve members of the Advisory 
Committee will have an initial term of one year, and another four of 
the initial twelve members of the Advisory Committee will have an 
initial term of two years. Id. at Section 4.13(c).
---------------------------------------------------------------------------

    Members of the Advisory Committee will have the right to attend 
meetings of the Operating Committee or any Subcommittee, to receive 
information concerning the operation of the Central Repository, and to 
submit their views to the Operating Committee or any Subcommittee on 
matters pursuant to the Plan prior to a decision by the Operating 
Committee on such matters.\100\ A member of the Advisory Committee will 
not have a right to vote on any matter considered by the Operating 
Committee or any Subcommittee.\101\ In addition, the Operating 
Committee or any Subcommittee may meet in Executive Session if the 
Operating Committee or Subcommittee determines by Majority Vote that 
such an Executive Session is advisable.\102\ The Operating Committee 
may solicit and consider views of other stakeholders on the operation 
of the Central Repository in addition to those of the Advisory 
Committee.\103\ Although members of the Advisory Committee

[[Page 84703]]

will have the right to receive information concerning the operation of 
the Central Repository, the Operating Committee retains the authority 
to determine the scope and content of information supplied to the 
Advisory Committee, which will be limited to that information that is 
necessary and appropriate for the Advisory Committee to fulfill its 
functions.\104\ Any information received by members of the Advisory 
Committee will remain confidential unless otherwise specified by the 
Operating Committee.\105\
---------------------------------------------------------------------------

    \100\ Id. at Section 4.13(d).
    \101\ Id.
    \102\ See Notice, supra note 5, at 30621 n.54.
    \103\ Id.
    \104\ See CAT NMS Plan, supra note 5, at Section 4.13(e).
    \105\ Id.
---------------------------------------------------------------------------

    Article IV also describes the appointment of Officers for the 
Company. Specifically, the CCO and the CISO, each of whom will be 
employed solely by the Plan Processor and neither of whom will be 
deemed or construed in any way to be an employee of the Company, will 
be Officers of the Company.\106\ Neither such Officer will receive or 
be entitled to any compensation from the Company or any Participant by 
virtue of his or her service in such capacity (other than if a 
Participant is then serving as the Plan Processor, compensation paid to 
such Officer as an employee of such Participant).\107\ Each such 
Officer will report directly to the Operating Committee.\108\ The CCO 
will work on a regular and frequent basis with the Compliance 
Subcommittee and/or other Subcommittees as may be determined by the 
Operating Committee.\109\ Except to the extent otherwise provided in 
the Plan, including Section 6.2, each such Officer will have such 
fiduciary and other duties with regard to the Plan Processor as imposed 
by the Plan Processor on such individual by virtue of his or her 
employment by the Plan Processor.\110\
---------------------------------------------------------------------------

    \106\ Id. at Section 4.6(a).
    \107\ Id.
    \108\ Id.
    \109\ Id.
    \110\ Id. at Sections 4.6(a), 6.2.
---------------------------------------------------------------------------

    In addition, the Plan Processor will inform the Operating Committee 
of the individual who has direct management responsibility for the Plan 
Processor's performance of its obligations with respect to the 
CAT.\111\ Subject to approval by the Operating Committee of such 
individual, the Operating Committee will appoint such individual as an 
Officer.\112\ In addition, the Operating Committee by Supermajority 
Vote may appoint other Officers as it shall from time to time deem 
necessary.\113\ Any Officer appointed pursuant to Section 4.6(b) will 
have only such duties and responsibilities as set forth in the Plan, or 
as the Operating Committee shall from time to time expressly 
determine.\114\ No such Officer shall have any authority to bind the 
Company (which authority is vested solely in the Operating Committee) 
or be an employee of the Company, unless in each case the Operating 
Committee, by Supermajority Vote, expressly determines otherwise.\115\ 
No person subject to a ``statutory disqualification'' (as defined in 
Section 3(a)(39) of the Exchange Act) may serve as an Officer.\116\ It 
is the intent of the Participants that the Company have no 
employees.\117\
---------------------------------------------------------------------------

    \111\ Id. at Section 4.6(b).
    \112\ Id.
    \113\ Id.
    \114\ Id.
    \115\ Id.
    \116\ Id. The Plan uses the term ``statutory disqualification'' 
as defined in Section 3(a)(39) of the Exchange Act, which addresses 
disqualification from membership or participation in, or association 
with a member of, an SRO. While Officers of the Plan are not persons 
associated with a member of an SRO, the Commission interprets this 
provision of the Plan to mean that no person that is subject to one 
of the statutory disqualifications set forth in Sections 3(a)(39)(A) 
through (F) of the Exchange Act may serve as Officer.
    \117\ See CAT NMS Plan, supra note 5, at Section 4.6(b).
---------------------------------------------------------------------------

4. Initial Plan Processor Selection

    Article V of the Plan sets forth the process for the Participants' 
evaluation of Bids and the selection process for narrowing down the 
Bids and choosing the Initial Plan Processor.\118\ The initial steps in 
the evaluation and selection process were and will be performed 
pursuant to the Selection Plan; the final two rounds of evaluation and 
voting, as well as the final selection of the Initial Plan Processor, 
will be performed pursuant to the Plan.\119\
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    \118\ The Plan Processor selection process set forth in the CAT 
NMS Plan is identical to the post-CAT NMS Plan approval selection 
process set forth in the Selection Plan. See Selection Plan, supra 
note 23.
    \119\ By its terms, the Selection Plan will terminate upon 
Commission approval of the Plan. Id.
---------------------------------------------------------------------------

    As discussed above, the Selection Committee has selected the 
Shortlisted Bids pursuant to the Selection Plan. After reviewing the 
Shortlisted Bids, the Participants have identified the optimal proposed 
solutions for the CAT and, to the extent possible, included such 
solutions in the Plan.\120\ The Selection Committee will determine, by 
majority vote, whether Shortlisted Bidders will have the opportunity to 
revise their Bids.\121\ To reduce potential conflicts of interest, no 
Bidding Participant may vote on whether a Shortlisted Bidder will be 
permitted to revise its Bid if a Bid submitted by or including the 
Participant or an Affiliate of the Participant is a Shortlisted 
Bid.\122\ The Selection Committee will review and evaluate all 
Shortlisted Bids, including any permitted revisions submitted by 
Shortlisted Bidders.\123\ In performing this review and evaluation, the 
Selection Committee may consult with the Advisory Committee and such 
other Persons as the Selection Committee deems appropriate, which may 
include the DAG until the Advisory Committee is formed.\124\
---------------------------------------------------------------------------

    \120\ As noted above, the Participants stated their belief that 
certain exemptive relief is necessary to include in the Plan all of 
the provisions the Participants believe are part of the optimal 
solution for the CAT. The Commission notes that the request for 
exemptive relief was granted on March 1, 2016. See Exemption Order, 
supra note 21.
    \121\ See CAT NMS Plan, supra note 5, at Section 5.2(c)(ii).
    \122\ Id. at Section 5.1(b)(ii).
    \123\ Id.
    \124\ Id.
---------------------------------------------------------------------------

    After receipt of any permitted revisions, the Selection Committee 
will select the Initial Plan Processor from the Shortlisted Bids in two 
rounds of voting where each Participant has one vote via its Voting 
Senior Officer in each round.\125\ No Bidding Participant, however, 
will be entitled to vote in any round if the Participant's Bid, a Bid 
submitted by an Affiliate of the Participant, or a Bid including the 
Participant or an Affiliate of the Participant is considered in such 
round.\126\ In the first round, each Voting Senior Officer, subject to 
the recusal provision in Section 5.2(e)(ii), will select a first and 
second choice, with the first choice receiving two points and the 
second choice receiving one point.\127\ The two Shortlisted Bids 
receiving the highest cumulative scores in the first round will advance 
to the second round.\128\ In the event of a tie, the tie will be broken 
by assigning one point per vote to the tied Shortlisted Bids, and the 
Shortlisted Bid with the most votes will advance.\129\ If this 
procedure fails to break the tie, a revote will be taken on the tied 
Bids with each vote

[[Page 84704]]

receiving one point.\130\ If the tie persists, the Participants will 
identify areas for discussion, and revotes will be taken until the tie 
is broken.\131\
---------------------------------------------------------------------------

    \125\ See Notice, supra note 5, at 30623. If the proposed 
amendment to the Selection Plan is approved, the Selection Committee 
may determine to narrow the number of Shortlisted Bids prior to the 
two rounds of voting. Id. at 30623 n.58.
    \126\ This recusal provision is included in the Plan, as well as 
in an amendment to the Selection Plan. See Order Approving Amendment 
No. 2 to the Selection Plan, supra note 23.
    \127\ See CAT NMS Plan, supra note 5, at Section 5.2(e)(iii)(A).
    \128\ Id. at Section 5.2(e)(iii)(C). Each round of voting 
throughout the Plan is independent of other rounds. See Notice, 
supra note 5, at 30623 n.60.
    \129\ See CAT NMS Plan, supra note 5, at Section 5.2(e)(iii)(D).
    \130\ Id.
    \131\ Id.
---------------------------------------------------------------------------

    Once two Shortlisted Bids have been chosen, the Voting Senior 
Officers of the Participants (other than those subject to recusal) will 
vote for a single Shortlisted Bid from the final two to determine the 
Initial Plan Processor.\132\ If the tie persists, the Participants will 
identify areas for discussion and, following these discussions, revotes 
will be taken until the tie is broken.\133\ As set forth in Article VI 
of the Plan, following the selection of the Initial Plan Processor, the 
Participants will file with the Commission a statement identifying the 
Initial Plan Processor and including the information required by Rule 
608.\134\
---------------------------------------------------------------------------

    \132\ Id. at Section 5.2(e)(iii)(E).
    \133\ Id.
    \134\ Id. at Section 6.7(a)(i).
---------------------------------------------------------------------------

5. Functions and Activities of the CAT System

a. Plan Processor
    Article VI describes the responsibilities of the selected Plan 
Processor. The Company, under the direction of the Operating Committee, 
will enter into one or more agreements with the Plan Processor 
obligating the Plan Processor to perform the functions and duties 
contemplated by the Plan to be performed by the Plan Processor, as well 
as such other functions and duties the Operating Committee deems 
necessary or appropriate.\135\
---------------------------------------------------------------------------

    \135\ Id. at Section 6.1(a).
---------------------------------------------------------------------------

    As set forth in the Plan, the Plan Processor is required to develop 
and, with the prior approval of the Operating Committee, implement 
policies, procedures, and control structures related to the CAT System 
that are consistent with Rule 613(e)(4), Appendix C and Appendix 
D.\136\ The Plan Processor will: (1) Comply with applicable provisions 
of 15 U.S. Code Sec.  78u-6 (Securities Whistleblower Incentives and 
Protection) and the recordkeeping requirements of Rule 613(e)(8); (2) 
consistent with Appendix D, Central Repository Requirements, ensure the 
effective management and operation of the Central Repository; (3) 
consistent with Appendix D, Data Management, ensure the accuracy of the 
consolidation of the CAT Data \137\ reported to the Central Repository; 
and (4) consistent with Appendix D, Upgrade Process and Development of 
New Functionality, design and implement appropriate policies and 
procedures governing the determination to develop new functionality for 
the CAT including, among other requirements, a mechanism by which 
changes can be suggested by Advisory Committee members, Participants, 
or the Commission.\138\ Such policies and procedures also shall: (1) 
Provide for the escalation of reviews of proposed technological changes 
and upgrades to the Operating Committee; and (2) address the handling 
of surveillance, including coordinated, Rule 17d-2 under the Exchange 
Act or Regulatory Surveillance Agreement(s) (``RSA'') surveillance 
queries and requests for data.\139\ Any policy, procedure or standard 
(and any material modification or amendment thereto) applicable 
primarily to the performance of the Plan Processor's duties as the Plan 
Processor (excluding any policies, procedures or standards generally 
applicable to the Plan Processor's operations and employees) will 
become effective only upon approval by the Operating Committee.\140\ 
The Plan Processor also will, subject to the prior approval of the 
Operating Committee, establish appropriate procedures for escalation of 
matters to the Operating Committee.\141\ In addition to other policies, 
procedures and standards generally applicable to the Plan Processor's 
employees and contractors, the Plan Processor will have hiring 
standards and will conduct and enforce background checks (e.g., 
fingerprint-based) for all of its employees and contractors to ensure 
the protection, safeguarding and security of the facilities, systems, 
networks, equipment and data of the CAT System, and will have an 
insider and external threat policy to detect, monitor and remedy cyber 
and other threats.\142\
---------------------------------------------------------------------------

    \136\ Id. at Section 6.1(d).
    \137\ ``CAT Data'' means data derived from Participant Data, 
Industry Member Data, SIP Data, and such other data as the Operating 
Committee may designate as ``CAT Data'' from time to time. Id. at 
Section 1.1.
    \138\ Id. at Section 6.1(d).
    \139\ Id.
    \140\ Id. at Section 6.1(e).
    \141\ Id. at Section 6.1(f).
    \142\ Id. at Section 6.1(g).
---------------------------------------------------------------------------

    The Plan Processor will enter into appropriate Service Level 
Agreements (``SLAs'') governing the performance of the Central 
Repository, as generally described in Appendix D, Functionality of the 
CAT System, with the prior approval of the Operating Committee.\143\ 
The Plan Processor in conjunction with the Operating Committee will 
regularly review and, as necessary, update the SLAs, in accordance with 
the terms of the SLAs.\144\ As further contemplated in Appendix C, 
System Service Level Agreements (SLAs), and in Appendix D, System SLAs, 
the Plan Processor may enter into appropriate service level agreements 
with third parties applicable to the Plan Processor's functions related 
to the CAT System (``Other SLAs''), with the prior approval of the 
Operating Committee.\145\ The CCO and/or the Independent Auditor will, 
in conjunction with the Plan Processor, and as necessary the Operating 
Committee, regularly review and, as necessary, update the Other SLAs, 
in accordance with the terms of the applicable Other SLA.\146\ In 
addition, the Plan Processor: (1) Will, on an ongoing basis and 
consistent with any applicable policies and procedures, evaluate and 
implement potential system changes and upgrades to maintain and improve 
the normal day-to-day operating function of the CAT System; \147\ (2) 
in consultation with the Operating Committee, will, on an as needed 
basis and consistent with any applicable operational and escalation 
policies and procedures, implement such material system changes and 
upgrades as may be required to ensure effective functioning of the CAT 
System; \148\ and (3) in consultation with the Operating Committee, 
will, on an as needed basis, implement system changes and upgrades to 
the CAT System to ensure compliance with applicable laws, regulations 
or rules (including those promulgated by the SEC or any 
Participant).\149\ Furthermore, the Plan Processor will develop and, 
with the prior approval of the Operating Committee, implement a 
securities trading policy, as well as necessary procedures, control 
structures and tools to enforce this policy.\150\
---------------------------------------------------------------------------

    \143\ Id. at Section 6.1(h).
    \144\ Id.
    \145\ Id.
    \146\ Id.
    \147\ Id. at Section 6.1(i).
    \148\ Id. at Section 6.1(j).
    \149\ Id. at Section 6.1(k).
    \150\ Id. at Section 6.1(l).
---------------------------------------------------------------------------

    In addition, the Plan Processor will provide the Operating 
Committee regular reports on the CAT System's operation and 
maintenance.\151\ Furthermore, upon request of the Operating Committee 
or any Subcommittee, the Plan Processor will attend any meetings of the 
Operating Committee or such Subcommittee.\152\
---------------------------------------------------------------------------

    \151\ Id. at Section 6.1(o).
    \152\ Id. at Section 6.1(p).
---------------------------------------------------------------------------

    The Plan Processor may appoint such officers of the Plan Processor 
as it deems necessary and appropriate to perform its functions under 
the Plan and Rule 613.\153\ The Plan Processor, however, will be 
required to appoint, at a

[[Page 84705]]

minimum, the CCO, the CISO, and the Independent Auditor.\154\ The 
Operating Committee, by Supermajority Vote, will approve any 
appointment or removal of the CCO, CISO, or the Independent 
Auditor.\155\
---------------------------------------------------------------------------

    \153\ Id. at Section 6.1(b).
    \154\ Id.
    \155\ Id.
---------------------------------------------------------------------------

    In addition to a CCO, the Plan Processor will designate at least 
one other employee (in addition to the person then serving as CCO), 
which employee the Operating Committee has previously approved, to 
serve temporarily as the CCO if the employee then serving as the CCO 
becomes unavailable or unable to serve in such capacity (including by 
reason of injury or illness).\156\ Any person designated to serve as 
the CCO (including to serve temporarily) will be appropriately 
qualified to serve in such capacity based on the duties and 
responsibilities assigned to the CCO and will dedicate such person's 
entire working time to such service (or temporary service) except for 
any time required to attend to any incidental administrative matters 
related to such person's employment with the Plan Processor that do not 
detract in any material respect from such person's service as the 
CCO.\157\ Article VI sets forth various responsibilities of the CCO. 
With respect to all of his or her duties and responsibilities in such 
capacity (including those as set forth in the Plan), the CCO will be 
directly responsible and will directly report to the Operating 
Committee, notwithstanding that she or he is employed by the Plan 
Processor.\158\ The Plan Processor, subject to the oversight of the 
Operating Committee, will ensure that the CCO has appropriate resources 
to fulfill his or her obligations under the Plan and Rule 613.\159\ The 
compensation (including base salary and bonus) of the CCO will be 
payable by the Plan Processor, but be subject to review and approval by 
the Operating Committee.\160\ The Operating Committee will render the 
CCO's annual performance review.\161\
---------------------------------------------------------------------------

    \156\ Id.
    \157\ Id.
    \158\ Id. at Section 6.2(a)(iii).
    \159\ Id. at Section 6.2(a)(ii).
    \160\ Id. at Section 6.2(a)(iv).
    \161\ Id. at Section 6.2(b)(i).
---------------------------------------------------------------------------

    In addition to a CISO, the Plan Processor will designate at least 
one other employee (in addition to the person then serving as CISO), 
which employee the Operating Committee has previously approved, to 
serve temporarily as the CISO if the employee then serving as the CISO 
becomes unavailable or unable to serve in such capacity (including by 
reason of injury or illness).\162\ Any person designated to serve as 
the CISO (including to serve temporarily) will be appropriately 
qualified to serve in such capacity based on the duties and 
responsibilities assigned to the CISO under the Plan and will dedicate 
such person's entire working time to such service (or temporary 
service) except for any time required to attend to any incidental 
administrative matters related to such person's employment with the 
Plan Processor that do not detract in any material respect from such 
person's service as the CISO.\163\
---------------------------------------------------------------------------

    \162\ Id.
    \163\ Id.
---------------------------------------------------------------------------

    The Plan Processor, subject to the oversight of the Operating 
Committee, will ensure that the CISO has appropriate resources to 
fulfill the obligations of the CISO set forth in Rule 613 and in the 
Plan, including providing appropriate responses to questions posed by 
the Participants and the SEC.\164\ In performing such obligations, the 
CISO will be directly responsible and directly report to the Operating 
Committee, notwithstanding that he or she is employed by the Plan 
Processor.\165\ The compensation (including base salary and bonus) of 
the CISO will be payable by the Plan Processor, but be subject to 
review and approval by the Operating Committee, and the Operating 
Committee will render the CISO's annual performance review.\166\ 
Consistent with Appendices C and D, the CISO will be responsible for 
creating and enforcing appropriate policies, procedures, standards, 
control structures and real-time tools to monitor and address data 
security issues for the Plan Processor and the Central Repository, as 
described in the Plan.\167\ At regular intervals, to the extent that 
such information is available to the Company, the CISO will report to 
the Operating Committee the activities of the Financial Services 
Information Sharing and Analysis Center (``FS-ISAC'') or comparable 
bodies to the extent that the Company has joined FS-ISAC or other 
comparable body.\168\
---------------------------------------------------------------------------

    \164\ Id. at Section 6.2(b)(ii).
    \165\ Id. at Section 6.2(b)(iii).
    \166\ Id. at Section 6.2(b)(iv).
    \167\ Id. at Section 6.2(b)(v).
    \168\ Id. at Section 6.2(b)(vi).
---------------------------------------------------------------------------

    The Plan Processor will afford to the Participants and the 
Commission such access to the Representatives of the Plan Processor as 
any Participant or the Commission may reasonably request solely for the 
purpose of performing such Person's regulatory and oversight 
responsibilities pursuant to the federal securities laws, rules, and 
regulations or any contractual obligations.\169\ The Plan Processor 
will direct such Representatives to reasonably cooperate with any 
inquiry, investigation, or proceeding conducted by or on behalf of any 
Participant or the Commission related to such purpose.\170\
---------------------------------------------------------------------------

    \169\ Id. at Section 6.1(u).
    \170\ Id.
---------------------------------------------------------------------------

    The Operating Committee will review the Plan Processor's 
performance under the Plan at least once each year, or more often than 
once each year upon the request of two or more Participants that are 
not Affiliated Participants.\171\ The Operating Committee will notify 
the SEC of any determination made by the Operating Committee concerning 
the continuing engagement of the Plan Processor as a result of the 
Operating Committee's review of the Plan Processor and will provide the 
SEC with a copy of any reports that may be prepared in connection 
therewith.\172\
---------------------------------------------------------------------------

    \171\ Id. at Section 6.1(n).
    \172\ Id.
---------------------------------------------------------------------------

    The Operating Committee, by Supermajority Vote, may remove the Plan 
Processor from such position at any time.\173\ However, the Operating 
Committee, by Majority Vote, may remove the Plan Processor from such 
position at any time if it determines that the Plan Processor has 
failed to perform its functions in a reasonably acceptable manner in 
accordance with the provisions of the Plan or that the Plan Processor's 
expenses have become excessive and are not justified.\174\ In making 
such a determination, the Operating Committee will consider, among 
other factors: (1) The reasonableness of the Plan Processor's response 
to requests from Participants or the Company for technological changes 
or enhancements; (2) results of any assessments performed pursuant to 
Section 6.6; (3) the timeliness of preventative and corrective 
information technology system maintenance for reliable and secure 
operations; (4) compliance with requirements of Appendix D; and (5) 
such other factors related to experience, technological capability, 
quality and reliability of service, costs, back-up facilities, failure 
to meet service level agreement(s) and regulatory considerations as the 
Operating Committee may determine to be appropriate.\175\
---------------------------------------------------------------------------

    \173\ Id. at Section 6.1(q).
    \174\ Id. at Section 6.1(r).
    \175\ Id.
---------------------------------------------------------------------------

    In addition, the Plan Processor may resign upon two year's (or such 
other shorter period as may be determined by the Operating Committee by

[[Page 84706]]

Supermajority Vote) prior written notice.\176\ The Operating Committee 
will fill any vacancy in the Plan Processor position by Supermajority 
Vote, and will establish a Plan Processor Selection Subcommittee to 
evaluate and review Bids and make a recommendation to the Operating 
Committee with respect to the selection of the successor Plan 
Processor.\177\
---------------------------------------------------------------------------

    \176\ Id. at Section 6.1(s).
    \177\ Id. at Section 6.1(t).
---------------------------------------------------------------------------

b. Central Repository
    The Central Repository, under the oversight of the Plan Processor, 
and consistent with Appendix D, Central Repository Requirements, will 
receive, consolidate, and retain all CAT Data.\178\ The Central 
Repository will collect (from a Securities Information Processor 
(``SIP'') or pursuant to an NMS plan) and retain on a current and 
continuing basis, in a format compatible with the Participant Data and 
Industry Member Data, all data, including the following: (1) 
Information, including the size and quote condition, on quotes, 
including the National Best Bid and National Best Offer for each NMS 
Security; \179\ (2) Last Sale Reports and transaction reports reported 
pursuant to an effective transaction reporting plan filed with the SEC 
pursuant to, and meeting the requirements of, Rules 601 and 608; \180\ 
(3) trading halts, Limit Up-Limit Down price bands and LULD indicators; 
\181\ and (4) summary data or reports described in the specifications 
for each of the SIPs and disseminated by the respective SIP.\182\
---------------------------------------------------------------------------

    \178\ Id. at Section 6.5(a)(i).
    \179\ Id. at Section 6.5(a)(ii)(A).
    \180\ Id. at Section 6.5(a)(ii)(B).
    \181\ Id. at Section 6.5(a)(ii)(C).
    \182\ Id. at Section 6.5(a)(ii)(D).
---------------------------------------------------------------------------

    Consistent with Appendix D, Data Retention Requirements, the 
Central Repository will retain the information collected pursuant to 
paragraphs (c)(7) and (e)(7) of Rule 613 in a convenient and usable 
standard electronic data format that is directly available and 
searchable electronically without any manual intervention by the Plan 
Processor for a period of not less than six years. Such data, when 
available to the Participants' regulatory Staff and the SEC, will be 
linked.\183\ In addition, the Plan Processor will implement and comply 
with the records retention policy contemplated by Section 
6.1(d)(i).\184\
---------------------------------------------------------------------------

    \183\ Id. at Section 6.5(b)(i).
    \184\ Id. at Section 6.5(b)(ii).
---------------------------------------------------------------------------

    Consistent with Appendix D, Data Access, the Plan Processor will 
provide Participants and the SEC access to the Central Repository 
(including all systems operated by the Central Repository), and access 
to and use of the CAT Data stored in the Central Repository, solely for 
the purpose of performing their respective regulatory and oversight 
responsibilities pursuant to the federal securities laws, rules and 
regulations or any contractual obligations.\185\ The Plan Processor 
will create and maintain a method of access to the CAT Data stored in 
the Central Repository that includes the ability to run searches and 
generate reports.\186\ The method in which the CAT Data is stored in 
the Central Repository will allow the ability to return results of 
queries that are complex in nature, including market reconstructions 
and the status of order books at varying time intervals.\187\ The Plan 
Processor will, at least annually and at such earlier time promptly 
following a request by the Operating Committee, certify to the 
Operating Committee that only the Participants and the SEC have access 
to the Central Repository (other than access provided to any Industry 
Member for the purpose of correcting CAT Data previously reported to 
the Central Repository by such Industry Member).\188\
---------------------------------------------------------------------------

    \185\ Id. at Section 6.5(c)(i).
    \186\ Id. at Section 6.5(c)(ii).
    \187\ Id. at Section 6.5(c)(ii).
    \188\ Id. at Section 6.5(c)(iii); see also id. at Appendix C, 
The Security and Confidentiality of Information Reported to the 
Central Repository, and Appendix D, Data Security, describe the 
security and confidentiality of the CAT Data, including how access 
to the Central Repository is controlled.
---------------------------------------------------------------------------

c. Data Recording and Reporting by Participants
    The Plan also sets forth the requirements regarding the data 
recording and reporting by Participants.\189\ Each Participant will 
record and electronically report to the Central Repository the 
following details for each order and each Reportable Event,\190\ as 
applicable (``Participant Data;'' also referred to as ``Recorded 
Industry Member Data'', as discussed in the next Section):
---------------------------------------------------------------------------

    \189\ See CAT NMS Plan, supra note 5, at Section 6.3. 
Participants may, but are not required to, coordinate compliance 
with the recording and reporting efforts through the use of 
regulatory services agreements and/or agreements adopted pursuant to 
Rule 17d-2 under the Exchange Act.
    \190\ See CAT NMS Plan, supra note 5, at Section 6.5(d). The CAT 
NMS Plan defines ``Reportable Event'' as ``includ[ing], but . . . 
not limited to, the original receipt or origination, modification, 
cancellation, routing, execution (in whole or in part) and 
allocation of an order, and receipt of a routed order.'' Id. at 
Section 1.1.

    for original receipt or origination of an order: (1) Firm 
Designated ID(s) (FDIs) for each customer; \191\ (2) CAT-Order-ID; 
\192\ (3) SRO-Assigned Market Participant Identifier of the Industry 
Member receiving or originating the order; \193\ (4) date of order 
receipt or origination; \194\ (5) time of order receipt or 
origination (using time stamps pursuant to Section 6.8); \195\ and 
(6) the Material Terms of the Order.\196\
---------------------------------------------------------------------------

    \191\ Id. at Section 6.3(d)(i)(A).
    \192\ Id. at Section 6.3(d)(i)(B).
    \193\ Id. at Section 6.3(d)(i)(C).
    \194\ Id. at Section 6.3(d)(i)(D).
    \195\ Id. at Section 6.3(d)(i)(E).
    \196\ Id. at Section 6.3(d)(i)(F). For a discussion of the 
Material Terms of the Order required by Rule 613, see Adopting 
Release, supra note 14, at 45750-52. The Commission notes that the 
Participants include in the Plan a requirement for the reporting of 
the OTC Equity Security symbol as one of the ``Material Terms of the 
Order.'' See CAT NMS Plan, supra note 5, at Section 1.1.
---------------------------------------------------------------------------

    for the routing of an order: (1) CAT-Order-ID; \197\ (2) date on 
which the order is routed; \198\ (3) time at which the order is 
routed (using time stamps pursuant to Section 6.8); \199\ (4) SRO-
Assigned Market Participant Identifier of the Industry Member or 
Participant routing the order; \200\ (5) SRO-Assigned Market 
Participant Identifier of the Industry Member or Participant to 
which the order is being routed; \201\ (6) if routed internally at 
the Industry Member, the identity and nature of the department or 
desk to which the order is routed; \202\ and (7) the Material Terms 
of the Order.\203\
---------------------------------------------------------------------------

    \197\ See CAT NMS Plan, supra note 5, at Section 6.3(d)(ii)(A).
    \198\ Id. at Section 6.3(d)(ii)(B).
    \199\ Id. at Section 6.3(d)(ii)(C).
    \200\ Id. at Section 6.3(d)(ii)(D).
    \201\ Id. at Section 6.3(d)(ii)(E).
    \202\ Id. at Section 6.3(d)(ii)(F).
    \203\ Id. at Section 6.3(d)(ii)(G).
---------------------------------------------------------------------------

    for the receipt of an order that has been routed, the following 
information: (1) CAT-Order-ID; \204\ (2) date on which the order is 
received; \205\ (3) time at which the order is received (using time 
stamps pursuant to Section 6.8); \206\ (4) SRO-Assigned Market 
Participant Identifier of the Industry Member or Participant 
receiving the order; \207\ (5) SRO-Assigned Market Participant 
Identifier of the Industry Member or Participant routing the order; 
\208\ and (6) the Material Terms of the Order.\209\
---------------------------------------------------------------------------

    \204\ Id. at Section 6.3(d)(iii)(A).
    \205\ Id. at Section 6.3(d)(iii)(B).
    \206\ Id. at Section 6.3(d)(iii)(C).
    \207\ Id. at Section 6.3(d)(iii)(D).
    \208\ Id. at Section 6.3(d)(iii)(E).
    \209\ Id. at Section 6.3(d)(iii)(F).
---------------------------------------------------------------------------

    if the order is modified or cancelled: (1) CAT-Order-ID; \210\ 
(2) date the modification or cancellation is received or originated; 
\211\ (3) time at which the modification or cancellation is received 
or originated (using time stamps pursuant to Section 6.8); \212\ (4) 
price and remaining size of the order, if modified; \213\ (5) other 
changes in Material Terms, if modified; \214\ and (6) whether the 
modification or cancellation instruction was given by the Customer, 
or was initiated by the Industry Member or Participant.\215\
---------------------------------------------------------------------------

    \210\ Id. at Section 6.3(d)(iv)(A).
    \211\ Id. at Section 6.3(d)(iv)(B).
    \212\ Id. at Section 6.3(d)(iv)(C).
    \213\ Id. at Section 6.3(d)(iv)(D).
    \214\ Id. at Section 6.3(d)(iv)(E).
    \215\ Id. at Section 6.3(d)(iv)(F).

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[[Page 84707]]

    if the order is executed, in whole or in part: (1) CAT-Order-ID; 
\216\ (2) date of execution; \217\ (3) time of execution (using time 
stamps pursuant to Section 6.8); \218\ (4) execution capacity 
(principal, agency or riskless principal); \219\ (5) execution price 
and size;\220\ (6) the SRO-Assigned Market Participant Identifier of 
the Participant or Industry Member executing the order; \221\ (7) 
whether the execution was reported pursuant to an effective 
transaction reporting plan or the Plan for Reporting of Consolidated 
Options Last Sale Reports and Quotation Information; \222\ and (8) 
other information or additional events as may otherwise be 
---------------------------------------------------------------------------
prescribed in Appendix D, Reporting and Linkage Requirements.\223\

    \216\ Id. at Section 6.3(d)(v)(A).

    \217\ Id. at Section 6.3(d)(v)(B).
    \218\ Id. at Section 6.3(d)(v)(C).
    \219\ Id. at Section 6.3(d)(v)(D).
    \220\ Id. at Section 6.3(d)(v)(E).
    \221\ Id. at Section 6.3(d)(v)(F).
    \222\ Id. at Section 6.3(d)(v)(G).
    \223\ Id. at Section 6.3(d)(vi).
---------------------------------------------------------------------------

    As contemplated in Appendix D, Data Types and Sources, each 
Participant will report Participant Data to the Central Repository for 
consolidation and storage in a format specified by the Plan Processor, 
approved by the Operating Committee and compliant with Rule 613.\224\ 
As further described in Appendix D, Reporting and Linkage Requirements, 
each Participant is required to record the Participant Data 
contemporaneously with the Reportable Event.\225\ In addition, each 
Participant must report the Participant Data to the Central Repository 
by 8:00 a.m. Eastern Time (``ET'') on the Trading Day following the day 
that the Participant recorded the Participant Data.\226\ Participants 
may voluntarily report the Participant Data prior to the 8:00 a.m. ET 
deadline.\227\
---------------------------------------------------------------------------

    \224\ Id. at Section 6.3(a); Appendix D, Section 2.1.
    \225\ Id. at Section 6.3(b)(i); Appendix D, Section 3.
    \226\ Id. at Section 6.3(b)(ii).
    \227\ Id. at Section 6.3(b)(ii).
---------------------------------------------------------------------------

    Each Participant that is a national securities exchange is required 
to comply with the above recording and reporting requirements for each 
NMS Security registered or listed for trading on such exchange or 
admitted to unlisted trading privileges on such exchange.\228\ Each 
Participant that is a national securities association is required to 
comply with the above recording and reporting requirements for each 
Eligible Security for which transaction reports are required to be 
submitted to the association.\229\
---------------------------------------------------------------------------

    \228\ Id. at Section 6.3(c)(i).
    \229\ Id. at Section 6.3(c)(ii).
---------------------------------------------------------------------------

d. Data Reporting and Recording by Industry Members
    The Plan also sets forth the data reporting and recording 
requirements for Industry Members. Specifically, subject to Section 
6.4(c), and Section 6.4(d)(iii) with respect to Options Market Makers, 
and consistent with Appendix D, Reporting and Linkage Requirements, 
each Participant, through its Compliance Rule, will require its 
Industry Members to record and electronically report to the Central 
Repository for each order and each Reportable Event the information 
referred to in Section 6.3(d), as applicable (``Recorded Industry 
Member Data'')--that is, Participant Data discussed above.\230\ In 
addition, subject to Section 6.4(c), and Section 6.4(d)(iii) with 
respect to Options Market Makers, and consistent with Appendix D, 
Reporting and Linkage Requirements, each Participant, through its 
Compliance Rule, will require its Industry Members to record and report 
to the Central Repository the following (``Received Industry Member 
Data'' and, collectively with the Recorded Industry Member Data, 
``Industry Member Data''): (1) If the order is executed, in whole or in 
part: (a) An Allocation Report; \231\ (b) SRO-Assigned Market 
Participant Identifier of the clearing broker or prime broker, if 
applicable; and (c) CAT-Order-ID of any contra-side order(s); (2) if 
the trade is cancelled, a cancelled trade indicator; and (3) for 
original receipt or origination of an order, information of sufficient 
detail to identify the Customer.\232\
---------------------------------------------------------------------------

    \230\ Id. at Section 6.4(d)(i).
    \231\ Id. at Section 6.4(d)(ii).
    \232\ Id.
---------------------------------------------------------------------------

    With respect to the reporting obligations of an Options Market 
Maker with regard to its quotes in Listed Options, Reportable Events 
required pursuant to Sections 6.3(d)(ii) and (iv) will be reported to 
the Central Repository by an Options Exchange in lieu of the reporting 
of such information by the Options Market Maker.\233\ Each Participant 
that is an Options Exchange will, through its Compliance Rule, require 
its Industry Members that are Options Market Makers to report to the 
Options Exchange the time at which a quote in a Listed Option is sent 
to the Options Exchange (and, if applicable, any subsequent quote 
modifications and/or cancellation time when such modification or 
cancellation is originated by the Options Market Maker).\234\ Such time 
information also will be reported to the Central Repository by the 
Options Exchange in lieu of reporting by the Options Market Maker.\235\
---------------------------------------------------------------------------

    \233\ Id. at Section 6.4(d)(iii).
    \234\ Id.
    \235\ Id.
---------------------------------------------------------------------------

    Each Participant will, through its Compliance Rule, require its 
Industry Members to record and report to the Central Repository other 
information or additional events as prescribed in Appendix D, Reporting 
and Linkage Requirements.\236\
---------------------------------------------------------------------------

    \236\ Id. at Section 6.4(d)(v).
---------------------------------------------------------------------------

    As contemplated in Appendix D, Data Types and Sources, each 
Participant will require its Industry Members to report Industry Member 
Data to the Central Repository for consolidation and storage in a 
format(s) specified by the Plan Processor, approved by the Operating 
Committee and compliant with Rule 613.\237\ As further described in 
Appendix D, Reporting and Linkage Requirements, each Participant will 
require its Industry Members to record Recorded Industry Member Data 
contemporaneously with the applicable Reportable Event.\238\ In 
addition, consistent with Appendix D, Reporting and Linkage 
Requirements, each Participant will require its Industry Members to 
report: (1) Recorded Industry Member Data to the Central Repository by 
8:00 a.m. ET on the Trading Day following the day the Industry Member 
records such Recorded Industry Member Data; and (2) Received Industry 
Member Data to the Central Repository by 8:00 a.m. ET on the Trading 
Day following the day the Industry Member receives such Received 
Industry Member Data.\239\ Each Participant will permit its Industry 
Members to voluntarily report Industry Member Data prior to the 
applicable 8:00 a.m. ET deadline.\240\
---------------------------------------------------------------------------

    \237\ Id. at Section 6.4(e).
    \238\ Id. at Section 6.4(b)(i).
    \239\ Id. at Section 6.4(b)(ii).
    \240\ Id.
---------------------------------------------------------------------------

    Each Participant that is a national securities exchange must 
require its Industry Members to report Industry Member Data for each 
NMS Security registered or listed for trading on such exchange or 
admitted to unlisted trading privileges on such exchange.\241\ Each 
Participant that is a national securities association must require its 
Industry Members to report Industry Member Data for each Eligible 
Security for which transaction reports are required to be submitted to 
the association.\242\
---------------------------------------------------------------------------

    \241\ Id. at Section 6.4(c)(i).
    \242\ Id. at Section 6.4(c)(ii).
---------------------------------------------------------------------------

e. Written Assessment
    As described in Article VI, the Participants are required to 
provide the Commission with a written assessment of the operation of 
the CAT that meets the requirements set forth in Rule 613, Appendix D, 
and the Plan at least every

[[Page 84708]]

two years or more frequently in connection with any review of the Plan 
Processor's performance under the Plan pursuant to Section 6.1(n).\243\ 
The CCO will oversee this assessment and will provide the Participants 
a reasonable time to review and comment upon the written assessment 
prior to its submission to the SEC.\244\ In no case will the written 
assessment be changed or amended in response to a comment from a 
Participant; rather any comment by a Participant will be provided to 
the SEC at the same time as the written assessment.\245\
---------------------------------------------------------------------------

    \243\ See CAT NMS Plan, supra note 5, at Section 6.6(a)(i).
    \244\ Id. at Section 6.6(a)(ii).
    \245\ Id.
---------------------------------------------------------------------------

f. Business Clock Synchronization and Timestamp
    Section 6.8 of the Plan discusses the synchronization of Business 
Clocks \246\ and timestamps.
---------------------------------------------------------------------------

    \246\ Id. at Section 1.1. The CAT NMS Plan defines a ``Business 
Clock'' to mean ``a clock used to record the date and time of any 
Reportable Event required to be reported under SEC Rule 613.'' Id.
---------------------------------------------------------------------------

    Each Participant is required to synchronize its Business Clocks 
(other than such Business Clocks used solely for Manual Order Events) 
at a minimum to within 50 milliseconds of the time maintained by the 
National Institute of Standards and Technology (``NIST''), consistent 
with industry standards.\247\ In addition, each Participant must, 
through its Compliance Rule, require its Industry Members to: (1) 
Synchronize their respective Business Clocks (other than such Business 
Clocks used solely for Manual Order Events) at a minimum to within 50 
milliseconds of the time maintained by the NIST, and maintain such a 
synchronization; (2) certify periodically that their Business Clocks 
meet the requirements of the Compliance Rule; and (3) report to the 
Plan Processor and the Participant any violation of the Compliance Rule 
pursuant to the thresholds set by the Operating Committee.\248\ 
Furthermore, each Participant is required to synchronize its Business 
Clocks and, through its Compliance Rule, require its Industry Members 
to synchronize their Business Clocks used solely for Manual Order 
Events at a minimum to within one second of the time maintained by the 
NIST, consistent with industry standards, and maintain such 
synchronization.\249\ Each Participant will require its Industry 
Members to certify periodically (according to a schedule defined by the 
Operating Committee) that their Business Clocks used solely for Manual 
Order Events meet the requirements of the Compliance Rule.\250\ The 
Compliance Rule of a Participant shall require its Industry Members 
using Business Clocks solely for Manual Order Events to report to the 
Plan Processor any violation of the Compliance Rule pursuant to the 
thresholds set by the Operating Committee.\251\ Pursuant to Section 
6.8(c) of the CAT NMS Plan, the CCO, in conjunction with the 
Participants and other appropriate Industry Member advisory groups, 
annually must evaluate and make a recommendation to the Operating 
Committee as to whether the industry standard has evolved such that the 
clock synchronization standard should be tightened.\252\
---------------------------------------------------------------------------

    \247\ Id. at Section 6.8(a)(i). Participants and Industry 
Members reviewed their respective internal clock synchronization 
technology practices, and reviewed the results of The Financial 
Information Forum (``FIF'') Clock Offset and determined that a 50 
millisecond clock offset tolerance was consistent with the current 
industry clock synchronization standard. See CAT NMS Plan, supra 
note 5, at Appendix C, Section A.3(c) and D.12(p); see also 
Financial Information Forum, FIF Clock Offset Survey Preliminary 
Report (February 17, 2015), available at http://www.catnmsplan.com/industryfeedback/p602479.pdf and http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602479.pdf (``FIF Clock 
Offset Survey'').
    \248\ See CAT NMS Plan, supra note 5, at Section 6.8(a)(ii).
    \249\ Id. at Section 6.8(a)(iii).
    \250\ Id.
    \251\ Id.
    \252\ Id. at Section 6.8(c).
---------------------------------------------------------------------------

    Appendix C discusses mechanisms to ensure compliance with the 50 
millisecond clock offset tolerance.\253\ The Participants anticipate 
that they and Industry Members will adopt policies and procedures to 
verify the required clock synchronization each trading day before the 
market opens, as well as periodically throughout the trading day.\254\ 
The Participants also anticipate that they and Industry Members will 
document their clock synchronization procedures and maintain a log 
recording the time of each clock synchronization performed, and the 
result of such synchronization, specifically identifying any 
synchronization revealing any clock offset between the Participant's or 
Industry Member's Business Clock and the time maintained by the NIST 
exceeding 50 milliseconds.\255\ The CAT NMS Plan states that once both 
large and small broker-dealers begin reporting to the Central 
Repository, and as clock synchronization technology matures further, 
the Participants will assess, in accordance with Rule 613, tightening 
the CAT's clock synchronization standards to reflect changes in 
industry standards.\256\
---------------------------------------------------------------------------

    \253\ See id. at Appendix C, Section A.3(c).
    \254\ See id.
    \255\ See id. It was noted that such a log would include results 
for a period of not less than five years ending on the then current 
date. Id.
    \256\ See id. at Appendix C, Section D.12(p).
---------------------------------------------------------------------------

    Each Participant shall, and through its Compliance Rule require its 
Industry Members to, report information required by Rule 613 and the 
Plan to the Central Repository in milliseconds.\257\ To the extent that 
any Participant utilizes timestamps in increments finer than the 
minimum required by the Plan, the Participant is required to make 
reports to the Central Repository utilizing such finer increment when 
reporting CAT Data to the Central Repository so that all Reportable 
Events reported to the Central Repository could be adequately 
sequenced. Each Participant will, through its Compliance Rule: (1) 
Require that, to the extent that its Industry Members utilize 
timestamps in increments finer than the minimum required in the Plan, 
such Industry Members will utilize such finer increment when reporting 
CAT Data to the Central Repository; and (2) provide that a pattern or 
practice of reporting events outside of the required clock 
synchronization time period without reasonable justification or 
exceptional circumstances may be considered a violation of SEC Rule 613 
and the Plan.\258\ Notwithstanding the preceding sentences, each 
Participant and Industry Member will be permitted to record and report 
Manual Order Events to the Central Repository in increments up to and 
including one second, provided that Participants and Industry Members 
will be required to record and report the time when a Manual Order 
Event has been captured electronically in an order handling and 
execution system of such Participant or Industry Member (``Electronic 
Capture Time'') in milliseconds.\259\ In conjunction with Participants' 
and other appropriate Industry Member advisory groups, the CCO will 
annually evaluate and make a recommendation to the Operating Committee 
as to whether industry standards have evolved such that the required 
synchronization should be shortened or the required timestamp should be 
in finer increments.\260\ The Operating Committee will make 
determinations regarding the need to revise the synchronization and 
timestamp requirements.\261\
---------------------------------------------------------------------------

    \257\ See id. at Section 6.8(b).
    \258\ Id. at Section 6.8(b).
    \259\ Id.
    \260\ Id. at Section 6.8(c).
    \261\ Id. at Sections 6.8(a)(ii)(C), 6.8(a)(iii).

---------------------------------------------------------------------------

[[Page 84709]]

g. Technical Specifications
    Section 6.9 of the Plan establishes the requirements involving the 
Plan Processor's Technical Specifications. The Plan Processor will 
publish Technical Specifications that are at a minimum consistent with 
Appendices C and D, and updates thereto as needed, providing detailed 
instructions regarding the submission of CAT Data by Participants and 
Industry Members to the Plan Processor for entry into the Central 
Repository.\262\ The Technical Specifications will be made available on 
a publicly available Web site to be developed and maintained by the 
Plan Processor.\263\ The initial Technical Specifications and any 
Material Amendments thereto will require the approval of the Operating 
Committee by Supermajority Vote.\264\
---------------------------------------------------------------------------

    \262\ Id. at Section 6.9(a).
    \263\ Id.
    \264\ Id.
---------------------------------------------------------------------------

    The Technical Specifications will include a detailed description of 
the following: (1) The specifications for the layout of files and 
records submitted to the Central Repository; (2) the process for the 
release of new data format specification changes; (3) the process for 
industry testing for any changes to data format specifications; (4) the 
procedures for obtaining feedback about and submitting corrections to 
information submitted to the Central Repository; (5) each data element, 
including permitted values, in any type of report submitted to the 
Central Repository; (6) any error messages generated by the Plan 
Processor in the course of validating the data; (7) the process for 
file submissions (and re-submissions for corrected files); (8) the 
storage and access requirements for all files submitted; (9) metadata 
requirements for all files submitted to the CAT System; (10) any 
required secure network connectivity; (11) data security standards, 
which will, at a minimum: (a) Satisfy all applicable regulations 
regarding database security, including provisions of Regulation Systems 
Compliance and Integrity under the Exchange Act (``Reg SCI''); (b) to 
the extent not otherwise provided for under the Plan (including 
Appendix C thereto), set forth such provisions as may be necessary or 
appropriate to comply with Rule 613(e)(4); and (c) comply with industry 
best practices; and (12) any other items reasonably deemed appropriate 
by the Plan Processor and approved by the Operating Committee.\265\
---------------------------------------------------------------------------

    \265\ Id. at Section 6.9(b).
---------------------------------------------------------------------------

    Amendments to the Technical Specifications may be made only in 
accordance with Section 6.9(c).\266\ The process for amending the 
Technical Specifications varies depending on whether the change is 
material. An amendment will be deemed ``material'' if it would require 
a Participant or an Industry Member to engage in significant changes to 
the coding necessary to submit information to the Central Repository 
pursuant to the Plan, or if it is required to safeguard the security or 
confidentiality of the CAT Data.\267\ Except for Material Amendments to 
the Technical Specifications, the Plan Processor will have the sole 
discretion to amend and publish interpretations regarding the Technical 
Specifications; however, all non-Material Amendments made to the 
Technical Specifications and all published interpretations will be 
provided to the Operating Committee in writing at least ten days before 
being published.\268\ Such non-Material Amendments and published 
interpretations will be deemed approved ten days following provision to 
the Operating Committee unless two or more unaffiliated Participants 
call for a vote to be taken on the proposed amendment or 
interpretation.\269\ If an amendment or interpretation is called for a 
vote by two or more unaffiliated Participants, the proposed amendment 
must be approved by Majority Vote of the Operating Committee.\270\ Once 
a non-Material Amendment has been approved or deemed approved by the 
Operating Committee, the Plan Processor will be responsible for 
determining the specific changes to the Central Repository and 
providing technical documentation of those changes, including an 
implementation timeline.\271\
---------------------------------------------------------------------------

    \266\ Id. at Section 6.9(c).
    \267\ Id.
    \268\ Id. at Section 6.9(c)(i).
    \269\ Id.
    \270\ Id.
    \271\ Id.
---------------------------------------------------------------------------

    Material Amendments to the Technical Specifications require 
approval of the Operating Committee by Supermajority Vote.\272\ The 
Operating Committee, by Supermajority Vote, may amend the Technical 
Specifications on its own motion.\273\
---------------------------------------------------------------------------

    \272\ Id. at Section 6.9(c)(ii).
    \273\ Id. at Section 6.9(c)(iii).
---------------------------------------------------------------------------

h. Surveillance
    Surveillance requirements are described in Section 6.10. Using the 
tools provided for in Appendix D, Functionality of the CAT System, each 
Participant will develop and implement a surveillance system, or 
enhance existing surveillance systems, reasonably designed to make use 
of the consolidated information contained in the Central 
Repository.\274\ Unless otherwise ordered by the SEC, within fourteen 
months after the Effective Date, each Participant must initially 
implement a new or enhanced surveillance system(s) as required by Rule 
613 and Section 6.10(a) of the Plan.\275\ Participants may, but are not 
required to, coordinate surveillance efforts through the use of 
regulatory services agreements and agreements adopted pursuant to Rule 
17d-2 under the Exchange Act.\276\
---------------------------------------------------------------------------

    \274\ See CAT NMS Plan, supra note 5, at Section 6.10(a).
    \275\ Id.
    \276\ Id. at Section 6.10(b).
---------------------------------------------------------------------------

    Consistent with Appendix D, Functionality of the CAT System, the 
Plan Processor will provide Participants and the SEC with access to all 
CAT Data stored in the Central Repository. Regulators will have access 
to processed CAT Data through two different methods: (1) An online 
targeted query tool; and (2) user-defined direct queries and bulk 
extracts.\277\ The online targeted query tool will provide authorized 
users with the ability to retrieve CAT Data via an online query screen 
that includes the ability to choose from a variety of pre-defined 
selection criteria.\278\ Targeted queries must include date(s) and/or 
time range(s), as well as one or more of a variety of fields.\279\ The 
user-defined direct queries and bulk extracts will 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.\280\
---------------------------------------------------------------------------

    \277\ Id. at Section 6.10(c)(i).
    \278\ Id. at Section 6.10(c)(i)(A).
    \279\ Id.
    \280\ Id. at Section 6.10(c)(i)(B).
---------------------------------------------------------------------------

    Extraction of CAT Data will be consistent with all permission 
rights granted by the Plan Processor.\281\ All CAT Data returned will 
be encrypted, and PII data \282\ will be masked unless users have 
permission to view the PII contained in the CAT Data that has been 
requested.\283\
---------------------------------------------------------------------------

    \281\ Id. at Section 6.10(c)(ii).
    \282\ The proposed CAT NMS Plan defines PII as ``personally 
identifiable information, including a social security number or tax 
identifier number or similar information.'' Id. at Section 1.1.
    \283\ Id. at Section 6.10(c)(ii).
---------------------------------------------------------------------------

    The Plan Processor will implement an automated mechanism to monitor 
direct query usage.\284\ Such monitoring will

[[Page 84710]]

include automated alerts to notify the Plan Processor of potential 
issues with bottlenecks or excessively long queues for queries or CAT 
Data extractions.\285\ The Plan Processor will provide the Operating 
Committee or its designee(s) details as to how the monitoring will be 
accomplished and the metrics that will be used to trigger alerts.\286\
---------------------------------------------------------------------------

    \284\ Id. at Section 6.10(c)(iii) (providing that ``[s]uch 
monitoring shall include automated alerts to notify the Plan 
Processor of potential issues with bottlenecks or excessively long 
queues for queries or CAT Data extractions. The Plan Processor shall 
provide the Operating Committee or its designee(s) details as to how 
the monitoring will be accomplished and the metrics that will be 
used to trigger alerts'').
    \285\ Id.
    \286\ Id.
---------------------------------------------------------------------------

    The Plan Processor will reasonably assist regulatory Staff 
(including those of Participants) with creating queries.\287\ Without 
limiting the manner in which regulatory Staff (including those of 
Participants) may submit queries, the Plan Processor will submit 
queries on behalf of regulatory Staff (including those of Participants) 
as reasonably requested.\288\ The Plan Processor will staff a CAT help 
desk, as described in Appendix D, CAT Help Desk, to provide technical 
expertise to assist regulatory Staff (including those of Participants) 
with questions about the content and structure of the CAT Data.\289\
---------------------------------------------------------------------------

    \287\ Id. at 6.10(c)(iv).
    \288\ Id. at Section 6.10(c)(v).
    \289\ Id. at Section 6.10(c)(vi).
---------------------------------------------------------------------------

i. Information Security Program
    As set forth in Section 6.12, the Plan Processor is required to 
develop and maintain a comprehensive information security program for 
the Central Repository that contains, at a minimum, the specific 
requirements detailed in Appendix D, Data Security. The information 
security program must be approved and reviewed at least annually by the 
Operating Committee.\290\
---------------------------------------------------------------------------

    \290\ Id. at Section 6.12.
---------------------------------------------------------------------------

6. Financial Matters

    Articles VII and VIII of the Plan address certain financial matters 
related to the Company. In particular, the Plan states that, subject to 
certain special allocations provided for in Section 8.2, any net profit 
or net loss will be allocated among the Participants equally.\291\ In 
addition, subject to Section 10.2, cash and property of the Company 
will not be distributed to the Participants unless the Operating 
Committee approves by Supermajority Vote a distribution after fully 
considering the reason that such distribution must or should be made to 
the Participants, including the circumstances contemplated under 
Section 8.3, Section 8.6, and Section 9.3.\292\ To the extent a 
distribution is made, all Participants will participate equally in any 
such distribution except as otherwise provided in Section 10.2.\293\
---------------------------------------------------------------------------

    \291\ Id. at Section 8.1.
    \292\ Id. at Section 8.5(a).
    \293\ Id.
---------------------------------------------------------------------------

    Article XI addresses the funding of the Company. On an annual basis 
the Operating Committee will approve an operating budget for the 
Company.\294\ The budget will include the projected costs of the 
Company, including the costs of developing and operating the CAT System 
for the upcoming year, and the sources of all revenues to cover such 
costs, as well as the funding of any reserve that the Operating 
Committee reasonably deems appropriate for prudent operation of the 
Company.\295\
---------------------------------------------------------------------------

    \294\ Id. at Section 11.1(a).
    \295\ Id.
---------------------------------------------------------------------------

    Subject to certain funding principles set forth in Article XI, the 
Operating Committee will have discretion to establish funding for the 
Company, including: (1) Establishing fees that the Participants will 
pay; and (2) establishing fees for Industry Members that will be 
implemented by Participants.\296\ In establishing the funding of the 
Company, the Operating Committee will seek to: (1) Create transparent, 
predictable revenue streams for the Company that are aligned with the 
anticipated costs to build, operate and administer the CAT and the 
other costs of the Company; (2) establish an allocation of the 
Company's related costs among Participants and Industry Members that is 
consistent with the Exchange Act, taking into account the timeline for 
implementation of the CAT and distinctions in the securities trading 
operations of Participants and Industry Members and their relative 
impact upon Company resources and operations; (3) establish a tiered 
fee structure in which the fees charged to: (a) CAT Reporters that are 
Execution Venues, including Alternative Trading Systems (``ATSs''), are 
based upon the level of market share, (b) Industry Members' non-ATS 
activities are based upon message traffic, and (c) the CAT Reporters 
with the most CAT-related activity (measured by market share and/or 
message traffic, as applicable) are generally comparable (where, for 
these comparability purposes, the tiered fee structure takes into 
consideration affiliations between or among CAT Reporters, whether 
Execution Venues and/or Industry Members); (4) provide for ease of 
billing and other administrative functions; (5) avoid any disincentives 
such as placing an inappropriate burden on competition and a reduction 
in market quality; and (6) build financial stability to support the 
Company as a going concern.\297\ The Participants will 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 will be 
labeled as ``Consolidated Audit Trail Funding Fees.'' \298\
---------------------------------------------------------------------------

    \296\ Id. at Section 11.1(b).
    \297\ Id. at Section 11.2.
    \298\ Id. at Section 11.1(b).
---------------------------------------------------------------------------

    To fund the development and implementation of the CAT, the Company 
will time the imposition and collection of all fees on Participants and 
Industry Members in a manner reasonably related to the timing when the 
Company expects to incur such development and implementation 
costs.\299\ In determining fees for Participants and Industry Members, 
the Operating Committee shall take into account fees, costs and 
expenses (including legal and consulting fees and expenses) incurred by 
the Participants on behalf of the Company prior to the Effective Date 
in connection with the creation and implementation of the CAT, and such 
fees, costs and expenses shall be fairly and reasonably shared among 
the Participants and Industry Members.\300\ Consistent with Article XI, 
the Operating Committee will adopt policies, procedures, and practices 
regarding the budget and budgeting process, assignment of tiers, 
resolution of disputes, billing and collection of fees, and other 
related matters.\301\ As a part of its regular review of fees for the 
CAT, the Operating Committee will have the right to change the tier 
assigned to any particular Person pursuant to this Article XI.\302\ Any 
such changes will be effective upon reasonable notice to such 
Person.\303\
---------------------------------------------------------------------------

    \299\ Id. at Section 11.1(c).
    \300\ Id.
    \301\ Id. at Section 11.1(d).
    \302\ The Commission notes that Section 11.1(b) of the CAT NMS 
Plan states that the Participants would file fees for Industry 
Members approved by the Operating Committee with the Commission. The 
Operating Committee may only change the tier to which a Person is 
assigned in accordance with a fee schedule filed with the 
Commission.
    \303\ See CAT NMS Plan, supra note 5, at Section 11.1(d).
---------------------------------------------------------------------------

    The Operating Committee will establish fixed fees to be payable by 
Execution Venues as follows. Each Execution Venue that executes 
transactions, or, in the case of a national securities association, has 
trades reported by its members to its trade reporting facility or 
facilities for reporting transactions effected otherwise than on an 
exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee 
depending on the market share of that Execution Venue in NMS

[[Page 84711]]

Stocks and OTC Equity Securities.\304\ The Operating Committee will 
establish at least two and no more than five tiers of fixed fees, based 
on an Execution Venue's NMS Stocks and OTC Equity Securities market 
share.\305\ For these purposes, market share will be calculated by 
share volume.\306\ In addition, each Execution Venue that executes 
transactions in Listed Options will pay a fixed fee depending on the 
Listed Options market share of that Execution Venue.\307\ The Operating 
Committee will establish at least two and no more than five tiers of 
fixed fees, based on an Execution Venue's Listed Options market share, 
with market share calculated by contract volume.\308\ Changes to the 
number of tiers after approval of the Plan would require a 
Supermajority Vote of the Operating Committee and Commission approval 
under Section 19(b) of the Exchange Act, as would the establishment of 
the initial fee schedule and any changes to the fee schedule within the 
tier structure.\309\
---------------------------------------------------------------------------

    \304\ Id. at Section 11.3(a)(i).
    \305\ Id.
    \306\ Id.
    \307\ Id. at Section 11.3(a)(ii).
    \308\ Id.
    \309\ The Commission notes that the Participants could choose to 
submit the proposed fee schedule to the Commission as individual 
SROs pursuant to Rule 19b-4 or jointly as Participants to an NMS 
plan pursuant to Rule 608 of Regulation NMS. Because the proposed 
fee schedule would establish fees, whether the Participants 
individually file it pursuant to Section 19(b)(3)(A)(ii) of the Act, 
or jointly file it pursuant to Rule 608(b)(3)(i) of Regulation NMS, 
the proposed fee schedule could take effect upon filing with the 
Commission. See 15 U.S.C. 78s(b)(3)(A)(ii); 17 CFR 242.608(b)(3)(i); 
see also Section IV.F, infra.
---------------------------------------------------------------------------

    The Operating Committee also will establish fixed fees payable by 
Industry Members, based on the message traffic generated by such 
Industry Member.\310\ The Operating Committee will establish at least 
five and no more than nine tiers of fixed fees, based on message 
traffic.\311\ For the avoidance of doubt, the fixed fees payable by 
Industry Members pursuant to this paragraph will, in addition to any 
other applicable message traffic, include message traffic generated by: 
(1) An ATS that does not execute orders that is sponsored by such 
Industry Member; and (2) routing orders to and from any ATS system 
sponsored by such Industry Member.\312\
---------------------------------------------------------------------------

    \310\ See CAT NMS Plan, supra note 5, at Section 11.3(b).
    \311\ Id.
    \312\ Id.
---------------------------------------------------------------------------

    Furthermore, the Operating Committee may establish any other fees 
ancillary to the operation of the CAT that it reasonably determines 
appropriate, including: fees for the late or inaccurate reporting of 
information to the CAT; fees for correcting submitted information; and 
fees based on access and use of the CAT for regulatory and oversight 
purposes (and not including any reporting obligations).\313\
---------------------------------------------------------------------------

    \313\ As it relates to fees that the Operating Committee may 
impose for access and use of the CAT for regulatory and oversight 
purposes, the Commission interprets the provisions in the Plan 
relating to the collection of fees as applying only to Participants 
and Industry Members, and thus the Commission would not be subject 
to such fees. See Section IV.F, infra, for further discussion 
regarding the funding of the Company.
---------------------------------------------------------------------------

    The Company will make publicly available a schedule of effective 
fees and charges adopted pursuant to the Plan as in effect from time to 
time.\314\ Such schedule will be developed after the Plan Processor is 
selected.\315\ The Operating Committee will review the fee schedule on 
at least an annual basis and will make any changes to such fee schedule 
that it deems appropriate.\316\ The Operating Committee is authorized 
to review the fee schedule on a more regular basis, but will not make 
any changes on more than a semi-annual basis unless, pursuant to a 
Supermajority Vote, the Operating Committee concludes that such change 
is necessary for the adequate funding of the Company.\317\
---------------------------------------------------------------------------

    \314\ See CAT NMS Plan, supra note 5, at Section 11.3(d).
    \315\ Id.
    \316\ Id.; see also supra note 309.
    \317\ Id.
---------------------------------------------------------------------------

    The Operating Committee will establish a system for the collection 
of fees authorized under the Plan.\318\ The Operating Committee may 
include such collection responsibility as a function of the Plan 
Processor or another administrator.\319\ Alternatively, the Operating 
Committee may use the facilities of a clearing agency registered under 
Section 17A of the Exchange Act to provide for the collection of such 
fees.\320\
---------------------------------------------------------------------------

    \318\ Id. at Section 11.4.
    \319\ Id.
    \320\ Id.
---------------------------------------------------------------------------

    Each Participant will require each Industry Member to pay all 
applicable fees authorized under Article XI within thirty days after 
receipt of an invoice or other notice indicating payment is due (unless 
a longer payment period is otherwise indicated).\321\ If an Industry 
Member fails to pay any such fee when due, such Industry Member will 
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: (1) The Prime 
Rate plus 300 basis points; or (2) the maximum rate permitted by 
applicable law.\322\ Each Participant will pay all applicable fees 
authorized under Article XI as required by Section 3.7(b).\323\
---------------------------------------------------------------------------

    \321\ Id.
    \322\ Id.
    \323\ Id.
---------------------------------------------------------------------------

    Disputes with respect to fees the Company charges Participants 
pursuant to Article XI will be determined by the Operating Committee or 
a Subcommittee designated by the Operating Committee.\324\ Decisions by 
the Operating Committee on such matters shall be binding on 
Participants, without prejudice to the rights of any Participant to 
seek redress from the SEC pursuant to SEC Rule 608 or in any other 
appropriate forum.\325\ The Participants will adopt rules requiring 
that disputes with respect to fees charged to Industry Members pursuant 
to Article XI be determined by the Operating Committee or a 
Subcommittee.\326\ Decisions by the Operating Committee or Subcommittee 
on such matters will be binding on Industry Members, without prejudice 
to the rights of any Industry Member to seek redress from the SEC 
pursuant to SEC Rule 608 or in any other appropriate forum.\327\
---------------------------------------------------------------------------

    \324\ Id. at Section 11.5.
    \325\ Id.
    \326\ Id.
    \327\ Id.
---------------------------------------------------------------------------

7. Amendments

    Section 12.3 of the CAT NMS Plan, which governs amendments to the 
Plan, states that, except with respect to the addition of new 
Participants (Section 3.3), the transfer of Company Interest (Section 
3.4), the termination of a Participant's participation in the Plan 
(Section 3.7), amendments to the Selection Plan (Section 5.3 [sic]) and 
special allocations (Section 8.2), any change to the Plan requires a 
written amendment authorized by the affirmative vote of not less than 
two-thirds of all of the Participants, or with respect to Section 3.8 
by the affirmative vote of all the Participants.\328\ Such proposed 
amendment must be approved by the Commission pursuant to Rule 608 or 
otherwise becomes effective under Rule 608.\329\ Notwithstanding the 
foregoing, to the extent that the Commission grants exemptive relief 
applicable to any provision of the LLC Agreement, Participants and 
Industry Members will be entitled to comply with such provision 
pursuant to the terms of the exemptive relief so granted at the time 
such relief is granted irrespective of whether the LLC Agreement has 
been amended.\330\
---------------------------------------------------------------------------

    \328\ Id. at Section 12.3.
    \329\ Id.
    \330\ Id.

---------------------------------------------------------------------------

[[Page 84712]]

8. Compliance Rule Applicable to Industry Members

    Under Article III, each Participant agrees to comply with and 
enforce compliance by its Industry Members with the provisions of Rule 
613 and the Plan, as applicable, to the Participant and its Industry 
Members.\331\ Accordingly, the Participants will endeavor to promulgate 
consistent rules (after taking into account circumstances and 
considerations that may impact Participants differently) requiring 
compliance by their respective Industry Members with the provisions of 
Rule 613 and the Plan.\332\
---------------------------------------------------------------------------

    \331\ Id. at Section 3.11.
    \332\ Id.
---------------------------------------------------------------------------

9. Plan Appendices

    The Plan includes three appendices.\333\ Appendix A provides the 
Consolidated Audit Trail National Market System Plan Request for 
Proposal, as issued February 26, 2013 and subsequently updated. In 
addition, Rule 613(a)(1) requires that the Plan discuss twelve 
considerations that explain the choices made by the Participants to 
meet the requirements specified in Rule 613 for the CAT. In accordance 
with this requirement, the Participants have addressed each of the 
twelve considerations in Appendix C. Finally, Appendix D describes the 
technical requirements for the Plan Processor.
---------------------------------------------------------------------------

    \333\ Appendix B is reserved for future use.
---------------------------------------------------------------------------

    As mentioned, Appendix C discusses the various ``considerations'' 
regarding how the Participants propose to develop and implement the CAT 
required to be discussed by Rule 613.\334\ These considerations, 
include: (i) The reporting of data to the Central Repository, including 
the sources of the data and the manner in which the Central Repository 
will receive, extract, transform, load, and retain the data; (ii) the 
time and method by which the data in the Central Repository will be 
made available to regulators; (iii) the reliability and accuracy of the 
data reported to and maintained by the Central Repository throughout 
its lifecycle; (iv) the security and confidentiality of the information 
reported to the Central Repository; (v) the flexibility and scalability 
of the systems used by the Central Repository to collect, consolidate 
and store CAT Data; (vi) the feasibility, benefits and costs of broker-
dealers reporting certain information to the CAT in a timely manner; 
(vii) an analysis of expected benefits and estimated costs for 
creating, implementing, and maintaining the CAT pursuant to the 
proposed CAT NMS Plan; (viii) an analysis of the proposed CAT NMS 
Plan's impact on competition, efficiency, and capital formation; (ix) a 
plan to eliminate rules and systems that will be rendered duplicative 
by the CAT; (x) objective milestones to assess progress toward the 
implementation of the proposed CAT NMS Plan; (xi) the process by which 
Participants solicited views of members and other parties regarding 
creation, implementation, and maintenance of CAT and a summary of these 
views and how the Participants took them into account in preparing the 
CAT NMS Plan; and (xii) a discussion of reasonable alternative 
approaches that the Participants considered to create, implement, and 
maintain the CAT.\335\
---------------------------------------------------------------------------

    \334\ 17 CFR 242.613(a).
    \335\ See CAT NMS Plan, supra note 5, at Appendix C, Sections 
A.1-6, B.7-8, C.9-10.
---------------------------------------------------------------------------

    The technical requirements discussed in Appendix D to the CAT NMS 
Plan, CAT NMS Plan Processor Requirements, include an outline of 
minimum functional and technical requirements established by the 
Participants of the CAT NMS Plan for the Plan Processor. Appendix D 
provides the Plan Processor with details and guidelines for compliance 
with the requirements contained in Article VI that are not expressly 
stated therein.
    Appendix D also outlines technical architecture, capacity and data 
retention requirements for the Central Repository,\336\ as well as 
describes the types of data that would be reported to the Central 
Repository and the sources of such information.\337\ The Appendix 
outlines specific requirements relating to reporting data, linking 
data, validating and processing data and timing for availability to 
regulators.\338\ Appendix D further discusses how regulators would be 
able to access and use the data.\339\ It also provides requirements 
related to data security, and specific requirements governing how 
Customer and Customer Account Information must be captured and stored, 
separate from transactional data.\340\ Appendix D outlines requirements 
for the Plan Processor's disaster recovery and business continuity 
plans.\341\ Finally, Appendix D describes plans for technical, 
operational, and business support to CAT Reporters for all aspects of 
reporting, and describes how upgrades and new functionality would be 
incorporated.\342\
---------------------------------------------------------------------------

    \336\ Id. at Appendix D, Sections 1.1, 1.3-1.4.
    \337\ Id. at Appendix D, Section 2.1.
    \338\ Id. at Appendix D, Sections 3, 6.1-6.2, 7.2.
    \339\ Id. at Appendix D, Section 8.1.
    \340\ Id. at Appendix D, Sections 4.1, 9.1.
    \341\ Id. at Appendix D, Sections 5.3-5.4.
    \342\ Id. at Appendix D, Sections 10, 11.
---------------------------------------------------------------------------

10. Reporting Procedures

    The CAT NMS Plan requires CAT Reporters to comply with specific 
reporting procedures when reporting CAT Data to the Central 
Repository.\343\ Specifically, CAT Reporters must format CAT Data to 
comply with the format specifications approved by the Operating 
Committee.\344\ CAT Reporters must record CAT Data contemporaneously 
with the applicable Reportable Event \345\ and report such data to the 
Central Repository by 8:00 a.m. ET on the next Trading Day.\346\ The 
obligation to report CAT Data applies to ``each NMS Security registered 
or listed for trading on [a national securities] exchange or admitted 
to unlisted trading privileges on such exchange,'' and ``each Eligible 
Security for which transaction reports are required to be submitted to 
such [national securities] association.'' \347\ Further, the 
Participants are required to adopt Compliance Rules \348\ that require 
Industry Members, subject to their SRO jurisdiction, to report CAT 
Data.\349\
---------------------------------------------------------------------------

    \343\ Id. at Sections 6.3-6.4; Appendix D, at Section 2.1.
    \344\ Id. at Sections 6.3(a), 6.4(a). The CAT NMS Plan also 
requires that the Operating Committee-approved format must be a 
format specified by the Plan Processor and Rule 613 compliant.
    \345\ Id. at Sections 6.3(b)(i), 6.4(b)(i).
    \346\ Id. at Sections 6.3(b)(ii); 6.4(b)(ii); Appendix C, 
Section A.1(a)(ii). Participants may voluntarily report CAT Data 
prior to the 8:00 a.m. ET deadline. Id. The CAT NMS Plan defines 
``Trading Day'' as the date ``as is determined by the Operating 
Committee.'' The CAT NMS Plan also provides that ``the Operating 
Committee may establish different Trading Days for NMS Stocks (as 
defined in SEC Rule 600(b)(47), Listed Options, OTC Equity 
Securities, and any other securities that are included as Eligible 
Securities from time to time.'') Id. at Section 1.1.
    \347\ See CAT NMS Plan, supra note 5, at Sections 6.3(c)(i)-
(ii), 6.4(c)(i)-(ii).
    \348\ The CAT NMS Plan defines the ``Compliance Rule'' to mean 
``with respect to a Participant, the rules promulgated by such 
Participant as contemplated by Section 3.11.'' Id. at Section 1.1. 
Section 3.11 of the CAT NMS Plan provides that ``each Participant 
shall comply with and enforce compliance, as required by SEC Rule 
608(c), by its Industry Members with the provisions of SEC Rule 613 
and of [the LLC Agreement], as applicable, to the Participant and 
its Industry Members. The Participants shall endeavor to promulgate 
consistent rules (after taking into account circumstances and 
considerations that may impact Participants differently) requiring 
compliance by their respective Industry Members with the provisions 
of SEC Rule 613 and [the LLC Agreement].'' Id. at Section 3.11.
    \349\ See id. at Section 6.4(c)(i)-(ii).
---------------------------------------------------------------------------

    The CAT NMS Plan requires specific data elements of CAT Data that 
must be recorded and reported to the Central Repository upon: (i) 
``original receipt or

[[Page 84713]]

origination of an order,'' \350\ (ii) ``routing of an order,'' \351\ 
and (iii) ``receipt of an order that has been routed.'' \352\ 
Additionally, the CAT NMS Plan requires that a CAT Reporter must record 
and report data related to an ``order [that] is modified or 
cancelled,'' \353\ and an ``order [that] is executed, in whole or in 
part,'' \354\ as well as ``other information or additional events as 
may be prescribed in Appendix D, Reporting and Linkage Requirements.'' 
\355\ The CAT NMS Plan also requires Industry Member CAT Reporters to 
report additional data elements for (i) an ``order [that] is executed, 
in whole or in part,'' \356\ (ii) a ``trade [that] is cancelled,'' 
\357\ or (iii) ``original receipt or origination of an order.'' \358\ 
Further, each Participant shall, through Compliance Rules, require 
Industry Members to record and report to the Central Repository 
information or additional events as may be prescribed to accurately 
reflect the complete lifecycle of each Reportable Event.\359\
---------------------------------------------------------------------------

    \350\ For ``original receipt or origination of an order,'' the 
CAT NMS Plan specifies the following data elements: (i) Firm 
Designated ID(s) for each Customer; (ii) CAT-Order-ID; (iii) SRO-
Assigned Market Participant Identifier of the Industry Member 
receiving or originating the order; (iv) date of order receipt or 
origination; (v) time of order receipt or origination (using 
timestamps pursuant to Section 6.8 of the CAT NMS Plan); and (vi) 
Material Terms of the Order. Id. at Section 6.3(d)(i).
    \351\ For ``routing of an order,'' the CAT NMS Plan specifies 
the following data elements: (i) CAT-Order-ID; (ii) date on which 
the order is routed; (iii) time at which the order is routed (using 
timestamps pursuant to Section 6.8 of the CAT NMS Plan); (iv) SRO-
Assigned Market Participant Identifier of the Industry Member or 
Participant routing the order; (v) SRO-Assigned Market Participant 
Identifier of the Industry Member or Participant to which the order 
is being routed; (vi) if routed internally at the Industry Member, 
the identity and nature of the department or desk to which the order 
is routed; and (vii) Material Terms of the Order. Id. at Section 
6.3(d)(ii).
    \352\ For ``receipt of an order that has been routed,'' the CAT 
NMS Plan specifies the following data elements: (i) CAT-Order-ID; 
(ii) date on which the order is received; (iii) time at which the 
order is received (using timestamps pursuant to Section 6.8); (iv) 
SRO-Assigned Market Participant Identifier of the Industry Member or 
Participant receiving the order; (v) SRO-Assigned Market Participant 
Identifier of the Industry Member or Participant routing the order; 
and (vi) Material Terms of the Order. Id. at Section 6.3(d)(iii).
    \353\ For an ``order [that] is modified or cancelled,'' the CAT 
NMS Plan specifies the following data elements: (i) CAT-Order-ID; 
(ii) date the modification or cancellation is received or 
originated; (iii) time at which the modification or cancellation is 
received or originated (using timestamps pursuant to Section 6.8 of 
the CAT NMS Plan); (iv) price and remaining size of the order, if 
modified; (v) other changes in the Material Terms of the Order, if 
modified; and (vi) whether the modification or cancellation 
instruction was given by the Customer or was initiated by the 
Industry Member or Participant. Id. at Section 6.3(d)(iv).
    \354\ For an ``order [that] is executed, in whole or in part,'' 
the CAT NMS Plan specifies the following data elements: (i) CAT-
Order-ID; (ii) date of execution; (iii) time of execution (using 
timestamps pursuant to Section 6.8 of the CAT NMS Plan); (iv) 
execution capacity (principal, agency or riskless principal); (v) 
execution price and size; (vi) SRO-Assigned Market Participant 
Identifier of the Participant or Industry Member executing the 
order; and (vii) whether the execution was reported pursuant to an 
effective transaction reporting plan or the Plan for Reporting of 
Consolidated Options Last Sale Reports and Quotation Information. 
Id. at Section 6.3(d)(v).
    \355\ See id. at Section 6.3(d)(vi).
    \356\ For an ``order [that] is executed, in whole or in part,'' 
the CAT NMS Plan specifies the following additional data elements: 
(i) an Allocation Report; (ii) SRO-Assigned Market Participant 
Identifier of the clearing broker or prime broker, if applicable; 
and (iii) CAT-Order-ID of any contra-side order(s). Id. at Section 
6.4(d)(ii)(A).
    \357\ For a ``trade [that] is cancelled,'' the CAT NMS Plan 
specifies the following additional data element: a cancelled trade 
indicator. Id. at Section 6.4(d)(ii)(B).
    \358\ For ``original receipt or origination of an order,'' the 
CAT NMS Plan specifies the following additional data element(s): the 
Firm Designated ID, Customer Account Information, and Customer 
Identifying Information for the relevant Customer. Id. at Section 
6.4(d)(ii)(C).
    \359\ Id. at Appendix D, Section 3.
---------------------------------------------------------------------------

11. Timeliness of Data Reporting

    Section 6.3(b)(ii) of the CAT NMS Plan requires each Participant to 
report Participant Data to the Central Repository by 8:00 a.m. ET on 
the Trading Day following the day the Participant records such 
data.\360\ Additionally, a Participant may voluntarily report such data 
prior to this deadline.\361\ Section 6.4(b)(ii) states that each 
Participant shall, through its Compliance Rule, require its Industry 
Members to report Recorded Industry Member Data to the Central 
Repository by 8:00 a.m. ET on the Trading Day following the day the 
Industry Member records such data, and Received Industry Member Data to 
the Central Repository by 8:00 a.m. ET on the Trading Day following the 
day the Industry Member receives such data.\362\ Section 6.4(b)(ii) of 
the CAT NMS Plan also states that each Participant shall, through its 
Compliance Rule, permit its Industry Members to voluntarily report such 
data prior to the applicable 8:00 a.m. ET deadline.\363\
---------------------------------------------------------------------------

    \360\ Id. at Section 6.3(b)(ii); see also id. at Appendix C, 
Section A.1(a)(ii); Appendix D, Sections 3.1, 6.1.
    \361\ Id. at Section 6.3(b)(ii).
    \362\ Id. at Section 6.4(b)(ii).
    \363\ Id.
---------------------------------------------------------------------------

12. Uniform Format

    The CAT NMS Plan does not mandate the format in which data must be 
reported to the Central Repository.\364\ Appendix D states that the 
Plan Processor will determine the electronic format in which data must 
be reported, and that the format will be described in the Technical 
Specifications.\365\ Appendix C specifies that CAT Reporters could be 
required to report data either in a uniform electronic format, or in a 
manner that would allow the Central Repository to convert the data to a 
uniform electronic format, for consolidation and storage.\366\ 
Similarly, Sections 6.3(a) and 6.4(a) of the CAT NMS Plan require that 
CAT Reporters report data to the Central Repository in a format or 
formats specified by the Plan Processor, approved by the Operating 
Committee, and compliant with Rule 613.\367\
---------------------------------------------------------------------------

    \364\ Id. at Appendix C, Section D.12(f); see also id. at 
Appendix C, Section A.1(a).
    \365\ Id. at Appendix D, Section 2.1. Appendix D states that 
more than one format may be allowed to support the various market 
participants that would report information to the Central 
Repository. Id.; see also id. at Section 6.9.
    \366\ Id. at Appendix C, Section A.1(b).
    \367\ Id. at Sections 6.3(a), 6.4(a).
---------------------------------------------------------------------------

    The CAT NMS Plan requires that data reported to the Central 
Repository be stored in an electronic standard format.\368\ 
Specifically, Section 6.5(b)(i) of the CAT NMS Plan requires the 
Central Repository to retain the information collected pursuant to Rule 
613(c)(7) and (e)(7) in a convenient and usable standard electronic 
data format that is directly available and searchable electronically 
without any manual intervention by the Plan Processor for a period of 
not less than six (6) years.\369\ Such data must be linked when it is 
made available to the Participant's regulatory Staff and the 
Commission.\370\
---------------------------------------------------------------------------

    \368\ Pursuant to the Plan, for data consolidation and storage, 
as noted above, such data must be reported in a uniform electronic 
format or in a manner that would allow the Central Repository to 
convert the data to a uniform electronic format. Id. at Appendix C, 
Section A.1(b).
    \369\ Id. at Section 6.5(b)(i).
    \370\ Id.
---------------------------------------------------------------------------

13. Symbology

    The CAT NMS Plan also addresses the symbology that CAT Reporters 
must use when reporting CAT Data. The CAT NMS Plan requires CAT 
Reporters to report data using the listing exchange's symbology. The 
CAT NMS Plan requires the Plan Processor to create and maintain a 
symbol history and mapping table, as well as provide a tool to 
regulators and CAT Reporters showing the security's complete symbol 
history, along with a start-of-day and end-of-day list of reportable 
securities for use by CAT Reporters, in .csv format, by 6:00 a.m. on 
each trading day.\371\ The Participants will be responsible for 
providing the Plan Processor with issue symbol information, and issue 
symbol validation must be included in the

[[Page 84714]]

processing of data submitted by CAT Reporters.\372\
---------------------------------------------------------------------------

    \371\ Id. at Appendix D, Section 2.
    \372\ Id. at Appendix C, Section A.1(a).
---------------------------------------------------------------------------

14. CAT-Reporter-ID

    Sections 6.3 and 6.4 of the CAT NMS Plan require CAT Reporters to 
record and report to the Central Repository an SRO-Assigned Market 
Participant Identifier \373\ for orders and certain Reportable Events 
to be used by the Central Repository to assign a unique CAT-Reporter-ID 
\374\ for purposes of identifying each CAT Reporter associated with an 
order or Reportable Event (the ``Existing Identifier Approach'').\375\ 
The CAT NMS Plan requires the reporting of SRO-Assigned Market 
Participant Identifiers of: The Industry Member receiving or 
originating an order; \376\ the Industry Member or Participant from 
which (and to which) an order is being routed; \377\ the Industry 
Member or Participant receiving (and routing) a routed order; \378\ the 
Industry Member or Participant executing an order, if an order is 
executed; \379\ and the clearing broker or prime broker, if applicable, 
if an order is executed.\380\ An Industry Member would report to the 
Central Repository its existing SRO-Assigned Market Participant 
Identifier used by the relevant SRO specifically for transactions 
occurring at that SRO.\381\ Similarly, an exchange reporting CAT 
Reporter information would report data using the SRO-Assigned Market 
Participant Identifier used by the Industry Member on that exchange or 
its systems.\382\ Over-the-counter (``OTC'') orders and Reportable 
Events would be reported with an Industry Member's FINRA SRO-Assigned 
Market Participant Identifier.\383\
---------------------------------------------------------------------------

    \373\ The CAT NMS Plan defines an ``SRO-Assigned Market 
Participant Identifier'' as ``an identifier assigned to an Industry 
Member by an SRO or an identifier used by a Participant.'' Id. at 
Section 1.1.
    \374\ Rule 613 defines a CAT-Reporter-ID as ``a code that 
uniquely and consistently identifies [a CAT Reporter] for purposes 
of providing data to the central repository.'' 17 CFR 242.613(j)(2).
    \375\ The SROs requested exemptive relief from Rule 613 so that 
the CAT NMS Plan may permit the Existing Identifier Approach, which 
would allow a CAT Reporter to report an existing SRO-Assigned Market 
Participant Identifier in lieu of requiring the reporting of a 
universal CAT-Reporter-ID. See Exemptive Request Letter, supra note 
21, at 19. The Commission granted exemptive relief on March 1, 2016 
in order to allow this alternative to be included in the CAT NMS 
Plan and subject to notice and comment. See Exemption Order, supra 
note 21.
    \376\ See CAT NMS Plan, supra note 5, at Sections 6.3(d)(i), 
6.4(d)(i).
    \377\ Id. at Sections 6.3(d)(ii), 6.4(d)(i).
    \378\ Id. at Sections 6.3(d)(iii), 6.4(d)(i).
    \379\ Id. at Sections 6.3(d)(v), 6.4(d)(i).
    \380\ Id. at Section 6.4(d)(ii)(A)(2). Industry Members are 
required by the CAT NMS Plan to record and report this information. 
Id. at Section 6.4(d)(ii).
    \381\ See Exemption Order, supra note 21, at 31-41.
    \382\ See id. at 20.
    \383\ Id.
---------------------------------------------------------------------------

    The CAT NMS Plan requires the Plan Processor to develop and 
maintain the mechanism to assign (and to change, if necessary) CAT-
Reporter-IDs.\384\ For the Central Repository to link the SRO-Assigned 
Market Participant Identifier to the CAT-Reporter-ID, each SRO must 
submit, on a daily basis, all SRO-Assigned Market Participant 
Identifiers used by its Industry Members (or itself), as well as 
information to identify the corresponding market participant (for 
example, a CRD number or Legal Entity Identifier (``LEI'') to the 
Central Repository.\385\ Additionally, each Industry Member shall be 
required to submit to the Central Repository information sufficient to 
identify such Industry Member (e.g., CRD number or LEI, as noted 
above).\386\ The Plan Processor would use the SRO-Assigned Market 
Participant Identifiers and identifying information (i.e., CRD number 
or LEI) to assign a CAT-Reporter-ID to each Industry Member and SRO for 
internal use across all data within the Central Repository.\387\ The 
Plan Processor would create and maintain a database in the Central 
Repository that would map the SRO-Assigned Market Participant 
Identifiers to the appropriate CAT-Reporter-ID.\388\
---------------------------------------------------------------------------

    \384\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
10.1. Changes to CAT-Reporter-IDs must be reviewed and approved by 
the Plan Processor. Id. The CAT NMS Plan also requires the Central 
Repository to generate and assign a unique CAT-Reporter-ID to all 
reports submitted to the system based on sub-identifiers that are 
currently used by CAT Reporters in their order handling and trading 
processes (described in the Exemption Request as SRO-assigned market 
participant identifiers). Id. at Appendix D, Section 3; see also 
Exemption Order, supra note 21, at 31-41.
    \385\ See CAT NMS Plan, supra note 5, at Section 6.3(e)(i).
    \386\ Id. at Section 6.4(d)(vi).
    \387\ See Exemption Order, supra note 21, at 31-41.
    \388\ Id. at 20.
---------------------------------------------------------------------------

    The CAT must be able to capture, store, and maintain current and 
historical SRO-Assigned Market Participant Identifiers.\389\ The SRO-
Assigned Market Participant Identifier must also be included on the 
Plan Processor's acknowledgment of its receipt of data files from a CAT 
Reporter or Data Submitter,\390\ on daily statistics provided by the 
Plan Processor after the Central Repository has processed data,\391\ 
and on a secure Web site that the Plan Processor would maintain that 
would contain each CAT Reporter's daily reporting statistics.\392\ In 
addition, data validations by the Plan Processor must include 
confirmation of a valid SRO-Assigned Market Participant 
Identifier.\393\
---------------------------------------------------------------------------

    \389\ Id. at Appendix D, Section 2.
    \390\ See id. at Appendix D, Section 7.1.
    \391\ See id. at Appendix D, Section 7.2.
    \392\ See id. at Appendix D, Section 10.1.
    \393\ See id. at Appendix D, Section 7.2. The CAT NMS Plan also 
notes that both the CAT-Reporter-ID and the SRO-Assigned Market 
Participant Identifier would be data fields for the online targeted 
query tool described in the CAT NMS Plan as providing authorized 
users with the ability to retrieve processed and/or validated 
(unlinked) data via an online query screen. See id. at Appendix D, 
Section 8.1.1.
---------------------------------------------------------------------------

15. Customer-ID

a. Customer Information Approach
    Rule 613(c)(7)(i)(A) requires that for the original receipt or 
origination of an order, a CAT Reporter report the ``Customer-ID(s) for 
each Customer.'' \394\ ``Customer-ID'' is defined in Rule 613(j)(5) to 
mean ``with respect to a customer, a code that uniquely and 
consistently identifies such customer for purposes of providing data to 
the Central Repository.'' \395\ Rule 613(c)(8) requires that ``[a]ll 
plan sponsors and their members shall use the same Customer-ID and CAT-
Reporter-ID for each customer and broker-dealer.'' \396\
---------------------------------------------------------------------------

    \394\ 17 CFR 242.613(c)(7)(i)(A).
    \395\ 17 CFR 242.613(j)(5).
    \396\ 17 CFR 242.613(c)(8).
---------------------------------------------------------------------------

    In Appendix C, the Participants describe the ``Customer Information 
Approach,'' \397\ an alternative approach to the requirement that a 
broker-dealer report a Customer-ID for every Customer upon original 
receipt or origination of an order.\398\ Under the Customer Information 
Approach, the CAT NMS Plan would require each broker-dealer to assign a 
unique Firm Designated ID to each Customer.\399\ As the Firm Designated 
ID, broker-dealers would be permitted to use an account number or any 
other identifier defined by the firm,

[[Page 84715]]

provided each identifier is unique across the firm for each business 
date (i.e., a single firm may not have multiple separate customers with 
the same identifier on any given date).\400\ According to the CAT NMS 
Plan, broker-dealers would submit an initial set of Customer 
information to the Central Repository, including, as applicable, the 
Firm Designated ID, the Customer's name, address, date of birth, 
individual tax payer identifier number (``ITIN'')/social security 
number (``SSN''), individual's role in the account (e.g., primary 
holder, joint holder, guardian, trustee, person with power of attorney) 
and LEI,\401\ and/or Large Trader ID (``LTID''), if applicable, which 
would be updated as set forth in the CAT NMS Plan.\402\
---------------------------------------------------------------------------

    \397\ The SROs requested exemptive relief from Rule 613 so that 
the CAT NMS Plan may permit the Customer Information Approach, which 
would require each broker-dealer to assign a unique Firm Designated 
ID to each trading account and to submit an initial set of 
information identifying the Customer to the Central Repository, in 
lieu of requiring each broker-dealer to report a Customer-ID for 
each Customer upon the original receipt or origination of an order. 
See Exemptive Request Letter, supra note 21, at 12. The Commission 
granted exemptive relief on March 1, 2016 in order to allow this 
alternative to be included in the CAT NMS Plan and subject to notice 
and comment. See Exemption Order, supra note 21.
    \398\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.1(a)(iii).
    \399\ Id. The CAT NMS Plan defines a ``Firm Designated ID'' as 
``a unique identifier for each trading account designated by 
Industry Members for purposes of providing data to the Central 
Repository, where each such identifier is unique among all 
identifiers from any given Industry Member for each business date.'' 
See id. at Section 1.1.
    \400\ Id. at Appendix C, Section A.1(a)(iii).
    \401\ The CAT NMS Plan provides that where a validated LEI is 
available for a Customer or entity, this may obviate a need to 
report other identifier information (e.g., Customer name, address, 
EIN). Id. at Appendix C, Section A.1(a)(iii) n.31.
    \402\ The CAT NMS Plan states that the Participants anticipate 
that Customer information that is initially reported to the CAT 
could be limited to Customer accounts that have, or are expected to 
have, CAT Reportable Event activity. For example, the CAT NMS Plan 
notes accounts that are considered open, but have not traded 
Eligible Securities in a given time frame, may not need to be pre-
established in the CAT, but rather could be reported as part of 
daily updates after they have CAT Reportable Event activity. Id. at 
Appendix C, Section A.1(a)(iii) n.32.
---------------------------------------------------------------------------

    Under the Customer Information Approach, broker-dealers would be 
required to report only the Firm Designated ID for each new order 
submitted to the Central Repository, rather than the ``Customer-ID'' as 
defined by Rule 613(c)(j)(5) and as required by Rule 613(c)(7)(i)(A), 
and the Plan Processor would associate specific Customers and their 
Customer-IDs with individual order events based on the reported Firm 
Designated IDs.\403\ Within the Central Repository, each Customer would 
be uniquely identified by identifiers or a combination of identifiers 
such as an ITIN/SSN, date of birth, and, as applicable, LEI and 
LTID.\404\ The Plan Processor would be required to use these unique 
identifiers to map orders to specific Customers across all broker-
dealers.\405\ To ensure information identifying a Customer is updated, 
broker-dealers would be required to submit to the Central Repository 
daily updates for reactivated accounts, newly established or revised 
Firm Designated IDs, or associated reportable Customer 
information.\406\
---------------------------------------------------------------------------

    \403\ See id. at Appendix C, Section A.1(a)(iii). The CAT NMS 
Plan also requires Industry Members to report ``Customer Account 
Information'' upon the original receipt of origination of an order. 
See CAT NMS Plan, supra note 5, at Sections 1.1, 6.4(d)(ii)(C).
    \404\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.1(a)(iii).
    \405\ Id.
    \406\ The CAT NMS Plan notes that because reporting to the CAT 
is on an end-of-day basis, intra-day changes to information could be 
captured as part of the daily updates to the information. To ensure 
the completeness and accuracy of Customer information and 
associations, in addition to daily updates, broker-dealers would be 
required to submit periodic full refreshes of Customer information 
to the CAT. The scope of the ``full'' Customer information refresh 
would need to be further defined, with the assistance of the Plan 
Processor, to determine the extent to which inactive or otherwise 
terminated accounts would need to be reported. Id. at Appendix C, 
Section A.1(a)(iii) n.33.
---------------------------------------------------------------------------

    Appendix C provides additional requirements that the Plan Processor 
must meet under the Customer Information Approach.\407\ The Plan 
Processor must maintain information of sufficient detail to uniquely 
and consistently identify each Customer across all CAT Reporters, and 
associated accounts from each CAT Reporter, and must document and 
publish, with the approval of the Operating Committee, the minimum list 
of attributes to be captured to maintain this association.\408\ In 
addition, the Plan Processor must maintain valid Customer and Customer 
Account Information \409\ for each trading day and provide a method for 
Participants and the Commission to easily obtain historical changes to 
that information (e.g., name changes, address changes).\410\ The Plan 
Processor also must design and implement a robust data validation 
process for submitted Firm Designated IDs, Customer Account Information 
and Customer Identifying Information, and be able to link accounts that 
move from one CAT Reporter to another due to mergers and acquisitions, 
divestitures, and other events.\411\ Under the Customer Information 
Approach, Industry Members will initially submit full account lists for 
all active accounts to the Plan Processor and subsequently submit 
updates and changes on a daily basis.\412\ Finally, the Plan Processor 
must have a process to periodically receive full account lists to 
ensure the completeness and accuracy of the account database.\413\
---------------------------------------------------------------------------

    \407\ See id. at Appendix C, Section A.1(a)(iii).
    \408\ Id. Section 9.1 of Appendix D also addresses, among other 
things, the minimum attributes that CAT must capture for Customers 
and the validation process for such attributes. Id. at Appendix D, 
Section 9.1.
    \409\ Id. at Appendix D, Section 9.1. In relevant part, 
``Customer Account Information'' is defined in the Plan to include, 
but not be limited to, account number, account type, customer type, 
date account opened, and large trader identifier (if applicable). 
See id. at Section 1.1.
    \410\ See id. at Appendix C, Section A.1(a)(iii).
    \411\ Id. The CAT NMS Plan defines ``Customer Identifying 
Information'' to mean ``information of sufficient detail to identify 
a Customer, including, but not limited to, (a) with respect to 
individuals: Name, address, date of birth, individual tax payer 
identification number (``ITIN'')/social security number (``SSN''), 
individual's role in the account (e.g., primary holder, joint 
holder, guardian, trustee, person with the power of attorney); and 
(b) with respect to legal entities: Name, address, Employer 
Identification Number (``EIN'')/LEI) or other comparable common 
entity identifier, if applicable; provided, however, where the LEI 
or other common entity identifier is provided, information covered 
by such common entity identifier (e.g., name, address) would not 
need to be separately submitted to the Central Repository.'' See id. 
at Section 1.1.
    \412\ Id. at Appendix C, Section A.1(a)(iii).
    \413\ Id.
---------------------------------------------------------------------------

b. Account Effective Date vs. Account Open Date

    Rule 613(c)(7)(viii)(B) requires broker-dealers to report to the 
Central Repository ``Customer Account Information'' upon the original 
receipt or origination of an order.\414\ The CAT NMS Plan defines 
``Customer Account Information'' to include, in part, the Customer's 
account number, account type, customer type, date account opened and 
LTID (if applicable).\415\ The Plan, however, provides that in two 
limited circumstances, a broker-dealer could report the ``Account 
Effective Date'' in lieu of the date an account was opened.\416\ The 
first circumstance is where a relationship identifier--rather than an 
actual parent account--has been established for an institutional 
Customer relationship.\417\ In this case, no account open date is 
available for the institutional Customer parent relationship because 
there is no parent account, and for the same reason, there is no 
account number or account type available.\418\ Thus, the Plan provides 
that in this circumstance, a broker-dealer could report the ``Account 
Effective Date'' of the relationship in

[[Page 84716]]

lieu of an account open date.\419\ Further, the Plan provides that 
where such an institutional Customer relationship was established 
before the broker-dealer's obligation to report audit trail data, the 
``Account Effective Date'' would be either (i) the date the broker-
dealer established the relationship identifier, or (ii) the date when 
trading began (i.e., the date the first order was received) using the 
relevant relationship identifier, and if both dates are available and 
differ, the earlier date.\420\ Where such relationships are established 
after the broker-dealer's obligation to report audit trail data is 
required, the ``Account Effective Date'' would be the date the broker-
dealer established the relationship identifier and would be no later 
than the date the first order was received.\421\ Regardless of when the 
relationship was established for such institutional Customers, the Plan 
provides that broker-dealers may report the relationship identifier in 
place of Rule 613(c)(7)(viii)(B)'s requirement to report the ``account 
number,'' and report ``relationship'' in place of ``account 
type.''\422\
---------------------------------------------------------------------------

    \414\ 17 CFR 242.613(c)(7)(viii)(B). ``Customer Account 
Information'' is defined in Rule 613(j)(4) to ``include, but not be 
limited to, account number, account type, customer type, date 
account opened, and large trader identifier (if applicable).'' 17 
CFR 242.613(j)(4).
    \415\ See CAT NMS Plan, supra note 5, at Section 1.1.
    \416\ Id. The SROs requested exemptive relief from Rule 613 so 
that the CAT NMS Plan may permit broker-dealers to report to the 
Central Repository the ``effective date'' of an account in lieu of 
requiring each broker-dealer to report the date the account was 
opened in certain limited circumstances. See Exemptive Request 
Letter, supra note 21, at 13. The Commission granted exemptive 
relief on March 1, 2016 in order to allow this alternative to be 
included in the CAT NMS Plan and subject to notice and comment. See 
Exemption Order, supra note 21.
    \417\ See Exemption Order, supra note 21; see also September 
2015 Supplement, supra note 21, at 4-5.
    \418\ See September 2015 Supplement, supra note 21, at 6.
    \419\ See CAT NMS Plan, supra note 5, at Section 1.1.
    \420\ Id.
    \421\ Id.
    \422\ Id.
---------------------------------------------------------------------------

    The second circumstance where a broker-dealer may report the 
``Account Effective Date'' rather than the date an account was opened 
as required in Rule 613(c)(7)(viii)(B) is when particular legacy system 
data issues prevent a broker-dealer from providing an account open date 
for any type of account (i.e., institutional, proprietary or retail) 
that was established before the CAT's implementation.\423\ According to 
the Plan, these legacy system data issues may arise because:
---------------------------------------------------------------------------

    \423\ Id.; see also September 2015 Supplement, supra note 21, at 
7-9.
---------------------------------------------------------------------------

    (1) A broker-dealer has switched back office providers or clearing 
firms and the new back office/clearing firm system identifies the 
account open date as the date the account was opened on the new system;
    (2) A broker-dealer is acquired and the account open date becomes 
the date that an account was opened on the post-merger back office/
clearing firm system;
    (3) Certain broker-dealers maintain multiple dates associated with 
accounts in their systems and do not designate in a consistent manner 
which date constitutes the account open date, as the parameters of each 
date are determined by the individual broker-dealer; or
    (4) No account open date exists for a proprietary account of a 
broker-dealer.\424\
---------------------------------------------------------------------------

    \424\ See CAT NMS Plan, supra note 5, at Section 1.1.
---------------------------------------------------------------------------

    Thus, when legacy systems data issues arise due to one of the four 
reasons above and no account open date is available, the Plan provides 
that broker-dealers would be permitted to report an ``Account Effective 
Date'' in lieu of an account open date.\425\ When the legacy systems 
data issues and lack of account open date are attributable to above 
reasons (1) or (2), the ``Account Effective Date'' would be the date 
the account was established, either directly or via a system transfer, 
at the relevant broker-dealer.\426\ When the legacy systems data issues 
and lack of account open date are attributable to above reason (3), the 
``Account Effective Date'' would be the earliest available date.\427\ 
When the legacy systems data issues and lack of account open date are 
attributable to above reason (4), the ``Account Effective Date'' would 
be (i) the date established for the proprietary account in the broker-
dealer or its system(s), or (ii) the date when proprietary trading 
began in the account, i.e., the date on which the first order was 
submitted from the account.\428\
---------------------------------------------------------------------------

    \425\ Id.
    \426\ Id.
    \427\ Id.
    \428\ Id.
---------------------------------------------------------------------------

c. Modification/Cancellation
    Rule 613(c)(7)(iv)(F) requires that ``[t]he CAT-Reporter-ID of the 
broker-dealer or Customer-ID of the person giving the modification or 
cancellation instruction'' be reported to the Central Repository.\429\ 
Because the Customer Information Approach no longer requires, as 
permitted by the Exemption Order, that a Customer-ID be reported upon 
original receipt or origination of an order, and because reporting the 
Customer-ID of the specific person that gave the modification or 
cancellation instruction would result in an inconsistent level of 
information regarding the identity of the person giving the 
modification or cancellation instruction versus the identity of the 
Customer that originally received or originated an order, Section 
6.3(d)(iv)(F) of the CAT NMS Plan modifies the requirement in Rule 613 
and instead requires CAT Reporters to report whether the modification 
or cancellation instruction was ``given by the Customer or was 
initiated by the Industry Member or Participant.''\430\
---------------------------------------------------------------------------

    \429\ 17 CFR 242.613(c)(7)(iv)(F) (emphasis added).
    \430\ See CAT NMS Plan, supra note 5, at Section 6.3(d)(iv)(F). 
The SROs requested exemptive relief from Rule 613 so that the CAT 
NMS Plan may permit CAT Reporters to report whether a modification 
or cancellation instruction was given by the Customer associated 
with the order, or was initiated by the broker-dealer or exchange 
associated with the order, in lieu of requiring CAT Reporters to 
report the Customer-ID of the person giving the modification or 
cancellation instruction. See Exemptive Request Letter, supra note 
21, at 12-13. The Commission granted exemptive relief on March 1, 
2016 in order to allow this alternative to be included in the CAT 
NMS Plan and subject to notice and comment. See Exemption Order, 
supra note 21.
---------------------------------------------------------------------------

16. Order Allocation Information

    Section 6.4(d)(ii)(A)(1) of the CAT NMS Plan provides that each 
Participant through its Compliance Rule must require that Industry 
Members record and report to the Central Repository an Allocation 
Report that includes the Firm Designated ID when an execution is 
allocated in whole or part.\431\ The CAT NMS Plan defines an Allocation 
Report as ``a report made to the Central Repository by an Industry 
Member that identifies the Firm Designated ID for any account(s), 
including subaccount(s), to which executed shares are allocated and 
provides the security that has been allocated, the identifier of the 
firm reporting the allocation, the price per share of shares allocated, 
the side of shares allocated, the number of shares allocated to each 
account, and the time of the allocation.'' \432\ The CAT NMS Plan 
explains, for the avoidance of doubt, that an Allocation Report shall 
not be required to be linked to particular orders or executions.\433\
---------------------------------------------------------------------------

    \431\ See CAT NMS Plan, supra note 5, at Section 
6.4(d)(ii)(A)(1); see also April 2015 Supplement, supra note 21. The 
SROs requested exemptive relief from Rule 613 so that the CAT NMS 
Plan may permit Industry Members to record and report to the Central 
Repository an Allocation Report that includes the Firm Designated ID 
when an execution is allocated in whole or part in lieu of requiring 
the reporting of the account number for any subaccount to which an 
execution is allocated, as is required by Rule 613. See Exemptive 
Request Letter, supra note 21, at 26-27. The Commission granted 
exemptive relief on March 1, 2016 in order to allow this alternative 
to be included in the CAT NMS Plan and subject to notice and 
comment. See Exemption Order, supra note 21.
    \432\ See CAT NMS Plan, supra note 5, at Section 1.1; see also 
April 2015 Supplement, supra note 21.
    \433\ See CAT NMS Plan, supra note 5, at Section 1.1.
---------------------------------------------------------------------------

17. Options Market Maker Quotes

    Section 6.4(d)(iii) of the CAT NMS Plan states that, with respect 
to the reporting obligations of an Options Market Maker under Sections 
6.3(d)(ii) and (iv) regarding its quotes\434\ in Listed

[[Page 84717]]

Options, such quotes shall be reported to the Central Repository by the 
relevant Options Exchange in lieu of reporting by the Options Market 
Maker.\435\ Section 6.4(d)(iii) further states that each Participant 
that is an Options Exchange shall, through its Compliance Rule, require 
its Industry Members that are Options Market Makers to report to the 
Options Exchange the time at which a quote in a Listed Option is sent 
to the Options Exchange (and, if applicable, the time of any subsequent 
quote modification and/or cancellation where such modification or 
cancellation is originated by the Options Market Maker).\436\ Such time 
information also shall be reported to the Central Repository by the 
Options Exchange in lieu of reporting by the Options Market Maker.\437\
---------------------------------------------------------------------------

    \434\ Rule 613(c)(7) provides that the CAT NMS Plan must require 
reporting of the details for each order and each Reportable Event, 
including the routing and modification or cancellation of an order. 
17 CFR 242.613(c)(7). Rule 613(j)(8) defines ``order'' to include 
``any bid or offer.'' 17 CFR 242.613(j)(8).
    \435\ See CAT NMS Plan, supra note 5, at Section 6.4(d)(iii). 
The SROs requested exemptive relief from Rule 613 so that the CAT 
NMS Plan may permit Options Market Maker quotes to be reported to 
the Central Repository by the relevant Options Exchange in lieu of 
requiring that such reporting be done by both the Options Exchange 
and the Options Market Maker, as is required by Rule 613. See 
Exemptive Request Letter, supra note 21, at 2. In accord with the 
exemptive relief requested, the SROs committed to require Options 
Market Makers to report to the Exchange the time at which a quote in 
a Listed Option is sent to the Options Exchange. Id. at 3. The 
Commission granted exemptive relief on March 1, 2016 in order to 
allow this alternative to be included in the CAT NMS Plan and 
subject to notice and comment. See Exemption Order, supra note 21.
    \436\ See CAT NMS Plan, supra note 5, at Section 6.4(d)(iii).
    \437\ Id.
---------------------------------------------------------------------------

18. Primary Market Transactions, Debt Securities and Futures

    Rule 613 and the CAT NMS Plan do not require the reporting of audit 
trail data for Primary Market Transactions,\438\ debt securities, and 
futures. However, Rule 613(i) requires that, within six months after 
the effective date of the CAT NMS Plan, the SROs shall jointly provide 
to the Commission ``a document outlining how such exchanges and 
associations could incorporate into the consolidated audit trail 
information with respect to equity securities that are not NMS 
securities,\439\ debt securities, primary market transactions in equity 
securities that are not NMS securities, and primary market transactions 
in debt securities, including details for each order and reportable 
event that may be required to be provided, which market participants 
may be required to provide the data, an implementation timeline, and a 
cost estimate.'' \440\
---------------------------------------------------------------------------

    \438\ The CAT NMS Plan defines ``Primary Market Transaction'' to 
mean ``any transaction other than a secondary market transaction and 
refers to any transaction where a Person purchases securities in an 
offering.'' Id. at Section 1.1.
    \439\ The Commission notes that in the CAT NMS Plan some non-NMS 
equities (specifically, OTC equity securities) are required to be 
reported. Id. at Sections 1.1, 6.3 (requiring Eligible Securities 
data to be reported, and where Eligible Securities is defined as all 
NMS securities and all OTC equity securities).
    \440\ See 17 CFR 242.613(i); see also CAT NMS Plan, supra note 
5, at Section 6.11. The CAT NMS Plan defines ``NMS Securities'' to 
mean ``any security or class of securities for which transaction 
reports are collected, processed, and made available pursuant to an 
effective transaction reporting plan, or an effective national 
market system plan for reporting transactions in Listed Options.'' 
See CAT NMS Plan, supra note 5, at Section 1.1. The CAT NMS Plan 
defines ``OTC Equity Securities'' as ``any equity security, other 
than an NMS Security, subject to prompt last sale reporting rules of 
a registered national securities association and reported to one of 
such association's equity trade reporting facilities.'' Id.
---------------------------------------------------------------------------

19. Error Rates

    The CAT NMS Plan defines Error Rate as ``the percentage of 
[R]eportable [E]vents collected by the [C]entral [R]epository in which 
the data reported does not fully and accurately reflect the order event 
that occurred in the market.'' \441\ Under the CAT NMS Plan, the 
Operating Committee sets the maximum Error Rate that the Central 
Repository would tolerate from a CAT Reporter reporting data to the 
Central Repository.\442\ The Operating Committee reviews and resets the 
maximum Error Rate, at least annually.\443\ If a CAT Reporter reports 
CAT Data to the Central Repository with errors such that their error 
percentage exceeds the maximum Error Rate, then such CAT Reporter would 
not be in compliance with the CAT NMS Plan or Rule 613.\444\ As such, 
``the Participants as Participants or the SEC may take appropriate 
action for failing to comply with the reporting obligations under the 
CAT NMS Plan and SEC Rule 613.'' \445\ The CAT NMS Plan, however, does 
not detail what specific compliance enforcement provisions would apply 
if a CAT Reporter exceeds the maximum Error Rate.\446\
---------------------------------------------------------------------------

    \441\ See CAT NMS Plan, supra note 5, at Section 1.1; see also 
Rule 613(j)(6).
    \442\ Id. at Section 6.5(d)(i).
    \443\ Id. at Appendix C, Section A.3(b).
    \444\ Id. at Appendix C, Section A.3(b); Rule 613(g)-(h).
    \445\ Id. at Appendix C, Section A.3(b).
    \446\ See Notice, supra note 5, at 30645.
---------------------------------------------------------------------------

    The CAT NMS Plan sets the initial maximum Error Rate at 5% for any 
data reported pursuant to subparagraphs (3) and (4) of Rule 
613(c).\447\ The SROs highlight that ``the Central Repository will 
require new reporting elements and methods for CAT Reporters and there 
will be a learning curve when CAT Reporters begin to submit data to the 
Central Repository'' in support of a 5% initial rate.\448\ Further, the 
SROs state that ``many CAT Reporters may have never been obligated to 
report data to an audit trail.'' \449\ The SROs believe an initial 
maximum Error Rate of 5% ``strikes the balance of making allowances for 
adapting to a new reporting regime, while ensuring that the data 
provided to regulators will be capable of being used to conduct 
surveillance and market reconstruction.'' \450\ In the CAT NMS Plan, 
the Participants compared the contemplated Error Rates of CAT Reporters 
to the error rates of OATS reporters in the time periods immediately 
following three significant OATS releases in the last ten years.\451\ 
The Participants state that for the three comparative OATS releases 
\452\: An average of 2.42% of order events did not pass systemic 
validations; an average of 0.36% of order events were not submitted in 
a timely manner; an average of 0.86% of orders were unsuccessfully 
matched to a trade reporting facility trade report; an average of 3.12% 
of OATS Route Reports were unsuccessfully matched to an exchange order; 
and an average of 2.44% of OATS Route Reports were unsuccessfully 
matched to a report by another reporting entity.\453\
---------------------------------------------------------------------------

    \447\ See CAT NMS Plan, supra note 5, at Section 6.5(d)(i).
    \448\ Id. at Appendix C, Section A.3(b).
    \449\ Id.
    \450\ Id.
    \451\ Id. The SROs note that the three comparative releases are 
known as ``(1) OATS Phase III, which required manual orders to be 
reported to OATS; (2) OATS for OTC Securities which required OTC 
equity securities to be reported to OATS; and (3) OATS for NMS which 
required all NMS stocks to be reported to OATS.'' Id.
    \452\ Id. The SROs note that the calculated ``combined average 
error rates for the time periods immediately following [the OATS] 
release across five significant categories for these three 
releases'' was used in setting in the initial maximum Error Rate. 
Id.
    \453\ Id.
---------------------------------------------------------------------------

    The Participants, moreover, anticipate reviewing and resetting the 
maximum Error Rate once Industry Members (excluding Small Industry 
Members) begin to report to the Central Repository and again once Small 
Industry Members report to the Central Repository.\454\
---------------------------------------------------------------------------

    \454\ Id.
---------------------------------------------------------------------------

    The Participants thus propose a phased approach to lowering the 
maximum Error Rates among CAT Reporters based on the period of time 
reporting to the Central Repository and whether the CAT Reporters are 
Participants, large broker-dealers or

[[Page 84718]]

small broker-dealers.\455\ The Plan sets forth a goal of the following 
maximum Error Rates \456\ where ``Year(s)'' refers to year(s) after the 
CAT NMS Plan's date of effectiveness:
---------------------------------------------------------------------------

    \455\ Id.
    \456\ Id.

                                      Table 1--Maximum Error Rates Schedule
----------------------------------------------------------------------------------------------------------------
                                                                                    Three years
                                                   One year (%)    Two years (%)        (%)       Four years (%)
----------------------------------------------------------------------------------------------------------------
Participants....................................               5               1               1               1
Large Industry Members..........................             N/A               5               1               1
Small Industry Members..........................             N/A             N/A               5               1
----------------------------------------------------------------------------------------------------------------

    The CAT NMS Plan requires the Plan Processor to: (i) Measure and 
report errors every business day; \457\ (ii) provide CAT Reporters 
daily statistics and error reports as they become available, including 
a description of such errors; \458\ (iii) provide monthly reports to 
CAT Reporters that detail a CAT Reporter's performance and comparison 
statistics; \459\ (iv) define educational and support programs for CAT 
Reporters to minimize Error Rates; \460\ and (v) identify, daily, all 
CAT Reporters exceeding the maximum allowable Error Rate.\461\ To 
timely correct data-submitted errors to the Central Repository, the 
Participants require that the Central Repository receive and process 
error corrections at all times.\462\ Further, the CAT NMS Plan requires 
that CAT Reporters be able to submit error corrections to the Central 
Repository through a web-interface or via bulk uploads or file 
submissions, and that the Plan Processor, subject to the Operating 
Committee's approval, support the bulk replacement of records and the 
reprocessing of such records.\463\ The Participants, furthermore, 
require that the Plan Processor identify CAT Reporter data submission 
errors based on the Plan Processor's validation processes.\464\
---------------------------------------------------------------------------

    \457\ Id. The CAT NMS Plan sets forth that the Plan Processor 
shall provide the Operating Committee with regular Error Rate 
reports. Id. at Section 6.1(o)(v). The Error Rate reports shall 
include each of the following--if the Operating Committee deems them 
necessary or advisable--``Error Rates by day and by delta over time, 
and Compliance Thresholds by CAT Reporter, by Reportable Event, by 
age before resolution, by symbol, by symbol type (e.g., ETF and 
Index) and by event time (by hour and cumulative on the hour)[.]'' 
Id.
    \458\ See id. at Appendix C, Section A.3(b).
    \459\ See id.
    \460\ See id. at Appendix D, Section 10.1. The CAT NMS Plan sets 
forth support programs that shall include educational programs, 
including FAQs, a dedicated help desk, industry-wide trainings, 
certifications, industry-wide testing, maintaining Technical 
Specifications with defined intervals for new releases/updates, 
emailing CAT Reporter data outliers, conducting annual assessments, 
using test environments prior to releasing new code to production, 
and imposing CAT Reporter attendance requirements for testing 
sessions and educational and industry-wide trainings. Id.
    \461\ See id. at Appendix D, Section 10.4.
    \462\ See id. at Appendix C, Section A.3(b).
    \463\ See id.
    \464\ See id. At a minimum, the processes would include 
validating the data's file format, CAT Data format, type, 
consistency, range, logic, validity, completeness, timeliness and 
linkage. See id. at Appendix D, Section 7.2.
---------------------------------------------------------------------------

20. Retirement of Existing Trade and Order Data Rules and Systems

a. Duplicative or Partially Duplicative Rules and Systems
    As required by Rule 613(a)(1)(ix),\465\ the CAT NMS Plan provides a 
plan to eliminate rules and systems that will be rendered duplicative 
by the CAT.\466\ Under the CAT NMS Plan, each Participant will initiate 
an analysis of its rules and systems to determine which require 
information that is duplicative of the information available to the 
Participants through the Central Repository. The CAT NMS Plan states 
that each Participant has begun reviewing its rulebook and is waiting 
for the publication of the final reporting requirements to the Central 
Repository to complete its analysis. According to the Plan, each 
Participant should complete its analysis within twelve months after 
Industry Members (other than Small Industry Members) are required to 
begin reporting data to the Central Repository (or a later date to be 
determined by each Participant if sufficient data is not available to 
complete the analysis in that timeframe).\467\
---------------------------------------------------------------------------

    \465\ 17 CFR 242.613(a)(1)(ix).
    \466\ See CAT NMS Plan, supra note 5, at Section 6.7(d); 
Appendix C, Section C.9.
    \467\ Id. at Appendix C, Section C.9.
---------------------------------------------------------------------------

    Similarly, the CAT NMS Plan provides that each Participant will 
analyze which of its rules and systems require information that is 
partially duplicative of the information available to the Participants 
through the Central Repository.\468\ According to the CAT NMS Plan, 
this analysis should include a determination as to: (i) Whether the 
Participant should continue to collect the duplicative information 
available in the Central Repository; (ii) whether the Participant can 
use the duplicative information made available in the Central 
Repository without degrading the effectiveness of the Participant's 
rules or systems; and (iii) whether the Participant should continue to 
collect the non-duplicative information or, alternatively, whether it 
should be added to information collected by the Central Repository. The 
CAT NMS Plan states that each Participant has begun reviewing its 
rulebook and is waiting for the publication of the final reporting 
requirements to the Central Repository to complete its analysis. 
According to the Plan, each Participant should complete this analysis 
within eighteen months after Industry Members (other than Small 
Industry Members) are required to begin reporting data to the Central 
Repository (or a later date to be determined by each Participant if 
sufficient data is not available to complete the analysis in that 
timeframe).\469\
---------------------------------------------------------------------------

    \468\ Id.
    \469\ Id.
---------------------------------------------------------------------------

    The CAT NMS Plan also discusses the elimination of specific trade 
and order data collection systems that may be duplicative or partially 
duplicative of CAT.\470\ With respect to FINRA's OATS, the CAT NMS Plan 
notes that FINRA's ability to retire OATS is dependent on whether the 
Central Repository contains complete and accurate CAT Data that is 
sufficient to ensure that FINRA can effectively conduct surveillance 
and investigations of its members for potential violations of FINRA 
rules and federal laws and regulations.\471\ Based on an analysis 
conducted by the Participants, there are 33 data elements currently 
captured in OATS that are not specified in SEC Rule 613. The Plan notes 
that the Participants believe it is appropriate to incorporate data 
elements into the Central Repository that are necessary to retire OATS, 
and that these additional data elements will increase the likelihood 
that the Central

[[Page 84719]]

Repository will include sufficient order information to ensure that 
FINRA can continue to perform its surveillance with CAT Data rather 
than OATS data and can more quickly eliminate OATS. However, the Plan 
notes that OATS cannot be entirely eliminated until all FINRA members 
who currently report to OATS are reporting to the Central Repository, 
and that there will likely be some period of dual reporting until FINRA 
can verify that the data in the Central Repository is of sufficient 
quality for surveillance purposes and that data reported to the Central 
Repository meets the Error Rate standards set out in the CAT NMS 
Plan.\472\ With respect to rules and systems other than OATS, the CAT 
NMS Plan notes that based on preliminary industry analyses, broker-
dealer recordkeeping and large trader reporting requirements under SEC 
Rule 17h-1 could potentially be eliminated. The Plan, however, notes 
that large trader self-identification and reporting responsibilities on 
Form 13H appear not be covered by the CAT.\473\
---------------------------------------------------------------------------

    \470\ Id.
    \471\ Id.
    \472\ Id.
    \473\ Id.
---------------------------------------------------------------------------

    Based on these analyses of duplicative or partially duplicative 
rules, the CAT NMS Plan provides that each Participant will prepare 
appropriate rule change filings to implement the rule modifications or 
deletions that can be made.\474\ The rule change filings should 
describe the process for phasing out the requirements under the 
relevant rule. Under the CAT NMS Plan, each Participant will file with 
the SEC the relevant rule change filing to eliminate or modify its 
rules within six months of the Participant's determination that such 
modification or deletion is appropriate.\475\ Similarly, the CAT NMS 
Plan provides that each Participant will analyze the most appropriate 
and expeditious timeline and manner for eliminating duplicative and 
partially duplicative rules and systems. Upon the Commission's approval 
of relevant rule changes, each Participant will implement this 
timeline. In developing these timelines, each Participant must consider 
when the quality of CAT Data will be sufficient to meet the 
surveillance needs of the Participants (i.e., to sufficiently replace 
current reporting data) before existing rules and systems can be 
eliminated.\476\
---------------------------------------------------------------------------

    \474\ Id.
    \475\ Id.
    \476\ Id.
---------------------------------------------------------------------------

b. Non-Duplicative Rules and Systems
    The CAT NMS Plan provides that each Participant will conduct an 
analysis to determine which of its rules and systems related to 
monitoring quotes, orders, and executions provide information that is 
not rendered duplicative by the CAT.\477\ Under the CAT NMS Plan, each 
Participant must analyze: (i) Whether collection of such information 
remains appropriate; (ii) if still appropriate, whether such 
information should continue to be separately collected or should 
instead be incorporated into the consolidated audit trail; and, (iii) 
if no longer appropriate, how the collection of such information could 
be efficiently terminated, the steps the Participants would need to 
take to seek Commission approval for the elimination of such rules and 
systems, and a timetable for such elimination. Each Participant should 
complete this analysis within eighteen months after Industry Members 
(other than Small Industry Members) are required to begin reporting 
data to the Central Repository (or a later date to be determined by 
each Participant if sufficient data is not available to complete the 
analysis in that timeframe).\478\
---------------------------------------------------------------------------

    \477\ Id.
    \478\ Id.
---------------------------------------------------------------------------

c. Elimination of SEC Rules
    In addition, to the extent that the Commission eliminates rules 
that require information that is duplicative of information available 
through the Central Repository, the CAT NMS Plan provides that each 
Participant will analyze its rules and systems to determine whether any 
modifications to such rules or systems are necessary (e.g., to delete 
references to outdated SEC rules) to support data requests made 
pursuant to such SEC rules.\479\ Each Participant should complete its 
analysis within three months after the SEC approves the deletion or 
modification of an SEC rule related to the information available 
through the Central Repository. The CAT NMS Plan also provides that 
Participants will coordinate with the Commission regarding modification 
of the CAT NMS Plan to include information sufficient to eliminate or 
modify those Exchange Act rules or systems that the Commission deems 
appropriate.\480\
---------------------------------------------------------------------------

    \479\ Id.
    \480\ Id.
---------------------------------------------------------------------------

21. Regulatory Access

    Under Section 6.5(c) of the CAT NMS Plan and as discussed above, 
the Plan Processor must provide regulators access to the Central 
Repository for regulatory and oversight purposes and create a method of 
accessing CAT Data that includes the ability to run complex searches 
and generate reports.\481\ Section 6.10(c) requires regulator access by 
two different methods: (1) An online targeted query tool with 
predefined selection criteria to choose from; and (2) user-defined 
direct queries and bulk extractions of data via a query tool or 
language allowing querying of all available attributes and data 
sources.\482\ Additional requirements concerning regulator access 
appear in Section 8 of Appendix D.\483\
---------------------------------------------------------------------------

    \481\ Id. at Section 6.5(c). Appendix C provides objective 
milestones to assess progress concerning regulator access to the 
Central Repository. See id. at Appendix C, Section C.10(d).
    \482\ Id. at Section 6.10(c). Section 6.10(c) also requires the 
Plan Processor to reasonably assist regulatory Staff with queries, 
submit queries on behalf of regulatory Staff as requested, and 
maintain a help desk to assist regulatory Staff with questions 
concerning CAT Data. Id.
    \483\ See id. at Appendix D, Section 8.
---------------------------------------------------------------------------

    The CAT NMS Plan requires that the CAT must support a minimum of 
3,000 regulatory users and at least 600 such users accessing the CAT 
concurrently without an unacceptable decline in performance.\484\ 
Moreover, the CAT must support an arbitrary number of user roles and, 
at a minimum, include defined roles for both basic and advanced 
regulatory users.\485\
---------------------------------------------------------------------------

    \484\ Id. at Appendix D, Section 8.1.
    \485\ Id.
---------------------------------------------------------------------------

a. Online Targeted Query Tool
    Sections 8.1.1, 8.1.2, and 8.1.3 of Appendix D contain further 
specifications for the online targeted query tool.\486\ The tool must 
allow for retrieval of processed and/or validated (unlinked) data via 
an online query screen that includes a choice of a variety of pre-
defined selection criteria.\487\ Targeted queries must include date(s) 
and/or time range(s), as well as one or more of a variety of fields 
listed in Section 8.1.1 (e.g., product type, CAT-Reporter-ID, and 
Customer-ID).\488\ Targeted queries would be logged such that the Plan 
Processor could provide monthly reports to the SROs and the SEC 
concerning metrics on performance and data usage of the search 
tool.\489\ The CAT NMS Plan further requires that acceptable response 
times for the targeted search be in increments of less than one minute; 
for complex queries scanning large volumes of data or large result sets 
(over one million records) response times must be available within 24 
hours of the request; and queries for data within one business date of 
a 12-month period must return results within

[[Page 84720]]

three hours regardless of the complexity of criteria.\490\ Under the 
CAT NMS Plan, regulators may access all CAT Data except for PII data 
(access to which would be limited to an authorized subset of 
Participant and Commission employees) and the Plan Processor must work 
with regulators to implement a process for providing them with access 
and routinely verifying a list of active users.\491\
---------------------------------------------------------------------------

    \486\ Id. at Appendix D, Sections 8.1.1-8.1.3.
    \487\ Id. at Appendix D, Section 8.1.1.
    \488\ Id.
    \489\ Id.
    \490\ Id. at Appendix D, Section 8.1.2. Appendix D, Section 
8.1.2 contains further performance requirements applicable to data 
and the architecture of the online query tool. Id.
    \491\ Id. at Appendix D, Section 8.1.3.
---------------------------------------------------------------------------

b. User-Defined Direct Queries and Bulk Extraction of Data
    Section 8.2 of Appendix D outlines the requirements for user-
defined direct queries and bulk extraction of data, which regulators 
would use to obtain large data sets for internal surveillance or market 
analysis.\492\ Under the CAT NMS Plan, regulators must be able to 
create, save, and schedule dynamic queries that would run directly 
against processed and/or unlinked CAT Data.\493\ Additionally, CAT must 
provide an open application program interface (``API'') that allows use 
of analytic tools and database drivers to access CAT Data.\494\ Queries 
submitted through the open API must be auditable and the CAT System 
must contain the same level of control, monitoring, logging, and 
reporting as the online targeted query tool.\495\ The Plan Processor 
must also provide procedures and training to regulators that would use 
the direct query feature.\496\ Sections 8.2.1 and 8.2.2 of Appendix D 
contain additional specifications for user-defined direct queries and 
bulk data extraction, respectively.\497\
---------------------------------------------------------------------------

    \492\ Id. at Appendix D, Section 8.2.
    \493\ Id.
    \494\ Id.
    \495\ Id. Direct queries must not return or display PII data but 
rather display non-PII unique identifiers (e.g., Customer-ID or Firm 
Designated ID). The PII corresponding to these identifiers could be 
gathered using the PII workflow described in Appendix D, Data 
Security, PII Data Requirements. See id. at Appendix D, Section 
4.1.6.
    \496\ Id. at Appendix D, Section 8.2.
    \497\ Id. at Appendix D, Sections 8.2.1 and 8.2.2.
---------------------------------------------------------------------------

c. Regulatory Access Schedule
    Section A.2 of Appendix C addresses the time and method by which 
CAT Data would be available to regulators.\498\ Section A.2(a) requires 
that data be available to regulators any point after the data enters 
the Central Repository and passes basic format validations.\499\ After 
errors are communicated to CAT Reporters on T+1, CAT Reporters would be 
required to report corrected data back to the Central Repository by 
8:00 a.m. ET on T+3.\500\ Regulators must then have access to corrected 
and linked order and Customer data by 8:00 a.m. ET on T+5.\501\ Section 
A.2(b) generally describes Bidders' approaches regarding regulator 
access and use of CAT Data and notes that although the SROs set forth 
the standards the Plan Processor must meet, they do not endorse any 
particular approach.\502\ Section A.2(c) outlines requirements the Plan 
Processor must meet for report building and analysis regarding data 
usage by regulators, consistent with, and in addition to, the 
specifications outlined in Section 8 of Appendix D.\503\
---------------------------------------------------------------------------

    \498\ Id. at Appendix C, Section A.2.
    \499\ Id. at Appendix C, Section A.2(a). Appendix C, Section 
A.3(e) indicates this would be no later than noon EST on T+1. Id. at 
Appendix C, Section A.3(e).
    \500\ Id. at Appendix C, Section A.1(a)(iv); Appendix D, Section 
6.1.
    \501\ Id. at Appendix C, Section A.2(a).
    \502\ Id. at Appendix C, Section A.2(b).
    \503\ Id. at Appendix C, Section A.2(c). Appendix C, Section 
A.2(d) addresses system service level agreements that the SROs and 
Plan Processor would enter into. Id. at Appendix C, Section A.2(d).
---------------------------------------------------------------------------

22. Upgrades and New Functionalities

    Under Article VI of the CAT NMS Plan, the Plan Processor is 
responsible for consulting with the Operating Committee and 
implementing necessary upgrades and new functionalities. In particular, 
the Plan Processor would be required to, consistent with Appendix D, 
Upgrade Process and Development of New Functionality, design and 
implement appropriate policies and procedures governing the 
determination to develop new functionality for the CAT including, among 
other requirements, a mechanism by which changes can be suggested by 
Advisory Committee members, Participants, or the SEC.\504\ The Plan 
Processor shall, on an ongoing basis and consistent with any applicable 
policies and procedures, evaluate and implement potential system 
changes and upgrades to maintain and improve the normal day-to-day 
operating function of the CAT System.\505\ In consultation with the 
Operating Committee, the Plan Processor shall, on an as-needed basis 
and consistent with any applicable operational and escalation policies 
and procedures, implement such material system changes and upgrades as 
may be required to ensure effective functioning of the CAT System.\506\ 
Also in consultation with the Operating Committee, the Plan Processor 
shall, on an as-needed basis, implement system changes and upgrades to 
the CAT System to ensure compliance with applicable laws, regulations 
or rules (including those promulgated by the Commission or any 
Participant).\507\
---------------------------------------------------------------------------

    \504\ Id. at Section 6.1(d)(iv). Such policies and procedures 
also shall: (A) Provide for the escalation of reviews of proposed 
technological changes and upgrades (including as required by Section 
6.1(i) and Section 6.1(j) or as otherwise appropriate) to the 
Operating Committee; and (B) address the handling of surveillance, 
including coordinated, SEC Rule 17d-2 or RSA surveillance queries 
and requests for data. Id.
    \505\ Id. at Section 6.1(i). Section 11 of Appendix D sets out 
the obligations of the Plan Processor with respect to the 
requirements discussed above (e.g., to develop a process to add 
functionality to CAT, including reviewing suggestions submitted by 
the Commission). The Plan Processor must create a defined process 
for developing impact assessments, including implementation 
timelines for proposed changes, and a mechanism by which functional 
changes that the Plan Processor wishes to undertake could be 
reviewed and approved by the Operating Committee. Section 11 further 
states that the Plan Processor must implement a process to govern 
changes to CAT (including ``business-as-usual'' changes and isolated 
infrastructure changes). Further, Section 11 states that the Plan 
Processor is required to implement a process governing user testing 
of changes to CAT functionality and infrastructure. See id. at 
Appendix D, Section 11.
    \506\ Id. at Section 6.1(j).
    \507\ Id. at Section 6.1(k).
---------------------------------------------------------------------------

    Appendix D provides additional detail about the obligations of the 
Plan Processor with respect to CAT Functional Changes, CAT 
Infrastructure Changes, and Testing of New Changes.\508\ In particular, 
the Plan Processor is required to propose a process for considering new 
functions, which must include a mechanism for suggesting changes to the 
Operating Committee from Advisory Committee members, the Participants 
and the Commission. The process must also include a method for 
developing impact assessments, including implementation timelines for 
proposed changes, and a mechanism by which functional changes that the 
Plan Processor wishes to undertake could be reviewed and approved by 
the Operating Committee.\509\
---------------------------------------------------------------------------

    \508\ Id. at Appendix D, Section 11.
    \509\ Id. at Appendix D, Section 11.1.
---------------------------------------------------------------------------

    The CAT NMS Plan also requires that the Plan Processor develop a 
similar process to govern the changes to the Central Repository--i.e., 
business-as-usual changes that could be performed by the Plan Processor 
with only a summary report to the Operating Committee, and 
infrastructure changes that would require approval by the Operating 
Committee.\510\ Finally, a process for user testing of new changes must 
be developed by the Plan Processor.\511\
---------------------------------------------------------------------------

    \510\ Id. at Appendix D, Section 11.2.
    \511\ Id. at Appendix D, Section 11.3.
---------------------------------------------------------------------------

    In addition, the CAT NMS Plan requires that the Plan Processor 
ensure that the Central Repository's technical

[[Page 84721]]

infrastructure is scalable (to increase capacity to handle increased 
reporting volumes); adaptable (to support future technology 
developments so that new requirements could be incorporated); and 
current (to ensure, through maintenance and upgrades, that technology 
is kept current, supported, and operational).\512\
---------------------------------------------------------------------------

    \512\ See id. at Appendix C, Section A.5(a).
---------------------------------------------------------------------------

23. Business Continuity and Disaster Recovery

    The CAT NMS Plan provides that the Plan Processor must develop 
disaster recovery and business continuity plans to support the 
continuation of CAT business operations.\513\ The Plan Processor is 
required to provide the Operating Committee with regular reports on the 
CAT System's operation and maintenance that specifically address 
Participant usage statistics for the Plan Processor and the Central 
Repository, including capacity planning studies and daily reports 
called for by Appendix D, as well as business continuity planning and 
disaster recovery issues for the Plan Processor and the Central 
Repository, taking into account the business continuity planning and 
disaster recovery requirements in the Business Continuity Planning/
Disaster Recovery (``BCP/DR'') Process set forth in Appendix D.\514\
---------------------------------------------------------------------------

    \513\ Id. at Appendix D, Sections 5.3-5.4.
    \514\ Id. at Section 6.1(o)(iii).
---------------------------------------------------------------------------

    The CAT NMS Plan requires the Business Continuity Plan to address 
protection of data, service for data submissions, processing, data 
access, support functions and operations.\515\ Additionally, the Plan 
Processor must develop a process to manage and report breaches.\516\ A 
secondary site that is fully equipped for immediate use must be 
selected to house critical staff necessary for CAT business operations, 
and planning should consider operational disruption and significant 
staff unavailability, but the Business Continuity Plan must also 
establish an effective telecommuting solution for critical staff which 
must ensure that CAT Data may not be downloaded to equipment that is 
not CAT-owned or compliant with CAT security requirements.\517\ The 
Business Continuity Plan will include a bi-annual test of CAT 
operations from the secondary site, and CAT operations staff must 
maintain and annually test remote access to ensure smooth operations in 
case of a ``site un-availability event.'' \518\ The Business Continuity 
Plan must also identify critical third-party dependencies to be 
involved in tests on an annual basis, and the Plan Processor will 
develop and annually test a crisis management plan to be invoked in 
specified circumstances.\519\ The Plan Processor must also conduct the 
following: An annual Business Continuity Audit using an Independent 
Auditor approved by the Operating Committee; and regular third party 
risk assessments to verify that security controls are in accordance 
with NIST SP 800-53.\520\ Appendix C mandates the use of a hot-warm 
structure for disaster recovery, where in the event of a disaster, the 
software and data would need to be loaded into the backup site for it 
to become operational.\521\
---------------------------------------------------------------------------

    \515\ Id. at Appendix D, Section 5.1.
    \516\ Id. at Appendix D, Section 5.2.
    \517\ Id. at Appendix D, Section 5.3.
    \518\ Id.
    \519\ Id.
    \520\ Id.
    \521\ Id. at Appendix C, Section 12(o). Appendix D, Section 5, 
provides details on how the CAT's BCP/DR process would be 
structured. In part, Appendix D states, ``[a] secondary processing 
site must be capable of recovery and restoration of services at the 
secondary site within a minimum of 48 hours, but with the goal of 
achieving next day recovery after a disaster event. The selection of 
the secondary site must consider sites with geographic diversity 
that do not rely on the same utility, telecom and other critical 
infrastructure services. The processing sites for disaster recovery 
and business continuity must adhere to the ``Interagency Paper on 
Sound Practices to Strengthen the Resilience of the U.S. Financial 
System.'' Id. at Appendix D, Section 5.1.
---------------------------------------------------------------------------

    Appendix D also requires that the Plan Processor provide an 
industry test environment that is discrete and separate from the 
production environment, but functionally equivalent to the production 
environment. The industry test environment must have end-to-end 
functionality meeting the standards of the production SLA, the 
performance metrics of the production environment, and management with 
the same information security policies applicable to the production 
environment.\522\ The industry test environment must have minimum 
availability of 24x6, and must support such things as: Testing of 
technical upgrades by the Plan Processor, testing of CAT code releases 
impacting CAT Reporters, testing of changes to industry data feeds, 
industry-wide disaster recovery testing, individual CAT Reporter and 
Data Submitter testing of their upgrades against CAT interfaces and 
functionality, and multiple, simultaneous CAT Reporter testing.\523\ 
The Plan Processor must provide the linkage processing of data 
submitted during industry-wide testing, as well as support for industry 
testing.\524\
---------------------------------------------------------------------------

    \522\ Id. at Appendix D, Section 1.2.
    \523\ Id.
    \524\ Id.
---------------------------------------------------------------------------

24. Records and Accounting and Dissolution and Termination of the 
Company

    Article IX of the CAT NMS Plan sets forth the Company's obligations 
and policies related to books and records, accounting, company funds 
and tax matters.\525\ The CAT NMS Plan provides that the Company must 
maintain complete and accurate books and records of the Company in 
accordance with Rule 17a-1.\526\ The CAT NMS Plan further provides that 
books and records will be maintained and be made available at the 
office of the Plan Processor and/or such other Company designated 
locations.\527\ The CAT NMS Plan specifies that all CAT Data and other 
Company books and records are the property of the Company (and not the 
property of the Plan Processor), and to the extent in the possession of 
the Plan Processor, they will be made available to the Commission upon 
reasonable request.\528\
---------------------------------------------------------------------------

    \525\ Id. at Article IX.
    \526\ 17 CFR 240.17a-1. Upon request, representative copies of 
books and records maintained under Rule 17a-1 must be furnished to 
the Commission. 17 CFR 240.17a-1(c); see also CAT NMS Plan, supra 
note 5, at Section 9.1.
    \527\ See CAT NMS Plan, supra note 5, at Section 9.1.
    \528\ Id.
---------------------------------------------------------------------------

    Article IX also includes a confidentiality provision (subject to 
several express carve-outs) wherein the Receiving Party (the Company or 
a Participant) must hold in confidence information received from a 
Disclosing Party (the Company or any other Participant); and the 
Receiving Party may only disclose such information if prior written 
approval from the Disclosing Party is obtained.\529\ The 
confidentiality provision applies to information that is disclosed in 
connection with the CAT NMS Plan or the CAT System but expressly carves 
out the following: (i) CAT Data or information otherwise disclosed 
pursuant to the requirements of Rule 613; \530\ (ii) any information 
that was already lawfully in the Receiving Party's possession and, to 
the knowledge of the Receiving Party, free from any confidentiality 
obligation to the Disclosing Party at the time of receipt from the 
Disclosing Party; (iii) any information that is, now or in the future,

[[Page 84722]]

public knowledge; (iv) any information that was lawfully obtained from 
a third party having the right to disclose it free from any obligation 
of confidentiality; or (v) any information that was independently 
developed by the Receiving Party prior to disclosure by a Disclosing 
Party.\531\ Finally, the CAT NMS Plan provides that the confidentiality 
provision does not restrict disclosures required by: (i) Applicable 
laws and regulations, stock market or exchange requirements or the 
rules of any self-regulatory organization having jurisdiction; (ii) an 
order, subpoena or legal process; or (iii) for the conduct of any 
litigation or arbitral proceeding among the Participants (and their 
respective representatives) and/or the Company.\532\
---------------------------------------------------------------------------

    \529\ Id. at Section 9.6. The CAT NMS Plan states that the 
information is disclosed by or on behalf of the Company or a 
Participant (the ``Disclosing Party'') to the Company or any other 
Participant (the ``Receiving Party'') in connection with the 
Agreement or the CAT System, but excludes any CAT Data or 
information otherwise disclosed pursuant to the requirements of Rule 
613. See CAT NMS Plan, supra note 5, at Section 9.6(a).
    \530\ 17 CFR 242.613.
    \531\ See CAT NMS Plan, supra note 5, at Section 9.6(a).
    \532\ Id.
---------------------------------------------------------------------------

    The CAT NMS Plan includes provisions relating to the dissolution of 
the Company.\533\ Any dissolution of the Company requires SEC approval 
and must be as a result of one of the following events (a ``Triggering 
Event''): (i) Unanimous written consent of the Participants; (ii) an 
event makes it unlawful or impossible for the Company business to be 
continued; (iii) the termination of one or more Participants such that 
there is only one remaining Participant; or (iv) a decree of judicial 
dissolution.\534\ If a Triggering Event has occurred and the SEC 
approves the Company's dissolution, the Operating Committee would act 
as liquidating trustee and liquidate and distribute the Company 
pursuant to the following necessary steps under the CAT NMS Plan: (i) 
Sell the Company's assets; and (ii) apply and distribute the sale 
proceeds by first, paying the Company's debts and liabilities; second, 
establishing reasonably necessary reserves for contingent recourse 
liabilities and obligations; and third, making a distribution to the 
Participants in proportion to the balances in their positive Capital 
Accounts.\535\
---------------------------------------------------------------------------

    \533\ Id. at Article X.
    \534\ Id. at Section 10.1.
    \535\ Id. at Section 10.2.
---------------------------------------------------------------------------

25. Security of Data

    The CAT NMS Plan provides that the Plan Processor is responsible 
for the security and confidentiality of all CAT Data received and 
reported to the Central Repository, including during all communications 
between CAT Reporters and the Plan Processor, data extraction, data 
manipulation and transformation, loading to and from the Central 
Repository, and data maintenance by the Central Repository.\536\ The 
Plan Processor must, among other things, require that individuals with 
access to the Central Repository agree to use CAT Data only for 
appropriate surveillance and regulatory activities and to employ 
safeguards to protect the confidentiality of CAT Data.\537\
---------------------------------------------------------------------------

    \536\ See CAT NMS Plan, supra note 5, at Section 6.5(f)(i), 
(iv)(A).
    \537\ Id. at Section 6.5(f)(i)(A).
---------------------------------------------------------------------------

    In addition, the Plan Processor must develop a comprehensive 
information security program as well as a training program that 
addresses the security and confidentiality of all information 
accessible from the CAT and the operational risks associated with 
accessing the Central Repository.\538\ The Plan Processor must also 
designate one of its employees as CISO; among other things, the CISO is 
responsible for creating and enforcing appropriate policies, 
procedures, and control structures regarding data security.\539\ The 
Technical Specifications, which the Plan Processor must publish, must 
include a detailed description of the data security standards for 
CAT.\540\ Appendix D of the CAT NMS Plan sets forth minimum data 
security requirements for CAT that the Plan Processor must meet.\541\
---------------------------------------------------------------------------

    \538\ Id. at Sections 6.1(m), 6.12.
    \539\ Id. at Section 6.2(b)(i), (v).
    \540\ Id. at Section 6.9(b)(xi).
    \541\ Id. at Appendix D, Section 4.
---------------------------------------------------------------------------

a. General Standards
    The CAT NMS Plan provides that the data security standards of the 
CAT System shall, at a minimum satisfy all applicable regulations 
regarding database security, including provisions of Reg SCI.\542\ 
Appendix D of the CAT NMS Plan contains a partial list of industry 
standards to which the Plan Processor will adhere, including standards 
issued by the NIST; \543\ by the Federal Financial Institutions 
Examination Council,\544\ and the International Organization for 
Standardization.\545\
---------------------------------------------------------------------------

    \542\ 17 CFR 242.1000-1007; see also CAT NMS Plan, supra note 5, 
at Section 6.9(b)(xi).
    \543\ Standards issued by NIST that are explicitly listed in the 
CAT NMS Plan include NIST Security and Privacy Controls for Federal 
Information Systems and Organizations (Special Publication 800-53 
Rev. 4); NIST Contingency Planning Guide for Federal Information 
Systems (Special Publication 800-34 Rev. 1), particularly Chapters 
3, 4 & 5; NIST Guidelines to Federal Organizations on Security 
Assurance and Acquisition/Use of Test/Evaluated Products (Special 
Publication 800-23); NIST Technical Guide to Information Security 
Testing and Assessment (Special Publication 800-115); NIST Guide to 
Enterprise Password Management (Special Publication 800-118); NIST 
Recommendation for Cryptographic Key Generation (Special Publication 
800-133); and NIST Information Security Continuous Monitoring for 
Federal Information Systems and Organizations (Special Publication 
800-137). See CAT NMS Plan, supra note 5, at Appendix D, Sections 
4.2, 5.2 and 5.3.
    \544\ Standards issued by the Federal Financial Institutions 
Examination Council that are explicitly listed in the CAT NMS Plan 
include FFIEC Authentication Best Practices, and the Federal 
Financial Institutions Examination Council, Supplement to 
Authentication in an Internet Banking Environment (June 22, 2011). 
See CAT NMS Plan, supra note 5, at Appendix D, Sections 4.1.1, 4.2.
    \545\ Standards issued by the International Organization for 
Standardization that are explicitly listed in the CAT NMS Plan 
include ISO/IEC 27001--Information Security Management. See CAT NMS 
Plan, supra note 5, at Appendix D, Section 4.2. The CAT NMS Plan 
also states that the CAT System must adhere to the 2003 Interagency 
White Paper on Sound Practices to Strengthen the Resilience of the 
U.S. Financial System, Securities Exchange Act Release No. 47638 
(April 8, 2003), 68 FR 17809 (April 11, 2003). See CAT NMS Plan, 
supra note 5, at Appendix D, Section 5.3.
---------------------------------------------------------------------------

    The CAT NMS Plan specifies that the Plan Processor is responsible 
for the security and confidentiality of all CAT Data received and 
reported to the Central Repository, including during all communications 
between CAT Reporters and the Plan Processor, data extraction, data 
manipulation and transformation, loading to and from the Central 
Repository, and data maintenance by the Central Repository.\546\ The 
Plan Processor must also designate one of its employees as the CISO; 
among other things, the CISO is responsible for creating and enforcing 
appropriate policies, procedures, and control structures regarding data 
security.\547\
---------------------------------------------------------------------------

    \546\ See CAT NMS Plan, supra note 5, at Section 6.5(f)(i), 
(iv)(A).
    \547\ Id. at Section 6.2(b)(i), (v).
---------------------------------------------------------------------------

b. Data Confidentiality
    The CAT NMS Plan also requires that the Plan Processor must develop 
a comprehensive information security program, with a dedicated staff 
for the Central Repository, that employs state of the art technology, 
which program will be regularly reviewed by the CCO and CISO, as well 
as a training program that addresses the security and confidentiality 
of all information accessible from the CAT and the operational risks 
associated with accessing the Central Repository.\548\ The Plan 
Processor must also implement and maintain a mechanism to confirm the 
identity of all individuals permitted to access the CAT Data stored in 
the Central Repository; maintain a record of all instances where such 
CAT Data was accessed; and implement and maintain appropriate policies 
regarding limitations on trading activities of its employees and 
independent contractors

[[Page 84723]]

involved with all CAT Data.\549\ The Technical Specifications, which 
will be published after the Plan Processor is selected, must include a 
detailed description of the data security standards for the CAT.\550\
---------------------------------------------------------------------------

    \548\ Id. at Sections 6.1(m), 6.5(f)(i)(C).
    \549\ Id. at Section 6.5(f)(i)(D), (E).
    \550\ Id. at Section 6.9.
---------------------------------------------------------------------------

    According to the CAT NMS Plan, the Plan Processor must require that 
individuals with access to the Central Repository (including the 
respective employees and consultants of the Participants and the Plan 
Processor, but excluding employees and Commissioners of the SEC) to 
agree: (i) To use appropriate safeguards to ensure the confidentiality 
of the CAT Data stored in the Central Repository and (ii) to not use 
CAT Data stored in the Central Repository for purposes other than 
surveillance and regulation in accordance with such individual's 
employment duties.\551\ A Participant, however, is permitted to use the 
CAT Data it reports to the Central Repository for regulatory, 
surveillance, commercial or other purposes as permitted by applicable 
law, rule, or regulation.\552\ In addition, the CAT NMS Plan provides 
that all individuals with access to the Central Repository (including 
the respective employees and consultants of the Participants and the 
Plan Processor, but excluding employees and Commissioners of the SEC) 
must execute a personal ``Safeguard of Information Affidavit'' in a 
form approved by the Operating Committee providing for personal 
liability for misuse of data.\553\
---------------------------------------------------------------------------

    \551\ Id. at Section 6.5(f)(i)(A).
    \552\ Id.
    \553\ Id. at Section 6.5(f)(i)(B).
---------------------------------------------------------------------------

c. Data Security
    Appendix D of the CAT NMS Plan sets forth minimum data security 
requirements for CAT that the Plan Processor must meet, including 
various connectivity, data transfer, and encryption requirements.\554\
---------------------------------------------------------------------------

    \554\ See CAT NMS Plan, supra note 5, at Appendix D, Section 4.
---------------------------------------------------------------------------

    Appendix D states that the CAT Systems must have encrypted internet 
connectivity, and that CAT Reporters must connect to the CAT 
infrastructure using secure methods such as private lines or, for 
smaller broker-dealers, Virtual Private Network connections over public 
lines.\555\ Remote access to the Central Repository must be limited to 
authorized Plan Processor Staff and must use secure ``Multi-factor 
Authentication'' (or ``MFA'') that meets or exceeds Federal Financial 
Institutions Examination Council security guidelines surrounding 
authentication best practices.\556\ Appendix D also notes that CAT 
databases must be deployed within the network infrastructure so that 
they are not directly accessible from external end-user networks.\557\ 
If public cloud infrastructures are used, Appendix D states that 
network segments or private tenant segmentation must be used to isolate 
CAT Data from unauthenticated public access.\558\
---------------------------------------------------------------------------

    \555\ Id. at Appendix D, Section 4.1.1.
    \556\ Id. Multi-factor authentication, or MFA, is a method 
requiring a person to provide more than one factor (e.g., 
biometrics/personal information in addition to a password) in order 
to be validated by the system.). See id. at Appendix C, Section 
D.12(e), n.250.
    \557\ See id. at Appendix D, Section 4.1.1.
    \558\ Id.
---------------------------------------------------------------------------

    Regarding data encryption, Appendix D states that all CAT Data must 
be encrypted in-flight using industry standard best practices (e.g., 
SSL/TLS).\559\ Appendix D provides that symmetric key encryption must 
use a minimum key size of 128 bits or greater (e.g., AES-128), though 
larger keys are preferable.\560\ Asymmetric key encryption (e.g., PGP) 
for exchanging data between Data Submitters and the Central Repository 
is desirable.\561\
---------------------------------------------------------------------------

    \559\ Id. at Appendix D, Section 4.1.2.
    \560\ Id.
    \561\ Id.
---------------------------------------------------------------------------

    Appendix D further states that CAT Data stored in a public cloud 
must be encrypted at-rest.\562\ Non-personally identifiable information 
in CAT Data stored in a Plan Processor private environment is not 
required to be encrypted at-rest.\563\ If public cloud managed services 
are used that would inherently have access to the data (e.g., BigQuery, 
S3, Redshift), then the key management surrounding the encryption of 
that data must be documented (particularly whether the cloud provider 
manages the keys, or if the Plan Processor maintains that 
control).\564\ Auditing and real-time monitoring of the service for 
when cloud provider personnel are able to access/decrypt CAT Data must 
be documented, as well as a response plan to address instances where 
unauthorized access to CAT Data is detected.\565\ Key management/
rotation/revocation strategies and key chain of custody must also be 
documented in detail.\566\
---------------------------------------------------------------------------

    \562\ Id.
    \563\ Id.
    \564\ Id.
    \565\ Id.
    \566\ Id.
---------------------------------------------------------------------------

    Regarding CAT Data storage, the CAT NMS Plan states that data 
centers housing CAT Systems (whether public or private) must, at a 
minimum, be SOC 2 certified by an independent third-party auditor.\567\ 
The frequency of the audit must be at least once per year.\568\ 
Furthermore, CAT computer infrastructure may not be commingled with 
other non-regulatory systems (or tenets, in the case of public cloud 
infrastructure).\569\ Systems hosting the CAT processing for any 
applications must be segmented from other systems as far as is feasible 
on a network level (firewalls, security groups, ACL's, VLAN's, 
authentication proxies/bastion hosts and similar).\570\ In the case of 
systems using inherently shared infrastructure/storage (e.g., public 
cloud storage services), an encryption/key management/access control 
strategy that effectively renders the data private must be 
documented.\571\
---------------------------------------------------------------------------

    \567\ Id. at Appendix D, Section 4.1.3.
    \568\ Id.
    \569\ Id.
    \570\ Id.
    \571\ Id.
---------------------------------------------------------------------------

    Appendix D further requires that the Plan Processor must include 
penetration testing and an application security code audit by a 
reputable (and named) third party prior to the launch of CAT as well as 
periodically as defined in the SLAs.\572\ Reports of the audit will be 
provided to the Operating Committee as well as a remediation plan for 
identified issues.\573\ The penetration test reviews of the Central 
Repository's network, firewalls, and development, testing and 
production systems should help the CAT evaluate the systems' security 
and resiliency in the face of attempted and successful systems 
intrusions.\574\
---------------------------------------------------------------------------

    \572\ Id.
    \573\ Id.
    \574\ Id.
---------------------------------------------------------------------------

    The CAT NMS Plan also addresses issues surrounding access to CAT 
Data. Among other things, the CAT NMS Plan requires the Plan Processor 
to provide an overview of how access to PII and other CAT Data by Plan 
Processor employees and administrators is restricted.\575\ This 
overview must include items such as, but not limited to, how the Plan 
Processor will manage access to the systems, internal segmentation, 
MFA, separation of duties, entitlement management, and background 
checks.\576\ The Plan Processor must develop and maintain policies and 
procedures reasonably designed to prevent, detect, and mitigate the 
impact of unauthorized access or usage of data in the Central 
Repository.\577\ The CAT NMS Plan also specifically states that a Role 
Based Access Control (``RBAC'') model must

[[Page 84724]]

be used to permission users with access to different areas of the CAT 
System.\578\ The Plan Processor must log every instance of access to 
Central Repository data by users.\579\ The CAT NMS Plan also has 
specific provisions related to passwords and logins, particularly as 
these relate to accessing PII in the Central Repository.\580\ Any login 
to the system that is able to access PII data must follow non-PII 
password rules and must be further secured via MFA.\581\
---------------------------------------------------------------------------

    \575\ Id. at Appendix D, Section 4.1.4.
    \576\ Id.
    \577\ Id.
    \578\ Id.
    \579\ Id.
    \580\ See id.
    \581\ Id.
---------------------------------------------------------------------------

    Appendix D also addresses what should be done in the event there is 
a breach in the security systems protecting CAT Data. Appendix D 
requires the Plan Processor to develop policies and procedures 
governing its responses to systems or data breaches.\582\ Such policies 
and procedures will include a formal cyber incident response plan, and 
documentation of all information relevant to breaches.\583\ The cyber 
incident response plan will provide guidance and direction during 
security incidents, and the plan will be subject to approval by the 
Operating Committee.\584\
---------------------------------------------------------------------------

    \582\ Id. at Appendix D, Section 4.1.5.
    \583\ Id.
    \584\ Id.
---------------------------------------------------------------------------

d. Data Access and Use
    The CAT NMS Plan states that the Plan Processor shall provide 
Participants and the Commission with access to and use of the CAT Data 
stored in the Central Repository solely for the purpose of performing 
their respective regulatory and oversight responsibilities pursuant to 
federal securities laws, rules and regulations or any contractual 
obligations.\585\ The Plan specifies that Participants shall establish, 
maintain and enforce written policies and procedures reasonably 
designed to ensure the confidentiality of the CAT Data obtained from 
the Central Repository and limit the use of CAT Data obtained from the 
Central Repository to surveillance and regulatory purposes.\586\ The 
CAT NMS Plan provides that Participants must adopt and enforce policies 
and procedures that implement effective information barriers between 
each Participant's regulatory and non-regulatory Staff with regard to 
CAT Data, permit only persons designated by Participants to have access 
to the CAT Data stored in the Central Repository; and impose penalties 
for Staff non-compliance with any of its or the Plan Processor's 
policies and procedures with respect to information security.\587\ 
However, the Plan provides that a Participant may use the Raw Data 
\588\ it reports to the Central Repository for ``commercial or other'' 
purposes if not prohibited by applicable law, rule or regulation.\589\
---------------------------------------------------------------------------

    \585\ See id. at Section 6.5(c)(i).
    \586\ Id. at Section 6.5(g). The Commission notes that 
regulatory purposes includes, among other things, analysis and 
reconstruction of market events, market analysis and research to 
inform policy decisions, market surveillance, examinations, 
investigations, and other enforcement functions. See Notice, supra 
note 5, at 30649 n.266.
    \587\ See CAT NMS Plan, supra note 5, at Section 6.5(f)(ii).
    \588\ Raw Data is defined as ``Participant Data and Industry 
Member Data that has not been through any validation or otherwise 
checked by the CAT System.'' Id. at Section 1.1.
    \589\ Id. at Section 6.5(h).
---------------------------------------------------------------------------

    Article VI of the CAT NMS Plan requires that the Plan Processor 
provide regulators access to the Central Repository for regulatory and 
oversight purposes and create a method of accessing CAT Data that 
includes the ability to run complex searches and generate reports.\590\ 
Section 6.10(c) of the CAT NMS Plan requires regulator access by two 
different methods: (i) An online targeted query tool with predefined 
selection criteria to choose from; and (ii) user-defined direct queries 
and bulk extractions of data via a query tool or language allowing 
querying of all available attributes and data sources.\591\ Appendix D 
contains technical details and parameters for use by the Plan Processor 
in developing the systems that will allow regulators access to CAT 
Data.\592\
---------------------------------------------------------------------------

    \590\ Id. at Section 6.5(c)(i), (ii). Appendix C provides 
objective milestones to assess progress concerning regulator access 
to the Central Repository. See id. at Appendix C, Section C.10(d).
    \591\ Id. at Section 6.10(c)(i). Section 6.10(c) also requires 
the Plan Processor to reasonably assist regulatory Staff with 
queries, submit queries on behalf of regulatory Staff as requested, 
and maintain a help desk to assist regulatory Staff with questions 
concerning CAT Data. Id. at 6.10(c)(iv)-(vi).
    \592\ See id. at Appendix D, Section 8.
---------------------------------------------------------------------------

    Appendix C addresses the time and method by which CAT Data would be 
available to regulators.\593\ Specifically, Appendix C requires that 
data be available to regulators any point after the data enters the 
Central Repository and passes basic format validations.\594\ After 
errors are communicated to CAT Reporters on a T+1 basis, CAT Reporters 
would be required to report corrected data back to the Central 
Repository by 8:00 a.m. ET on T+3.\595\ Regulators must then have 
access to corrected and linked order and Customer data by 8:00 a.m. ET 
on T+5.\596\ Appendix C further outlines requirements the Plan 
Processor must meet for report building and analysis regarding data 
usage by regulators, consistent with, and in addition to, the 
specifications outlined in Appendix D.\597\
---------------------------------------------------------------------------

    \593\ Id. at Appendix C, Section A.2.
    \594\ Id. at Appendix C, Section A.2(a). Appendix C, Section 
A.3(e) indicates this would be no later than noon EST on T+1. Id. at 
Appendix C, Section A.3(e).
    \595\ Id. at Appendix C, Section A.1(a)(iv); Appendix D, Section 
6.1.
    \596\ Id. at Appendix C, Section A.2(a).
    \597\ Id. at Appendix C, Section A.2(c). Appendix C, Section 
A.2(d) addresses system service level agreements that the SROs and 
Plan Processor would enter into. See id. at Appendix C, Section 
A.2(d).
---------------------------------------------------------------------------

e. Personally Identifiable Information
    According to the CAT NMS Plan, there are two separate categories of 
CAT Data for data security and confidentiality purposes: (i) PII; and 
(ii) other data related to orders and trades reported to the CAT.\598\ 
The Plan requires additional levels of protection for PII that is 
collected from Customers and reported to the Central Repository.\599\ 
For example, the CAT NMS Plan requires that all CAT Data provided to 
regulators must be encrypted, but that PII data shall be masked unless 
users have permission to view the CAT Data that has been 
requested.\600\ The Plan requires that all PII data must be encrypted 
both at-rest and in-flight, including archival data storage methods 
such as tape backup.\601\ Storage of unencrypted PII data is 
prohibited.\602\ The Plan Processor must describe how PII encryption is 
performed and the key management strategy (e.g., AES-256, 3DES).\603\
---------------------------------------------------------------------------

    \598\ See id. at Appendix C, Section A.4.
    \599\ See id. at Appendix C, Section A.4(a).
    \600\ See id. at Section 6.10(c)(ii).
    \601\ Id. at Appendix D, Section 4.1.2
    \602\ Id.
    \603\ Id.
---------------------------------------------------------------------------

    An additional protection afforded to PII concerns specific 
requirements for access. The CAT NMS Plan specifies that by default, 
users entitled to query CAT Data are not automatically authorized for 
PII access, and that the process by which a person becomes entitled for 
PII access, and how they then go about accessing PII data, must be 
documented by the Plan Processor.\604\ Access to PII will be based on a 
Role Based Access Control (``RBAC'') model, and shall follow the 
``least privileged'' practice of limiting access as much as 
possible.\605\ In this regard, the CAT NMS Plan states that access will 
be limited to a ``need-to-know'' basis, and it is expected that the 
number of people given access to PII

[[Page 84725]]

associated with Customers and accounts will be much lower than the 
number granted access to non-PII CAT Data.\606\ The CAT NMS Plan 
further specifies that any login system that is able to access PII must 
follow non-PII password rules and must be further secured via MFA.\607\ 
MFA authentication for all logins (including non-PII) is required to be 
implemented by the Plan Processor.\608\
---------------------------------------------------------------------------

    \604\ Id. at Appendix D, Section 4.1.6.
    \605\ Id.
    \606\ Id. at Appendix C, Section A.4.
    \607\ Id. at Appendix D, Section 4.1.4. MFA is a method 
requiring a person to provide more than one factor (e.g., 
biometrics/personal information in addition to a password) in order 
to be validated by the system. See CAT NMS Plan, supra note 5, at 
Appendix C, Section D.12(e), n.250.
    \608\ See id. at Appendix D, Section 4.1.4.
---------------------------------------------------------------------------

    The CAT NMS Plan also requires that a designated officer or 
employee at each Participant and the Commission, such as the chief 
regulatory officer, must, at least annually, review and certify that 
persons with PII access have appropriately been designated to access 
PII in light of their respective roles.\609\ The CAT NMS Plan requires 
that a full audit trail of access to the PII collected at the Central 
Repository--which would include who accessed what data and when--must 
be maintained, and that the CCO and CISO shall have access to daily PII 
reports that list all users who are entitled for PII access, as well as 
the audit trail of all PII access that has occurred for the day being 
reported on.\610\
---------------------------------------------------------------------------

    \609\ Id. at Appendix D, Section 4.1.6.
    \610\ Id.
---------------------------------------------------------------------------

    The CAT NMS Plan also restricts the circumstances under which PII 
can be provided to an authorized person. The CAT NMS Plan provides, for 
example, that PII must not be included in the result set(s) from online 
or direct query tools, reports or bulk data extraction.\611\ Instead, 
the CAT NMS Plan requires any such results, reports or extractions to 
be displayed with ``non-PII unique identifiers (e.g., Customer-ID or 
Firm Designated ID).'' \612\ The CAT NMS Plan states that the PII 
corresponding to these non-PII identifiers can be gathered by using a 
separate ``PII workflow.'' \613\
---------------------------------------------------------------------------

    \611\ Id.
    \612\ Id.
    \613\ Id.
---------------------------------------------------------------------------

    Finally, the CAT NMS Plan further protects PII by requiring that 
PII data be stored separately from other CAT Data.\614\ The Plan 
specifies that PII cannot be stored with the transactional CAT Data, 
and it must not be accessible from public internet connectivity.\615\
---------------------------------------------------------------------------

    \614\ Id.
    \615\ Id.
---------------------------------------------------------------------------

26. Governing or Constituent Documents

    Rule 608 requires copies of all governing or constituent documents 
relating to any person (other than a self-regulatory organization) 
authorized to implement or administer such plan on behalf of its 
sponsors.\616\ The Participants will submit to the Commission such 
documents related to the Plan Processor when the Plan Processor is 
selected.\617\
---------------------------------------------------------------------------

    \616\ 17 CFR 242.608(a)(4)(i).
    \617\ See CAT NMS Plan, supra note 5, at Section 6.7(a)(i).
---------------------------------------------------------------------------

27. Development and Implementation Phases

    The terms of the Plan will be effective immediately upon approval 
of the Plan by the Commission (the ``Effective Date'').\618\ The Plan 
sets forth each of the significant phases of development and 
implementation contemplated by the Plan, together with the projected 
date of completion of each phase.\619\ These include the following, 
each of which is subject to orders otherwise by the Commission:
---------------------------------------------------------------------------

    \618\ Effective Date is defined as ``the date of approval of 
[the CAT NMS Plan] by the Commission.'' Id. at Section 1.1.
    \619\ Id. at Section 6.7, Appendix C, Section C.10.

    Within two months after the Effective Date, the Participants 
will jointly select the winning Shortlisted Bid and the Plan 
Processor pursuant to the process set forth in Article V. Following 
the selection of the Initial Plan Processor, the Participants will 
file with the Commission a statement identifying the Plan Processor 
and including the information required by Rule 608;
    Within four months after the Effective Date, each Participant 
will, and, through its Compliance Rule, will require its Industry 
Members to, synchronize its or their Business Clocks and certify to 
the Chief Compliance Officer (in the case of Participants) or the 
applicable Participant (in the case of Industry Members) that it has 
met this requirement;
    Within six months after the Effective Date, the Participants 
must jointly provide to the SEC a document outlining how the 
Participants could incorporate into the CAT information with respect 
to equity securities that are not NMS Securities,\620\ including 
Primary Market Transactions in securities that are not NMS 
Securities, which document will include details for each order and 
Reportable Event that may be required to be provided, which market 
participants may be required to provide the data, the implementation 
timeline, and a cost estimate;
---------------------------------------------------------------------------

    \620\ See id. at Section 6.7(a). In the Amendment to the CAT NMS 
Plan, Section 6.11 excludes OTC Equity Securities from the document 
the Participants would submit to the Commission, since the 
Participants plan to include OTC Equity Securities as well as NMS 
Securities in the initial phase in of CAT. See Notice, supra note 5, 
at 30634 n.82.
---------------------------------------------------------------------------

    Within one year after the Effective Date, each Participant must 
report Participant Data to the Central Repository;
    Within fourteen months after the Effective Date, each 
Participant must implement a new or enhanced surveillance system(s);
    Within two years after the Effective Date, each Participant 
must, through its Compliance Rule, require its Industry Members 
(other than Small Industry Members) to report Industry Member Data 
to the Central Repository; and
    Within three years after the Effective Date, each Participant 
must, through its Compliance Rule, require its Small Industry 
Members to provide Industry Member Data to the Central 
Repository.\621\
---------------------------------------------------------------------------

    \621\ See CAT NMS Plan, supra note 5, at Section 6.7(a).

In addition, Industry Members and Participants will be required to 
participate in industry testing with the Central Repository on a 
schedule to be determined by the Operating Committee. Furthermore, 
Appendix C, A Plan to Eliminate Existing Rules and Systems (Rule 
613(a)(1)(ix)), and Appendix D, Data Types and Sources, set forth 
additional implementation details concerning the elimination of rules 
and systems.
    The CCO will appropriately document objective milestones to assess 
progress toward the implementation of the CAT.\622\
---------------------------------------------------------------------------

    \622\ See id. at Section 6.7(b).
---------------------------------------------------------------------------

    As required by Rule 613(a)(1)(x),\623\ the CAT NMS Plan also sets 
forth detailed objective milestones, with projected completion dates, 
towards CAT implementation.\624\ The milestones discussed in the Plan 
include timeframes for when the Plan Processor will publish Technical 
Specifications for Participants and Industry Members to report order 
and market maker quote data and Customer Account Information \625\ to 
the Central

[[Page 84726]]

Repository, as well as timeframes for connectivity and acceptance 
testing for the reporting of this information.\626\ For example, the 
Plan Processor will publish Technical Specifications for Industry 
Member submission of order data one year before Industry Members are 
required to begin submitting this data to the Central Repository, and 
the Plan Processor will begin connectivity testing and accepting order 
data from Industry Members for testing purposes six months before 
Industry Members are required to begin submitting this data to the 
Central Repository.\627\ The Plan Processor will begin connectivity 
testing and accepting order and market maker quote data from 
Participants for testing purposes three months before Participants are 
required to begin reporting this data to the Central Repository and 
will publish Technical Specifications for Participant submission of 
this data six months before Participants are required to submit this 
data to the Central Repository.\628\ The CAT NMS Plan also includes 
implementation timeframes for the linkage of the lifecycle of order 
events, regulator access to the Central Repository, and the integration 
of other data (such as SIP quote and trade data) into the Central 
Repository.\629\
---------------------------------------------------------------------------

    \623\ 17 CFR 242.613(a)(1)(x).
    \624\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
C.10. The CAT NMS Plan requires the CCO to document these objective 
milestones to assess progress toward the implementation of CAT. See 
id. at Section 6.7(b).
    \625\ ``Customer Account Information'' shall include, but not be 
limited to, account number, account type, customer type, date 
account opened, and large trader identifier (if applicable); except, 
however, that (a) in those circumstances in which an Industry Member 
has established a trading relationship with an institution but has 
not established an account with that institution, the Industry 
Member will (i) provide the Account Effective Date in lieu of the 
``date account opened''; (ii) provide the relationship identifier in 
lieu of the ``account number''; and (iii) identify the ``account 
type'' as a ``relationship''; (b) in those circumstances in which 
the relevant account was established prior to the implementation 
date of the CAT NMS Plan applicable to the relevant CAT Reporter (as 
set forth in Rule 613(a)(3)(v) and (vi)), and no ``date account 
opened'' is available for the account, the Industry Member will 
provide the Account Effective Date in the following circumstances: 
(i) Where an Industry Member changes back office providers or 
clearing firms and the date account opened is changed to the date 
the account was opened on the new back office/clearing firm system; 
(ii) where an Industry Member acquires another Industry Member and 
the date account opened is changed to the date the account was 
opened on the post-merger back office/clearing firm system; (iii) 
where there are multiple dates associated with an account in an 
Industry Member's system, and the parameters of each date are 
determined by the individual Industry Member; and (iv) where the 
relevant account is an Industry Member proprietary account.'' See 
id. at Section 1.1.
    \626\ See id. at Appendix C, Section C.10(a)-(b).
    \627\ See id. at Appendix C, Section C.10(b).
    \628\ See id.
    \629\ See id. at Appendix C, Section C.10(c)-(e).
---------------------------------------------------------------------------

28. Written Understanding or Agreements Relating to Interpretation of, 
or Participation in, the Plan

    The Participants have no written understandings or agreements 
relating to interpretations of, or participation in, the Plan other 
than those set forth in the Plan itself.\630\ For example, Section 
4.3(a)(iii) states that the Operating Committee only may authorize the 
interpretation of the Plan by Majority Vote, Section 6.9(c)(i) 
addresses interpretations of the Technical Specifications, and Section 
8.2 addresses the interpretation of Sections 8.1 and 8.2.\631\ In 
addition, Section 3.3 sets forth how any entity registered as a 
national securities exchange or national securities association under 
the Exchange Act may become a Participant.\632\
---------------------------------------------------------------------------

    \630\ See Notice, supra note 5, at 30635.
    \631\ See CAT NMS Plan, supra note 5, at Sections 4.3(a)(iii), 
6.9(c)(i), 8.2.
    \632\ See id. at Section 3.3.
---------------------------------------------------------------------------

29. Dispute Resolution

    The Plan does not include a general provision addressing the method 
by which disputes arising in connection with the operation of the Plan 
will be resolved.\633\ The Plan does, however, provide the means for 
resolving disputes regarding the Participation Fee.\634\ Specifically, 
Article III states that, in the event that the Company and a 
prospective Participant do not agree on the amount of the Participation 
Fee, such amount will be subject to the review by the Commission 
pursuant to Section 11A(b)(5) of the Exchange Act.\635\ In addition, 
the Plan addresses disputes with respect to fees charged to 
Participants and Industry Members pursuant to Article XI. Specifically, 
such disputes will be determined by the Operating Committee or a 
Subcommittee designated by the Operating Committee.\636\ Decisions by 
the Operating Committee or such designated Subcommittee on such matters 
will be binding on Participants and Industry Members, without prejudice 
to the rights of any Participant or Industry Member to seek redress 
from the Commission pursuant to Rule 608 or in any other appropriate 
forum.\637\
---------------------------------------------------------------------------

    \633\ See Notice, supra note 5, at 30635.
    \634\ See CAT NMS Plan, supra note 5, at Section 3.3(b).
    \635\ See id.; see also 15 U.S.C. 78k-l(b)(5).
    \636\ See CAT NMS Plan, supra note 5, at Section 11.5.
    \637\ Id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    In 1975, Congress directed the Commission, through the enactment of 
Section 11A of the Act,\638\ to facilitate the establishment of a 
national market system. Section 11A(a)(3)(B) of the Act authorizes the 
Commission, ``by rule or order, to authorize or require self-regulatory 
organizations to act jointly with respect to matters as to which they 
share authority under this title in planning, developing, operating, or 
regulating a national market system (or a subsystem thereof) or one or 
more facilities.'' \639\ The Commission adopted Rule 613 of Regulation 
NMS under the Act,\640\ requiring the SROs to submit an NMS plan to 
create, implement, and maintain the CAT.\641\
---------------------------------------------------------------------------

    \638\ 15 U.S.C. 78k-1.
    \639\ 15 U.S.C. 78k-1(a)(3)(B).
    \640\ See Adopting Release, supra note 14; see also Proposing 
Release, supra note 14.
    \641\ 17 CFR 242.613(a)(1), (c)(1), (c)(7).
---------------------------------------------------------------------------

    Rule 613 tasks the Participants with the responsibility to develop 
a CAT NMS Plan that achieves the goals set forth by the Commission. 
Because the Participants will be more directly responsible for the 
implementation of the CAT NMS Plan, in the Commission's view, it is 
appropriate that they make the judgment as to how to obtain the 
benefits of a consolidated audit trail in a way that is practicable and 
cost-effective in the first instance. The Commission's review of an NMS 
plan is governed by Rule 608 and, under that rule, approval is 
conditioned upon a finding that the proposed plan is ``necessary or 
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 otherwise in 
furtherance of the purposes of the Act.'' \642\ Further, Rule 608 
provides the Commission with the authority to approve an NMS plan, 
``with such changes or subject to such conditions as the Commission may 
deem necessary or appropriate.'' \643\ In reviewing the policy choices 
made by the Participants in developing the CAT NMS Plan, the Commission 
has sought to ensure that they are supported by an adequate rationale, 
do not call into question the Plan's satisfaction of the approval 
standard in Rule 608, and reasonably achieve the benefits of a 
consolidated audit trail without imposing unnecessary burdens. In 
addition, because of the evolving nature of the data captured by the 
CAT and the technology used, as well as the number of decisions still 
to be made in the process of implementing the CAT NMS Plan, the 
Commission has paid particular attention to the structures in place to 
guide decision-making going forward. These include the governance of 
the Company, the provisions made for Commission and other oversight, 
the standards established, and the development milestones provided for 
in the Plan.
---------------------------------------------------------------------------

    \642\ 17 CFR 242.608(b)(2); see also 15 U.S.C. 78k-1(a).
    \643\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

    The Commission received 24 comment letters on the CAT NMS 
Plan.\644\ The commenters included, among others, national securities 
exchanges, technology providers, academics, broker-dealers, investors, 
and organizations representing industry participants. Of the comment 
letters received regarding the Plan, 13

[[Page 84727]]

expressed general support,\645\ 3 comment letters expressed opposition 
to the Plan,\646\ and 8 comment letters neither supported nor opposed 
the Plan.\647\ Many of the commenters suggested modifications to 
certain provisions of the Plan or identified what they believed were 
deficiencies in the Plan.
---------------------------------------------------------------------------

    \644\ See supra note 6.
    \645\ FSR, FSI, MFA, ICI, TR, SIFMA, FIF, Fidelity, UnaVista, 
CBOE, KCG, and NYSE Letters.
    \646\ Better Markets, Bloomberg, and Data Boiler Letters.
    \647\ Anonymous I, Anonymous II, DAG, STA, DTCC, Hanley, 
Wachtel, FIX Trading, and Garrett Letters.
---------------------------------------------------------------------------

    The most significant areas raised in the comment letters pertained 
to: (i) The security and confidentiality of CAT Data (especially of 
PII); (ii) the cost and funding of the CAT; (iii) the timing of the 
retirement of duplicative regulatory reporting systems; (iv) the 
implementation time frame; (v) governance (particularly with respect to 
industry representation); (vi) the clock synchronization standard; (vi) 
error rates; and (vii) an overall lack of detail in the CAT NMS Plan.
    As discussed in detail below, the Commission has determined to 
approve the CAT NMS Plan, as amended, pursuant to Section 11A of the 
Act \648\ and Rule 608.\649\ The Commission believes that the Plan is 
reasonably designed to improve the completeness, accuracy, 
accessibility and timeliness of order and execution data used by 
regulators. The Commission believes that the Plan will facilitate 
regulators' access to more complete, accurate and timely audit trail 
data. The Plan will also allow for more efficient and effective 
surveillance and analysis, which will better enable regulators to 
detect misconduct, reconstruct market events, and assess potential 
regulatory changes. As a result, the CAT NMS Plan should significantly 
improve regulatory efforts by the SROs and the Commission, including 
market surveillance, market reconstructions, enforcement 
investigations, and examinations of market participants. The Commission 
believes that improved regulatory efforts, in turn, will strengthen the 
integrity and efficiency of the markets, which will enhance investor 
protection and increase capital formation.
---------------------------------------------------------------------------

    \648\ 15 U.S.C. 78k-1.
    \649\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

    As noted, commenters raised concerns about, and suggested 
alternatives to, certain Plan provisions. The Participants submitted 
five letters which responded to the comments and provided certain 
suggestions for amendments to the Plan, as discussed in detail below. 
After considering the proposed Plan, the issues raised by commenters, 
and the Participants' responses, the Commission has amended certain 
aspects of the Plan and has determined that the proposed Plan, as 
amended by the Commission, satisfies the standard of Rule 608. The 
Commission finds that the CAT NMS Plan is necessary or 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.\650\ The Commission does not 
believe that the remaining concerns identified by commenters 
individually or collectively call into question the Plan's satisfaction 
of the approval standard in Rule 608, or otherwise warrant a departure 
from the policy choices made by the Participants.
---------------------------------------------------------------------------

    \650\ See 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

A. Definitions, Effectiveness of Agreement, and Participation (Articles 
I, II, and III)

    Article I of the CAT NMS Plan sets forth definitions for certain 
terms used in the CAT NMS Plan, as well as principles of 
interpretation. Article II of the CAT NMS Plan describes the corporate 
structure under which the Participants will build and maintain the CAT, 
and Article III addresses participation in the Plan, including 
admission of new Participants, resignation and termination of 
Participants, and the obligations and liability of Participants.\651\
---------------------------------------------------------------------------

    \651\ See Section III.1.; Section III.2., supra.
---------------------------------------------------------------------------

    The Commission did not receive any comments relating to Article II 
or III of the CAT NMS Plan, and is approving them as proposed, with 
certain technical conforming changes to reflect the Participants' 
proposal to treat the Company as a non-profit and certain Exchange Act 
obligations.\652\ The Commission did receive comments on three 
definitions: \653\ (1) Allocation Report; \654\ (2) Trading Day; \655\ 
and (3) Eligible Security.\656\
---------------------------------------------------------------------------

    \652\ See Sections IV.B and IV.F, infra.
    \653\ The Commission notes that some commenters recommended 
changing specific provisions in the CAT NMS Plan, which would also 
result in modifications to certain definitions set forth in Article 
I (e.g., Error Rate and Primary Market Transaction). The Commission 
discusses such comments in the Sections below in conjunction with 
the relevant substantive CAT NMS Plan provisions.
    \654\ TR Letter at 9.
    \655\ FIF Letter at 95-96.
    \656\ Anonymous Letter I at 9.
---------------------------------------------------------------------------

    For the definition of Allocation Report,\657\ one commenter stated 
that ``allocation time is not consistently defined or captured,'' and 
that without further guidance, CAT Reporters may have difficulties 
reporting this data element.\658\ The Participants responded to this 
comment by explaining that the Participants have not yet determined how 
``time of the allocation'' will be defined, but indicated that they 
would address this in the Technical Specifications.\659\
---------------------------------------------------------------------------

    \657\ The Plan defines ``Allocation Report'' to mean a report 
made to the Central Repository by an Industry Member that identifies 
the Firm Designated ID for any account(s), including subaccount(s), 
to which executed shares are allocated and provides the security 
that has been allocated, the identifier of the firm reporting the 
allocation, the price per share of shares allocated, the side of 
shares allocated, the number of shares allocated to each account, 
and the time of the allocation; provided, for the avoidance of 
doubt, any such Allocation Report shall not be required to be linked 
to particular orders or executions. See CAT NMS Plan, supra note 5, 
at Section 1.1.
    \658\ TR Letter at 9.
    \659\ Response Letter I at 25.
---------------------------------------------------------------------------

    For the definition of Trading Day,\660\ one commenter stated that 
the cut-off time for Trading Day is not defined and argued that, 
consistent with OATS, the cut-off time should be 4:00 p.m., ET.\661\ 
The commenter argued a later cut-off time would compress the time CAT 
Reporters have to collect, validate, and report data in a timely 
manner.\662\ The Participants responded to this comment by explaining 
that a universal cut-off time for Trading Day is not recommended for 
the CAT because cut-off times may differ based on the different types 
of Eligible Securities (including the potential expansion of the 
security types covered in Eligible Securities). Rather, the 
Participants stated that the Operating Committee should determine cut-
off times for the Trading Day and indicated that they would address 
this in the Technical Specifications.\663\
---------------------------------------------------------------------------

    \660\ The Plan states that ``Trading Day'' shall have such 
meaning as is determined by the Operating Committee. For the 
avoidance of doubt, the Operating Committee may establish different 
Trading Days for NMS Stocks (as defined in SEC Rule 600(b)(47), 
Listed Options, OTC Equity Securities, and any other securities that 
are included as Eligible Securities from time to time. See CAT NMS 
Plan, supra note 5, at Section 1.1.
    \661\ FIF Letter at 95-96.
    \662\ Id. at 96, 124.
    \663\ Response Letter I at 31.
---------------------------------------------------------------------------

    For the definition of Eligible Security,\664\ one commenter stated 
that ``a full audit trail would include transactions both on and off

[[Page 84728]]

exchange.'' \665\ The Participants noted that the CAT will capture on- 
and off-exchange transactions for NMS Securities and OTC Equity 
Securities, as the CAT would ``capture orders and transactions in NMS 
Securities and OTC Equity Securities, even if they occur in ATSs/dark 
pools, other trading venues or internally within broker-dealers.'' 
\666\
---------------------------------------------------------------------------

    \664\ The CAT NMS Plan provides that ``Eligible Security'' 
includes (a) all NMS Securities and (b) all OTC Equity Securities. 
See CAT NMS Plan, supra note 5, at Section 1.1.
    \665\ Anonymous Letter I at 9.
    \666\ Response Letter I at 25.
---------------------------------------------------------------------------

    The Commission believes that the definitions and principles of 
interpretation set forth in Article I of the CAT NMS Plan are 
reasonably designed to provide clarity to the terms set forth in the 
CAT NMS Plan. In response to the commenters that recommended 
modifications to the definitions of Allocation Report and Trading Day, 
the Commission believes it is reasonable for the Participants to 
address the Allocation Report and Trading Day specifics raised by 
commenters in the Technical Specifications to provide the CAT with 
necessary flexibility during its implementation, and based on the 
Plan's requirement that the Technical Specifications will be published 
no later than one year prior to when Industry Member reporting 
begins.\667\ With respect to Eligible Securities, the Commission 
believes that the commenter's concern is addressed already in the Plan.
---------------------------------------------------------------------------

    \667\ See Section IV.D.8.a, infra.
---------------------------------------------------------------------------

    The Commission also notes that the Participants submitted a letter 
to the Commission indicating that the names of certain Participants had 
changed and that two new exchanges have been approved by the 
Commission.\668\ Specifically, the Participants stated that BATS 
Exchange, Inc. is now known as Bats BZX Exchange, Inc.; BATS Y-
Exchange, Inc. is now known as Bats BYX Exchange, Inc.; EDGA Exchange, 
Inc. is now known as Bats EDGA Exchange, Inc.; EDGX Exchange, Inc. is 
now known as Bats EDGX Exchange, Inc.; NASDAQ OMX BX, Inc. is now known 
as NASDAQ BX, Inc.; and NASDAQ OMX PHLX LLC is now known as NASDAQ PHLX 
LLC.\669\ In addition, the Participants stated that two new exchanges 
were approved by the Commission: ISE Mercury, LLC and Investors' 
Exchange, LLC.\670\ Thus, the Participants suggested that the 
Commission amend the Plan to reflect that ISE Mercury, LLC and 
Investors' Exchange LLC are Participants to the CAT NMS Plan, and to 
include their names on the signature block for the CAT NMS Plan 
(including the Plan's appendices).\671\ The Commission believes it is 
appropriate to amend the CAT NMS Plan to reflect the name changes of 
certain Participants because this will ensure that the names of those 
Participants are accurately reflected, and to amend the CAT NMS Plan to 
add ISE Mercury, LLC and Investors' Exchange, LLC as Participants to 
the CAT NMS Plan because all SROs are intended to be Participants to 
the CAT NMS Plan.\672\
---------------------------------------------------------------------------

    \668\ Participants' Letter I at 1.
    \669\ Id.
    \670\ Id.
    \671\ Id.
    \672\ See Notice, supra note 5, at 30618.
---------------------------------------------------------------------------

B. Management of the Company (Article IV)

    Article IV of the CAT NMS Plan describes the management structure 
of CAT NMS, LLC.\673\ Many commenters raised concerns related to the 
governance structure set forth in the CAT NMS Plan.\674\ Most of the 
governance comments focused on the role, composition, obligations and 
powers of the Operating Committee and the Advisory Committee.\675\ A 
few commenters identified potential conflicts of interest (both with 
respect to the Officers and the Participants) as well as other 
governance concerns, including whether the CAT should be under the 
Commission's direct and sole control.\676\
---------------------------------------------------------------------------

    \673\ See Section III.3, supra.
    \674\ FSI Letter at 3; MFA Letter at 3-4; ICI Letter at 10-13; 
TR Letter at 6-7; SIFMA Letter at 24-29; FIF Letter at 14, 135-37; 
Fidelity Letter at 6-8; Better Markets Letter at 4-6; KCG Letter at 
5-7; DAG Letter at 3; NYSE Letter at 4-6; STA Letter at 1-2.
    \675\ MFA Letter at 3-4; ICI Letter at 10-13; SIFMA Letter at 
24-29; KCG Letter at 5-7; DAG Letter at 3; NYSE Letter at 4-6; TR 
Letter at 6-7; FIF Letter at 14, 135-37; see also STA Letter at 1 
(supporting the DAG Letter's governance recommendations).
    \676\ FSI Letter at 3; MFA Letter at 3-4; ICI Letter at 10-13; 
Better Markets Letter at 4-6.
---------------------------------------------------------------------------

1. Operating Committee
    Article IV of the CAT NMS Plan provides that an Operating Committee 
will manage the CAT, where each Participant appoints one member of the 
Operating Committee, and each Participant appointee has one vote.\677\ 
Article IV also sets forth certain other provisions relating to the 
Operating Committee, including identification of those actions 
requiring a Majority Vote, a Supermajority Vote, or a unanimous vote; 
and the management of conflicts of interest. Commenters raised concerns 
about the composition, voting and independence of the Operating 
Committee.
---------------------------------------------------------------------------

    \677\ See CAT NMS Plan, supra note 5, at Section 4.2, Appendix 
C, Section D.11(b).
---------------------------------------------------------------------------

    Some commenters argued that the composition of the Operating 
Committee should not be limited to the SROs,\678\ arguing that non-SROs 
also should have full voting powers.\679\ Commenters recommended that 
the Operating Committee should include members who are broker-
dealers,\680\ and other non-SRO and non-broker-dealer market 
participants,\681\ institutional investors, broker-dealers with a 
substantial retail base, broker-dealers with a substantial 
institutional base, a data management expert, and a federal agency 
representative with national security cybersecurity experience.\682\ 
Another commenter recommended including representatives of registered 
funds as members of the Operating Committee, noting their strong 
interest in ensuring the security of CAT Data and that CAT Reporter 
position information and trading strategies not be compromised.\683\ 
Two commenters argued that no legal authority bars broker-dealers or 
other non-SROs from serving on the Operating Committee.\684\
---------------------------------------------------------------------------

    \678\ MFA Letter at 3-4; ICI Letter at 10-13; SIFMA Letter at 
24-26; KCG Letter at 5-7; DAG Letter at 3; see also STA Letter at 1 
(supporting the DAG Letter's governance recommendations).
    \679\ SIFMA Letter at 24-26; KCG Letter at 5-7; DAG Letter at 3; 
see also STA Letter at 1 (supporting the DAG Letter's governance 
recommendations).
    \680\ SIFMA Letter at 25; MFA Letter at 3; DAG Letter at 3; KCG 
Letter at 6; see also STA Letter at 1 (supporting the DAG Letter's 
governance recommendations).
    \681\ KCG Letter at 6; MFA Letter at 3.
    \682\ MFA Letter at 3.
    \683\ ICI Letter at 11. This commenter further noted that 
registered funds' expertise in protecting trade and order 
information could help formulate CAT-related data security policies. 
Id.
    \684\ KCG Letter at 6; ICI Letter at 11.
---------------------------------------------------------------------------

    In support of their recommendation to expand the Operating 
Committee's membership, commenters stressed the need for meaningful 
input by stakeholders with specific expertise, which they believed 
would improve the implementation and maintenance of the CAT.\685\ One 
commenter described the CAT as ``a uniquely complex facility'' \686\ 
and another commenter described the CAT as ``a critical market utility 
designed to benefit the national market system and all market 
participants,'' and stated that as such ``the governance and operation 
of the CAT NMS Plan should be structured to obtain meaningful input 
from the broker-dealer community.'' \687\ One of these commenters noted 
broker-dealers would have complementary ``expertise and insight'' to 
the SROs, insofar as broker-dealers would be ``providing the

[[Page 84729]]

lion's share of the reported data to the CAT.'' \688\ This commenter 
clarified that, in recommending broker-dealer participation on the 
Operating Committee, the commenter ``does not expect (or request) that 
broker-dealer representatives would have access to the surveillance 
patterns and other regulatory means by which the SROs will use the data 
collected by the CAT.'' \689\
---------------------------------------------------------------------------

    \685\ SIFMA Letter at 25; KCG Letter at 7.
    \686\ SIFMA Letter at 25.
    \687\ KCG Letter at 7. KCG suggested that the Advisory Committee 
alone would have ``almost no voice in the operation [of the] NMS 
plan'' based on the feedback regarding the administration and 
operation of other NMS plans. KCG Letter at 7.
    \688\ SIFMA Letter at 25; see also ICI Letter at 11 (``The 
perspective of other market participants--particularly given that 
the central repository will house their sensitive information--would 
help in the development and maintenance of the CAT.''); MFA Letter 
at 3 (``The decisions of the Operating Committee, such as those 
related to data security . . . will have a significant impact on 
market participants immediately and in the future.''). One commenter 
further noted that ``the SROs expect the broker-dealers to help fund 
the costs of the CAT, and they proposed a funding model under which 
the vast majority of the CAT building and operating costs would be 
imposed on the broker-dealer firms.'' SIFMA Letter at 25.
    \689\ SIFMA Letter at 25.
---------------------------------------------------------------------------

    One commenter described the industry's experience as part of the 
DAG as informing its belief that full industry participation on the 
Operating Committee is required.\690\ This commenter stated that ``the 
SROs limited the Industry's participation in important aspects of the 
development process'' to an extent that direct engagement with Bidders 
``provided a more complete and relevant picture of the proposed CAT 
solution than had been received through involvement in the DAG.'' \691\ 
This commenter argued the Operating Committee should include non-SRO 
industry participants because it would allow them to participate in 
selecting a Plan Processor and developing the CAT operating 
procedures.\692\
---------------------------------------------------------------------------

    \690\ DAG Letter at 3; see also STA Letter at 1 (supporting the 
DAG Letter's governance recommendations).
    \691\ DAG Letter at 3; see also STA Letter at 1 (supporting the 
DAG Letter's governance recommendations).
    \692\ DAG Letter at 3; see also STA Letter at 1 (supporting the 
DAG Letter's governance recommendations).
---------------------------------------------------------------------------

    One commenter recommended that the allocation of voting rights 
among the Participants be reevaluated, noting that the Commission's 
Equity Market Structure Advisory Committee (``EMSAC'') provided a 
similar recommendation regarding plan governance generally.\693\ This 
commenter also recommended limiting the number of Operating Committee 
actions that require unanimous voting.\694\
---------------------------------------------------------------------------

    \693\ Fidelity Letter at 7. The Commission also notes that 
although the commenter did not include the EMSAC's rationale for the 
reallocation of voting rights recommendation, in the EMSAC 
Recommendations cited by the commenter, the EMSAC explained that it 
recommended reallocating voting rights because the ``reallocation of 
voting rights [among NMS plan participants] is intended to better 
reflect the proportional interests of NMS [p]lan participants''). 
See EMSAC, Recommendations Regarding Enhanced Industry Participation 
in Certain SRO Regulatory Matters (June 10, 2016), available at 
https://www.sec.gov/spotlight/emsac/emsac-trading-venues-regulation-subcommittee-recomendation-61016.pdf (``EMSAC Recommendations'').
    \694\ Fidelity Letter at 7. This commenter noted that the EMSAC 
provided this recommendation. The Commission notes that although the 
commenter did not include the EMSAC's rationale for this 
recommendation, in the EMSAC Recommendations cited by the commenter, 
the EMSAC explained that it recommended the limited use of unanimous 
voting requirements ``to prevent undue friction or delay in [p]lan 
voting matters.'' See EMSAC Recommendations, supra note 693, at 8.
---------------------------------------------------------------------------

    Commenters also recommended that the Operating Committee include 
``independent directors.'' \695\ One commenter recommended that these 
independent directors be both non-industry and non-SRO.\696\ Other 
commenters argued that the ``CAT governance structure should include 
independent directors, comprised of both non-[i]ndustry and [i]ndustry 
participants.'' \697\
---------------------------------------------------------------------------

    \695\ See Better Markets Letter at 6; DAG Letter at 3; see also 
STA Letter at 1 (supporting the DAG Letter's governance 
recommendations); SIFMA Letter at 25 n.4 (noting Rule 613 does not 
preclude the SROs from including independent directors in the 
Operating Committee).
    \696\ Better Markets Letter at 6.
    \697\ DAG Letter at 3; see also STA Letter at 1 (supporting the 
DAG Letter's governance recommendations).
---------------------------------------------------------------------------

    In response to comments regarding the composition of the Operating 
Committee, the Participants argued that the Operating Committee should 
remain as a committee solely of SROs because only SROs have a statutory 
obligation under the Exchange Act to create, implement and maintain the 
CAT and regulate securities markets, whereas broker-dealers do 
not.\698\ The Participants also identified potential conflicts of 
interest if the ``subjects of surveillance [are] involved in decision-
making of a plan that, at its core has SEC and [SRO] regulatory 
surveillance as its primary objective.'' \699\ Finally, the 
Participants discussed their belief that the Advisory Committee, 
discussed below, is the appropriate forum for non-Participants to 
provide their views.\700\
---------------------------------------------------------------------------

    \698\ Response Letter I at 6; see also, NYSE Letter at 5.
    \699\ Response Letter I at 6.
    \700\ Id. at 7.
---------------------------------------------------------------------------

    In response to comments regarding the allocation of voting rights 
among the Participants, the Participants explained that each 
Participant has one vote to permit equal representation among the 
Participants.\701\ The Participants indicated their commitment to this 
allocation of voting rights because each Participant independently has 
obligations with regard to the CAT under Rule 613, and each 
Participant's regulatory surveillance obligations are not constrained 
by revenues or market share. The Participants also noted that this 
voting model is common among other NMS plans.\702\
---------------------------------------------------------------------------

    \701\ Id.
    \702\ Id.
---------------------------------------------------------------------------

    In response to the commenter suggesting that the CAT NMS Plan 
should limit the number of provisions requiring a unanimous vote, the 
Participants highlighted that only three extraordinary circumstances 
require a unanimous vote under the CAT NMS Plan: (i) Obligating 
Participants to make a loan or capital contribution to the 
Company;\703\ (ii) dissolving the Company; \704\ and (iii) acting by 
written consent in lieu of a meeting.\705\
---------------------------------------------------------------------------

    \703\ The Participants explained this would impose an additional 
and direct financial burden on each Participant, thus each 
Participant's approval is important. Id. at 8.
    \704\ The Participants explained this would directly impact each 
Participant's ability to meet its regulatory and compliance 
requirements, so it is critical that each Participant consent to 
this action. Id.
    \705\ The Participants explained that this would ensure that all 
Operating Committee members would have knowledge of, and consider, 
all actions taken by the Operating Committee if an action by written 
consent is effected in lieu of a meeting. Id.
---------------------------------------------------------------------------

    In response to comments recommending the CAT governance structure 
include independent directors, the Participants noted that many of the 
Participants have independent representation on their governing boards, 
such that each Participant's input regarding the CAT would reflect 
independent views.\706\
---------------------------------------------------------------------------

    \706\ Id. at 7.
---------------------------------------------------------------------------

    The Commission notes that the Participants' proposed governance 
structure--with both an Operating Committee and an Advisory Committee--
is similar to the governance structure used today by other NMS plans, 
and the Commission believes that this general structure is reasonably 
designed to allow the Participants to fulfill their regulatory 
obligations and, at the same time, provide an opportunity for 
meaningful input from the industry and other stakeholders.\707\

[[Page 84730]]

The Commission believes that it is reasonable for the Operating 
Committee to be composed exclusively of SROs. As the Participants point 
out, the CAT NMS Plan is the vehicle through which they will fulfill 
key regulatory and oversight responsibilities. The Commission notes the 
Participants' statutory obligations as SROs, the opportunity for 
Advisory Committee input on the CAT NMS Plan decisions, the opportunity 
for public comment on Plan amendments, and close Commission oversight, 
when reaching that determination.\708\
---------------------------------------------------------------------------

    \707\ See 17 CFR 242.613; see, e.g., Securities Exchange Act 
Release Nos. 77679 (April 21, 2016), 81 FR 24908 (April 21, 2016) 
(NMS plan regarding addressing extraordinary market volatility); 
75660 (August 11, 2015), 80 FR 48940 (August 14, 2015) (NMS plan 
regarding the consolidated tape association); 75504 (July 22, 2015), 
80 FR 45252 (July 29, 2015) (NMS plan regarding consolidated 
quotations); 75505 (July 22, 2015), 80 FR 45254 (July 29, 2015) (NMS 
plan regarding unlisted trading privileges). The Commission believes 
it is reasonable for the CAT NMS Plan to include a governance 
structure similar to that utilized by other NMS plans that the 
Commission previously has found to be consistent with the Act. As 
noted above, the Commission is separately reviewing the EMSAC 
recommendations. See supra note 693.
    \708\ For these reasons, the Commission does not believe it is 
necessary to mandate independent directors in the governance of the 
CAT.
---------------------------------------------------------------------------

    Furthermore, the Commission notes that the current provisions, 
which allocate voting rights such that each Participant has one vote, 
is consistent with other NMS plans and recognizes that the obligations 
imposed by Rule 613 on the SROs are also imposed on each SRO 
independently. With respect to the limited use of a unanimous voting 
standard, the Commission believes that the Plan is reasonably designed 
to facilitate effective governance and notes that only the three 
extraordinary Operating Committee actions specified above require 
unanimity, whereas all other Operating Committee actions can be 
accomplished with either a Majority Vote or Supermajority Vote.
    The Commission notes that Commission Staff may observe all meetings 
(regular and special), including Executive Sessions, of the Operating 
Committee and Advisory Committee and receive all minutes.\709\ The 
Commission anticipates that only a few members of Commission Staff 
would observe any given meeting.
---------------------------------------------------------------------------

    \709\ See Section IV.B.2, infra.
---------------------------------------------------------------------------

    The Commission also notes that independent of its review of the CAT 
NMS Plan, the EMSAC has been reviewing, among other things, the issues 
surrounding NMS plan governance. On June 10, 2016, the EMSAC presented 
its recommendations in this area to the Commission.\710\
---------------------------------------------------------------------------

    \710\ See supra note 693.
---------------------------------------------------------------------------

    Finally, the Commission is amending Section 4.4(b) of the Plan to 
specify that the Operating Committee's discretion to deviate from the 
treatment, as set forth therein, of persons submitting a Form 1 
application to become a national securities exchange or persons 
submitting a Form X-15AA-A application to become a national securities 
association, must be reasonable and not impose any unnecessary or 
inappropriate burden on competition. The Commission is also amending 
Section 3.3(b)(v) of the Plan to specify that the Operating Committee's 
discretion, in considering other factors in determining the 
Participation Fee of a new Participant, must be reasonable, equitable 
and not unfairly discriminatory. The Commission believes these 
amendments are appropriate because they set forth in the CAT NMS Plan 
specific limitations with respect to the Operating Committee's 
discretion that are consistent with existing SRO obligations under the 
Exchange Act.\711\
---------------------------------------------------------------------------

    \711\ 15 U.S.C. 78f(b)(4)-(5), (8).
---------------------------------------------------------------------------

2. Advisory Committee
    Article IV of the Plan establishes an Advisory Committee charged 
with advising the SROs on the implementation, operation, and 
administration of the Central Repository.\712\ Under the Plan, the 
Advisory Committee has the right to attend Operating Committee and 
Subcommittee meetings--unless they are held in Executive Session--and 
submit its views prior to a decision by the Operating Committee.\713\ 
As proposed, the composition of the Advisory Committee includes: (i) 
Broker-dealers of varying sizes and types of business, including a 
clearing firm, (ii) an individual who maintains a securities account, 
(iii) an academic, (iv) institutional investors, and (v) the 
Commission's Chief Technology Officer (or Commission equivalent), who 
while not formally a member of the Advisory Committee, serves as an 
observer.\714\
---------------------------------------------------------------------------

    \712\ See Section III.3, supra; see also CAT NMS Plan, supra 
note 5, at Section 4.13(a), (d).
    \713\ See Section III.3, supra; see also CAT NMS Plan, supra 
note 5, at Section 4.13(d).
    \714\ See Section III.3, supra; see also CAT NMS Plan, supra 
note 5, at Section 4.13(b).
---------------------------------------------------------------------------

    Most comments regarding the Advisory Committee recommended 
formalizing and expanding its role.\715\ Commenters made the following 
recommendations: (i) Change the selection process of, and expand the 
membership of, the Advisory Committee; \716\ (ii) form the Advisory 
Committee before the CAT NMS Plan is approved; \717\ (iii) formalize 
procedures for Advisory Committee meetings, including requiring 
specific documentation and written correspondence; (iv) narrow the use 
of Operating Committee Executive Sessions, whereby the Advisory 
Committee is excluded from participating; and (v) adopt in the CAT NMS 
Plan, the EMSAC's recommendations for NMS plan advisory 
committees.\718\
---------------------------------------------------------------------------

    \715\ DAG Letter at 3; ICI Letter at 10-13; SIFMA Letter at 26-
29; FIF Letter at 14, 135-37; see also STA Letter at 1-2 (supporting 
the SIFMA, FIF and DAG Letters' Advisory Committee recommendations); 
but see NYSE Letter.
    \716\ TR Letter at 6-7; SIFMA Letter at 26-27; FIF Letter at 14, 
135-37; see also STA Letter at 2 (supporting the SIFMA and FIF 
Letters' Advisory Committee recommendations).
    \717\ DAG Letter at 3; see also STA Letter at 1 (supporting the 
DAG Letter's governance recommendations).
    \718\ SIFMA Letter at 26; ICI Letter at 10-13; see also STA 
Letter at 1-2 (supporting the SIFMA Letter's Advisory Committee 
recommendations).
---------------------------------------------------------------------------

    One commenter suggested that the process for selecting Advisory 
Committee members should change to ensure that the Advisory Committee 
membership is independent of the SROs.\719\ The commenter noted 
selection of Advisory Committee members independent from the 
Participants is critical in light of the inherent conflict of interest 
the Participants face as sponsors and overseers of a Plan that will, at 
the same time, impose obligations on the very same Participants.\720\ 
This commenter also recommended that the Advisory Committee members 
should be selected by broker-dealer representatives--not by the SROs--
and in support of this position argued that the Advisory Committee's 
purpose ``should be to represent the interest of the industry and bring 
to bear the wide expertise of broker-dealers.'' \721\
---------------------------------------------------------------------------

    \719\ SIFMA Letter at 27; see also STA Letter at 2 (supporting 
the SIFMA Letter's Advisory Committee recommendations).
    \720\ SIFMA Letter at 27; see also STA Letter at 2 (supporting 
the SIFMA Letter's Advisory Committee recommendations).
    \721\ SIFMA Letter at 27; see also STA Letter at 2 (supporting 
the SIFMA Letter's Advisory Committee recommendations).
---------------------------------------------------------------------------

    Those commenters that advocated expanding the membership of the 
Advisory Committee \722\ suggested including: (i) Trade processing and 
order management service bureaus; (ii) registered funds; (iii) inter-
dealer brokers; (iv) agency brokers; (v) retail brokers; (vi) 
institutional brokers; (vii) proprietary trading firms; (viii) smaller 
broker-dealers; (ix) firms with a floor presence; (x) and industry/
trade associations.\723\ One commenter recommended expanding the 
Advisory Committee to 20 members, with a

[[Page 84731]]

minimum of 12 broker-dealers.\724\ Another commenter suggested 
including two financial economists (preferably academic) with expertise 
in both econometrics and the economics of the primary market and market 
microstructure.\725\
---------------------------------------------------------------------------

    \722\ SIFMA Letter at 27; FIF Letter at 14, 135-37; TR Letter at 
6-7 (arguing that a service bureau representative should be added to 
the Advisory Committee to offer a ``collective perspective'' that 
comes from supporting multiple clients); ICI Letter at 10-13; see 
also STA Letter at 1-2 (supporting the SIFMA and FIF Letters' 
Advisory Committee recommendations).
    \723\ TR Letter at 6; SIFMA Letter at 27; FIF Letter at 135; ICI 
Letter at 12; see also STA Letter at 2 (supporting the SIFMA and FIF 
Letters' Advisory Committee recommendations).
    \724\ FIF Letter at 135; see also STA Letter at 2 (supporting 
the FIF Letter's Advisory Committee recommendations).
    \725\ Hanley Letter at 6.
---------------------------------------------------------------------------

    Another commenter recommended forming the Advisory Committee prior 
to the CAT NMS Plan receiving the Commission's approval to ``allow 
representative participation in the selection of the [Plan] Processor 
and in developing [o]perating procedures.'' \726\
---------------------------------------------------------------------------

    \726\ DAG Letter at 3; see also STA Letter at 1 (supporting the 
DAG Letter's Advisory Committee recommendations).
---------------------------------------------------------------------------

    Commenters suggested increasing the governance role of the Advisory 
Committee, with one commenter advocating that ``the Advisory Committee 
should be involved in every aspect of the CAT,'' \727\ such as budgets, 
fees and charges, and new requirements that may significantly burden 
broker-dealers.\728\
---------------------------------------------------------------------------

    \727\ SIFMA Letter at 27; see also ICI Letter at 11; FIF Letter 
at 14, 135-37; STA Letter at 2 (supporting the FIF and SIFMA 
Letters' Advisory Committee recommendations).
    \728\ SIFMA Letter at 27; see also STA Letter at 2 (supporting 
the SIFMA Letter's Advisory Committee recommendations).
---------------------------------------------------------------------------

    To facilitate increasing the Advisory Committee's role in the CAT's 
governance, a few commenters offered concrete recommendations for 
procedural safeguards.\729\ Two commenters suggested that the Operating 
Committee be required to document a written rationale any time the 
Operating Committee rejects an Advisory Committee recommendation.\730\ 
One of these commenters recommended that all documents prepared for or 
submitted to the Operating Committee by the Plan Processor also be 
submitted to the Advisory Committee, to keep the Advisory Committee 
fully informed.\731\ One commenter recommended that agendas and 
documentation for Operating Committee meetings be distributed to 
Advisory Committee members in advance of meetings.\732\
---------------------------------------------------------------------------

    \729\ SIFMA Letter 27-29; ICI Letter at 10-13; TR Letter at 6-7; 
see also STA Letter at 2 (supporting the SIFMA Letter's Advisory 
Committee recommendations). These recommendations are similar to the 
recommendations of the EMSAC.
    \730\ SIFMA Letter at 28; ICI Letter at 13; see also STA Letter 
at 2 (supporting the SIFMA Letter's Advisory Committee 
recommendations).
    \731\ ICI Letter at 13.
    \732\ SIFMA Letter at 28; see also STA Letter at 2 (supporting 
the SIFMA Letter's Advisory Committee recommendations and noting its 
concern with the frequency and timeliness of information provided to 
the Advisory Committee).
---------------------------------------------------------------------------

    A commenter also recommended that all information concerning the 
operation of the Central Repository be made available to the Advisory 
Committee, except for limited information of a confidential regulatory 
nature.\733\ This commenter added that when information is deemed to be 
of a confidential regulatory nature, the SROs should maintain a written 
record of what is designated confidential (and excluded from the 
Advisory Committee) and include an explanation of such 
designation.\734\
---------------------------------------------------------------------------

    \733\ SIFMA Letter at 28; ICI Letter at 10-13; see also STA 
Letter at 2 (supporting the SIFMA Letter's Advisory Committee 
recommendations).
    \734\ SIFMA Letter at 28; see also Fidelity Letter at 7 (noting 
the ``Operating Committee determines the scope and content of 
information supplied to the Advisory Committee''); STA Letter at 2 
(supporting the SIFMA Letter's Advisory Committee recommendations).
---------------------------------------------------------------------------

    Two commenters recommended revising the confidentiality policies 
related to the CAT to permit Advisory Committee members to ``share 
information from the [Advisory Committee] meetings with their 
colleagues and with other industry participants.'' \735\ One commenter 
further suggested that an Advisory Committee member should be allowed 
to make other firm personnel available that may have relevant expertise 
if the Advisory Committee is ``tasked with evaluating issues outside 
the members' subject matter expertise.'' \736\
---------------------------------------------------------------------------

    \735\ SIFMA Letter at 27, 28; DAG Letter at 3; see also STA 
Letter at 1-2 (supporting the SIFMA and DAG Letters' Advisory 
Committee recommendations).
    \736\ SIFMA Letter at 27; see also STA Letter at 2 (supporting 
the SIFMA Letter's Advisory Committee recommendations).
---------------------------------------------------------------------------

    Two commenters suggested that the Advisory Committee should have a 
right to review proposed amendments to the CAT NMS Plan that would 
affect CAT Reporters.\737\ One of these commenters noted that ``[i]t 
may not be obvious to the Operating Committee when a change to the Plan 
impacts CAT [R]eporters in a material way.'' \738\ The other commenter 
suggested modifying the Plan's definition of a Material Amendment \739\ 
to distinguish between amendments that are internal or external to the 
Plan Processor.\740\ This commenter recommended that both internal and 
external material amendments to the CAT NMS Plan be reviewed by the 
Advisory Committee, but be designated for different levels of review. 
This commenter suggested that material amendments that are ``internal'' 
to the Plan Processor would only be reviewed to ensure that that they 
do not materially affect CAT Reporters; whereas, amendments that are 
``external'' to the Plan Processor would require Advisory Committee 
consultation and an implementation plan with reasonable time for 
development and testing.\741\
---------------------------------------------------------------------------

    \737\ TR Letter at 7; FIF Letter at 136; see also STA Letter at 
2 (supporting the FIF Letter's Advisory Committee recommendations).
    \738\ TR Letter at 7.
    \739\ The CAT NMS Plan defines a ``Material Amendment'' to the 
Technical Specifications as an amendment that requires ``a 
Participant or an Industry Member to engage in significant changes 
to the coding necessary to submit information to the Central 
Repository pursuant to the LLC Agreement or if it is required to 
safeguard the security or confidentiality of the CAT Data.'' See CAT 
NMS Plan, supra note 5, at Section 6.9(c).
    \740\ FIF Letter at 136; see also STA Letter at 2 (supporting 
the FIF Letter's Advisory Committee recommendations). The commenter 
references ``external'' material amendments as any change that 
affects the CAT Reporter Interface, such as coding or configuration 
changes. ``Internal'' material amendments are changes that do not 
affect the CAT Reporter interface (i.e., does not require coding or 
configuration changes).
    \741\ FIF Letter at 136; see also STA Letter at 2 (supporting 
the FIF Letter's Advisory Committee recommendations).
---------------------------------------------------------------------------

    A commenter recommended specific CAT NMS Plan governance changes to 
expand and clarify the role of the Advisory Committee.\742\ This 
commenter supported: (i) Clarifying the process for selecting Advisory 
Committee representatives; (ii) expanding and formalizing the role of 
the Advisory Committee, such as providing it formal votes on matters 
before the Operating Committee and the ability to initiate its own 
recommendations; and (iii) significantly narrowing the use of Executive 
Sessions for the Operating Committee.\743\ Moreover, a commenter 
recommended that when the Operating Committee meets in Executive 
Session, the SROs should maintain a written record including an 
explanation of why an Executive Session is required.\744\
---------------------------------------------------------------------------

    \742\ Fidelity Letter at 7.
    \743\ Id. This commenter noted that the EMSAC provided these 
recommendations; see also SIFMA Letter at 28; STA Letter at 2 
(supporting the SIFMA Letter's Advisory Committee recommendations).
    \744\ SIFMA Letter at 28; see also Fidelity Letter at 7 (noting 
there are ``no limitations on when the Operating Committee can call 
an Executive Session'' and that the Operating Committee can, for any 
reason, ``prohibit the Advisory Committee from attending any 
Executive Session of the Operating Committee by a majority vote''); 
STA Letter at 2 (supporting the SIFMA Letter's Advisory Committee 
recommendations).
---------------------------------------------------------------------------

    One commenter, an SRO, stated that ``the governance structure in 
the proposed CAT NMS Plan would establish an appropriate advisory role 
for the Advisory Committee that is consistent with the requirements 
specified by the Commission in Rule

[[Page 84732]]

613.'' \745\ This commenter stressed that while the SROs have a legal 
obligation under Commission rules to create, implement and maintain a 
consolidated audit trail and central repository, non-SROs do not have 
this legal obligation. Accordingly, this commenter stated its belief 
that Advisory Committee members should not have a voting right with 
respect to Operating Committee actions.\746\ Finally, this commenter 
argued that having non-SRO Advisory Committee members vote in 
connection with the CAT NMS Plan would be incompatible with the 
requirements of the Exchange Act and Commission rules that squarely 
place the obligations to implement and enforce ``the CAT NMS Plan on 
the shoulders of the SROs.'' \747\ In this regard, the commenter 
highlighted the Rule 613(f) requirement that SROs ``develop and 
implement a surveillance system, or enhance existing surveillance 
systems, reasonably designed to make use of the consolidated 
information contained in the consolidated audit trail.'' \748\
---------------------------------------------------------------------------

    \745\ NYSE Letter at 4.
    \746\ Id.
    \747\ Id. at 6.
    \748\ Id.
---------------------------------------------------------------------------

    Regarding the size and composition of the Advisory Committee, the 
Participants recommended amending the Plan to include a service bureau 
representative, because service bureaus ``perform audit trail reporting 
on behalf of their customers . . . [and] would provide a valuable 
perspective on how the CAT and any enhancements thereto would affect 
the service bureau clients, which often include a number of small and 
medium-sized firms.'' \749\ The Participants also recommended 
augmenting the institutional investor representation on the Advisory 
Committee by including institutional investor representation by an 
adviser from registered funds, and increasing from two to three 
institutional investor representatives with at least one of the 
institutional investor representatives trading on behalf of an 
investment company or group of investment companies registered pursuant 
to the Investment Company Act of 1940.\750\ The Participants also 
suggested removing references in the Advisory Committee eligibility 
requirements for those institutional investors ``on behalf of a public 
entity . . . and on behalf of a private entity,'' which is in response 
to a comment noting the vagueness of the terms ``public'' and 
``private'' with respect to institutional investors.\751\
---------------------------------------------------------------------------

    \749\ Response Letter I at 9.
    \750\ Id. at 10.
    \751\ Id.
---------------------------------------------------------------------------

    The Participants, however, disagreed with commenters that the 
academic representative of the Advisory Committee should be limited to 
a financial economist because a general requirement that ``a member of 
academia with expertise in the securities industry or any other 
industry relevant to the operation of the CAT System,'' does not 
preclude a financial economist serving on the Advisory Committee so 
long as they have the relevant expertise.\752\ The Participants also 
disagreed with commenters that members of industry trade groups should 
also serve on the Advisory Committee, noting that the CAT NMS Plan 
includes a variety of representatives from the members of such trade 
groups and would provide ``a meaningful opportunity for the 
representation of the views of industry trade groups.'' \753\ 
Furthermore, the Participants disagreed with commenters who advocated 
increasing the number of broker-dealer representatives on the Advisory 
Committee from seven to twelve, and increasing the size of the Advisory 
Committee from twelve to twenty members. The Participants noted that, 
in ``balancing the goal of having a sufficient cross section of 
representation with the goal of having a well-run committee,'' seven 
broker-dealers of varying sizes and business types would provide 
``significant opportunity to provide [broker-dealers'] views'' and 
increasing an Advisory Committee from twelve to twenty creates a 
committee structure that would ``likely hamper, rather than 
facilitate,'' discussion.\754\
---------------------------------------------------------------------------

    \752\ Id.
    \753\ Id.
    \754\ Id. at 10-12.
---------------------------------------------------------------------------

    In response to commenters recommending a more active and 
participatory role in operation of the CAT for non-SRO stakeholders, 
the Participants stated that the Plan strikes an appropriate balance 
between providing the ``industry with an active role in governance 
while recognizing the Participants' regulatory obligations with regard 
to the CAT.'' \755\ In response to a commenter recommending that 
Advisory Committee members be selected by broker-dealer 
representatives, the Participants stated their belief that the 
Operating Committee should select the members, but agreed with 
commenters that the Advisory Committee should be permitted to advise 
the Operating Committee regarding potential Advisory Committee 
members.\756\ The Participants suggested that the CAT NMS Plan be 
amended to permit the Advisory Committee to advise the Operating 
Committee on Advisory Committee member selection, provided however, 
that the Operating Committee in its sole discretion would select 
members of the Advisory Committee.\757\
---------------------------------------------------------------------------

    \755\ Id. at 13-14.
    \756\ Id.
    \757\ Id.
---------------------------------------------------------------------------

    In response to comments recommending formalized modes of written 
communication between the Operating Committee and the Advisory 
Committee, the Participants recommended that the CAT NMS Plan remain 
unchanged.\758\ In support, the Participants stated their belief that 
the proposed structure adequately addresses the commenters' concerns, 
while recognizing the need for the Participants to have the opportunity 
to discuss certain matters, particularly certain regulatory and 
security issues, without the participation of the industry.\759\ The 
Participants also noted that the Advisory Committee is permitted to 
attend all of the non-Executive Session Operating Committee meetings, 
where information concerning the operation of the CAT is received 
(subject to the Operating Committee's authority to determine the scope 
and content of information supplied to the Advisory Committee).\760\ 
Further, the Participants stated that minutes, subject to customary 
exceptions for confidentiality and privilege considerations, will be 
provided to the Advisory Committee. Finally, the Participants did not 
support instituting formalized modes of written communication between 
the Operating Committee and the Advisory Committee because such ``an 
overly formulaic approach to [Operating Committee] interactions'' would 
``hamper, rather than enhance, [Operating Committee] interactions with 
the Advisory Committee.'' \761\
---------------------------------------------------------------------------

    \758\ Id. at 15-16.
    \759\ Id. at 16.
    \760\ Id.
    \761\ Id.
---------------------------------------------------------------------------

    With respect to comments recommending narrowing the use of 
Operating Committee Executive Sessions, the Participants stated their 
belief that the Operating Committee's capabilities to meet in Executive 
Session are appropriate and cited the Commission's statement in the 
Adopting Release that: ``meet[ing] in [E]xecutive [S]ession without 
members of the Advisory Committee appropriately balances the need to 
provide a mechanism for industry input into the operation of the 
central repository, against the regulatory imperative that the 
operations and decisions regarding the consolidated

[[Page 84733]]

audit trail be made by SROs who have a statutory obligation to regulate 
the securities markets, rather than by members of the SROs, who have no 
corresponding statutory obligation to oversee the securities markets.'' 
\762\ The Participants represented that their intended use of an 
Executive Session is for limited purposes requiring confidentiality and 
offered four examples: Matters that present an actual or potential 
conflict of interest for Advisory Committee members (e.g., relating to 
member's regulatory compliance); discussion of actual or potential 
litigation; CAT security issues; and personnel issues. The Participants 
also noted that Executive Sessions must be called by a Majority Vote 
and that the meeting minutes are recorded, subject to confidentiality 
and attorney-client privilege considerations.\763\
---------------------------------------------------------------------------

    \762\ Id. at 15.
    \763\ Id.
---------------------------------------------------------------------------

    Finally, in response to comments that the Advisory Committee should 
form before the approval of the CAT NMS Plan, the Participants noted 
that the Plan itself provides for the establishment of the Operating 
Committee and the Advisory Committee and thus cannot be formed until 
the Commission approves the Plan. The Participants also noted that the 
DAG provides the Participants with ``advice regarding the development 
of the Plan from an industry perspective.'' \764\
---------------------------------------------------------------------------

    \764\ Id. at 16.
---------------------------------------------------------------------------

    For reasons discussed below, the Commission finds reasonable the 
Participants' suggested modifications to add a service bureau 
representative, increase the number of institutional investor 
representatives on the Advisory Committee, remove terms that create 
vagueness for the institutional investor representative categories, and 
make the applicable conforming changes to Section 4.13 of the Plan. 
Accordingly, after considering the comments, the Commission is amending 
Section 4.13 of the Plan to include a service bureau representative, 
increase the number of institutional investor representatives from two 
(2) to three (3), and remove the terms that a commenter identified as 
creating vagueness with respect to the institutional investor category.
    The Commission understands that service bureaus frequently serve a 
core role in reporting CAT Data on behalf of broker-dealers, and as 
such, the Commission finds appropriate their inclusion as an Advisory 
Committee member. Further, the Commission finds the increase from two 
to three members on the Advisory Committee representing institutional 
investors, as well as removing the references to ``on behalf of a 
public entity'' and ``on behalf of a private entity'' due to the 
vagueness of such terms with respect to institutional investor Advisory 
Committee members, to be reasonable responses to commenters seeking 
additional representation and clarity. The Commission also agrees with 
the Participants that it is reasonable to not mandate inclusion of 
representatives on the Advisory Committee from industry and trade 
associations, given the existing substantial industry representation on 
the Advisory Committee, which is reasonably designed to ensure a wide 
range of meaningful industry perspectives.
    The Commission agrees with commenters who argued that the academic 
representative on the Advisory Committee should be a financial 
economist. The Commission acknowledges the Participants' response that 
a financial economist is not precluded from serving as the academic 
representative of the Advisory Committee, but the Commission believes 
that specifying that the academic representative must be a financial 
economist is appropriate to ensure the Advisory Committee and the 
Operating Committee have access to such expertise in assessing the 
CAT's operations and development. Accordingly, the Commission is 
amending Section 4.13(b)(ix) of the Plan to specify that the academic 
representative on the Advisory Committee must be a financial economist.
    The Commission agrees with the Participants' suggestion, in 
response to commenters, to permit the Advisory Committee to recommend 
Advisory Committee candidates to the Operating Committee. Accordingly, 
the Commission is amending Section 4.13(d) of the Plan to permit the 
Advisory Committee to recommend Advisory Committee candidates to the 
Operating Committee, but notes that the Operating Committee still 
maintains the sole discretion to select members of the Advisory 
Committee.
    The Commission believes the amendment is reasonably designed to 
ensure a robust selection process for Advisory Committee membership 
that identifies candidates that best represent the industry 
perspective. With respect to the comment suggesting that the Advisory 
Committee be established before the approval of the CAT NMS Plan, the 
Commission notes it would be premature and technically not possible to 
establish an advisory committee to an NMS plan before such plan has 
been approved by the Commission. Moreover, the Commission notes that 
the interests of the industry and other stakeholders have been 
represented through the DAG, the public comment process, and through 
the SROs themselves as the CAT NMS Plan has been developed.
    The Commission is amending the Executive Sessions provision in 
Section 4.4(a) of the Plan, as well as the Advisory Committee provision 
in Section 4.13(b) of the Plan related to the Commission's Chief 
Technology Officer (or equivalent) being an observer of the Advisory 
Committee. As the Commission is responsible for regulatory oversight of 
the Participants and the CAT NMS Plan, the Commission believes that it 
is appropriate for the Plan to expressly provide that Commission Staff 
may attend all CAT NMS Plan meetings, including those held in Executive 
Session. Similarly, because the Commission has broad regulatory 
responsibility for the Plan, the Commission does not believe it is 
appropriate to limit to the Commission's Chief Technology Officer (or 
equivalent) the right to serve as an observer at Advisory Committee 
meetings. Accordingly, the Commission is amending Sections 4.4(a) and 
4.13(b) to provide that Commission Staff may attend Executive Sessions, 
and to permit the Commission to select the Commission representative to 
observe Advisory Committee meetings. The Commission anticipates that 
only a few members of Commission Staff would observe any given meeting.
    The Commission also is amending Section 4.13(e) of the Plan in 
response to comments to provide that the Advisory Committee shall 
receive the same documents and information concerning the operation of 
the Central Repository as the Operating Committee. The Operating 
Committee may, however, withhold such information to the extent it 
reasonably determines such information requires confidential treatment. 
Although the Plan as filed permits Advisory Committee members to attend 
all of the non-Executive Session Operating Committee meetings, with 
respect to information concerning the operation of the CAT, it allows 
the Operating Committee broad discretion to determine the scope and 
content of information supplied to the Advisory Committee. The 
Commission believes it is important for the Advisory Committee to 
fulfill its role that its members receive full information on Plan 
operations (other than confidential information) and that it is 
therefore appropriate to amend Section 4.13(e) of the Plan accordingly.

[[Page 84734]]

    With respect to the other comments regarding authority, composition 
and role of the Advisory Committee, as well as the use of the Operating 
Committee Executive Sessions, the Commission notes that the Plan 
provisions relating to the Advisory Committee and the Operating 
Committee Executive Sessions are similar to those in other NMS plans 
and are, therefore, reasonable.\765\
---------------------------------------------------------------------------

    \765\ As previously stated, the Commission believes it is 
reasonable for the CAT NMS Plan to include a governance structure 
similar to that utilized by other NMS plans that the Commission 
previously has found to be consistent with the Act. As with the 
comments regarding the Operating Committee, some of the suggestions 
made by commenters regarding the Advisory Committee are mirrored in 
the EMSAC recommendations. As already discussed, the Commission is 
separately reviewing these EMSAC recommendations. See supra note 
693.
---------------------------------------------------------------------------

3. Officers of the Company
    The CAT NMS Plan requires the Company to appoint a CISO and a CCO, 
who shall be employees solely of the Plan Processor.\766\ The Plan 
acknowledges that the CISO and CCO may have fiduciary and other similar 
duties to the Plan Processor pursuant to their employment with the Plan 
Processor, and the Plan, as proposed, sets forth that to the extent 
permitted by law, the CISO and CCO will have no fiduciary or similar 
duties to the Company.\767\
---------------------------------------------------------------------------

    \766\ See Section III.3, supra; see also CAT NMS Plan, supra 
note 5, at Section 4.6(a).
    \767\ See Section III.3, supra; see also CAT NMS Plan, supra 
note 5, at Sections 4.6(a), 4.7(c).
---------------------------------------------------------------------------

    One commenter expressed concern that appointing a CISO and CCO who 
would both be officers of the Company and employees of the Plan 
Processor ``creates a potential conflict of interest that would 
undermine the ability of these officers to effectively carry out their 
responsibilities under the CAT NMS Plan because they would owe a 
fiduciary duty to the Plan Processor rather than to the [Company].'' 
\768\ This commenter recommended that the officers of the Company 
should be required to act in the best interest of the [Company] to 
avoid conflicts of interest in carrying out their oversight 
activities.\769\ In addition, this commenter suggested that the CAT NMS 
Plan impose a fiduciary duty on the CISO and CCO, or at a minimum 
require the Plan Processor to select individuals who do not have a 
fiduciary duty to the Plan Processor to serve in these roles.\770\
---------------------------------------------------------------------------

    \768\ FSI Letter at 3.
    \769\ Id.
    \770\ Id.
---------------------------------------------------------------------------

    In response to these comments, the Participants suggested that the 
CAT NMS Plan be changed so that all Officers of the Company, including 
the CISO and CCO, have fiduciary duties to the Company in the same 
manner and extent as an officer of a Delaware corporation.\771\ The 
Participants also represented that the Operating Committee, in an 
agreement with the Plan Processor, will have the Plan Processor 
acknowledge that the Officers of the Company will owe fiduciary duties 
to the Company, and to the extent that the duties owed to the Company 
by the Officers of the Company, including the CISO or CCO, conflict 
with any duties owed to the Plan Processor, the duties to the Company 
should control.\772\
---------------------------------------------------------------------------

    \771\ Response Letter I at 18-19.
    \772\ Id. at 18.
---------------------------------------------------------------------------

    The Commission believes that the suggested modifications by the 
Participants in response to comments about potential conflicts of 
interest are reasonable. Accordingly, the Commission is amending 
Section 4.7(c) of the Plan so that each Officer shall have the same 
fiduciary duties and obligations to the Company as a comparable officer 
of a Delaware corporation and in all cases shall conduct the business 
of the Company and execute his or her duties and obligations in good 
faith and in the manner that the Officer reasonably believes to be in 
the best interests of the Company. Furthermore, the Commission is 
amending Section 4.6(a) of the Plan to codify the Participants' 
representation that that the Operating Committee, in an agreement with 
the Plan Processor, will have the Plan Processor acknowledge that the 
Officers of the Company will owe fiduciary duties to the Company, and 
to the extent that the duties owed to the Company by the Officers of 
the Company, including the CISO or CCO, conflict with any duties owed 
to the Plan Processor, the duties to the Company should control.
    The Commission believes that amending the CAT NMS Plan to expressly 
affirm the Officers' fiduciary duties or similar duties or obligations 
to the Company provides clarity and assurances that the Officers will 
act in the best interests of the Company.\773\ The Commission also 
believes it is reasonable, as the Participants have suggested in their 
response to comments, to have the Company and the Plan Processor enter 
into an agreement that specifies not only that Officers have fiduciary 
duties and obligations to the Company, but that if such Officers may 
have competing duties and obligations owed to the Company and to the 
Plan Processor, the duties and obligations to the Company should 
control. At this time, it is unclear what competing duties and 
obligations Officers may owe to the Company and the Plan Processor. 
While in many cases, the Officers' duties towards the Plan Processor 
and the Company are likely to be aligned, there may be circumstances 
(e.g., related to the performance of the Plan Processor) where such 
duties may conflict and the Commission finds reasonable that in such 
circumstances, the duties to the Company should control in order to 
mitigate any conflict between the interests of the Plan Processor and 
those of the Company in administering the CAT. The Commission further 
notes that the CAT NMS Plan provides reasonable oversight of the 
Officers by the Operating Committee, for example, the Plan requires: 
(i) The Operating Committee to approve the CISO and CCO with a 
Supermajority Vote \774\; (ii) the CISO and CCO to devote, with minor 
exceptions, their entire working time to serving as the CISO and CCO 
\775\; (iii) the Operating Committee to oversee that the Plan Processor 
allocates appropriate resources for the CISO and CCO to fulfill their 
obligations \776\; (iv) the CISO and CCO to report directly to the 
Operating Committee with respect to their duties \777\; (v) the 
compensation of the CISO and CCO to be subject to the Operating 
Committee's review and approval \778\; and (vi) an annual performance 
review of the CISO and CCO to be conducted by the Operating 
Committee.\779\
---------------------------------------------------------------------------

    \773\ While the SROs expressly waive fiduciary obligations to 
the Company, the SROs are subject to statutory obligations to 
regulate the securities markets and to create, implement and 
maintain the CAT.
    \774\ See CAT NMS Plan, supra note 5, at Section 6.2(a)(i), 
(b)(i).
    \775\ See id. at Section 6.2(a)(i), (b)(i).
    \776\ See id. at Section 6.2(a)(ii), (b)(ii).
    \777\ See id. at Section 6.2(a)(iii), (b)(iii).
    \778\ See id. at Section 6.2(a)(iv), (b)(iv).
    \779\ See id. at Section 6.2(a)(iv), (b)(iv).
---------------------------------------------------------------------------

4. Additional Governance Provisions
    Commenters raised additional governance concerns related to 
conflicts of interest for the Participants, whether there should be an 
audit committee, and whether the Participants should be required to 
coordinate the administration of the CAT from a legal, administrative, 
supervisory and enforcement perspective.\780\
---------------------------------------------------------------------------

    \780\ See SIFMA Letter at 27, 29; ICI Letter at 12; Better 
Markets Letter at 5-6; DAG Letter at 3; see also STA Letter at 1 
(supporting the DAG Letter's governance recommendations).
---------------------------------------------------------------------------

    Some commenters expressed concern that the Participants would have 
a conflict of interest because of the various roles they perform with 
respect

[[Page 84735]]

to the CAT. One commenter stated that the Participants are ``sponsors 
and overseers of the Plan, while at the same time, the Plan will impose 
obligations on [them].'' \781\ Another commenter raised concerns that 
the Participants would ``control the [O]perating [C]ommittee for the 
[P]lan, use CAT [D]ata for regulatory purposes, and potentially 
commercialize the information that they report to the CAT.'' \782\ This 
commenter suggested that these roles may ``present conflicting 
incentives'' for Participants.\783\
---------------------------------------------------------------------------

    \781\ SIFMA Letter at 27.
    \782\ ICI Letter at 12.
    \783\ Id.
---------------------------------------------------------------------------

    One commenter argued that the Participants should not oversee and 
control the CAT and recommended instead that the Commission should 
build and host the CAT, which would then be under the Commission's 
direct and sole control.\784\ In support of this view, the commenter 
stated the Commission's statutory mission to protect investors would 
make it better positioned to operate the CAT, as compared to for-profit 
SROs, who would seek to maximize profits from the CAT Data.\785\ The 
commenter suggested that the Commission could outsource the building of 
the CAT and fund the CAT similar to how it funds its EDGAR system.\786\ 
The commenter stated that CAT NMS, LLC should reorganize as a not-for-
profit entity and set forth an organizational purpose aligned with the 
Commission's mission statement.\787\ Finally, the commenter argued that 
the Commission solely should control access to and usage of the CAT 
System.\788\
---------------------------------------------------------------------------

    \784\ Better Markets Letter at 5.
    \785\ Id. at 5-6.
    \786\ Id. at 6.
    \787\ Id. The commenter recommended that the board of directors 
of such entity contain a super-majority of independent directors to 
oversee the not-for-profit CAT NMS, LLC, and that the chair of the 
board of directors should be non-industry and appointed by the 
Commission. Further, the commenter recommended that the Director of 
the Division of Trading and Markets permanently serve as the vice-
chair of the board of directors. Better Markets Letter at 6; see 
also DAG Letter at 3 (arguing that the CAT corporate governance 
structure should have independent directors comprised of both non-
industry and industry participants); STA Letter at 1 (supporting the 
DAG Letter's governance recommendations).
    \788\ Better Markets Letter at 6.
---------------------------------------------------------------------------

    Two commenters recommended that the Company governance structure 
include an audit committee.\789\ One commenter noted that the audit 
committee should be comprised of mostly independent directors.\790\ 
Another commenter stated the audit committee should be responsible for 
the oversight of how the CAT's revenue sources are used for regulatory 
purposes, and that the costs and financing of the CAT must be fully 
transparent and publicly disclosed in annual reports, including audited 
financial statements.\791\
---------------------------------------------------------------------------

    \789\ SIFMA Letter at 29; DAG Letter at 3; see also STA Letter 
at 1 (supporting the DAG Letter's governance recommendations).
    \790\ DAG Letter at 3; see also STA Letter at 1 (supporting the 
DAG Letter's governance recommendations). The Commission notes that 
the commenter specified in its comment that their definition of 
independent director includes industry participants (i.e., broker-
dealers). See DAG Letter at 3.
    \791\ SIFMA Letter at 29.
---------------------------------------------------------------------------

    Finally, one commenter suggested that the SROs should coordinate 
the administration of the CAT through a single centralized body from a 
legal, administrative, supervisory and enforcement perspective.\792\ 
The commenter recommended amending the Plan to require this 
coordination, and suggested that such coordination could be facilitated 
through agreements under SEC Rule 17d-2, regulatory service agreements 
or some combination thereof.\793\ In support of this view, the 
commenter noted that different CAT-related compliance requirements 
among the SROs might arise and subject firms to duplicative regulation 
and enforcement, with the accompanying inefficiencies, additional 
costs, and potential inconsistencies.\794\
---------------------------------------------------------------------------

    \792\ Id.
    \793\ Id.
    \794\ Id.
---------------------------------------------------------------------------

    In response to commenters suggesting the formation of an audit 
committee, the Participants stated that they would have the ability to 
review CAT-related issues objectively because ``members of the 
Operating Committee are not employed by the [Company] and are 
fulfilling mandated regulatory oversight responsibilities, and that the 
[Company] will not operate as a profit-making company, which may need 
more scrutiny as compared to a company that is operating on a break-
even basis.'' \795\ Further, the Participants noted that the CAT NMS 
Plan requires that a Compliance Subcommittee be established--and noted 
that the Operating Committee in the future could decide if an audit 
committee should be formed as a subcommittee.\796\
---------------------------------------------------------------------------

    \795\ Response Letter I at 8.
    \796\ Id. at 9.
---------------------------------------------------------------------------

    In response to commenters regarding the coordinated compliance and 
enforcement oversight of the CAT, the Participants acknowledged the 
benefits of having a single Participant be responsible for enforcing 
compliance with Rule 613 and the CAT NMS Plan through Rule 17d-2 
agreements, regulatory services agreements or some other approach and 
represented that they would consider such an arrangement after the CAT 
NMS Plan's approval.\797\ As discussed in Section IV.H, the Commission 
is amending Section 6.6 of the Plan to require that the Participants 
provide the Commission within 12 months of effectiveness of the Plan, a 
report detailing the Participants' consideration of coordinated 
surveillance (e.g., entering into 17d-2 agreements or regulatory 
services agreements).\798\
---------------------------------------------------------------------------

    \797\ Id. at 17.
    \798\ See Section IV.H., supra.
---------------------------------------------------------------------------

    The Commission acknowledges the commenters' concern about the 
conflicts inherent in having SROs performing various roles as overseers 
of the Plan and at the same time enforcing compliance with Rule 613. 
The Commission, however, highlights that the Participants are 
performing roles specified pursuant to obligations under the Exchange 
Act and the rules thereunder and remain under the direct oversight of 
the Commission. With respect to comments expressing concerns that the 
Participants may be in a position to commercialize the respective Raw 
Data reported by each SRO submitting to the CAT, order and execution 
information is already collected by SROs from its members and they are 
permitted under current law to commercialize this data (e.g., direct 
market feeds, provided that the terms are fair and reasonable and not 
unreasonably discriminatory \799\) subject to appropriate rule filings 
and oversight by the Commission.\800\ Thus, the Plan does not expand 
the Participants' ability to commercialize their Raw Data beyond what 
is currently permitted.
---------------------------------------------------------------------------

    \799\ 17 CFR 242.603.
    \800\ See, e.g., Securities Exchange Act Release Nos. 73918 
(December 23, 2014), 79 FR 78920 (December 31, 2014) (BATS One 
Feed); 74128 (January 23, 2015), 80 FR 4951 (January 29, 2015) (NYSE 
Integrated Feed).
---------------------------------------------------------------------------

    With respect to comments that suggested that the Participants 
should not oversee and control the CAT, but that instead it should be 
under the Commission's direct and sole control, the Commission notes 
that in the Adopting Release, the Commission mandated that the 
Participants develop an NMS plan for the development and operation of 
the CAT. As such, the CAT NMS Plan, as noticed, whereby the 
Participants directly manage the CAT, was in furtherance of Rule 613 as 
adopted. Additionally, because the Participants, as SROs, currently 
serve as front-line regulators of many aspects of the securities 
markets, including

[[Page 84736]]

administering the existing sources of regulatory data, the Commission 
believes they are well positioned to oversee the CAT. Moreover, the 
Commission believes that any potential conflicts arising from the 
status of certain Participants as for profit enterprises are reasonably 
addressed through the Plan provisions and Commission oversight.
    The Commission concurs with the Participants that it is reasonable 
for the Company not to have an audit committee at this time. Further, 
the Participants are permitted to form an audit committee, as a 
subcommittee of the Operating Committee. The Commission notes that the 
absence of a requirement for an audit committee is consistent with 
other NMS plans.
    Section 9.2(a) of the Plan states that the Operating Committee 
shall maintain a system of accounting for the Company established and 
administered in accordance with GAAP (or another standard if determined 
appropriate by the Operating Committee). Section 9.2(a) also requires, 
among other things, that the Company prepare and provide to each 
Participant an audited balance sheet, income statement and statement of 
cash flow, to the extent the Operating Committee deems advisable. In 
addition, Section 9.2(c) of the Plan states that all matters concerning 
accounting procedures shall be determined by the Operating Committee. 
The Participants recommended that the Commission amend Section 9.2(a) 
to eliminate the flexibility for the Company to administer a system of 
accounting in accordance with non-GAAP standards, thus requiring that 
all financial statements or information that may be supplied to the 
Participants shall be prepared in accordance with GAAP.\801\ In 
addition, the Participants recommended amending the Plan to eliminate 
the discretion of the Operating Committee to provide financials only if 
it deems advisable and instead to require that the Company's audited 
annual balance sheet, income statement, and statement of cash flows be 
audited by an independent public accounting firm and made publicly 
available.\802\ The Commission believes that the changes recommended by 
the Participants are reasonable because they will promote greater 
accuracy and transparency with respect to the Company's financial 
accounting and is therefore amending the Plan accordingly.
---------------------------------------------------------------------------

    \801\ Participants' Letter II at 2.
    \802\ Participants' Letter II at 2.
---------------------------------------------------------------------------

    Section 6.1(o)(vi) of the Plan states that financial statements of 
the Plan Processor, prepared in accordance with GAAP and audited by an 
independent public accounting firm or certified by the Plan Processor's 
Chief Financial Officer, shall be provided to the Operating Committee 
no later than 90 days after the Plan Processor's fiscal year end. The 
Participants recommended that the Commission amend the Plan to change 
this timeframe to 180 days after the Plan Processor's fiscal year end 
to provide further flexibility to the Plan Processor with respect to 
the preparation of its financial statements.\803\ The Commission 
believes that it is reasonable to provide this additional flexibility 
and is therefore amending the Plan accordingly.
---------------------------------------------------------------------------

    \803\ Participants' Letter II at 1.
---------------------------------------------------------------------------

    The Commission also agrees with the commenters and Participants 
that a coordinated approach to self-regulatory oversight may have 
benefits, such as regulatory efficiencies and consistency, but believes 
that it is reasonable for such an arrangement to be considered by the 
Participants after the CAT NMS Plan's approval rather than mandating a 
specific approach for SRO coordination under the Plan at this time--as 
the Plan Processor has not been selected nor has the CAT System been 
developed. The Commission nevertheless notes that, as described above, 
it is amending the CAT NMS Plan to require a written assessment by the 
Participants within 12 months of effectiveness of the Plan, considering 
coordinated surveillance (e.g., entering into Rule 17d-2 agreements, 
regulatory services agreements or other arrangements, to facilitate 
regulatory coordination).\804\
---------------------------------------------------------------------------

    \804\ See Section IV.H, infra.
---------------------------------------------------------------------------

    Finally, the Commission notes that the CAT NMS Plan provides that 
books and records of the CAT LLC shall be made available to the 
Commission upon ``reasonable request.'' \805\ Because the CAT LLC is a 
facility of the Participants, the Commission has the right to the books 
and records of CAT LLC ``upon request'' under Exchange Act Rule 17a-
1,\806\ and therefore is amending Section 9.1 of the Plan to delete the 
requirement that any request for the CAT LLC's books and records be 
``reasonable.''
---------------------------------------------------------------------------

    \805\ See CAT NMS Plan, supra note 5, at Section 9.1.
    \806\ 17 CFR 240.17a-1(c).
---------------------------------------------------------------------------

C. Plan Processor Selection (Article V)

    Article V of the CAT NMS Plan sets forth the process for selecting 
the Plan Processor following approval of the CAT NMS Plan.\807\ The 
Plan Processor selection provisions in Article V are identical to the 
selection process set forth in the Selection Plan.\808\
---------------------------------------------------------------------------

    \807\ See Section III.4, supra, for a more detailed description 
of the Selection Plan.
    \808\ See Selection Plan, supra note 23.
---------------------------------------------------------------------------

    The Commission received three comments suggesting that the Plan 
Processor selection process be accelerated,\809\ with some commenters 
suggesting that the Selection Plan be amended to require the selection 
of the Plan Processor prior to the approval of the CAT NMS Plan.\810\ 
According to one commenter, the earlier selection of a Plan Processor 
would advance the release and development of the Technical 
Specifications.\811\ Another commenter offered support for a specific 
Bidder, noting their regulatory and technical competencies.\812\ One 
commenter recommended that the Commission re-open the Plan Processor's 
agreement with CAT NMS, LLC every five years to ensure that the Plan 
remains state-of-the-art, and to provide a process for public 
input.\813\ Another commenter stated that the Plan does not set forth 
sufficient incentives for the Plan Processor and the Participants to 
incorporate new technology into or to continuously innovate and strive 
to reduce the costs of the CAT System.\814\
---------------------------------------------------------------------------

    \809\ FSR Letter at 10; TR Letter at 4-5; FIF Letter at 42-43.
    \810\ TR Letter at 4-5; FIF Letter at 42-43.
    \811\ TR Letter at 4-5; see also Section V.G.4, infra, for a 
further discussion of these comment letters.
    \812\ Anonymous Letter I at 1 (advocating for FINRA's regulatory 
abilities related to OATS); but see Anonymous Letter II (criticizing 
FINRA's handling of OATS non-compliance).
    \813\ Better Markets Letter at 7.
    \814\ Data Boiler Letter at 17, 27.
---------------------------------------------------------------------------

    In response to the comments to accelerate the Plan Processor 
selection process, the Participants acknowledged that the selection of 
the Plan Processor will likely affect implementation issues and related 
costs,\815\ but that it is not feasible to accelerate the selection of 
the Plan Processor prior to the Commission's approval of the Plan. The 
Participants noted that until the Plan is finalized and approved by the 
Commission, the requirements of the CAT could change, which could 
impact the selection of the Plan Processor.\816\ Moreover, the 
Participants noted that Rule 613's requirement that the Plan Processor 
be selected within two months after effectiveness of the Plan ensures 
that the selection of the Plan

[[Page 84737]]

Processor will occur expeditiously once the Commission approves the 
Plan.\817\
---------------------------------------------------------------------------

    \815\ Response Letter I at 51.
    \816\ The Participants note in Response Letter I that the 
Selection Plan contemplates the selection of the Plan Processor 
after the approval of the Plan. Id. at 52.
    \817\ 17 CFR 242.613(a)(3)(i).
---------------------------------------------------------------------------

    In response to the comment in support for a specific Bidder, the 
Participants stated that they determined that utilizing a competitive 
bidding process to select the Plan Processor was the most appropriate 
way to promote an innovative and efficient CAT solution.\818\ Pursuant 
to that process, the Participants noted that they have reduced the 
number of Bidders to three Shortlisted Bidders.
---------------------------------------------------------------------------

    \818\ Response Letter I at 52.
---------------------------------------------------------------------------

    In response to the comment to re-open the Plan Processor's 
agreement with the CAT LLC every five years and to provide a process 
for public input on the agreement, the Participants stated that they 
agree that it is important to ensure that the CAT solution remains 
effective and efficient going forward.\819\ Accordingly, the 
Participants noted that they have proposed a process for regularly 
reviewing the performance of the Plan Processor throughout the term of 
the Plan Processor's agreement and for modifying it if necessary to 
avoid an outdated CAT solution. The Participants added that, as set 
forth in the Plan, the Operating Committee will review the Plan 
Processor's performance under the Plan at least once each year, or more 
often than once each year upon the request of two or more Participants 
that are not Affiliated Participants.\820\ In addition, the 
Participants noted that the Plan sets forth the process for removing 
the Plan Processor. Specifically, the Participants noted that the 
Operating Committee, by Supermajority Vote, may remove the Plan 
Processor from such position at any time, and that the Operating 
Committee may, by Majority Vote, remove the Plan Processor from such 
position at any time if it determines that the Plan Processor has 
failed to perform its functions in a reasonably acceptable manner in 
accordance with the provisions of the Plan. The Participants stated 
that if they were to vote to remove the Plan Processor, the Operating 
Committee would select a new Plan Processor through a competitive 
bidding process.
---------------------------------------------------------------------------

    \819\ Id.
    \820\ See supra note 67 for a definition of ``Affiliated 
Participants.''
---------------------------------------------------------------------------

    In approving the Selection Plan, the Commission stated that the 
Selection Plan is reasonably designed to achieve its objective of 
facilitating the development of the CAT NMS Plan and the selection of 
the Plan Processor.\821\ The Commission also found that the Selection 
Plan is reasonably designed to govern the process by which the SROs 
will formulate and submit the CAT NMS Plan, including the review, 
evaluation, and narrowing down of Bids in response to the RFP, and 
ultimately choosing the Plan Processor that will build, operate, and 
maintain the consolidated audit trail.\822\ The Commission believes 
that the process set out in the Selection Plan for selecting a Plan 
Processor remains a reasonable approach, which will facilitate the 
selection of Plan Processor through a fair, transparent and competitive 
process and that no modifications to the Selection Plan are required to 
meet the approval standard. In response to the commenters recommending 
that the Plan Processor selection process be accelerated, the 
Commission agrees with the Participants that changes to the CAT NMS 
Plan that are being made in this Order may be relevant to the selection 
of the Plan Processor. The Commission believes that selecting the Plan 
Processor within two months of Plan approval, rather than prior to Plan 
approval, will allow the remaining Bidders to consider the CAT NMS 
Plan, as amended and approved by the Commission, and to make any 
necessary modifications to their Bids, which will enable the 
Participants to make a more fully informed decision on the Plan 
Processor in light of the amended and approved CAT NMS Plan.\823\ The 
Commission believes this timeframe to select the Plan Processor--two 
months following Commission approval of the Plan--will not result in 
the untimely release of the Technical Specifications.
---------------------------------------------------------------------------

    \821\ See Selection Plan Approval Order, supra note 23.
    \822\ See id.
    \823\ In addition, the Commission notes that, pursuant to an 
amendment to the Selection Plan, the Participants have already 
narrowed the Bidders to three Shortlisted Bidders, which will 
facilitate the timely completion of the Plan Processor selection 
process. See Selection Plan, supra note 23.
---------------------------------------------------------------------------

    In response to the comment that offered support for a specific 
Bidder, the Commission agrees with the Participants that the 
competitive bidding process to select the Plan Processor is a 
reasonable and effective way to choose a Plan Processor and thus 
believes that the process set forth in the Selection Plan should be 
permitted to continue. In response to the commenter that recommended 
that the Commission re-open the Plan Processor's agreement with the CAT 
LLC every five years and provide a process for public input on the 
agreement, the Commission believes that the CAT NMS Plan already 
contains provisions that permit the reevaluation--and possible 
replacement--of the Plan Processor. Thus, the Commission is not 
amending the plan to require that the Plan Processor's agreement with 
the CAT LLC be reevaluated every five years.
    Finally, in response to the commenter that stated that the Plan 
does not provide sufficient incentives for the Plan Processor and the 
Participants to incorporate new technology, innovate and reduce the 
costs of the CAT System, the Commission believes that requirements for 
regular evaluations of the operation of the CAT, the identification of 
potential improvements, and the delivery of a written assessment to the 
Commission, as well as the Plan's provisions regarding the possible 
removal of the Plan Processor provide sufficient incentives for the 
Plan Processor and the Participants in these areas.\824\
---------------------------------------------------------------------------

    \824\ See CAT NMS Plan, supra note 5, at Section 4.3(b)(ii) 
(providing that the Operating Committee may terminate the Plan 
Processor without cause).
---------------------------------------------------------------------------

D. Functions and Activities of the CAT System (Article VI)

    Article VI of the CAT NMS Plan sets forth the functions and 
activities of the CAT System.\825\
---------------------------------------------------------------------------

    \825\ See Section IV.B., supra.
---------------------------------------------------------------------------

1. Data Recording and Reporting Requirements
    Article VI of the Plan imposes requirements regarding what data 
elements must be reported to the Central Repository and by when. The 
Commission received comments regarding to whom these requirements 
should apply and the appropriateness of the provisions.
    One commenter recommended that firms using manual orders that are 
currently exempt from OATS reporting pursuant to FINRA Rule 7470 should 
also be exempt from the CAT reporting obligations.\826\ This commenter 
argued that to qualify for such an exemption, a firm would need to 
``eliminate many practices of regulatory concern'' and have a ``perfect 
regulatory history,'' and that the exemption would have little impact 
on the CAT because it would exclude only the reporting of events that 
take place prior to delivery of an order to a market venue. The 
commenter argued that the exemption is necessary to keep currently-
exempt firms in business due to the high costs that CAT reporting would 
impose.\827\ This commenter further argued that the requested exemption 
for OATS-exempt firms would not be the same as an exemption for ``small 
firms,'' and that wrongdoers would not fall within this exemption 
because of the limitations on the level of market activity, the

[[Page 84738]]

voluntary restrictions from operations such as market making and 
trading with customers, the use of manual orders, and the expected high 
levels of compliance.\828\
---------------------------------------------------------------------------

    \826\ Wachtel Letter at 1-2.
    \827\ Id.
    \828\ Id.
---------------------------------------------------------------------------

    Another commenter broadly stated that the data recording and 
reporting procedures described in the CAT NMS Plan are inappropriate 
and unreasonable.\829\ This commenter also stated that it may be easier 
for the Plan Processor to work directly with service bureaus, rather 
than with individual CAT Reporters, on data submission.\830\
---------------------------------------------------------------------------

    \829\ Data Boiler Letter at 18. Specifically, the commenter 
argued that to link information accurately, there must be ``a robust 
event sequencing method,'' and stated that the Plan lacks sufficient 
detail on this matter. The commenter further suggested that order 
and execution information should be represented in a meaningful way 
and recommended expressing this information in audio/musical notes 
form.
    \830\ Id. at 19-20.
---------------------------------------------------------------------------

    In response to the commenter's request that OATS-exempt firms also 
be exempted from reporting to the CAT, the Commission believes that 
completely exempting any group of broker-dealers from reporting 
requirements would be contradictory to the goal of Rule 613, which is 
to create an accurate, complete, accessible and timely audit 
trail.\831\ To permit such an exemption would eliminate the collection 
of audit trail information from a segment of broker-dealers and would 
thus result in an audit trail that does not capture all orders by all 
participants in the securities markets. The Commission believes that 
the CAT should contain data from all broker-dealers, including those 
that may appear to be at low risk for wrong-doing based on their 
history of compliance or business model. Regulators will not only use 
the CAT for surveillance and investigations, but also for market 
reconstructions and market analyses. Therefore, data from all broker-
dealers is necessary.\832\
---------------------------------------------------------------------------

    \831\ The Participants did not respond to this comment.
    \832\ As discussed in more detail below, the Commission believes 
that even if regulatory burdens reduce the number of small broker-
dealers in specialized segments, overall competition in those 
segments may not be harmed. See Section V.G.1, infra.
---------------------------------------------------------------------------

    The Commission believes that the data recording and reporting 
procedures outlined in the CAT NMS Plan meet the requirements of Rule 
613 \833\ and are reasonable in that they are designed to ensure that 
data is recorded and reported in a manner that will provide regulators 
access to linked CAT Data that is timely, accurate, secure, and 
complete.\834\ Further, while under certain circumstances it might be 
efficient for the Plan Processor to work directly with service bureaus, 
the reporting requirements in the CAT NMS Plan apply to CAT Reporters, 
which are regulated entities, and therefore, it is necessary that the 
Plan Processor deal directly with CAT Reporters in determining matters 
related to reporting CAT Data.\835\
---------------------------------------------------------------------------

    \833\ 17 CFR 242.613(c).
    \834\ In the Adopting Release for Exchange Act Rule 613, the 
Commission stated that the data recording and reporting procedures 
are reasonably designed ``to ensure that the [CAT] will be designed 
in a way that provides regulators with the accurate, complete, 
accessible, and timely market activity data they need for robust 
market oversight.'' See Adopting Release, supra note 14, at 45743.
    \835\ The Commission notes that the CAT NMS Plan also requires 
the Plan Processor to measure and monitor latency within the CAT. 
See CAT NMS Plan, supra note 5, at Appendix D, Section 8.3.
---------------------------------------------------------------------------

2. Format
    The CAT NMS Plan does not mandate the format in which data must be 
reported to the Central Repository.\836\ Rather, the Plan provides that 
the Plan Processor will determine the electronic format in which data 
must be reported, and that the format will be described in the 
Technical Specifications.\837\
---------------------------------------------------------------------------

    \836\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
D.12(f); see also id. at Appendix C, Section A.1(a). The CAT NMS 
Plan states that CAT Reporters could be required to report data 
either in a uniform electronic format, or in a manner that would 
allow the Central Repository to convert the data to a uniform 
electronic format, for consolidation and storage. Id. at Appendix C, 
Section A.1(b).
    \837\ Id. at Appendix D, Section 2.1. Appendix D states that 
more than one format may be allowed to support the various market 
participants that would report information to the Central 
Repository. Id.; see also id. at Section 6.9.
---------------------------------------------------------------------------

    Two commenters expressed support for allowing the Plan Processor to 
determine the format for reporting data.\838\ One of these commenters 
stated that prescribing an approach in the Plan may hinder scalability 
and future system development.\839\
---------------------------------------------------------------------------

    \838\ ICI Letter at 13.
    \839\ Data Boiler Letter at 9. This commenter also stated that 
the formatting procedures in the Plan were insufficient and 
recommended using an audio/musical approach. Id. at 18.
---------------------------------------------------------------------------

    Three commenters, however, recommended that the format be specified 
in the Plan.\840\ One commenter argued that mandating an approach in 
the Plan, rather than waiting for the Technical Specifications, would 
give the industry more time to develop approaches to reporting using 
that format.\841\ The commenter also argued that if the format is not 
known until the Technical Specifications are published, this would 
limit the opportunity to make changes to the format, if necessary, 
without disrupting the implementation schedule.\842\ The commenter 
suggested that at least guidelines for a messaging protocol be included 
in the Plan.\843\
---------------------------------------------------------------------------

    \840\ FIF Letter at 90-92; FIX Trading Letter at 1; Better 
Markets Letter at 7 (stating that ``the Commission should mandate 
the most widely used, open-sourced, machine-readable data format 
possible.'')
    \841\ FIF Letter at 90-91.
    \842\ Id. at 90.
    \843\ Id. at 91-92.
---------------------------------------------------------------------------

    Commenters also expressed opinions about whether the Plan Processor 
should allow CAT Reporters to use multiple formats or one uniform 
format to report CAT Data. Four commenters generally supported an 
approach that would allow CAT Reporters to report CAT Data using a non-
uniform format.\844\ Under such an approach, the Central Repository 
would be responsible for normalizing the data into a uniform format to 
link and store the data. These commenters noted that CAT Reporters 
should be permitted to use any of the currently existing industry 
protocols widely used by industry participants, such as OATS, SWIFT or 
FIX.\845\ One commenter advocated for the use of its own electronic 
communications protocol, FIX, stating that it would result in quicker 
implementation times and simplify data aggregation.\846\ This commenter 
noted that FIX is currently used by thousands of firms in the financial 
services industry and that it would not make sense to require firms to 
convert from a FIX format to a proprietary format designed by the Plan 
Processor and mandated for CAT reporting.\847\ The commenter stated 
that FIX already tracks the lifecycle of an order both within an 
organization and across organizations, thus making it a good choice as 
the format for the CAT.\848\ It also noted that it is used globally and 
can be used for products beyond listed options and equities. Finally, 
the commenter represented that FIX can handle any identifier, including 
LEI, and can support the CAT NMS Plan's use of Customer-ID, average 
price processing, options reporting, and the daisy chain approach for 
reporting.\849\
---------------------------------------------------------------------------

    \844\ FIF Letter at 90-92; ICI Letter at 13; FIX Trading Letter 
at 1-2; Data Boiler Letter at 41.
    \845\ ICI Letter at 13; FIX Trading Letter at 1-2; Data Boiler 
Letter at 41; FIF Letter at 91. FIF stated that CAT Reporters could 
use either an existing format or a ``native'' format developed by 
the Plan Processor. Another commenter was against trying to develop 
a native CAT format. Data Boiler Letter at 20. This commenter 
suggested preserving data in its most original format and then 
converting trade streams into ``music formats'' for ease of storage 
and comparison and to facilitate surveillance. Id.
    \846\ FIX Trading Letter at 1-2.
    \847\ Id. at 1; see also FIF Letter at 92.
    \848\ FIX Trading Letter at 2.
    \849\ Id. at 2-3.

---------------------------------------------------------------------------

[[Page 84739]]

    One commenter stated that while mandating one uniform format would 
reduce the burden on the Central Repository for consolidating and 
storing data, it would impose a burden on CAT Reporters to accurately 
translate their current reporting format into a uniform CAT interface 
that could result in more errors than if the conversion to a uniform 
format occurred at the Central Repository.\850\ Conversely, another 
commenter cautioned that requiring one uniform format would create a 
monopoly.\851\
---------------------------------------------------------------------------

    \850\ FIF Letter at 92.
    \851\ Data Boiler Letter at 36, 41.
---------------------------------------------------------------------------

    One commenter argued that while data reported in a non-uniform 
format can be reliably converted into a uniform format, there are 
benefits to using a uniform format.\852\ Specifically, the commenter 
stated that using a uniform format can reduce data integrity issues 
within the Plan Processor, reduce data processing times, lower error 
correction rates between T+1 and T+3, reduce time and resources needed 
to on-board participants, and improve data accuracy and consistency 
across broker-dealers.\853\ The commenter also stated that use of a 
uniform format would improve data completeness because exact fields and 
standards would be defined.
---------------------------------------------------------------------------

    \852\ UnaVista Letter at 2.
    \853\ Id.
---------------------------------------------------------------------------

    In their response, the Participants stated that they do not believe 
that the Plan should mandate a specific format for reporting to the 
Central Repository, but rather should allow the Bidders to use 
discretion in selecting the format that will work most efficiently with 
their solution.\854\ The Participants stated that the nature of data 
ingestion is key to the architecture of the CAT and therefore the Plan 
does not mandate a data ingestion format, but allows the Plan Processor 
to determine the format.\855\ The Participants also noted that the 
remaining three Bidders propose accepting existing messaging protocols 
(e.g., FIX), rather than requiring CAT Reporters to use a new 
format.\856\ The Participants stated that when they evaluate each 
Bidder's solution, they will consider whether the Bidder's proposed 
approach for a message format is easily understood and adoptable by the 
industry. The Participants also stated that they will take into 
consideration each Bidder's ability ``to reliably and accurately 
convert data to a uniform electronic format for consolidation and 
storage, regardless of the message formats in which the CAT Reporters 
would be required to report data to the Central Repository.'' \857\
---------------------------------------------------------------------------

    \854\ Response Letter I at 29.
    \855\ Response Letter III at 14.
    \856\ Id.
    \857\ Response Letter I at 29.
---------------------------------------------------------------------------

    The Commission believes it is reasonable to allow the Plan 
Processor to determine the electronic format in which data must be 
reported, and whether the format is uniform or whether multiple formats 
can be used to report CAT Data. The Commission recognizes that if a 
format were mandated in the CAT NMS Plan, CAT Reporters would have the 
information necessary to accommodate the format sooner than if they 
need to wait for the Plan Processor to choose the format. Although the 
Commission recognizes the benefit of early notice, mandating a 
particular format(s) in the Plan could limit the Plan Processor's 
options for designing the operation of the CAT as envisioned. Moreover, 
the Commission notes that the Participants have stated that they will 
consider whether a Bidder has proposed a format that is easily 
understood and adoptable by the industry.\858\ Further, because the 
Plan contemplates there will be iterations of the Technical 
Specifications, as well as time between publication of the Technical 
Specifications and the time by which data reporting must begin, the 
Commission believes that Industry Members will have sufficient time to 
comply with the ultimate format chosen by the Plan Processor. 
Therefore, the Commission believes that, rather than mandating the 
decision regarding the format for reporting in the CAT NMS Plan, it is 
reasonable for the format to be determined by the Plan Processor as a 
component of the CAT design.
---------------------------------------------------------------------------

    \858\ Id.
---------------------------------------------------------------------------

3. Reporting Timelines
    The CAT NMS Plan provides that CAT Reporters must report order 
event and trading information into the Central Repository by 8:00 a.m. 
ET on the Trading Day following the day the CAT Reporter records such 
information.\859\ A CAT Reporter must report post-trade information by 
8:00 a.m. ET on the Trading Day following the day the CAT Reporter 
receives such information.\860\ The CAT NMS Plan provides that CAT 
Reporters may voluntarily report Participant Data prior to the 8:00 
a.m. ET deadline.\861\
---------------------------------------------------------------------------

    \859\ See CAT NMS Plan, supra note 5, at Sections 6.3, 6.4.
    \860\ See id. at Section 6.4. Post-trade information includes: 
(1) If an order is executed in whole or part: (a) An Allocation 
Report; (b) SRO-Assigned Market Participant Identifier of the 
clearing broker or prime broker, if applicable; and (c) CAT-Order-ID 
of any contra-side order(s); (2) if the trade is cancelled, a 
cancelled trade indicator; and (3) for original receipt or 
origination of an order, the Firm Designated ID, Customer Account 
Information, and Customer Identifying Information for the relevant 
Customer.
    \861\ See id. at Sections 6.3, 6.4.
---------------------------------------------------------------------------

    Commenters expressed opinions about the timeframe in which data 
should be reported by CAT Reporters to the Central Repository. One 
commenter expressed general support for the proposed reporting 
deadline, but noted that without having detailed Technical 
Specifications and validation rules, it could not assess the 
feasibility of meeting this deadline.\862\ The commenter stated that 
more information is needed regarding the CAT data reporting 
requirements to determine whether collating and formatting for the 
required data fields is achievable within the deadlines.\863\
---------------------------------------------------------------------------

    \862\ UnaVista Letter at 2.
    \863\ Id.
---------------------------------------------------------------------------

    In contrast, two commenters suggested that data should be reported 
in real-time, or near real-time, rather than at 8:00 a.m. ET the 
Trading Day following the day that the data was recorded.\864\ One 
commenter noted under the CAT NMS Plan's reporting deadlines, if a 
trade were completed at 9:30 a.m. ET on a Friday on an exchange, it 
would not have to be reported until Monday at 8:00 a.m. ET.\865\ The 
commenter stated that the CAT NMS Plan does not present a convincing 
reason for the 8:00 a.m. ET deadline given that market participants 
have access to the data in real-time and should be able to report it in 
seconds or less.\866\ The commenter opined that real-time, or near 
real-time, reporting would allow for more robust surveillance and a 
``quicker reaction time.'' \867\ Another commenter argued that data 
should be reported within 50 milliseconds so that regulators can 
conduct real-time surveillance.\868\ The commenter recommended that CAT 
support real-time ingestion, processing and surveillance.\869\
---------------------------------------------------------------------------

    \864\ Data Boiler Letter at 18; Better Markets Letter at 6.
    \865\ Better Markets Letter at 6.
    \866\ Id.
    \867\ Id.
    \868\ Data Boiler Letter at 19.
    \869\ Id. at 1. This commenter suggested that if CAT Data was 
going to be reported in real-time, SIP data should also be reported 
in real-time. See Data Boiler Letter at 42. Because the Commission 
does not believe that real-time reporting should be mandated by the 
Plan, the commenter's suggestion that SIP data be reported in real-
time if CAT Data is going to be reported in real-time, is moot.
---------------------------------------------------------------------------

    This commenter also questioned the Plan Processor's ability to 
receive data from all CAT Reporters at 8:00 a.m. ET, and suggested that 
receiving data in real-time would alleviate any potential

[[Page 84740]]

problems in this regard.\870\ Another commenter also addressed concerns 
regarding CAT's capacity if a significant number of CAT Reporters 
choose to submit data at or around the same time, and recommended that 
the Plan Processor model its methodology on a system that has proven it 
can successfully project and manage large amounts of data, such as the 
Options Price Reporting Authority (``OPRA'').\871\
---------------------------------------------------------------------------

    \870\ Id. at 19-20.
    \871\ FIF Letter at 125.
---------------------------------------------------------------------------

    In response to these comments, the Participants noted that the 
Commission considered the idea of requiring real-time reporting in Rule 
613, but instead imposed a reporting deadline of 8:00 a.m. ET.\872\ 
Therefore, the Participants are not required to file a plan containing 
real-time reporting.\873\ Further, in response to the commenter that 
stated that real-time, or near real-time, reporting would assist with 
surveillance and early warning of market events,\874\ the Participants 
noted that certain of them already have real-time surveillance tools in 
place that will not be affected by the implementation of the CAT.\875\
---------------------------------------------------------------------------

    \872\ See Adopting Release, supra note 14, at 45765.
    \873\ See 17 CFR 242.613(c)(3). See Adopting Release, supra note 
14, at 45765. Indeed, Rule 613 stated that the CAT NMS Plan may not 
impose a reporting deadline earlier than 8:00 a.m. ET on the Trading 
Day after the trade date. 17 CFR 242.613(c)(3).
    \874\ Better Markets Letter at 6.
    \875\ Response Letter I at 31, 43.
---------------------------------------------------------------------------

    As the Participants noted, the Commission considered whether CAT 
Reporters should be required to report data in real-time when it 
adopted Rule 613 under Regulation NMS.\876\ In response to the 
Proposing Release which proposed that data be collected in real-time, 
commenters questioned the accuracy, cost, and usability of data 
reported in real-time.\877\ The Commission concluded that there were 
practical advantages to taking a more gradual approach for an 
undertaking such as the CAT, and acknowledged that while there might be 
certain advantages to receiving data intraday, the greater majority of 
benefits to be realized from development of the CAT do not require 
real-time reporting.\878\ Further, the Commission recognized that not 
requiring real-time reporting upon implementation would result in 
significant cost savings for industry participants.\879\ After 
reviewing the CAT NMS Plan and considering the commenters' statements, 
the Commission continues to adhere to that view.
---------------------------------------------------------------------------

    \876\ See Adopting Release, supra note 14, at 45765.
    \877\ Id. at 45768-69.
    \878\ Id. at 45768.
    \879\ Id. at 45769.
---------------------------------------------------------------------------

    Further, in response to the commenter that questioned the 
feasibility of reporting data by the 8:00 a.m. ET reporting deadline 
without having detailed Technical Specifications and validation 
rules,\880\ the Commission notes that this reporting deadline is the 
same as that currently required for OATS reporting. Therefore, while 
again acknowledging the importance of timely delivery of Technical 
Specifications, the Commission believes many CAT Reporters already have 
the capability to report in compliance with the deadline proposed in 
the Plan and that such deadline is reasonable.
---------------------------------------------------------------------------

    \880\ UnaVista Letter at 2.
---------------------------------------------------------------------------

    Additionally, in response to the commenter that questioned the Plan 
Processor's ability to simultaneously receive data from all CAT 
Reporters at 8:00 a.m. ET and suggested that receiving data in real-
time would alleviate potential problems resulting from an influx of all 
the data at one time, the Commission notes that the CAT NMS Plan 
requires the Plan Processor to have the capacity to handle two times 
the historical peak daily volume to ensure that, if CAT Reporters 
choose to submit data all at one time, the Plan Processor can handle 
the influx of data.\881\ Furthermore, because CAT Reporters have the 
option to report data throughout the day, the Commission anticipates 
that CAT Reporters, consistent with certain reporting practices, such 
as OATs reporting, will stagger their reports, thus alleviating 
concerns that a flurry of activity shortly before the 8:00 a.m. ET 
deadline would impose unnecessary burdens on the Plan Processor.
---------------------------------------------------------------------------

    \881\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.1.(a).(ii).
---------------------------------------------------------------------------

4. Data Elements
    The CAT NMS Plan requires that numerous data elements be reported 
to the Central Repository to ensure there is sufficient information to 
create the lifecycle of an order, and provide regulators with 
sufficient detail about an order to perform their regulatory duties.
    The Commission received a number of comments regarding specific 
data elements that CAT Reporters are required to report to the Central 
Repository. In addition, one commenter questioned generally if the SEC 
should reconsider the scope of Rule 613 and ``ask whether a more broad 
and complete audit trail is really what regulators need to efficiently 
and effectively perform their duties.'' \882\ This commenter also 
questioned whether the data being captured is ``relevant to achieve the 
SEC's goals, or whether the data is being collected for statistical 
purposes and would simply overwhelm usability of the audit trail.'' 
\883\
---------------------------------------------------------------------------

    \882\ Anonymous Letter I at 1.
    \883\ Id. at 3.
---------------------------------------------------------------------------

    The Commission continues to believe that the overall scope of Rule 
613 is appropriate. However, the Commission has considered comments on 
each data element contained in the CAT NMS Plan and its necessity to 
achieving the goal of creating a consolidated audit trail, and has 
determined to amend or eliminate certain of the requirements proposed 
in the CAT NMS Plan as detailed below.
a. Customer-ID
(1) Customer Information Approach
    Article VI of the CAT NMS Plan adopts the ``Customer Information 
Approach'' for creating and utilizing a Customer-ID and identifying a 
Customer, which reflects the exemptive relief granted by the 
Commission.\884\ Several commenters expressed general support for the 
Customer Information Approach.\885\ Two commenters, however, requested 
a modification to the Customer Information Approach to permit Customer 
Identifying Information and Customer Account Information to be reported 
as part of the ``customer definition process'' \886\ instead of upon 
the original receipt or origination of an order.\887\ One of these 
commenters also stated that this modification would improve the 
security of Customer Account Information and the CAT because sensitive 
customer PII data ``would not need to [be] passed to order management 
systems or stored with the firm's CAT Reporting systems, but would 
remain with Customer Information Repositories which would issue the 
`Customer definition' CAT Report.'' \888\ One commenter stated that a 
unique identifier for every client may not be necessary and a unique 
identifier could be applied to only those with a

[[Page 84741]]

certain threshold of trading activity.\889\ Another commenter expressed 
general support for the Customer Information Approach, but suggested 
that the CAT system should tag related trade patterns with each 
identifiable customer and counterparties as a ``fingerprint (unique ID) 
to a customer and/or counterparty.'' \890\
---------------------------------------------------------------------------

    \884\ See Exemptive Request Letter, supra note 21, at 8-18; see 
also Section III.15, supra.
    \885\ FIF Letter at 9-10, 67-72; Data Boiler Letter at 22-24; TR 
Letter at 8; see also UnaVista Letter at 3; DAG Letter at 2; STA 
Letter at 1 (supporting the DAG Letter's Exemptive Request Letter 
recommendations).
    \886\ Under the ``customer definition process,'' broker-dealers 
would submit an initial set of information identifying the Customer 
to the Central Repository.
    \887\ FIF Letter at 9-10, 70-71; TR Letter at 8.
    \888\ FIF Letter at 67; see also DAG Letter at 2; STA Letter at 
1 (supporting the DAG Letter's Exemptive Request Letter 
recommendations).
    \889\ Anonymous Letter I at 3.
    \890\ Data Boiler Letter at 23.
---------------------------------------------------------------------------

    Several commenters commented on the specific data elements required 
to be reported under the Customer Information Approach. One commenter 
suggested that the definition of ``account type'' should be consistent 
with existing OATS definitions.\891\ Another commenter noted that it 
could not find the definition of ``customer type'' in the CAT NMS Plan 
or Rule 613.\892\ This commenter recommended using an existing field 
currently reported to the SROs or the SEC for ``customer type'' to 
minimize implementation effort.\893\ This commenter also stated that an 
individual's ``role in the account,'' required to be reported as part 
of Customer Identifying Information, may not be consistently maintained 
across firms and that population and maintenance of this data field may 
be an issue.\894\ As a result, this commenter believed that the field 
for an individual's role in the account should only be required to be 
reported when firms create new accounts after the implementation of 
reporting under the CAT.\895\
---------------------------------------------------------------------------

    \891\ TR Letter at 9.
    \892\ Id.
    \893\ Id.
    \894\ Id. at 10.
    \895\ Id.
---------------------------------------------------------------------------

    One commenter requested clarification that Industry Members would 
only be required to report CAT Data for ``active'' accounts, and then 
offered that ``active accounts would be defined as those with activity 
in CAT reportable securities.'' \896\ One commenter discussed whether 
Customer Identifying Information and Customer Account Information 
should be ``refreshed'' (i.e., updated) by an Industry Member. This 
commenter suggested ``having the functional support for a voluntary 
full refresh, but . . . eliminat[ing] the mandated requirement to 
provide full refreshes periodically,'' and stated that, ``the initial 
load, daily updates and standard error processing should be sufficient 
to maintain data integrity.'' \897\ This commenter added that while 
eliminating the periodic refresh of the information used to identify a 
Customer ``may slightly reduce the burden or cost on the broker-dealer 
community as well as the Plan Processor, it would eliminate the need 
for unneeded transmission and handling of sensitive PII data.'' \898\
---------------------------------------------------------------------------

    \896\ FIF Letter at 10.
    \897\ Id. at 122.
    \898\ Id. at 93.
---------------------------------------------------------------------------

    Another commenter noted the different data elements that identify a 
Customer under the Customer Information Approach and recommended that 
``customer information fields be categorized based on degree of 
importance for market surveillance and market reconstruction, so that 
focus can be concentrated on ensuring accuracy of the most important 
fields from a surveillance viewpoint.'' \899\ This commenter added that 
``[d]ifferent criteria could be established based on the customer data 
categorization for correction turn-around time; e.g., customer unique 
identifier (LTID or social security number) would be of highest 
priority; zip code may be of lesser importance and not impact 
regulators' ability to surveil the marketplace.'' \900\ This commenter 
requested clarification whether only ``active'' accounts are required 
to report customer identifying information as part of the customer 
definition process.\901\
---------------------------------------------------------------------------

    \899\ Id.
    \900\ Id.
    \901\ Id. at 10.
---------------------------------------------------------------------------

    One commenter opposed the Customer Information Approach. This 
commenter stated that the Commission should require ``a universal 
customer ID to aid in the accuracy, integrity, and consolidation of CAT 
Data'' and that ``[f]irm-based IDs will significantly increase the 
complexity and fragmentation of the dataset, slowing down 
consolidation.'' \902\
---------------------------------------------------------------------------

    \902\ Better Markets Letter at 9.
---------------------------------------------------------------------------

    According to the Participants, the Customer Information Approach 
would not have an adverse effect on the various ways in which, and 
purposes for which, regulators would use, access, and analyze the audit 
trail data reported under Rule 613 nor would it compromise the linking 
of order events, alter the time and method by which regulators may 
access the data, or limit the use of the CAT audit trail data. The 
Participants noted the unique nature of the existing identifiers to be 
used under the Customer Information Approach, which would allow the 
Plan Processor to create customer linkages with the same level of 
accuracy as the Customer-ID. The Participants also stated that the 
reliability and accuracy of the data reported to the Central Repository 
under the Customer Information Approach is the same as under the 
approach outlined in Rule 613 with regard to Customer-IDs because the 
identifiers used under the proposed Customer Information Approach are 
also unique identifiers. In some cases, the Participants stated that 
the Customer Information Approach may result in more accurate data, as 
errors may be minimized because broker-dealers will not have to adjust 
their systems to capture and maintain the additional Customer-ID data 
element, and only a single entity will have to perform the mapping of 
firm-designated account information to Customer-ID. The Participants 
also noted that a universal identifier that is tied to personally 
identifiable information could create a substantial risk of misuse and 
of possible identify theft as the universal identifiers are passed 
between the Plan Processor and each CAT Reporter.
    The Participants further argued that the benefits of the Customer 
Information Approach outweigh any potential disadvantages.\903\ The 
Participants added that based upon their analysis of this issue and 
discussions with the industry, as detailed in the Exemptive Request 
Letter and the Plan, the Participants disagree that the Customer 
Information Approach will increase complexity or slow down 
consolidation. The Participants stated that utilizing a single 
Customer-ID within the CAT while allowing firms to report using 
existing identifiers would substantially reduce costs and speed 
implementation without limiting the regulatory use of the data. Indeed, 
the Participants noted that the additional cost required to comply with 
the Customer-ID approach set forth in the Rule, rather than with the 
Customer Information Approach as proposed in the CAT NMS Plan, would be 
at least $195 million for the largest CAT Reporters.\904\
---------------------------------------------------------------------------

    \903\ Response Letter I at 33.
    \904\ See Exemptive Request Letter, supra note 21, at 17.
---------------------------------------------------------------------------

    The Participants clarified in their response at what point Customer 
Account Information and Customer Identifying Information must be 
reported under the Plan.\905\ The Participants stated that the approach 
discussed in the Exemptive Request Letter was intended to require CAT 
Reporters to supply Customer Identifying Information and Customer 
Account Information as part of the customer definition process--that 
is, prior to the origination or original receipt of an order--rather 
than as information submitted with each order. The Participants noted 
that Section

[[Page 84742]]

6.4(d)(iv) of the Plan describes this customer definition process, 
which includes the process for submitting customer information and for 
assigning Customer-IDs for use within the CAT. According to the 
Participants, the operation of Sections 6.3(d)(i) and 6.4(d)(i) of the 
Plan clarify that a CAT Reporter is required to submit the Firm 
Designated IDs with the new order reports, but not the information to 
identify a Customer. The Participants recognized, however, that the 
language in Section 6.4(d)(ii)(C) of the Plan could be read to suggest 
that the customer identifying information must be provided with each 
new order report (i.e., that the Customer Account Information and 
Customer Identifying Information must be submitted contemporaneously 
with each order, rather than submitting such information pursuant to 
the customer definition process). The Participants proposed that the 
CAT NMS Plan be amended to make clear that customer information would 
be submitted pursuant to the customer definition process rather than 
with each original receipt or origination of an order.
---------------------------------------------------------------------------

    \905\ Response Letter I at 34.
---------------------------------------------------------------------------

    The Participants also noted that they do not believe that trading 
activity thresholds with respect to identifiers would be consistent 
with the requirements of Rule 613.\906\ The Participants stated that 
the use of unique IDs is essential to the effectiveness and usefulness 
of the CAT because these data elements will help regulatory users 
conduct surveillance across market centers and identify activity 
originating from multiple market participants.
---------------------------------------------------------------------------

    \906\ Id. at 23.
---------------------------------------------------------------------------

    In their response, the Participants stated that they have not yet 
determined how ``account type'' and ``customer type'' will be defined 
for purposes of reporting to the Central Repository and anticipate that 
they will be defined in the Technical Specifications.\907\
---------------------------------------------------------------------------

    \907\ Id. at 24.
---------------------------------------------------------------------------

    With respect to limiting the reporting of a Customer's ``role in 
the account'' on a going-forward basis (i.e., after implementation of 
the CAT), the Participants stated that the Plan does not distinguish 
between legacy and new accounts with regard to this requirement and the 
Participants do not believe that this change is necessary.\908\
---------------------------------------------------------------------------

    \908\ Id. at 23.
---------------------------------------------------------------------------

    The Participants stated in their response that the CAT NMS Plan 
currently anticipates that Industry Member CAT Reporters would only 
report information to identify a customer for ``active accounts'' as 
part of the customer definition process.\909\ Specifically, the Plan 
states that ``broker-dealers will initially submit full account lists 
for all active accounts to the Plan Processor and subsequently submit 
updates and changes on a daily basis,'' \910\ and defines ``active 
accounts'' as ``accounts that have had activity within the last six 
months.'' \911\ Moreover, the Participants noted that the Plan states 
that ``[t]he Participants anticipate that Customer information that is 
initially reported to the CAT could be limited to only customer 
accounts that have, or are expected to have, CAT-reportable activity. 
For example, accounts that are considered open, but have not traded 
Eligible Securities in a given timeframe may not need to be pre-
established in the CAT, but rather could be reported as part of daily 
updates after they have CAT-reportable activity.'' \912\ Accordingly, 
the Participants suggested that the CAT NMS Plan be amended to clarify 
that only active accounts are required to report Customer Identifying 
Information during the customer definition process.
---------------------------------------------------------------------------

    \909\ Id. at 35.
    \910\ Id. at 22 (citing the CAT NMS Plan, Appendix C, Section 
A.1(a)(iii)).
    \911\ Id. (citing the CAT NMS Plan, Appendix C, Section 
A.1(a)(iii), n.39).
    \912\ Id. (citing the CAT NMS Plan, Appendix C, Section 
A.1(a)(iii), n.36).
---------------------------------------------------------------------------

    With respect to the Plan's requirement to periodically refresh 
Customer Identifying Information and Customer Account Information, the 
Participants stated in their response that they believe that 
maintaining the accuracy of customer information is vital to the 
operation of the CAT.\913\ Therefore, the Participants noted that a 
periodic refresh of customer information is beneficial because it will 
help to ensure that all customer information remains accurate and up to 
date. The Participants further acknowledged the concern with 
maintaining the confidentiality of PII and other CAT Data.\914\ To that 
end, the Participants highlighted Section 6.12 of the Plan, which 
requires the Plan Processor to develop and maintain a comprehensive 
information security program that meets certain requirements set forth 
in the Plan, and the fact that the information security program must be 
approved and reviewed at least annually by the Operating Committee. The 
Participants stated that they continue to assess the Bidders' proposed 
security solutions and believe that once the CAT is operational the 
information security program will address the commenters' concerns 
regarding data security. Finally, the Participants noted that the Plan 
will define the scope of a ``full'' customer information refresh and 
the extent to which inactive or other accounts would need to be 
reported.\915\
---------------------------------------------------------------------------

    \913\ Id. at 31.
    \914\ Id. at 32.
    \915\ Id.
---------------------------------------------------------------------------

    The Participants further stated that they do not agree that it 
would be appropriate to rank the importance of particular data elements 
reported to the Central Repository for data correction or other 
purposes for several reasons.\916\ First, the Participants pointed out 
that Rule 613 does not indicate that any data elements are more or less 
important for market surveillance or market reconstruction purposes. 
The Participants noted that Rule 613(c)(7) states that the Plan ``shall 
require each national securities exchange, national securities 
association, and any member of such exchange or association to record 
and electronically report to the central repository details for each 
order and each reportable event, including, but not limited to [the 
information set forth in Rule 613(c)(7)(i)-(viii)]'' (emphasis added). 
Second, the Participants noted that ranking the importance of data 
elements for market surveillance and market reconstruction purposes 
might inappropriately reveal the confidential, proprietary surveillance 
processes used by each Participant. Third, the Participants stated that 
with respect to data accuracy, the Participants have included 
provisions in the Plan to take into account minor and major 
inconsistencies in Customer information. In particular, the 
Participants noted that Appendix D explains that ``[t]he Plan Processor 
must design and implement procedures and mechanisms to handle both 
minor and material inconsistencies in Customer information.'' \917\ 
Additionally, material inconsistencies must be communicated to the 
submitting CAT Reporter(s) and resolved within the established error 
correction timeframe, as detailed in Sections 6-7 of Appendix D of the 
Plan.\918\ The Participants stated that the Central Repository also 
must have an audit trail showing the resolution of all errors.\919\ 
Finally, the Participants noted that they intend to monitor errors in 
the customer information fields and will consider, as appropriate, 
whether to prioritize the correction of certain data fields over 
others.
---------------------------------------------------------------------------

    \916\ Id.
    \917\ Id. at 22 (citing the CAT NMS Plan at Appendix D, Section 
9.4).
    \918\ Id.
    \919\ Id.
---------------------------------------------------------------------------

    The Commission believes that the clarification provided by the

[[Page 84743]]

Participants that Customer Account Information and Customer Identifying 
Information are reported as part of the customer definition process, 
rather than with each original receipt or origination of an order, is 
reasonable. The Commission believes that this will clarify the process 
for submitting information to identify a Customer under the CAT NMS 
Plan and will remove any ambiguity as to the reporting responsibilities 
of Industry Members. The Commission further believes that this 
clarification also will reduce the prospect of unnecessarily passing 
sensitive customer PII data. Accordingly, the Commission is amending 
Section 6.4(d)(ii)(C) of the CAT NMS Plan to clarify that Customer 
Identifying Information and Customer Account Information will be 
reported as part of the Customer definition process, rather than upon 
original receipt or origination of an order.
    The Commission also agrees that creating a unique Customer-ID as 
contemplated by the CAT NMS Plan, regardless of the Customer's trading 
activity threshold, is reasonable. The Commission notes that 
surveillance and enforcement efforts are necessary, even for accounts 
with low levels of trading activity.
    The Commission further believes that it is reasonable to allow the 
Plan Processor, in conjunction with the Operating Committee, to define 
the specific ``account types'' and ``customer types'' in the Technical 
Specifications for the CAT NMS Plan. This approach will allow the Plan 
Processor to assess the various definitions of ``account type'' and 
``customer type'' that exist among the CAT Reporters, and then make a 
determination as to how to appropriately classify them for purposes of 
CAT reporting. The Commission expects the Plan Processor will define 
these terms with sufficient precision so that the reporting 
requirements will be clear.
    The Commission agrees that a Customer's role in the account should 
be a data element that is reported as part of the customer definition 
process, regardless of whether the account existed prior to 
implementation of the CAT or was created thereafter. The CAT NMS Plan 
does not distinguish between legacy and new accounts, for purposes of 
reporting Customer Identifying Information, and the Commission believes 
identifying the Customer's role in the account will facilitate 
surveillance and enforcement efforts.
    The Commission also believes that it is reasonable to limit the 
reporting of Customer Identifying Information and Customer Account 
Information to only those accounts that are ``active,'' defined as a 
Customer account that has had activity (i.e., received or originated an 
order), in an Eligible Security within the last six months. This will 
alleviate the need for CAT Reporters to update the Customer Identifying 
Information or Customer Account Information for accounts that have not 
received or originated an order for more than six months, but still 
ensures that the Central Repository will collect audit trail data for 
Customer accounts that have any Reportable Events. The Commission notes 
that pursuant to the Plan and the Customer Information Approach, a CAT 
Reporter must upload any Customer Identifying Information and Customer 
Account Information to the Central Repository prior to a Customer 
originating an order. Because of this requirement, even if a CAT 
Reporter has not been updating the Customer Identifying Information and 
Customer Account Information for a Customer with an account with no 
Reportable Events for six months, if the Customer decides to submit or 
originate an order, the CAT Reporter would upload the required 
information identifying the Customer on the same day the Customer 
submits the order, and upon submission of the order, the Central 
Repository will collect the audit trail data required by Section 6.4 of 
the Plan. Accordingly, the Commission is amending Section 1.1 of the 
CAT NMS Plan to add a definition of ``Active Accounts'' to mean an 
account that has received or originated an order in an Eligible 
Security within the last six months. In addition, the Commission will 
amend Section 6.4(d)(iv) of the Plan to require that Industry Members 
submit an initial set of Customer Identifying Information and Customer 
Account Information to the Central Repository only for Active Accounts; 
and require Industry Members to update Customer Identifying Information 
and Customer Account Information only for Active Accounts.
    The Commission also believes that it is reasonable for the CAT NMS 
Plan to require the periodic refresh of such information to ensure that 
the Central Repository has the most current information identifying a 
Customer. The Commission notes that both daily updates and periodic 
refreshes will require the uploading of PII, along with other CAT Data, 
to the Central Repository, but believes that the robust information 
security program to be implemented and maintained by the Plan Processor 
should sufficiently protect all CAT Data.\920\
---------------------------------------------------------------------------

    \920\ The Commission also finds it reasonable not to rank CAT 
data elements in terms of relative importance because importance of 
the CAT data elements will necessarily vary in accordance with the 
manner in which the data is used.
---------------------------------------------------------------------------

(2) Modification or Cancellation of an Order
    In connection with their proposal to adopt the Customer Information 
Approach, as discussed above, the Participants also suggested 
modification to Rule 613(c)(7)(iv)(F), which requires that ``[t]he CAT-
Reporter-ID of the broker-dealer or Customer-ID of the person giving 
the modification or cancellation instruction'' be reported to the 
Central Repository.\921\ In the CAT NMS Plan, the Participants proposed 
that CAT Reporters report whether a modification or cancellation 
instruction was given by the Customer associated with the order, or was 
initiated by the broker-dealer or exchange associated with the 
order.\922\ According to the Participants, it is most critical for 
regulatory purposes to ascertain whether the modification or 
cancellation instruction was given by the Customer or was instead 
initiated by the broker-dealer or exchange, rather than capturing the 
identity of the specific person who gave the instruction.\923\
---------------------------------------------------------------------------

    \921\ 17 CFR 242.613(c)(7)(iv)(F) (emphasis added).
    \922\ See Exemption Request Letter, supra note 21, at 12.
    \923\ Id.
---------------------------------------------------------------------------

    One commenter believed that modification and cancellation 
instructions are as important as other Reportable Events and, 
therefore, the identity of the person giving such instructions is 
``vital information for market surveillance purpose[s].'' \924\ The 
commenter opposed the Participants' approach of permitting CAT 
Reporters to report whether a modification or cancellation of an order 
was given by a Customer or initiated by a broker-dealer or exchange, in 
lieu of requiring the reporting of the Customer-ID of the person giving 
the modification or cancellation instruction.\925\
---------------------------------------------------------------------------

    \924\ Data Boiler Letter at 24 (responding to Question 161 of 
the Plan Proposing Release).
    \925\ See CAT NMS Plan, supra note 5, at Section 6.3(d)(iv)(F).
---------------------------------------------------------------------------

    In their response, the Participants noted that reporting a single, 
specific Customer-ID for all modifications and cancellations is not 
possible under the Customer Information Approach because broker-dealers 
would not maintain Customer-IDs; instead, each broker-dealer would 
provide Firm-Designated IDs to the Central Repository

[[Page 84744]]

to identify a Customer.\926\ The Participants also stated that 
requiring CAT Reporters to report the Customer-ID of the specific 
individual initiating a cancellation or modification would introduce an 
inconsistent level of granularity in customer information between order 
origination and order modifications or cancellations, because Rule 
613(c)(7)(i) does not require the reporting of the specific individual 
originating an order.
---------------------------------------------------------------------------

    \926\ Response Letter I at 24.
---------------------------------------------------------------------------

    The Commission has considered the commenter's concern and the 
Participants' response, and believes that requiring that CAT Reporters 
report whether a modification or cancellation instruction was given by 
the Customer associated with the order, or was initiated by the broker-
dealer or exchange associated with the order, is a reasonable approach 
to providing useful audit trail data regarding the modification or 
cancellation of an order. The approach set forth in the Plan also will 
not result an inconsistent level of granularity between the Reportable 
Events of origination or receipt of an order, and the modification or 
cancellation of the order because it would not require the identity of 
the person that gave the modification or cancellation instruction--
which is not required under the CAT NMS Plan nor Rule 613.
(3) Reporting an Account Effective Date
    In connection with their proposal to adopt the Customer Information 
Approach, as discussed above, the Participants also proposed an 
alternative method for reporting the date an account was opened, as 
required by Rule 613(c)(7)(viii)(B).\927\ When reporting ``Customer 
Account Information,'' an Industry Member is required to report the 
date an account was opened.\928\ The SROs requested an exemption to 
allow an ``effective date'' be reported in lieu of an account open date 
in certain limited circumstances.\929\ As a result, an Industry Member 
will report the date an account was opened; except, however, that (a) 
in those circumstances in which an Industry Member has established a 
trading relationship with an institution but has not established an 
account with that institution, the Industry Member will (i) provide the 
Account Effective Date in lieu of the ``date account opened''; (ii) 
provide the relationship identifier in lieu of the ``account number''; 
and (iii) identify the ``account type'' as a ``relationship''; \930\ 
and (b) in those circumstances in which the relevant account was 
established prior to the implementation date of the CAT NMS Plan 
applicable to the relevant CAT Reporter and no ``date account opened'' 
is available for the account, the Industry Member will provide the 
Account Effective Date in the following circumstances: (i) Where an 
Industry Member changes back office providers or clearing firms and the 
date account opened is changed to the date the account was opened on 
the new back office/clearing firm system; (ii) where an Industry Member 
acquires another Industry Member and the date account opened is changed 
to the date the account was opened on the post-merger back office/
clearing firm system; (iii) where there are multiple dates associated 
with an account in an Industry Member's system, and the parameters of 
each date are determined by the individual Industry Member; and (iv) 
where the relevant account is an Industry Member proprietary 
account.\931\ Several commenters supported the Participants' approach 
to reporting an account effective date rather than the date an account 
was opened, as set forth in the CAT NMS Plan, and which reflects the 
exemptive relief granted by the Commission.\932\ The Commission 
believes that the CAT NMS Plan's approach to reporting an account 
effective date, rather than the date an account was opened, is 
reasonable and will not impact the quality or usefulness of the 
information available to regulators.
---------------------------------------------------------------------------

    \927\ See September 2015 Supplement, supra note 21.
    \928\ See CAT NMS Plan, supra note 5, at Section 1.1.
    \929\ See September 2015 Supplement, supra note 21.
    \930\ The Commission notes that because ``account type'' will be 
defined in the Technical Specifications for purposes of reporting to 
the Central Repository, one type of ``account type'' will be 
``relationship,'' See Section IV.D.4.a(1), supra.
    \931\ CAT NMS Plan, supra note 5, at Section 1.1.
    \932\ Data Boiler Letter at 24; TR Letter at 8; FIF Letter at 9, 
81-83; see also Exemption Order, supra note 21.
---------------------------------------------------------------------------

(4) Identifying a Customer Using LEI
    The Commission also received several comments stating that the 
Commission should mandate the use of LEIs whenever applicable.\933\ One 
commenter, also noting its support for using a global entity identifier 
in general and LEI specifically, stated that while it agrees that the 
system should provide for the capture and reporting of LEIs for 
customer identification, it would be appropriate to provide for a 
transitional approach to the collection of the LEIs. Under the 
commenter's recommended transitional approach, broker-dealers would 
provide the LEI to the CAT in each instance where the LEI is already 
known and collected.\934\ This commenter also believed that it would be 
important to establish the CAT in a way that captures the LEI as part 
of the initial implementation of the system, rather than having to 
adapt the system at a future date, and that use of LEIs is important 
for both risk management and operational efficiency.\935\ Another 
commenter, however, did not recommend that the LEI be mandated for use 
by broker-dealers and argued that mandating the use of LEIs would 
disadvantage small broker-dealers who have no business requirement at 
this time to use LEI.\936\
---------------------------------------------------------------------------

    \933\ Better Markets Letter at 8; DTCC Letter at 1; see also 
UnaVista Letter at 3 (supporting the use of LEIs in conjunction with 
other personal identifiers to identify Customers).
    \934\ SIFMA Letter at 36.
    \935\ Id. at 37; see also DTCC Letter at 2-4 (noting industry 
and regulatory support for LEIs and, that if LEIs were mandated, it 
would facilitate the ability for regulators to aggregate systemic 
risk exposures across markets).
    \936\ FIF Letter at 70.
---------------------------------------------------------------------------

    In their response, the Participants stated that based on 
discussions with the DAG, they agree with the commenters that it would 
be reasonable to require an Industry Member to report its LEI or the 
LEI of a Customer to the Central Repository as part of Customer 
Identifying Information if the Industry Member has or acquires an 
LEI.\937\ The Participants added that Industry Members that report LEIs 
would do so in addition to, rather than in lieu of, the other Customer 
Identifying Information required by the Plan.\938\ The Participants do 
not believe, however, that the Plan should require Industry Members or 
others to obtain an LEI for a Customer if they do not already have 
one.\939\
---------------------------------------------------------------------------

    \937\ Response Letter II at 5-6.
    \938\ Response Letter III at 12.
    \939\ Response Letter II at 5.
---------------------------------------------------------------------------

    The Participants further stated that, based on discussions with the 
DAG, they believe that Industry Members should be permitted to provide 
Customer LEIs in their possession without the imposition of any due 
diligence obligations beyond those that may exist today with respect to 
information associated with an LEI.\940\ The Participants noted that, 
although Industry Members should not be required to perform additional 
due diligence with regard to the LEIs for CAT purposes, Industry 
Members will be required to accurately provide the LEIs in their 
records and may not knowingly submit inaccurate LEIs to the CAT.\941\ 
In addition, the Participants

[[Page 84745]]

stated that all of the remaining Bidders have indicated that their 
solutions will be able to support the use of LEIs.\942\ Moreover, 
although the Participants believed that there are costs related to 
requiring Industry Members to provide an LEI if they have one, the 
Participants believed that the benefits outweigh the costs.\943\
---------------------------------------------------------------------------

    \940\ Id.
    \941\ Id.
    \942\ Id. at 5-6.
    \943\ The Participants do not believe that the proposed use of 
LEIs would reduce the granularity of information provided as the 
proposed use of LEIs would not change the provisions related to the 
SRO-Assigned Market Participant Identifiers (e.g., MPIDs). See CAT 
NMS Plan, supra note 5, at Sections 1.1 (definition of SRO-Assigned 
Market Participant Identifier), 6.3 (requiring reporting of SRO-
Assigned Market Participant Identifier).
---------------------------------------------------------------------------

    The Commission has considered the commenters' views on the merits 
of reporting an LEI to the Central Repository as part of Customer 
Identifying Information and the Participants' response and believes 
that it is reasonable to require an Industry Member to report an LEI 
for its Customer if the Industry Member has or acquires the LEI for its 
Customer. Accordingly, the Commission is amending the definition of 
``Customer Identifying Information'' in Section 1.1 of the Plan to 
require that an Industry Member report an LEI to identify a Customer 
that is a legal entity, if the Industry Member has or acquires the LEI 
of such Customer. However, the Commission is also making clear that the 
LEI is not reported in lieu of the other Customer Identifying 
Information for a legal entity (e.g., name, address, or employer 
identification number), but must be reported along with other Customer 
Identifying Information.
    The Commission believes use of the LEI enhances the quality of 
identifying information for Customers by incorporating a global 
standard identifier increasingly used throughout the financial markets. 
The Commission notes that according to the Plan, Industry Members will 
still be required to report other Customer Identifying Information even 
if the Industry Member reports an LEI to identify a Customer; thus the 
LEI supplements the other information that will be used by the Central 
Repository to identify a Customer.
    The Commission further believes that it is reasonable to not 
require an Industry Member to obtain an LEI for its Customer or for 
itself if the Industry Member does not already have an LEI for its 
Customer or itself because such a requirement would impose an 
additional burden. However, the Commission believes that requiring 
Industry Members to accurately provide the LEIs in their records and 
not knowingly submit inaccurate LEIs to the CAT is reasonable, because 
reporting accurate information to the CAT is a fundamental requirement 
of the Plan.\944\
---------------------------------------------------------------------------

    \944\ See CAT NMS Plan, supra note 5, at Section 6.5(d).
---------------------------------------------------------------------------

    In response to the commenter that believed that such a requirement 
might disadvantage small broker-dealers, the Commission notes that the 
requirement to report LEIs does not mandate that a broker-dealer obtain 
an LEI to comply with the Plan; therefore, small broker-dealers that do 
not currently have an LEI will not be required to report one and thus 
will not be disadvantaged.
b. CAT-Reporter-ID
(1) Existing Identifier Approach
    Article VI of the CAT NMS Plan reflects the ``Existing Identifier 
Approach'' for purposes of identifying each CAT Reporter associated 
with an order or Reportable Event.\945\ Under the Existing Identifier 
Approach, CAT Reporters are required to record and report to the 
Central Repository an SRO-Assigned Market Participant Identifier for 
orders and certain Reportable Events to be used by the Central 
Repository to assign a unique CAT-Reporter-ID to identify CAT 
Reporters. An Industry Member is required to report its existing SRO-
Assigned Market Participant Identifier used by the relevant SRO 
specifically for transactions occurring on that SRO to the Central 
Repository.\946\ Similarly, an exchange reporting CAT Reporter 
information is required to report data using the SRO-Assigned Market 
Participant Identifier used by the Industry Member on that exchange or 
its systems.\947\ Off-exchange orders and Reportable Events will be 
reported with an Industry Member's FINRA SRO-Assigned Market 
Participant Identifier.\948\
---------------------------------------------------------------------------

    \945\ See id. at Section 6.3(e).
    \946\ See Exemption Order, supra note 21, at 31-41.
    \947\ See id. at 20.
    \948\ Id.
---------------------------------------------------------------------------

    For the Central Repository to link the SRO-Assigned Market 
Participant Identifier to the CAT-Reporter-ID, each SRO will submit, on 
a daily basis, all SRO-Assigned Market Participant Identifiers used by 
its Industry Members (or itself), as well as information sufficient to 
identify the corresponding market participant (e.g. a CRD number or 
LEI) to the Central Repository.\949\ Additionally, each Industry Member 
will be required to submit to the Central Repository information 
sufficient to identify such Industry Member (e.g., CRD number or LEI, 
as noted above).\950\ The Plan Processor will use the SRO-Assigned 
Market Participant Identifiers and identifying information (i.e., CRD 
number or LEI) to assign a CAT-Reporter-ID to each Industry Member and 
SRO for internal use within the Central Repository.\951\
---------------------------------------------------------------------------

    \949\ See CAT NMS Plan, supra note 5, at Section 6.3(e)(i).
    \950\ Id. at Section 6.4(d)(vi).
    \951\ See Exemption Order, supra note 21, at 31-41.
---------------------------------------------------------------------------

    The reporting of an existing SRO-Assigned Market Participant 
Identifier differs from Rule 613 in that under Rule 613(c)(8), CAT 
Reporters would be required to report a universal CAT-Reporter-ID for 
certain Reportable Events.\952\ In the Exemptive Request Letter, the 
SROs requested an exemption to permit a CAT Reporter to report an 
existing SRO-Assigned Market Participant Identifier in lieu of 
requiring the reporting of a universal CAT-Reporter-ID.\953\ 
Specifically, the Participants stated that the Existing Identifier 
Approach would not negatively impact regulators' access, use, and 
analysis of CAT Data, and that it could allow additional levels of 
granularity compared to the universal CAT-Reporter-ID approach, in that 
SRO-Assigned Market Participant Identifiers may contain additional 
information not mandated by the CAT NMS Plan, such as the specific desk 
or department responsible for trades.\954\ The Participants also stated 
that they believe the reliability and accuracy of CAT Data under the 
Existing Identifier Approach would not be undermined,\955\ and 
represented that the Existing Identifier Approach could result in fewer 
errors and more reliable and accurate linkage

[[Page 84746]]

of order information.\956\ Further, the Participants noted their 
belief--based upon discussion with the DAG--that the Existing 
Identifier Approach would reduce the cost and implementation burdens on 
CAT Reporters to comply with Rule 613,\957\ as it would allow them to 
continue using their current business practices and data flows instead 
of building new infrastructure to support the CAT-Reporter-ID 
requirement.\958\
---------------------------------------------------------------------------

    \952\ Rule 613(c)(8) requires that CAT Reporters use the same 
CAT-Reporter-ID for each broker-dealer. 17 CFR 242.613(c)(8). The 
Reportable Events for which CAT-Reporter-IDs must be reported are: 
The broker-dealer receiving or originating an order (17 CFR 
242.613(c)(7)(i)(C)); the broker-dealer or national securities 
exchange from which (or to which) an order is being routed (17 CFR 
242.613(c)(7)(ii)(D) and (E)); if the order is routed to a national 
securities association, then the CAT-Reporter-ID of that national 
securities association must be reported (17 CFR 
242.613(c)(7)(ii)(E)); the broker-dealer or national securities 
exchange receiving (or routing) a routed order (17 CFR 
242.613(c)(7)(iii)(D) and (E)); if a national securities association 
receives the routed order, then the CAT-Reporter-ID of that national 
securities association must be reported (17 CFR 
242.613(c)(7)(iii)(D)); the broker-dealer, if applicable, giving a 
modification or cancellation instruction, if an order is modified or 
cancelled (17 CFR 242.613(c)(7)(iv)(F)); the national securities 
exchange or broker-dealer executing an order, if an order is 
executed (17 CFR 242.613(c)(7)(v)(F)); and the clearing broker or 
prime broker, if applicable, if an order is executed (17 CFR 
242.613(c)(7)(vi)(B)).
    \953\ See Exemptive Request Letter, supra note 21, at 19.
    \954\ See id. at 23, 26.
    \955\ Id. at 23.
    \956\ Id.
    \957\ Id. at 21, 22, 24.
    \958\ Id. at 24.
---------------------------------------------------------------------------

    Several commenters expressed support for the Existing Identifier 
Approach.\959\ Two of the commenters listed benefits of the Existing 
Identifier Approach over the approach required in Rule 613.\960\ One of 
the commenters stated that the Existing Identifier Approach would be 
more efficient and cost-effective than the Rule 613 approach.\961\ The 
other commenter listed the following benefits: The Existing Identifier 
Approach would allow the industry to keep its current business 
processes and identifiers; coordination of a single CAT-Reporter-ID to 
be used across all Participants to identify broker-dealers would not be 
necessary; CAT Reporters would not have to expand their information 
repositories to store and manage a new CAT-Reporter-ID; the Plan 
Processor would manage the translation between the SRO-Assigned Market 
Participant Identifiers and the CAT-Reporter-ID; since the Plan 
Processor would be assigning CAT-Reporter-IDs, CAT Reporters would not 
be subject to errors with respect to the application of CAT-Reporter-
IDs; a common information technology solution would be used; the 
Existing Identifier Approach would allow regulators to surveil on a 
more granular level; and the Existing Identifier Approach would save 
CAT Reporters the expense of maintaining and supplying a unique CAT-
Reporter-ID for every Reportable Event.\962\ Both commenters stated 
that the Existing Identifier Approach would not affect the accuracy, 
accessibility, timeliness or security and confidentiality of CAT Data 
over the Rule 613 approach.\963\
---------------------------------------------------------------------------

    \959\ See Data Boiler Letter at 22; FIF Letter at 73-74 ; TR 
Letter at 7-8; see also DAG Letter at 2; STA Letter at 1 (supporting 
the DAG Letter's Exemptive Request Letter recommendations).
    \960\ Data Boiler Letter at 22; FIF Letter at 73-74.
    \961\ Data Boiler Letter at 22.
    \962\ FIF Letter at 73-74.
    \963\ Data Boiler Letter at 22; FIF Letter at 74.
---------------------------------------------------------------------------

    Three commenters offered recommendations for modifying the Existing 
Identifier Approach.\964\ Two commenters asked that the FINRA MPID be 
permitted for non-execution reports.\965\ One commenter stated that, 
regardless of whether the Existing Identifier Approach or the Rule 613 
approach is used, the CAT should ``tag'' trade patterns with the 
trading desk and trader.\966\
---------------------------------------------------------------------------

    \964\ Data Boiler Letter; TR Letter; FIF Letter.
    \965\ TR Letter at 8-9; FIF Letter at 10-11.
    \966\ Data Boiler at 22.
---------------------------------------------------------------------------

    In response to the two commenters that requested that the FINRA 
MPID be used for non-execution reports,\967\ the Participants stated 
that the practices described by the two commenters would be acceptable 
under the Existing Identifier Approach, explaining that a broker-dealer 
CAT Reporter would be permitted to use any existing SRO-Assigned Market 
Participant Identifier (e.g., FINRA MPID, NASDAQ MPID, NYSE Mnemonic, 
CBOE User Acronym and CHX Acronym) when reporting order information to 
the Central Repository, regardless of the eventual execution 
venue.\968\
---------------------------------------------------------------------------

    \967\ TR Letter at 8-9; FIF Letter at 10-11. The Participants 
did not respond to the comment suggesting the CAT should ``tag'' 
trade patterns with the trading desk and trader.
    \968\ Response Letter I at 33.
---------------------------------------------------------------------------

    Based on the Participants' representations in the Plan, the 
Commission believes that the Existing Identifier Approach is designed 
to provide the same regulatory benefits in terms of identifying CAT 
Reporters as would be achieved under Rule 613, at a reduced cost and 
implementation burden on CAT Reporters.\969\ The Existing Identifier 
Approach is designed to link, within the Central Repository, all SRO-
Assigned Market Participant Identifiers to the appropriate CAT-
Reporter-ID, and ultimately to the CAT Reporter, in a manner that is 
efficient, accurate, and reliable.
---------------------------------------------------------------------------

    \969\ According to the Participants, requiring the reporting of 
unique CAT-Reporter-IDs of: (i) The Industry Member receiving or 
originating an order; (ii) the Industry Member or Participant from 
which (and to which) an order is being routed; (iii) the Industry 
Member or Participant receiving (and routing) a routed order; (iv) 
the Industry Member or Participant executing an order; and (v) the 
clearing broker or prime broker, would have imposed technical 
implementation difficulties on CAT Reporters and the Plan Processor 
alike to adopt the infrastructure to comply with the reporting, 
collection, and maintenance of CAT-Reporter-IDs. See Exemptive 
Request Letter, supra note 21, at 26. The Commission has considered 
the economic implications of the exemptive relief permitting the 
Existing Identifier Approach, as well as the other approaches in the 
CAT NMS Plan (options market maker quotes, Customer-ID, linking of 
executions to specific subaccount allocations on Allocation Reports, 
and timestamp granularity for Manual Order Events) that required 
exemptive relief from Rule 613 for inclusion in its economic 
analysis. See Notice, supra note 5, at 30709.
---------------------------------------------------------------------------

    The Commission notes that one commenter recommended that the CAT be 
able to link trades to the responsible trading desk and trader.\970\ 
The Commission notes that an additional benefit of the Existing 
Identifier Approach is that, as the Participants have represented, it 
may allow for the voluntary collection of additional levels of 
granularity, such as responsible trading desk or trader.\971\
---------------------------------------------------------------------------

    \970\ Data Boiler Letter at 22.
    \971\ See Exemptive Request Letter, supra note 21, at 23. 
Further, the Commission notes that Section 6.3(d)(ii)(F) of the CAT 
NMS Plan currently requires the reporting of the identity and nature 
of the department or desk to which an internally routed order is 
being routed, so the identity of a trading desk for internally 
routed orders will be captured through this provision.
---------------------------------------------------------------------------

(2) Use of LEI
    Section 6.3(e)(i) of the CAT NMS Plan requires each Participant to 
submit, on a daily basis, all SRO-Assigned Market Participant 
Identifiers used by its Industry Members or itself, as well as 
information to identify the corresponding market participant to the 
Central Repository, such as a CRD number or LEI, but does not require 
the reporting of LEIs. Section 6.4(d)(vi) of the CAT NMS Plan requires 
each Industry Member to submit to the Central Repository information 
sufficient to identify such Industry Member, such as a CRD number or 
LEI, but similarly does not require the reporting of LEIs.
    As discussed above in relation to the Customer-ID, several 
commenters recommended, or noted, the use of LEIs in lieu, or as part 
of the development of, a CAT-Reporter-ID.\972\ One commenter stated 
that it supported requiring Industry Members to provide their LEIs, as 
long as LEIs are already being captured by their systems.\973\ Another 
commenter supported the optional use of LEIs, believing that mandatory 
use of LEIs would unfairly burden small broker-dealers that may not 
currently accommodate LEIs in their systems.\974\
---------------------------------------------------------------------------

    \972\ FIX Letter at 2; FIF Letter at 75, Data Boiler Letter at 
22; DTCC Letter at 1-6.
    \973\ Data Boiler Letter at 22.
    \974\ FIF Letter at 11.
---------------------------------------------------------------------------

    In recognition of the comments that encouraged the use of LEIs in 
the CAT, and based on discussions with the DAG, the Participants have 
recommended that Sections 6.3(e)(i) and 6.4(d)(vi) of the CAT NMS Plan 
be amended to require a Participant to submit an Industry Member's LEI 
if the Participant has (or acquires) an LEI for an Industry Member, and 
to require Industry Members to submit to the Central Repository their 
LEIs if they have LEIs.\975\ This information will be

[[Page 84747]]

reported to the Central Repository as part as the information the Plan 
Processor will use to assign CAT-Reporter-IDs.
---------------------------------------------------------------------------

    \975\ Response Letter II at 6; Response Letter III at 12.
---------------------------------------------------------------------------

    The Commission considers the suggested modifications by the 
Participants to Section 6.3(e)(i) and Section 6.4(d)(vi) of the CAT NMS 
Plan to require the Participants and Industry Members to provide 
Industry Member LEIs, if known, by such Participant or Industry Member 
to be reasonable and an improvement in the information available in the 
CAT with respect to CAT Reporters. Accordingly, the Commission is 
amending these sections to require the Participants and Industry 
Members to provide Industry Member LEIs, if known, by such Participant 
or Industry Member; however, the Commission is also amending these 
sections to require the submission of Participant LEIs, if a 
Participant has an LEI, as well as Industry Member CRD numbers. 
Specifically, the amendment to Section 6.3(e)(i) would require a 
Participant (i) for purposes of reporting information to identify 
itself pursuant to Section 6.3(e)(i), to submit its LEI to the Central 
Repository, if the Participant has an LEI; and (ii) for purposes of 
reporting information to identify an Industry Member pursuant to 
Section 6.3(e)(i), to submit the CRD number for the Industry Member, as 
well as the LEI of the Industry Member if the Participant has collected 
such LEI of the Industry Member. The amendment to Section 6.4(d)(vi) 
with respect to Industry Members would require an Industry Member, for 
purposes of reporting information to identify itself pursuant to 
Section 6.4(d)(vi), to submit to the Central Repository the CRD number 
of the Industry Member as well as the LEI of the Industry Member (if 
the Industry Member has an LEI).
    The Commission believes these amendments are appropriate because 
they may enhance the quality of identifying information by requiring 
the submission of the LEI--a global standard identifier increasingly 
used throughout the financial markets--to the extent it has otherwise 
been obtained. Because the amendments only impose the requirement to 
report an LEI on Participants and Industry Members that currently have 
an LEI, and which is known by the CAT Reporter, it should not impose 
the additional burden on them to obtain an LEI. Further, the 
Participants have represented that the Bidders' solutions can support 
the reporting of LEIs.\976\ Although Section 6.3(e)(i) and Section 
6.4(d)(vi) currently permit the submission of CRD numbers, the 
Commission believes that requiring the submission of the Industry 
Member CRD numbers will provide regulators with consistent identifying 
information about Industry Members that is useful for regulatory 
investigations and has significant regulatory benefit. In addition, 
requiring CRD numbers to be provided should not impose additional 
burdens on Industry Members because, as registered broker-dealers, all 
Industry Members currently have CRD numbers.
---------------------------------------------------------------------------

    \976\ Response Letter II at 5-6.
---------------------------------------------------------------------------

c. Open/Close Indicator
    Rule 613 and the CAT NMS Plan require CAT Reporters to report an 
open/close indicator as a ``Material Term'' on all orders.
    Three commenters objected to the requirement that CAT Reporters 
report an open/close indicator for equities transactions.\977\ One of 
these commenters requested additional cost-benefit analysis on the 
open/close indicator.\978\ Another commenter argued that the open/close 
indicator should be reported for options only, noting that this 
indicator is not currently used for equities.\979\ Another commenter 
noted that including an open/close indicator for equities would require 
``significant process changes and involve parties other than CAT 
Reporters, such as buy-side clients, OMS/EMS vendors, and others.'' 
\980\ This commenter stated that, if the SROs and the Commission 
believe that there is value in obtaining the open/close indicator for 
surveillance purposes with respect to equities transactions, then a 
rule proposal covering this request and a thorough cost-benefit 
analysis should be filed for public comment.\981\ Another commenter 
characterized the requirement to report an open/close indicator as a 
``market structure change'' and likewise stated that the requirement 
should be subject to its own rulemaking process, including a cost-
benefit analysis, and subject to a public comment period.\982\
---------------------------------------------------------------------------

    \977\ TR Letter at 9; SIFMA Letter at 35-36; FIF Letter at 83-
86.
    \978\ FIF Letter at 84; see also SIFMA Letter at 36.
    \979\ TR Letter at 9.
    \980\ SIFMA Letter at 35.
    \981\ SIFMA Letter at 36; see also FIF Letter at 83-85.
    \982\ FIF Letter at 85.
---------------------------------------------------------------------------

    In response, the Participants stated that they understand that Rule 
613 requires that an ``open/close indicator'' be reported as part of 
the ``material terms of the order'' for both equities and options 
transactions, but recommended that CAT Reporters not be required to 
report an open/close indicator for equities transactions, or for 
options transactions, such as for market marker options transactions, 
in which the open/close indicator is not captured by current industry 
practice.\983\
---------------------------------------------------------------------------

    \983\ Response Letter I at 22.
---------------------------------------------------------------------------

    The Commission notes that Rule 613(c)(2) states only that ``the 
plan submitted pursuant to this section'' (emphasis added) must require 
reporting of a set of ``material terms of the order,'' including an 
open/close indicator. It does not state that the Plan as approved must 
include that data element. Now that the Participants have submitted a 
plan in compliance with Rule 613, that rule does not preclude the 
Commission from approving a Plan that implements the Participants' 
recommendation to limit the set of transactions to which the 
requirement to report an open/close indicator would apply. After 
consideration, the Commission believes that limiting the requirement to 
provide an open/close indicator to listed options is reasonable. The 
open/close indicator will provide important information about whether 
an order is opening or increasing a position in the option, or closing 
or reducing a position. While this information is useful with respect 
to non-market maker options activity, the Commission acknowledges the 
concerns in other areas, including the lack of a clear definition of 
the term for equities transactions, and the lack of utility of that 
data at the time of quote entry for options market makers.
    Accordingly, as recommended by the Participants, the Commission is 
amending the Plan to remove the requirement that an open/close 
indicator be reported as part of the Material Terms of the Order for 
equities and Options Market Maker quotations.\984\
---------------------------------------------------------------------------

    \984\ ``Material Terms of the Order'' is defined in Section 1.1 
of the CAT NMS Plan.
---------------------------------------------------------------------------

d. Allocations
(1) Use of Allocation Reports
    The CAT NMS Plan requires that broker-dealers submit an Allocation 
Report following the execution of an order if such order is allocated 
to one or more accounts or subaccounts (the ``Allocation Report 
Approach''). An Allocation Report must contain the following 
information: (i) The Firm Designated ID for any account(s), including 
subaccount(s), to which executed shares are allocated and the security 
that has been allocated; (ii) the identifier of the firm reporting the 
allocation; (iii) the price per share of shares allocated; (iv) the 
side of shares allocated; (v) the number of shares

[[Page 84748]]

allocated to each account; and (vi) the time of the allocation.\985\
---------------------------------------------------------------------------

    \985\ See CAT NMS Plan, supra note 5, at Section 1.1.
---------------------------------------------------------------------------

    The Allocation Report Approach differs from Rule 613 in that under 
Rule 613(c)(7)(vi)(A), each CAT Reporter would be required to record 
and report to the Central Repository ``the account number for any 
subaccounts to which the execution is allocated (in whole or part).'' 
\986\ Under Rule 613 regulators would be able to link the subaccount to 
which an allocation was made to a specific order. In contrast, under 
the Allocation Report Approach, regulators would only be able to link 
an allocation to the account to which it was made, and not to a 
specific order.
---------------------------------------------------------------------------

    \986\ See 17 CFR 242.613(c)(7)(vi)(A).
---------------------------------------------------------------------------

    In the Exemption Request, the Participants represented that, based 
on discussions with the DAG, broker-dealer systems do not presently 
link orders with allocations of the resulting executions, and building 
such functionality would be complex and costly. In addition, the 
Participants stated that the Allocation Report Approach would not 
affect the various ways in which, and purposes for which, regulators 
would use, access, and analyze CAT Data.\987\ The Participants 
represented that the Allocation Report Approach would still provide 
regulators with the ability to associate allocations with the Customers 
that received them and would provide regulators with useful information 
without imposing undue burden on the industry.\988\ The Participants 
also stated that they do not believe that this approach would 
compromise the linking of order events, alter the time and method by 
which regulators may access the data, or limit the use of the data as 
described in the use cases contained in the Adopting Release for Rule 
613.\989\
---------------------------------------------------------------------------

    \987\ See Exemption Request, supra note 21, at 30.
    \988\ See id.
    \989\ Id.; see also Adopting Release, supra note 14, at 45798-
99.
---------------------------------------------------------------------------

    Moreover, the Participants stated that they, along with the 
industry, believe that linking allocations to specific executions, as 
mandated by Rule 613, would be artificial and would not otherwise serve 
a legitimate purpose.\990\ The Participants argued that because the 
Allocation Report Approach leverages existing business processes 
instead of creating new workflows, it could help improve the 
reliability and accuracy of CAT Data as well as reduce the time CAT 
Reporters need to comply with the CAT reporting requirements.\991\ The 
Participants also stated that complying with the requirements of Rule 
613(c)(7)(vi)(A) would require additional system and process changes 
which could potentially impact the reliability and accuracy of CAT 
Data.\992\
---------------------------------------------------------------------------

    \990\ See Exemption Request, supra note 21, at 30.
    \991\ Id.
    \992\ Id.
---------------------------------------------------------------------------

    Four commenters expressed support for the Allocation Report 
Approach, noting that the approach would eliminate the need to re-
engineer systems.\993\ One of the commenters stated that the 
information reported in an Allocation Report would provide regulators 
with sufficient information to link allocations through reference 
information to the Customer that placed the order, but noted that 
``there may not always be sufficient linkage information to relate a 
specific order, execution and allocation for a customer.'' \994\ This 
commenter argued that it is not possible to link allocations to order 
lifecycles in the case of many-to-many orders.\995\
---------------------------------------------------------------------------

    \993\ See FIF Letter at 75-79; TR Letter at 8; see also DAG 
Letter at 2; STA Letter at 1 (supporting the DAG Letter's Exemptive 
Request Letter recommendations).
    \994\ FIF Letter at 78, 90.
    \995\ Id. at 90.
---------------------------------------------------------------------------

    One commenter, however, disagreed with the Allocation Report 
Approach, stating that it would impact the completeness, accessibility 
and timeliness of CAT Data, and foreseeing challenges in linking the 
accounts and subaccounts to which an execution is allocated.\996\ This 
commenter believed that broker-dealers can, and should, track order 
allocation information, including in the case of many-to-many 
orders.\997\
---------------------------------------------------------------------------

    \996\ Data Boiler Letter at 24-25.
    \997\ Id. at 40.
---------------------------------------------------------------------------

    In response to commenters, the Participants restated their belief 
that the Allocation Report Approach set forth in the CAT NMS Plan 
appropriately weights the costs and benefits, and that ``linking 
allocations to executions could show artificial relationships between 
these order events.'' \998\
---------------------------------------------------------------------------

    \998\ Response Letter I at 36-37. The Participants estimated 
compliance costs related to linking orders to executions to be at 
least $525 million for the largest broker-dealers. Id.
---------------------------------------------------------------------------

    The Commission believes that the Plan's Allocation Report Approach 
will provide regulators the necessary information to detect abuses in 
the allocation process without imposing undue burdens on broker-
dealers. The use of Allocation Reports will provide the Central 
Repository the ability to efficiently, accurately, and reliably link 
the subaccount holder to those with authority to trade on behalf of the 
account, which will ultimately improve regulatory efforts by SROs and 
the Commission, including market surveillance, market reconstructions, 
enforcement investigations, and examinations of market 
participants.\999\ Additionally, by leveraging existing broker-dealer 
processes, the Plan's Allocation Report Approach could potentially 
reduce the time CAT Reporters need to comply with CAT reporting 
requirements and lower costs by using existing business processes.
---------------------------------------------------------------------------

    \999\ See April 2015 Supplement, supra note 20 (providing 
examples of how the Allocation Report would be used to link the 
subaccount holder to those with authority to trade on behalf of the 
account).
---------------------------------------------------------------------------

(2) Time of Allocations
    Under the CAT NMS Plan, CAT Reporters would need to submit the time 
of an allocation on the Allocation Report which, with the exception of 
Manual Orders, must be at a millisecond level of granularity.\1000\
---------------------------------------------------------------------------

    \1000\ See CAT NMS Plan, supra note 5, at Sections 
6.4(d)(ii)(A)(1), 6.8(b).
---------------------------------------------------------------------------

    Two commenters argued that the time of allocation should be 
reported with a timestamp granularity of no finer than one 
second.\1001\ Three commenters asserted that the timestamps should not 
be required at all as part of the Allocation Report.\1002\ One of those 
commenters noted that, because allocations are part of the post-trade 
process, the timing of such allocations is not critical, and requiring 
timestamps on allocations would represent ``a potentially costly and 
misleading reporting requirement divorced from the goals of CAT.'' 
\1003\ Another commenter similarly asserted that requiring a timestamp 
on allocations would be costly and ``will not assist the SEC in 
achieving the expected regulatory benefit.'' \1004\ This commenter 
explained that instructions for allocations can be communicated by 
phone, fax, or instant messaging or that standing instructions may be 
maintained for allocations.\1005\ Therefore, the commenter stated, the 
only consistent point at which to capture a timestamp for an allocation 
is the time the allocation is booked into an allocation processing 
system.\1006\
---------------------------------------------------------------------------

    \1001\ Id. These commenters also expressed the view that 
Business Clocks that capture the time of allocation should be 
subject to a clock synchronization standard of one second. Id.
    \1002\ SIFMA Letter at 35; FIF Letter at 86-90; FSR Letter at 9.
    \1003\ SIFMA Letter at 35.
    \1004\ FIF Letter at 86. In support of its objection to 
including a timestamp in the Allocation Report, this commenter 
explained that, to detect wrongdoing in the collection process, one 
could compare the average execution price on the allocation to the 
market price when the allocation was submitted. If any subaccount 
had a total and an average profit and loss far exceeding the average 
profit and loss for all subaccounts of the advisor, such subaccount 
could be highlighted. Id.
    \1005\ FIF Letter at 86.
    \1006\ Id. This commenter also provided an analysis of the cost 
for adding a timestamp on allocations. The cost analysis concluded 
that the cost to the industry of reporting timestamps on allocations 
to the millisecond with a clock offset of 50 milliseconds would be 
$88,775,000. The cost estimate is discussed further in the economic 
analysis. See Section V.F.3.a(4), infra.

---------------------------------------------------------------------------

[[Page 84749]]

    In response, the Participants stated that allocation timestamps 
would ``be a significant tool for detecting regulatory issues 
associated with allocations, including allocation fraud,'' and 
supported requiring them in the Plan.\1007\ However, the Participants 
stated that the cost of changes that would be necessary to capture 
timestamps to the millisecond may not be justified, particularly in 
light of the fact that allocations tend to be a manual process. 
Therefore, the Participants suggested that Allocation Reports should 
have timestamps with a one second granularity, as is the case with 
similar Manual Order Events.\1008\
---------------------------------------------------------------------------

    \1007\ Response Letter I at 37.
    \1008\ Id. at 37-38. Similarly, the Participants also suggested 
that the Plan be amended to permit Industry Members to synchronize 
their Business Clocks used solely for reporting of the time of 
allocation to within one second of NIST, instead of 50 milliseconds. 
Id.
---------------------------------------------------------------------------

    The Commission agrees with the Participants that inclusion of the 
time of an allocation as part of the data submitted in the Allocation 
Report is reasonable to help detect abuse that may occur if executions 
are allocated among subaccounts at the same time. For example, the 
Commission believes that the time of allocation will assist regulators 
in assessing regulatory issues that might arise in the allocation 
process, such as ``cherry-picking'' (systematically favoring one 
customer over another in connection with specific allocation 
decisions).\1009\ Currently, investigations of potential cherry-picking 
require a manual, data-intensive process. The Commission believes that 
having access to data with the time of allocations should improve 
regulators' ability to spot potential abuses and assess the prevalence 
of allocation practices industry-wide.\1010\ The Commission also 
believes that data with the time of allocations could assist in 
examining whether broker-dealers are making allocations in accordance 
with their policies and procedures.
---------------------------------------------------------------------------

    \1009\ See Notice, supra note 5, at Section I.e(2).
    \1010\ The Commission does not believe that the alternative 
suggested by one commenter, comparing the average execution price on 
the allocation to the market price when the allocation was submitted 
and looking for excess profits and losses, would be nearly as 
effective, given that the time of the actual allocation would not be 
available.
---------------------------------------------------------------------------

    With regard to the appropriate level of granularity for the 
timestamps on Allocation Reports, the Commission agrees with the 
Participants that, given the manual nature of the allocation process, a 
timestamp granularity of one second is appropriate and would not reduce 
the regulatory value of the information. The Commission also believes 
that the clock synchronization standard for Business Clocks that 
capture the time of an allocation need only be to the second. This 
approach is consistent with the approach for Manual Order Events. The 
Commission does not believe that the regulatory benefit of requiring 
allocation times to be recorded in milliseconds (compared to seconds) 
and clock synchronization to 50 milliseconds (compared to one second) 
justifies the costs at this time.\1011\
---------------------------------------------------------------------------

    \1011\ As discussed in the economic analysis, the Commission 
believes that requiring a one-second timestamp instead of a one-
millisecond timestamp for the allocation on Allocation Reports could 
save $44 million in implementation costs and $5 million in annual 
ongoing costs. See Section V.H.5, infra.
---------------------------------------------------------------------------

    Accordingly, the Commission is amending Section 6.8(a)(ii) and (b) 
of the Plan to permit the Business Clocks used solely for the time of 
allocation on Allocation Reports to be synchronized to no less than 
within one second of the time maintained by the NIST and the time of 
allocation on an Allocation Report to the second.
e. Market Maker Quotes
    Under the CAT NMS Plan, market maker quotations in Listed Options 
need to be reported as Reportable Events to the Central Repository only 
by the applicable Options Exchange \1012\ and not by the Options Market 
Maker.\1013\ However, under the Plan: (1) An Options Market Maker must 
submit to the relevant Options Exchange, along with any quotation, or 
any modification or cancellation thereof, the time it sent such message 
to the Options Exchange (``Quote Sent Time''); and (2) Options 
Exchanges must submit the Quote Sent Time received from Options Market 
Makers, along with the applicable message, to the Central Repository 
without change.\1014\
---------------------------------------------------------------------------

    \1012\ As used in the CAT NMS Plan, ``Options Exchange'' means a 
registered national securities exchange or automated trading 
facility of a registered securities association that trades Listed 
Options. See CAT NMS Plan, supra note 5, at Section 1.1.
    \1013\ See CAT NMS Plan, supra note 5, at Section 6.4(d)(iii). 
As used in the CAT NMS Plan, ``Options Market Maker'' means a 
broker-dealer registered with an exchange for the purpose of making 
markets in options contracts traded on the exchange. See id. at 
Section 1.1.
    \1014\ Id.
---------------------------------------------------------------------------

    The requirements for reporting Options Market Maker quotes in the 
Plan differ from the requirements in Rule 613(c)(7), which provide that 
the CAT NMS Plan must require each CAT Reporter to record and 
electronically report to the Central Repository details for each order 
and each reportable event, including the routing and modification or 
cancellation of an order.\1015\ Rule 613(j)(8) defines ``order'' to 
include ``any bid or offer;'' so that the details for each Options 
Market Maker quotation must be reported to the Central Repository by 
both the Options Market Maker and the Options Exchange to which it 
routes its quote.\1016\
---------------------------------------------------------------------------

    \1015\ See 17 CFR 242.613(c)(7).
    \1016\ See 17 CFR 242.613(j)(8).
---------------------------------------------------------------------------

    In the Exemption Request, the Participants noted that requiring the 
applicable Options Exchange to report market maker quotations to the 
Central Repository would not degrade the reliability or accuracy of the 
CAT Data, or its security and confidentiality.\1017\ Further, the 
Participants stated that the proposed approach would not have an 
adverse effect on the ways in which, and purposes for which, regulators 
would use, access, and analyze the CAT Data.\1018\ The Participants 
included a cost-benefit analysis of options data reporting approaches 
in support of the Exemption Request.\1019\ This analysis noted that the 
volume of options market maker quotes would be larger than any other 
category of data to be reported to the Central Repository, generating 
approximately 18 billion daily records, and that requiring duplicative 
reporting of this large amount of data would lead to a substantial 
increase in costs.\1020\ The Participants argued in their cost-benefit 
analysis that eliminating the requirement of Rule 613(c)(7) that both 
Options Market Makers and Options Exchanges report nearly identical 
quotation data to the Central Repository would have the potential 
effect of reducing the projected capacity and other technological 
requirements of the Central Repository, which could result in 
significant cost savings.\1021\
---------------------------------------------------------------------------

    \1017\ See Exemption Request, supra note 21, at 8.
    \1018\ Id. at 7.
    \1019\ Id. at 6-7.
    \1020\ Id.
    \1021\ Id. at 7.
---------------------------------------------------------------------------

    A few commenters expressed support for the provisions of the CAT 
NMS Plan regarding the reporting of Market Maker Quotations in Listed 
Options.\1022\ One of these commenters stated that permitting only 
Option Exchanges to report Options Market Maker quote information, 
instead of both Options Market Makers and Options Exchanges, would not 
affect the completeness, timeliness, accuracy, security or 
confidentiality of CAT Data, and would

[[Page 84750]]

result in a cost savings.\1023\ One commenter suggested that equities 
market maker quotes should be handled in the same manner as Options 
Market Maker quotes.\1024\
---------------------------------------------------------------------------

    \1022\ FIF Letter at 62-64; TR Letter at 8; see also DAG Letter 
at 2; STA Letter at 1 (supporting the DAG Letter's Exemptive Request 
Letter recommendations).
    \1023\ FIF Letter at 64-65.
    \1024\ Id. at 65-66.
---------------------------------------------------------------------------

    Another commenter, however, suggested that providing an exemption 
to Options Market Makers for reporting Options Market Maker quotes 
could be ``detrimental to achieving the objective of capturing 
`complete audit trails' of all the market activities.'' \1025\ The 
commenter believed that exempting Options Market Makers from reporting 
their quotes to the CAT risked ``overly discounted/distorted signals'' 
for market surveillance and manipulation detection purposes.\1026\
---------------------------------------------------------------------------

    \1025\ Data Boiler Letter at 25.
    \1026\ Id.
---------------------------------------------------------------------------

    In their response, the Participants disagreed that requiring only 
the Options Exchanges to report market maker quotations to the Central 
Repository would be detrimental to the CAT.\1027\ The Participants 
noted that all data that would otherwise be reported by Options Market 
Makers will still be reported, including Quote Sent Time. The only 
difference between the requirement under Rule 613 and the approach in 
the Plan is the reporting party.\1028\
---------------------------------------------------------------------------

    \1027\ Response Letter I at 36.
    \1028\ Id.
---------------------------------------------------------------------------

    With regard to the commenter that suggested equities market maker 
quotes should be handled in the same manner as Options Market Maker 
quotes, the Participants explained that they focused on Options Market 
Makers because of the significant volume of quotes they produce.\1029\ 
The Participants stated that the volume of equities market maker quotes 
is much smaller than the volume of options market maker quotes, noting 
that there are far fewer quote updates for every trade in the equities 
markets, with an approximate average ratio of quotes to trades of 18 to 
1 in the equities markets as compared to ratio of 8,634 to 1 for 
options.\1030\
---------------------------------------------------------------------------

    \1029\ Id.
    \1030\ Id. (noting that this is an approximation based on the 
equities SIP data from the Consolidated Tape Association/
Consolidated Quotation System and UTP Plans from June 2014 to June 
2016).
---------------------------------------------------------------------------

    The Commission believes the proposed approach is reasonable in 
providing the same regulatory benefits as would be achieved under Rule 
613, at a reduced cost and implementation burden on CAT Reporters. The 
Commission notes that the information that Options Market Makers report 
to Options Exchanges must be reported to the Central Repository without 
change, and the information that regulators would receive if Options 
Market Makers reported their quotation information to the Central 
Repository would be identical to the information that they will receive 
under the requirements of the CAT NMS Plan. Therefore, there will be no 
degradation to the audit trail. The Commission disagrees with the 
comment that signals for market surveillance and manipulation detection 
purposes could be distorted if Options Market Makers are not required 
to report their quotation information \1031\ because the exact 
information that the Options Market Makers would report to the CAT will 
be reported on their behalf by the Options Exchanges. The Commission 
acknowledges the commenter who recommended that equity market makers 
also be exempt from reporting their quotes to the CAT, but does not 
believe that it is appropriate at this time to grant such an exemption. 
As noted above, equity market makers produce significantly fewer quotes 
that Options Market Makers, and the Commission has not been presented 
with evidence that reporting equity market maker quotes is unduly 
burdensome.\1032\
---------------------------------------------------------------------------

    \1031\ Data Boiler Letter at 25.
    \1032\ The Commission notes that, when considering whether to 
require Options Market Makers to report their quotes to the Central 
Repository, the Commission was provided a detailed cost analysis of 
the savings that would result if Options Market Makers were not 
required to directly report their quote information to the Central 
Repository.
---------------------------------------------------------------------------

f. Data Elements Not Included in the CAT
    One commenter recommended a re-examination of the data elements to 
be collected in the CAT NMS Plan, and questioned whether a ``more broad 
and complete audit trail'' is needed.\1033\ This commenter recommended 
that the CAT include data on the settlement of securities transactions 
(i.e., post-execution) from the DTCC and NSCC, short sale information, 
including lending/borrowing information and pre-execution short sale 
locate data, and creation/redemption information for Exchange Traded 
Funds (``ETFs'').\1034\
---------------------------------------------------------------------------

    \1033\ Anonymous Letter I at 1, 3; see also Anonymous Letter I 
at 9-15 (stating that CAT Reporters should include ATSs, 
internalizers, ELPs, clearing firms, the Depository Trust and 
Clearing Corporation (``DTCC''), National Securities Clearing 
Corporation (``NSCC'')).
    \1034\ Anonymous Letter I at 6.
---------------------------------------------------------------------------

    In response to the commenter, the Participants described how the 
CAT NMS Plan aligns with the scope of required elements in Rule 613. 
The Participants generally expressed their view that the potential 
benefit of requiring additional elements, such as settlement 
information, lending/borrowing information, short sale locate 
data,\1035\ and ETF creation/redemption data,\1036\ would be outweighed 
by the design and implementation costs at this time.\1037\ The 
Participants committed generally to assess whether additional 
information should be reported to the CAT in the future.\1038\
---------------------------------------------------------------------------

    \1035\ The Participants noted the definition of Material Terms 
of the Order includes whether an order is short or short exempt. 
Response Letter I at 26.
    \1036\ The Participants explained that the processes involved in 
the ETF creations and redemptions are distinct from those used for 
transactions in NMS securities, and may involve parties that are not 
CAT Reporters. Response Letter I at 25-26.
    \1037\ Response Letter I at 26.
    \1038\ Id. at 25.
---------------------------------------------------------------------------

    The Commission notes that, with regard to a locate identifier on 
short sales, data could be readily obtained from a follow-up request to 
a broker-dealer if the other data required to be reported to the CAT, 
particularly the information relating to the customer behind the order, 
is included in the consolidated audit trail. \1039\ With regard to 
lending/borrowing information, the Commission understands that some of 
this data can be obtained through private sources, such as service 
providers. The Participants stated that they do not believe that the 
benefits of including this information in the CAT justify the costs for 
requiring them to be reported. The Commission similarly believes that 
it is not necessary to require this information in CAT. With regard to 
the inclusion of information on ETF creations and redemptions, the 
Commission agrees with the Participants that the relevant market 
participants may not be included in the current scope of CAT Reporters. 
Therefore, the Commission is not amending the Plan to include these 
data elements in the CAT at this time. Nor is it amending the Plan to 
include information on the settlement of securities transactions from 
DTCC and NSCC in the CAT, as it would require participation by entities 
not currently party to the CAT NMS Plan, and the regulatory benefits to 
the Participants and the Commission would not, at this time, justify 
the costs.
---------------------------------------------------------------------------

    \1039\ See Proposing Release, supra note 14, at 32574.
---------------------------------------------------------------------------

    The Commission appreciates the commenter's perspective that 
additional data elements may offer some regulatory benefit. However, 
neither Rule 613 nor the CAT NMS Plan proposed including such data 
elements. After considering the comments, the Commission believes that 
it is reasonable to not mandate the reporting of new data elements to 
the

[[Page 84751]]

CAT at this time. The Commission does not believe that the benefits to 
the Commission and Participants justify the cost for requiring 
additional data elements to be reported. The Commission or the 
Participants may consider additional data elements in the future.
5. Symbology
    The CAT NMS Plan requires CAT Reporters to report data using the 
listing exchange's symbology. The CAT NMS Plan requires the Plan 
Processor to create and maintain a symbol history and mapping table, as 
well as provide a tool for regulators and CAT Reporters showing a 
security's complete symbol history, along with a start-of-day and end-
of-day list of reportable securities for use by CAT Reporters.\1040\
---------------------------------------------------------------------------

    \1040\ See CAT NMS Plan, supra note 5, at Appendix D, Section 2.
---------------------------------------------------------------------------

    Three commenters objected to the Plan requiring listing exchange 
symbology to be used by CAT Reporters.\1041\ One commenter recommended 
that CAT Reporters be permitted to use the symbology standard they 
currently use and that the Central Repository should be responsible for 
normalizing the various standards.\1042\ The commenter stated that 
while it does not expect that allowing CAT Reporters to use existing 
symbology would result in a large cost savings, it believes that use of 
existing symbology would reduce errors.\1043\
---------------------------------------------------------------------------

    \1041\ FIF Letter at 95; Bloomberg Letter at 5-6; Data Boiler 
Letter at 36 (recommending the use of multiple formats and favoring 
use of ``existing market practices/processes'').
    \1042\ FIF Letter at 95.
    \1043\ Id. The commenter also requested clarity on what 
symbology would be used for options. Id. This comment was not 
addressed by the Participants.
---------------------------------------------------------------------------

    Another commenter expressed the view that it would be costly to use 
the listing exchange's symbology for reporting to the CAT and instead 
advocated for a standardized nomenclature or symbology across the 
markets, stating that without a standardized data nomenclature, the 
integration of a data reporting system and surveillance will be 
significantly more difficult.\1044\ The commenter suggested use of a 
uniform, global, open, multi-asset identifier, such as the Financial 
Instrument Global Identifier (``FIGI''), a product developed by 
Bloomberg LP.\1045\ The commenter stated that use of a standard with 
the characteristics of FIGI would simplify cross-asset surveillance, 
lower error rates and potentially lower symbology licensing 
costs.\1046\
---------------------------------------------------------------------------

    \1044\ Bloomberg Letter at 5.
    \1045\ Id. at 6.
    \1046\ Id.
---------------------------------------------------------------------------

    The Participants responded that the Plan required CAT Reporters to 
submit data to the CAT using the listing exchange symbology based on 
their understanding of current reporting practices.\1047\ The 
Participants noted that Industry Members use solutions and systems that 
allow them to translate symbology into the correct format of the 
listing exchange when submitting data to exchanges or regulatory 
reporting systems, such as OATS and Electronic Blue Sheets 
(``EBS'').\1048\ The Participants further noted that all CAT Reporters 
subject to OATS or EBS reporting requirements use the symbology of the 
listing exchange when submitting such reports.\1049\ Accordingly, the 
Participants did not agree with the comment that advocated adopting a 
new symbology approach, concluding that it would add significant cost 
and complexity for the industry.\1050\ The Participants also noted that 
permitting CAT Reporters to use symbology other than the listing 
exchange symbology, and having the Plan Processor translate the 
symbology of different CAT Reporters to the listing exchange symbology, 
would require each CAT Reporter to submit regular mapping symbology 
information to the CAT, thereby increasing the complexity and the 
likelihood for errors in the CAT.\1051\ The Participants stated that 
the requirement to use exchange symbology is the most efficient, cost-
effective and least error-prone approach.\1052\ The Participants, 
however, acknowledged that the Plan Processor may, in the future, 
determine whether the use of a standardized symbology, other than 
listing exchange symbology, would be appropriate.\1053\
---------------------------------------------------------------------------

    \1047\ Response Letter II at 7.
    \1048\ Response Letter III at 13.
    \1049\ Response Letter II at 7 (citing OATS Reporting Technical 
Specifications (September 12, 2016), available at http://www.finra.org/sites/default/files/TechSpec_9122016.pdf. (requiring 
data to be reported using symbol format published by primary listing 
exchange for listed securities).
    \1050\ Id. The Plan requires the Participants to provide the 
Plan Processor with issue symbol information, and the Plan Processor 
to maintain a complete symbology database, including historical 
symbology. In addition, issue symbol validation must be included in 
the processing of data submitted by CAT Reporters. See CAT NMS Plan, 
supra note 5, at Appendix C, Section A.1(a); Appendix D, Section 2.
    \1051\ Id.
    \1052\ Response Letter II at 7.
    \1053\ The Participants noted, based on conversations with the 
DAG and as noted by one commenter, certain industry messaging 
formats, such as some exchange binary formats, require symbology 
other than the primary listing exchange symbology. Id.
---------------------------------------------------------------------------

    The Commission believes that the CAT NMS Plan's requirement that 
CAT Reporters report data using the listing exchange's symbol is 
reasonable. The Commission agrees with the Participants that allowing 
each CAT Reporter to determine its reporting symbology would impose 
burdens on, and add complexity for, the Plan Processor by requiring 
each CAT Reporter to regularly submit to the Plan Processor symbology 
mappings. Additionally, the Commission believes that using existing 
symbology may reduce errors, as noted by the Participants. The 
Commission also understands, based on the Participants' 
representations, that CAT Reporters that report to OATS and EBS today 
already have the ability to translate to the listing exchange's 
symbology.
6. Security of CAT Data
    The CAT NMS Plan requires that the Plan Processor develop and, with 
the prior approval of the Operating Committee, implement, policies, 
procedures and control structures related to the security of the CAT 
System.\1054\ Appendices C and D describe the general security 
requirements for CAT data and outline minimum data security 
requirements that the Plan Processor must meet.\1055\
---------------------------------------------------------------------------

    \1054\ See CAT NMS Plan, supra note 5, at Section 6.1(c); see 
also Sections III.26 and III.27, supra.
    \1055\ See CAT NMS Plan, supra note 5, at Appendix C and D.
---------------------------------------------------------------------------

a. CAT Information Security Program Details
    Several commenters believed that the CAT NMS Plan did not provide 
enough details regarding the security and confidentiality of CAT Data. 
One commenter noted that ``explicit language indicating requirements 
for overall security of data transmission and storage, rather than 
suggestions, should be included in the finalized CAT requirements.'' 
\1056\ Another commenter stated that the Plan does not provide enough 
granular details related to actual controls, service levels, and 
technical support that will be implemented by the Plan Processor.\1057\ 
Similarly, another commenter stated that the CAT NMS Plan lacks proper 
guidance concerning

[[Page 84752]]

the requirements for security and confidentiality controls of the CAT 
System regarding, for example, network security, firewalls, systems 
management and library controls, IT personnel access to the CAT System 
and data, system logs and archives.\1058\ One commenter ``urg[ed] the 
SEC to require the SROs to share more detailed information on [data 
loss prevention, business continuity plans and cyber incident response 
plans] as a Plan Processor is selected and the Central Repository is 
built.'' \1059\ Other commenters suggested that certain market 
participants be provided another opportunity to provide feedback on the 
security controls, policies and procedures that will be adopted by the 
Plan Processor.\1060\ Another commenter supported having an information 
security officer be responsible for regular updates of the documents 
and processes, breach identification, and management and processes for 
periodic penetration tests of all applications.\1061\
---------------------------------------------------------------------------

    \1056\ SIFMA Letter at 20; see also ICI Letter at 4 (stating 
that ``despite the highly sensitive nature of the data captured by 
the CAT, the proposed CAT NMS plan provides only vague details about 
the information security provisions for the CAT. . . . [W]e 
understand that certain details of the plan processor's information 
security program must remain confidential, but the proposed CAT NMS 
plan sets too low of a bar for information security'').
    \1057\ FSR Letter at 6; see also TR letter at 8 (seeking 
clarification on the service levels and liability that will be 
associated with data transfers between CAT Reporters and the CAT 
Processor, and how information security will be addressed with 
customer service staff at the Plan Processor that will assist CAT 
Reporters with troubleshooting).
    \1058\ FIF Letter at 131-132.
    \1059\ Fidelity Letter at 4.
    \1060\ One commenter, for example, suggested that experts from 
Industry Members be permitted to review and provide feedback on the 
security controls, policies and procedures of the Plan Processor. 
FIF Letter at 130. Another suggested that market participants be 
provided an opportunity to comment on these important details. 
Fidelity Letter at 4.
    \1061\ UnaVista Letter at 5.
---------------------------------------------------------------------------

    In response to commenters that requested more detail regarding the 
security controls for CAT Data, the Participants noted that in the 
Adopting Release for Rule 613, the Commission stated that ``an outline 
or overview description of the policies and procedures that would be 
implemented under the NMS plan submitted to the Commission for its 
consideration would be sufficient to satisfy the requirement of the 
Rule.'' \1062\ The Participants also reiterated the position of the 
Commission at the time of adoption of Rule 613 that ``it is important 
for the NMS plan submitted to the Commission to establish the 
fundamental framework of these policies and procedures, but recognizes 
the utility of allowing the plan sponsors flexibility to subsequently 
delineate them in greater detail with the ability to make modifications 
as needed.'' \1063\ The Participants noted that Section 6.12 of the CAT 
NMS Plan requires the Plan Processor to develop and maintain a 
comprehensive information security program for the Central Repository, 
to be approved and reviewed at least annually by the Operating 
Committee.\1064\
---------------------------------------------------------------------------

    \1062\ Response Letter I at 53-54 (citing Adopting Release, 
supra note 14, at 45782).
    \1063\ Response Letter I at 53-54 (citing Adopting Release, 
supra note 14, at 45782).
    \1064\ Id.
---------------------------------------------------------------------------

    The Participants also referred to Appendix D of the Plan, which 
discusses the fundamental framework of this program, including: (1) 
Appropriate solutions and controls to ensure data confidentiality and 
security during all communications between CAT Reporters and Data 
Submitters and the Plan Processor, data extraction, manipulation and 
transformation, loading to and from the Central Repository and data 
maintenance by the CAT System; (2) security controls for data retrieval 
and query reports by Participants and the SEC; and (3) appropriate 
tools, logging, auditing and access controls for all components of the 
CAT System.\1065\ The Participants further noted the Plan provisions 
addressing: (1) The physical assets and personnel of the CAT; (2) 
training of all persons who have access to the Central Repository; (3) 
encryption; (4) remote access to the CAT System; (5) the handling of 
PII; (6) data storage (including penetration testing and third party 
audits); (7) access to PII and other CAT Data; breach management; and 
(8) the minimum industry standards that must be followed by the Plan 
Processor in developing and implementing the security and 
confidentiality policies and procedures for the Plan.\1066\ The 
Participants also provided a high level description of the security 
requirements for the CAT System, which described the architecture 
controls, program level controls, and data usage and regulator controls 
applicable to the CAT.\1067\ Notably, the Participants also stated that 
they believe that ``publicly releasing too many details about the data 
security and information policies and procedures of the CAT System 
presents its own security concerns and is not advisable.'' \1068\
---------------------------------------------------------------------------

    \1065\ Response Letter I at 54.
    \1066\ Id.
    \1067\ Id.
    \1068\ Id.
---------------------------------------------------------------------------

    The Participants stated that they do not believe that market 
participants such as experts from Industry Members should be permitted 
to review and provide feedback on the security controls, policies and 
procedures of the Plan Processor because each Bidder already has 
provided information on the various security issues discussed in the 
Plan and as a result, the Plan Processor will have sufficient 
information from which to formulate appropriate data security and 
information policies and procedures.\1069\ The Participants added that 
data security policies and procedures of the Plan Processor will be 
subject to the review and approval of the Operating Committee, which 
will seek the views of the Advisory Committee.\1070\ Therefore, the 
Participants do not believe that it is necessary to allow Industry 
Members to separately review the security controls, policies and 
procedures of the Plan Processor.\1071\
---------------------------------------------------------------------------

    \1069\ Response Letter I at 55.
    \1070\ Id.
    \1071\ Id.
---------------------------------------------------------------------------

    The Participants also provided additional details concerning 
certain security controls and protocols required of the Plan Processor. 
Specifically, the Participants noted that the Plan Processor must 
establish a penetration testing protocol and that the Participants 
generally would expect penetration testing to occur following major 
changes to system architecture (e.g., changes in the network 
segmentation, major system upgrades, or installation of new management 
level applications), or when other specific new threats are 
identified.\1072\ The Participants also provided additional detail 
clarifying their threat monitoring program and stated that they expect 
that the Plan Processor will ``adhere to industry practice for an 
infrastructure initiative such as the CAT, and, therefore, the Plan 
Processor will provide 24x7 operational monitoring, including 
monitoring and alerting for any potential security issues across the 
entire CAT environment.'' \1073\ Related to threat monitoring, the 
Participants noted that the CISO also is required to establish policies 
and procedures to address imminent threats.\1074\ Specifically, the 
Participants stated that they expect the CISO to establish procedures 
for addressing security threats that require immediate action to 
prevent security threats to the CAT Data.\1075\
---------------------------------------------------------------------------

    \1072\ Response Letter III at 7.
    \1073\ Id.
    \1074\ Response Letter III at 8.
    \1075\ Id.
---------------------------------------------------------------------------

    The Commission fully recognizes the importance of maintaining the 
security of the CAT Data and the need to have sufficient information 
regarding the policies, procedures and control structures that will be 
adopted by the Plan Processor that will apply to the security of the 
CAT Data. The Commission also reiterates its view, as set forth in the 
Adopting Release and as noted by the Participants in their response, 
that an outline or overview description of the policies and procedures 
that would be implemented by the Plan Processor regarding data

[[Page 84753]]

security satisfies the requirements of Rule 613 and that it is 
reasonable for additional detail about the controls, policies and 
procedures applicable to the CAT's information security program to be 
determined and published after the Plan Processor is selected, 
including through the CAT's Technical Specifications, which will be 
publicly available.\1076\ The Commission also shares the concerns 
articulated by the Participants that publicly releasing too many 
details about the technical security requirements, tools and techniques 
of the CAT NMS Plan could invite exploitation. The Commission believes 
that the CAT NMS Plan must strike a balance between setting out the 
fundamental framework for the security of the CAT Data while 
maintaining the ability of the Plan Processor to adopt additional 
security parameters as it sees fit, some of which the Plan Processor 
may not want to make public.
---------------------------------------------------------------------------

    \1076\ See CAT NMS Plan, supra note 5, at Section 6.9(a).
---------------------------------------------------------------------------

    The Commission has considered the security provisions in the CAT 
NMS Plan and finds that a reasonable level of detail regarding the 
security and confidentiality controls has been provided in the CAT NMS 
Plan. However, the Commission expects that the Participants will 
require the Plan Processor to continuously monitor the information 
security program of the CAT to ensure that it is consistent with the 
highest industry standards for the protection of data, and to 
proactively implement appropriate changes to the security program to 
guard against any unauthorized intrusions or breaches of the Plan 
Processor's data security protocols and protections. The Commission 
also expects that, when the Plan Processor is chosen, the Plan 
Processor will provide more detail about the specific security 
requirements and attendant obligations placed on the Participants, 
including through the issuance of Technical Specifications, which will 
be publicly available; more explicit language indicating requirements 
for overall security of data transmission and storage; more granularity 
related to actual controls and service levels; and more details about 
the technical support that will be implemented by the Plan Processor. 
The Commission also notes that, as discussed in Section IV.H, the 
Commission is amending Section 6.6 of the Plan to require that the 
Participants provide the Commission with an annual evaluation of the 
information security program to ensure that the program is consistent 
with the highest industry standards for the protection of data.\1077\
---------------------------------------------------------------------------

    \1077\ See Section IV.H, supra.
---------------------------------------------------------------------------

    The Commission also believes that, based on the CAT NMS Plan and 
the Participants' response, a reasonable level of detail and explicit 
requirements regarding the overall security of data transmission, 
storage, service levels, and technical support has been provided.\1078\ 
Similarly, the Commission believes that the Plan adequately addresses 
network security, firewalls, systems management, data loss prevention, 
business continuity plans and cyber incident response plans.\1079\ In 
response to the commenters that requested that market participants such 
as experts from Industry Members be permitted to review and provide 
feedback on the security controls, policies and procedures of the Plan 
Processor, the Commission believes that such review and feedback is not 
necessary, particularly in light of input by the Advisory Committee.
---------------------------------------------------------------------------

    \1078\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.1(b) (discussing the manner in which the Central Repository will 
receive, extract, transform, load, and retain data); Section 6.10(c) 
(discussing the CAT user Help Desk).
    \1079\ See CAT NMS Plan, supra note 5, at Appendix D, Section 4 
(Data Security); Section 5 (Business Continuity/Disaster Recovery).
---------------------------------------------------------------------------

    In response to the commenter that supported having an information 
security officer be responsible for regular updates of the documents 
and processes, breach identification, and management and processes for 
periodic penetration tests of all applications, the Commission notes 
that the Plan provides for a CISO who has a broad range of 
responsibilities regarding the security of the CAT Data.
b. Security Standards for the CAT System
    Several commenters put forth various industry security standards 
that should be adopted by the Plan Processor. One commenter stated that 
if the CAT System operates using a cloud infrastructure, the CAT should 
employ a cloud provider rated for security via the Cloud Controls 
Matrix from the Cloud Security Alliance.\1080\ This commenter further 
recommended that the CAT ``be subject to existing data security and 
privacy standards like Regulation P [Annual Privacy Notice Requirement 
under the Gramm-Leach-Bliley Act], FISMA [Federal Information Security 
Management Act] and FedRAMP [Federal Risk and Authorization Management 
Program].'' \1081\ One commenter stated that steps should be taken to 
ensure proper controls are in place to protect the data throughout its 
lifecycle using secure, authenticated and industry-accepted encryption 
mechanisms.\1082\ Another commenter recommended the use of ``pre-
defined extract templates and uniform global formats such as ISO 
[International Organization for Standardization] 2002.'' \1083\ One 
commenter stated that at a minimum, connection to CAT infrastructure 
should be protected by transport layer security/secure sockets layer 
(``TLS/SSL'') through a secure tunnel.\1084\ Another commenter 
suggested that the CAT NMS Plan employ the cybersecurity framework 
developed by NIST and the cybersecurity assessment tool created by the 
Federal Financial Institutions Examination Council (``FFIEC'').\1085\
---------------------------------------------------------------------------

    \1080\ SIFMA Letter at 21.
    \1081\ Id.
    \1082\ FSI Letter at 5 (citing to Government Accountability 
Office, High-Risk Series: An Update, GAO-15-290 at 235 (Feb. 2016)).
    \1083\ UnaVista Letter at 4.
    \1084\ FIF Letter at 133.
    \1085\ ICI Letter at 5.
---------------------------------------------------------------------------

    One commenter noted the need for an ongoing assessment of the risks 
associated with the CAT System and data to meet the NIST industry 
standards referenced in the Plan.\1086\ In discussing the 
confidentiality and sensitivity of CAT Data, a commenter noted that 
``[t]he emphasis shouldn't be favoring on [sic] a particular prescribed 
standard . . . but the key is: CAT needs independence [sic] privacy and 
security assessment at regular intervals. The assessment will include: 
Vulnerability scan and identifying system nuisances that can cause or 
already caused privacy and security issues.'' \1087\
---------------------------------------------------------------------------

    \1086\ FIF Letter at 130-31.
    \1087\ Data Boiler Letter at 29.
---------------------------------------------------------------------------

    With respect to the industry standards applicable to the CAT 
System, in their response, the Participants noted that at the outset of 
operation of the CAT, the Plan Processor will adopt all relevant 
standards from the NIST Cyber Security Framework, NIST 800.53 or ISO 
27001 that would be appropriate to apply to the Plan Processor.\1088\ 
The Participants added that because industry standards may evolve over 
time, the Participants will require that the CAT's security program 
align with current industry standards and best practices as they evolve 
in the future.\1089\ To this end, the Plan requires that the Plan 
Processor's information security program be reviewed at least annually 
by the Operating Committee.\1090\
---------------------------------------------------------------------------

    \1088\ Response Letter III at 5.
    \1089\ Id.
    \1090\ Id.
---------------------------------------------------------------------------

    Regarding security standards applicable to the Participants that 
access

[[Page 84754]]

CAT Data, the Participants noted that the Plan requires the 
Participants to ``establish, maintain and enforce written policies and 
procedures reasonably designed . . . to ensure the confidentiality of 
the CAT Data obtained from the Central Repository.'' \1091\ The 
Participants stated that ``such policies and procedures will be subject 
to Reg SCI and oversight by the SEC.'' \1092\ Moreover, in their 
response, the Participants stated that ``[i]n the event that relevant 
standards evolve, the proposed Plan also requires that ``[e]ach 
Participant shall periodically review the effectiveness of the policies 
and procedures . . . and take prompt action to remedy deficiencies in 
such policies and procedures.'' \1093\
---------------------------------------------------------------------------

    \1091\ Response Letter III at 8.
    \1092\ Id.
    \1093\ Response Letter III at 8.
---------------------------------------------------------------------------

    In response to the commenters that believed that an ongoing 
assessment of the risks associated with the CAT System and data should 
meet the NIST standards in the Plan, the Participants stated that they 
agree that the CAT System should be regularly assessed for security 
risks,\1094\ and that the Operating Committee must conduct an annual 
review of the Plan Processor's information security program.\1095\ The 
Participants further noted that Section 6.2(a)(v)(C) of the Plan 
provides that the CCO, in collaboration with the CISO, will retain 
independent third parties with appropriate data security expertise to 
review and audit on an annual basis the policies, procedures, standards 
and real-time tools that monitor and address data security issues for 
the Plan Processor and the Central Repository.\1096\
---------------------------------------------------------------------------

    \1094\ Response Letter I at 61.
    \1095\ Response Letter III at 5.
    \1096\ Response Letter I at 61.
---------------------------------------------------------------------------

    In response to the commenter that believed that the Plan Processor 
should be FedRAMP certified, the Participants stated that they do not 
believe that the Plan Processor should be required to be certified 
FedRAMP.\1097\ The Participants stated that requiring FedRAMP 
certification could limit the portions of each cloud provider's 
solutions that each Bidder may access, while also increasing costs for 
the CAT. The Participants stated that furthermore, FedRAMP 
certification itself does not provide for additional security controls 
beyond those contained in the NIST standards, but rather focuses on 
providing a certification and evaluation process for government 
applications.\1098\ Moreover, the Participants believe that the 
security controls required in the Plan and proposed by the Bidders, as 
well as those provided by the Bidders' cloud providers, are robust and 
would not be materially enhanced by requiring them to be FedRAMP 
certified.\1099\ The Participants also pointed out that regular 
independent third party audits, as required by the Plan, also would 
help to ensure the security of the CAT and any cloud solutions in 
use.\1100\
---------------------------------------------------------------------------

    \1097\ Response Letter III at 5.
    \1098\ Response Letter III at 5.
    \1099\ Response Letter III at 5-6.
    \1100\ Id.
---------------------------------------------------------------------------

    The Commission notes that Appendix D of the Plan addresses the 
security standards applicable to the CAT System. Specifically, Section 
4.2 of Appendix D of the CAT NMS Plan, as proposed, states that ``[t]he 
following industry standards, at a minimum, must be followed as such 
standards and requirements may be replaced by successor publications, 
or modified, amended, or supplemented and as approved by the Operating 
Committee (in the event of a conflict between standards, the more 
stringent standard shall apply, subject to the approval of the 
Operating Committee).'' \1101\ The Plan then lists several NIST 
standards (e.g., NIST 800), FFIEC's ``Authentication Best Practices,'' 
and ISO/IEC 27001's ``Information Security Management. Appendix D, 
Section 4.2, as proposed, also states that the CAT LLC shall join the 
Financial Services-Information Sharing and Analysis Center (``FS-
ISAC'') and comparable bodies as the Operating Committee may determine.
---------------------------------------------------------------------------

    \1101\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.2.
---------------------------------------------------------------------------

    Moreover, in the Commission's view, the Participants' commitment in 
their response that, at the outset of the operation of CAT, the Plan 
Processor will adhere to the relevant standards from the NIST Cyber 
Security Framework is a reasonable step toward ensuring a robust 
security information program. At this time, the Commission believes 
that the NIST Cyber Security Framework provides a reliable and 
comprehensive approach to cybersecurity risks and threats, and helps to 
ensure that the Plan Processor will be abiding by appropriately 
rigorous industry standards to help identify, protect, detect, respond 
and recover from cyberattacks, whether internal or external, domestic 
or international. Accordingly, the Commission is amending Appendix D, 
Section 4.2 of the CAT NMS Plan to add the requirement that Plan 
Processor will adhere to the NIST Cyber Security Framework in its 
entirety.\1102\ The Commission believes that adherence to the standards 
of the NIST Cyber Security Framework provides a reasonable approach to 
ensuring that security standards applicable to the CAT System will 
reflect high industry standards regarding the protection of CAT Data.
---------------------------------------------------------------------------

    \1102\ The Commission notes that, in contrast to the 
Participants' response, the Commission is amending the Plan without 
limitation to only ``relevant standards'' because the Commission 
believes that the NIST Cyber Security Framework already provides 
flexibility to ensure only relevant standards apply, and without 
specific reference to NIST 800-53 or ISO 27001. The Commission also 
is amending Appendix D, Section 4.2 of the Plan to clarify that the 
listed industry standards are not intended to be an exclusive list. 
The Commission believes this amendment is appropriate to clarify 
that the Participants may adhere to additional industry standards.
---------------------------------------------------------------------------

    In light of the Participants' commitment and ongoing requirement to 
adhere to the NIST Cyber Security Framework--which will address the 
security of the CAT cloud provided by the Plan Processor--and the 
limitations that FedRAMP certification might impose on the cloud 
provider's solutions that each bidder might access should the bidder be 
chosen as the Plan Processor, the Commission believes that it is 
reasonable to not require that the Plan Processor be FedRAMP certified. 
In addition, the Commission believes that it is reasonable to allow the 
Plan Processor to evaluate whether it should adhere to the data 
security and privacy standards like Regulation P, FISMA and ISO 2002, 
and whether the connection to the CAT infrastructure should be 
protected by TLS/SSL.
    The Commission also notes that in their response, the Participants 
stated that with respect to partnerships with other private or public 
organizations and information sharing entities, the Participants do not 
intend to restrict the CAT LLC's partnership only to the FS-ISAC; the 
Participants stated that the CAT LLC may seek to join other industry 
groups such as the National Cyber-Forensic & Training Alliance, the 
Department of Homeland Security's National Cybersecurity & 
Communications Integration Center, or other reputable cyber and 
information security alliances.\1103\ The Commission believes the 
Participants have appropriately clarified that the provisions in 
Appendix D, Section 4.2 of the Plan listing the other organizations 
that the CAT LLC may join was not intended to be an exclusive list 
because the provision explicitly states that the CAT LLC shall endeavor

[[Page 84755]]

to join other ``comparable bodies as the Operating Committee may 
determine.''
---------------------------------------------------------------------------

    \1103\ Response Letter III at 6-7.
---------------------------------------------------------------------------

c. CAT User Access Administration
    Many commenters discussed issues related to the administration of 
CAT users. One commenter stated that ``[a]ppropriate policies and 
procedures should be in place for user access administration, including 
provisioning of administrators, user data management, password 
management and audit of user access management.'' \1104\ Another 
commenter noted the need to train employees and contractors with access 
to CAT Data on how to maintain the security and confidentiality of the 
data,\1105\ while another commenter supported the establishment of 
processes to prevent access to sensitive data by any individuals who 
have not attended compliance training.\1106\ One commenter stated that 
persons authorized to access CAT Data should have comprehensive 
background checks.\1107\
---------------------------------------------------------------------------

    \1104\ SIFMA Letter at 21.
    \1105\ ICI Letter at 9.
    \1106\ UnaVista Letter at 4.
    \1107\ FSR Letter at 5; FSI Letter at 5.
---------------------------------------------------------------------------

    Other commenters discussed the password authentication procedures 
in the CAT NMS Plan that are meant to ensure that CAT Data is only 
accessed by credentialed personnel. One commenter stated that all 
persons with access to the CAT System should have their access secured 
via multi-factor authentication as prescribed in OMB Memorandum M-06-
16.\1108\ Another commenter suggested leveraging any authentication 
procedures at the entity that employs a person seeking access to CAT 
Data, stating that this approach would also allow for automated 
deactivation of users that leave the CAT Reporter or Participant.\1109\
---------------------------------------------------------------------------

    \1108\ MFA Letter at 6.
    \1109\ SIFMA Letter at 21. This commenter also generally 
recommended automatic deactivation for users who do not access CAT 
for a specified period of time (e.g., 6 months), or whose access is 
not re-confirmed by the entity who employs the person requesting CAT 
Data, or whose firm account has been deactivated. Additionally, the 
commenter stated that email addresses for CAT users should be 
immutable and should allow for change via administrative review 
workflow, and shared user IDs should be prohibited. Id.
---------------------------------------------------------------------------

    In its response to commenters, the Participants noted the 
provisions in Appendix D of the Plan that require the Plan Processor to 
develop and maintain policies and procedures reasonably designed to 
prevent, detect and mitigate the impact of unauthorized access or usage 
of data in the Central Repository.\1110\ The Participants further noted 
that the Plan requires that such policies and procedures include, at a 
minimum, (1) information barriers governing access to and usage of data 
in the Central Repository; (2) monitoring processes to detect 
unauthorized access to or usage of data in the Central Repository; and 
(3) escalation procedures in the event that unauthorized access to or 
usage of data is detected.\1111\ The Participants also note that the 
Plan requires that passwords be stored according to industry best 
practices and recovered by secure channels, and that all logins will be 
subject to MFA.\1112\ The Participants further note that the Plan 
Processor will have discretion to consider additional controls on user 
access in formulating the data security policies and procedures for the 
CAT System, including, without limitation, deactivating users who have 
not accessed the CAT System for a specified period of time.\1113\
---------------------------------------------------------------------------

    \1110\ Response Letter I at 55-56.
    \1111\ Id.
    \1112\ The Commission notes that certain provisions of the Plan 
appeared to require MFA only for access to PII. The Participants 
clarified in their response letter that MFA is required for all 
logins. Response Letter III at 6.
    \1113\ Response Letter I at 56.
---------------------------------------------------------------------------

    The Commission believes that monitoring the access to CAT to ensure 
that only authorized persons are allowed to access the CAT System and 
CAT Data is critical to ensuring the security of CAT Data. The 
Commission agrees with the Participants that the requirements set out 
in Appendix D, and other provisions of the CAT NMS Plan, provide a 
reasonable outline of CAT user access administration (including 
provisioning of administrators) in general, as well as user data 
management and password management.\1114\
---------------------------------------------------------------------------

    \1114\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.4 (discussing an overview of access to CAT Data).
---------------------------------------------------------------------------

    In response to specific commenters that believed that only 
individuals with appropriate training should be permitted access to CAT 
Data, Section 6.1(m) of the Plan states that ``[t]he Plan Processor 
shall develop and, with the prior approval of the Operating Committee, 
implement a training program, which will be made available to all 
individuals who have access to the Central Repository on behalf of the 
Participants or the SEC prior to such individuals being granted access 
to the Central Repository, that addresses the security and 
confidentiality of all information accessible from the CAT, as well as 
the operational risks associated with accessing the Central 
Repository.'' \1115\ Appendix D of the Plan also states that the Plan 
Processor must provide to the Operating Committee a comprehensive 
security plan that covers all components of the CAT System, including 
physical assets and personnel, and the training of all persons who have 
access to the Central Repository consistent with Article VI, Section 
6.1(m).\1116\ Thus, the Commission believes that these Plan provisions, 
taken together, indicate that the Plan Processor will require that all 
persons that have access to CAT Data will be required to complete 
training prior to accessing CAT Data, and expects that only those 
persons that have been adequately trained will have access to CAT Data.
---------------------------------------------------------------------------

    \1115\ See CAT NMS Plan, supra note 5, at Section 6.1(m).
    \1116\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.
---------------------------------------------------------------------------

    In response to the commenter that stated that persons authorized to 
access CAT Data should have comprehensive background checks, the 
Commission notes that the Plan provides that ``in addition to other 
policies, procedures and standards generally applicable to the Plan 
Processor's employees and contractors, the Plan Processor shall have 
hiring standards and shall conduct and enforce background checks (e.g., 
fingerprint-based) for all of its employees and contractors to ensure 
the protection, safeguarding and security of the facilities, systems, 
networks, equipment and data of the CAT System. . . .'' \1117\ While 
the Commission believes that this provision sets out a reasonable 
approach to background checks for employees and contractors of the Plan 
Processor, the Commission believes that such a requirement generally 
should extend to Participants with respect to all of their users that 
have access to CAT Data and therefore is amending the Plan to require 
that each Participant conduct background checks for its employees and 
contractors that will use the CAT System.\1118\ The Commission believes 
that this amendment to the Plan is appropriate in order to ensure that 
only authorized and qualified persons are using the CAT System.
---------------------------------------------------------------------------

    \1117\ See CAT NMS Plan, supra note 5, at Section 6.1(g).
    \1118\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.4.
---------------------------------------------------------------------------

    The Commission also notes that the Participants have represented 
that all logins must be secured by MFA, in response to commenters 
concerns that authentication procedures for CAT users should ensure 
that only credentialed persons are accessing the CAT Data. In addition, 
in response to commenters that expressed concerns about the password 
authentication procedures of the Plan Processor, the Commission

[[Page 84756]]

notes that the Plan addresses password guidelines such as, for example, 
the appropriate complexity of passwords and the recovery of lost 
passwords.\1119\ The Commission also believes that the Plan does not 
prohibit the Plan Processor from considering an approach to 
authenticating a CAT user that would leverage the authentication 
procedures at the entity (either a Participant or CAT Reporter) that 
employs a person seeking access to CAT Data, as suggested by a 
commenter. The Commission believes these provisions, taken together, 
provide reasonable protections around CAT user administration.
---------------------------------------------------------------------------

    \1119\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.4 (discussing an overview of the CAT password requirements).
---------------------------------------------------------------------------

    Finally, with respect to another aspect of CAT user access 
administration, in their response the Participants noted that they do 
not believe that memoranda of understanding or similar agreements 
between the CAT LLC and the Participants are necessary since the 
Participants will be bound by both their participation in the Plan as 
well as the agreement between the CAT LLC and the Plan Processor.\1120\ 
However, the Participants stated they believe that it is important that 
information regarding CAT Data usage, such as contact points and 
escalation procedures, be shared between the Plan Processor and the 
Participants; therefore, the Participants state they expect to 
establish such information sharing agreements between the Plan 
Processor and the Participants once the Plan Processor is chosen. 
Moreover, the Participants stated, they expect that one of the CISO's 
responsibilities would be to make sure that this information is 
captured and kept up to date appropriately.\1121\
---------------------------------------------------------------------------

    \1120\ Response Letter III at 8.
    \1121\ Response Letter III at 9.
---------------------------------------------------------------------------

    The Commission notes that the Plan Processor has not yet been 
chosen and thus the execution of such memoranda is not appropriate at 
this time. However, the Commission believes that explicitly 
memorializing issues relating to CAT Data usage between the Plan 
Processor and each Participant would be beneficial to the operation of 
the CAT System.
    The Commission also notes that, with respect to access, the CAT NMS 
Plan provides that the Plan Processor will provide to the Participants 
and the Commission access to the Representatives of the Plan Processor 
as any Participant or the Commission may reasonably request solely for 
the purpose of performing such Person's regulatory and oversight 
responsibilities pursuant to the federal securities laws, rules, and 
regulations or any contractual obligations.\1122\ The Plan also 
provides that the Plan Processor will direct its Representatives to 
reasonably cooperate with any inquiry, investigation, or proceeding 
conducted by or on behalf of any Participant or the Commission related 
to such purpose.\1123\ As filed, this provision would allow the Plan 
Processor to refuse access to the Commission and/or Participants upon 
its own determination of ``unreasonableness.'' The Commission believes 
that Commission or Participant requests for access to Representatives 
of the Plan Processor should be considered reasonable, absent other 
circumstances. It is therefore amending the Plan to delete the 
requirement that the access to Plan Processor Representatives be 
``reasonable'' and that the Representatives of the Plan Processor only 
be required to ``reasonably'' cooperate with any inquiry, 
investigation, or proceeding conducted by or on behalf of the 
Commission. The Commission expects that, even without the 
``reasonableness'' qualifier, it and the Participants will be 
reasonable in requesting access to the Representatives of the Plan 
Processor.
---------------------------------------------------------------------------

    \1122\ See CAT NMS Plan, supra note 5, at Section 6.1(u).
    \1123\ Id.
---------------------------------------------------------------------------

d. Downloading CAT Data By Regulators
    Several commenters discussed the security risks associated with the 
downloading of CAT Data by regulators. One commenter argued that CAT 
Data should never be extracted, removed, duplicated, or copied from the 
CAT, noting that such practices would introduce additional risk and 
render even the most advanced security measures ineffective.\1124\ 
Instead, this commenter recommended allowing data to be imported into a 
CAT query sub-system if surveillance is needed in conjunction with 
external data.\1125\ Another commenter similarly noted the security 
risk associated with extracting data from the Central Repository and 
stated its preference for an approach ``where the data is accessible by 
the Regulators but the data is not extracted and stored outside the 
Central Repository, except for extraction of `comparable' data that 
would facilitate exemption from duplicative reporting and retirement of 
high priority duplicative systems.'' \1126\ This commenter added ``if 
combined datasets surveillance is needed (with data external to CAT), 
the SROs should be allowed to upload external SRO data to a sandbox 
environment within CAT, in order to enable combined surveillance.'' 
\1127\
---------------------------------------------------------------------------

    \1124\ SIFMA Letter at 20; see also Data Boiler Letter at 26 
(stating ``CAT should under ABSOLUTELY NO CIRCUMSTANCE (including 
BCP/DR) allow anyone the option of to download the `entire' data 
sets, because this essentially opens a `backdoor' to significant 
security risk.'').
    \1125\ SIFMA Letter at 20.
    \1126\ FIF Letter at 134.
    \1127\ Id.
---------------------------------------------------------------------------

    Another commenter stated that the CAT NMS Plan's provision 
permitting the Commission and SROs to download entire data sets and 
analyze the data within the regulator's systems or the regulator's 
cloud, and the Plan's proposal to allow broker-dealers to ``verify 
certain data that they have submitted to the CAT,'' represent security 
risks to CAT Data that the SEC and SROs should avoid.\1128\ This 
commenter further noted that having multiple points of access to CAT 
Data, and the ability to download CAT Data, raise ``significant 
cybersecurity concerns and outweigh the benefit of access to processed 
CAT [D]ata.'' \1129\ Another commenter believed that CAT Data should 
remain in the Central Repository, but noted that if the Commission 
determines to permit the downloading of CAT Data, the CAT NMS Plan 
should only allow a user to download CAT Data if the information 
security measures available at the user's site equal or exceed those 
protecting the data at the Central Repository.\1130\
---------------------------------------------------------------------------

    \1128\ Fidelity Letter at 4.
    \1129\ Id.
    \1130\ ICI Letter at 7.
---------------------------------------------------------------------------

    In response to commenters, the Participants noted that Rule 613 
requires regulators to develop and implement a surveillance system, or 
enhance existing surveillance systems to make use of CAT Data.\1131\ 
The Participants stated that regulators should have flexibility in 
designing such surveillance systems, including the ability to access 
and transfer data where necessary and consistent with appropriate data 
security safeguards.\1132\ Such access must be via secure channels 
(e.g., secure FTP, API or over encrypted lines) as required in the 
Plan.\1133\ The Participants further noted that the Plan requires that 
Participants have appropriate policies and procedures in place to 
protect such data.\1134\ Specifically, the Plan requires that 
Participants establish, maintain and enforce written policies and 
procedures reasonably designed to ensure the

[[Page 84757]]

confidentiality of CAT Data.\1135\ The Participants also stated that 
they believed that all regulators, including the Commission, should be 
obligated to establish security measures to protect the security and 
confidentiality of CAT Data for security purposes.\1136\
---------------------------------------------------------------------------

    \1131\ Response Letter I at 56.
    \1132\ Id.
    \1133\ Id.
    \1134\ Id.
    \1135\ Id. (citing to CAT NMS Plan, supra note 5, at Section 
6.5(f)(iv)).
    \1136\ Id.
---------------------------------------------------------------------------

    The Participants also noted that the CAT NMS Plan requires the Plan 
Processor to provide regulators with the ability to perform bulk data 
extraction and download of CAT Data.\1137\ The Participants stated they 
continue to believe that permitting regulators to download order/
transaction data from the Central Repository for regulatory use (i.e., 
``bulk data extracts'') is important for their regulatory purposes, and 
that eliminating or limiting bulk data extracts of the CAT Data may 
significantly and adversely impact the Participants' ability to 
effectively conduct surveillance of their markets using CAT Data. The 
Participants stated that they also plan to enrich their existing 
surveillance using bulk data extracts of CAT Data.\1138\
---------------------------------------------------------------------------

    \1137\ Response Letter III at 10 (citing to Appendix D, Section 
8.2 (providing that ``the Central Repository must provide for direct 
queries, bulk extraction, and download of Data for all regulatory 
users.'')).
    \1138\ Response Letter III at 11.
---------------------------------------------------------------------------

    Regarding the security of extracted CAT Data, the Participants 
stated that they ``recognize the security concerns raised by bulk data 
extracts and any Participant-controlled systems (e.g., Participant 
sandboxes residing in the Plan Processor's cloud or a Participant's 
local system) used to store and analyze such data extracts, but the 
Participants believe that requiring the Participants to adopt and 
enforce policies and procedures to address these security issues 
appropriately addresses these concerns without diminishing the 
surveillance benefits of the CAT.'' \1139\ The Participants noted that 
the Plan requires the Participants to ``establish, maintain and enforce 
written policies and procedures reasonably designed . . . to ensure the 
confidentiality of the CAT Data obtained from the Central Repository.'' 
\1140\ Accordingly, the Participants stated that Participants must have 
policies and procedures reasonably designed to ensure the 
confidentiality of CAT Data obtained through bulk data extracts and 
maintained in the Participants' systems.\1141\ In their response, the 
Participants stated that their own security controls, not those of the 
Plan Processor, would apply to such systems as they would be outside 
the Plan Processor's control.\1142\ The Participants' represented that 
their security controls would be consistent with industry standards, 
including security protocols that are compliant with Regulation SCI, 
and the Participants would periodically review the effectiveness of 
such controls pursuant to their policies and procedures addressing data 
security.\1143\
---------------------------------------------------------------------------

    \1139\ Id.
    \1140\ Id.
    \1141\ Id.
    \1142\ Id.
    \1143\ Id.
---------------------------------------------------------------------------

    Regarding the Participants' security controls, the Participants 
stated that the CISO would be obligated to escalate issues that could 
represent a security threat to CAT Data.\1144\ For example, the 
Participants stated that if the CISO observes activity from a CAT 
Reporter or Participant that suggests that there may be a security 
threat to the Plan Processor or the Central Repository, then the CISO, 
in consultation with the CCO, may escalate the matter to the Operating 
Committee.\1145\ The Participants stated, however, that they do not 
envision, that ``such policy enforcement [by the CISO] would involve a 
regulatory enforcement role with regard to the Participants.'' \1146\ 
The Participants further stated that ``[t]he Plan does not give the 
CISO the authority to engage in such regulatory enforcement.\1147\ 
Moreover, although the Plan permits the Operating Committee to impose 
fees for late or inaccurate reporting of information to the CAT, it 
does not authorize the Participants to oversee, or serve enforcement 
actions against, each other via the Plan Processor. Only the SEC has 
such authority under the Securities Exchange Act of 1934.'' \1148\
---------------------------------------------------------------------------

    \1144\ Response Letter III at 7. Notwithstanding the foregoing 
example, the Participants noted that the details regarding such an 
escalation policy will not be determined until the Plan Processor 
has been selected.
    \1145\ Id.
    \1146\ Response Letter III at 8.
    \1147\ Id.
    \1148\ Id.
---------------------------------------------------------------------------

    The Commission believes that ensuring the security and 
confidentiality of CAT Data is of utmost importance, and also notes the 
Participants' recognition that regulators should have flexibility in 
designing such surveillance systems, including the ability to access 
and transfer data where necessary and consistent with appropriate data 
security safeguards. As described above, the Plan Processor has the 
specific responsibility to develop and implement policies, procedures 
and control structures related to the security of the CAT System.\1149\ 
The Plan Processor also is responsible for the security and 
confidentiality of all CAT Data received and reported to the Central 
Repository, including during all communications between CAT Reporters 
and the Plan Processor, data extraction, data manipulation and 
transformation, loading to and from the Central Repository, and data 
maintenance and storage by the Central Repository.\1150\ The Plan 
Processor also must require the establishment of secure controls for 
data retrieval and query reports for CAT Data reported to and stored in 
the Central Repository.\1151\
---------------------------------------------------------------------------

    \1149\ See CAT NMS Plan, supra note 5, at Section 6.1(c).
    \1150\ See id. at Section 6.5(f)(i), (iv).
    \1151\ See id. at Section 6.5(f)(iv).
---------------------------------------------------------------------------

    While the Plan Processor is responsible for the security of the CAT 
Data collected by and stored in the Central Repository, the Commission 
agrees with commenters that once CAT Data is extracted into a 
Participant's regulatory surveillance system, the Plan Processor can no 
longer assure the security of the CAT Data because the details, 
requirements and rigor of the policies and procedures regarding the 
security of CAT Data at each Participant are beyond the direct control 
of the Plan Processor. This is the case whether the CAT Data is 
downloaded to a Participant's local server, or downloaded into a 
dedicated sandbox within the CAT cloud--and whether the CAT Data that 
is downloaded is a subset of all the CAT Data collected by the Central 
Repository, or the entirety of the CAT Data (i.e., cloning the entire 
CAT database).
    Therefore, the Commission believes that if a Participant chooses to 
extract CAT Data, whether into its own local server environment or into 
its own sandbox within the CAT cloud, the Participant must have 
policies and procedures regarding CAT Data security that are comparable 
to those implemented and maintained by the Plan Processor for the 
Central Repository, and that each Participant must certify and provide 
evidence to the CISO that its policies and procedures for the security 
of CAT Data meet the same security standards applicable to the CAT Data 
that is reported to, and collected and stored by, the Central 
Repository. Given the necessity of ensuring the security of CAT Data 
that is collected by and stored in the Central Repository, the 
Commission believes that this is a reasonable requirement that will 
ensure that CAT Data is subject to the same standards of security, 
whether the CAT Data is downloaded by

[[Page 84758]]

a Participant onto the Participant's local servers, or downloaded into 
the Participant's sandbox within the CAT cloud,\1152\ and therefore, is 
amending the plan accordingly.\1153\
---------------------------------------------------------------------------

    \1152\ The Commission also notes that each Participant must 
comply with Regulation SCI. Response Letter III at 8.
    \1153\ See CAT NMS Plan, supra note 5 at Section 6.2(b)(vii).
---------------------------------------------------------------------------

    The Commission believes that it is critical to the security of the 
CAT Data to assign responsibility to the CISO to review the data 
security policies and procedures of Participants that extract CAT Data 
into their own systems, whether on a local server or within a sandbox 
within the CAT cloud, to determine whether such policies and procedures 
are comparable to the data security policies and procedures applicable 
to the Central Repository. The Commission further believes that if the 
CISO, in consultation with the CCO, finds that any such information 
security policies and procedures of a Participant are not comparable to 
the policies and procedures applicable to the CAT System, and the issue 
is not promptly addressed by the applicable Participant, the CISO, in 
consultation with the CCO, will be required to provide notice of any 
such deficiency to the Operating Committee.\1154\
---------------------------------------------------------------------------

    \1154\ See id.
---------------------------------------------------------------------------

e. Use of CAT Data for Regulatory and Surveillance Purposes
    One commenter stated that access to CAT Data should be restricted 
to Commission and SRO Staff with regulatory and oversight 
responsibilities.\1155\ Another commenter stated that the proposed 
model and timeframe for regulatory access to the reported data is 
consistent with the Commission's broader regulatory objectives.\1156\ 
Another commenter noted that access should not be granted to the 
academic community.\1157\ On the other hand, one commenter believed 
that aggregated CAT Data should be made available to the public on a 
limited or time-delayed basis, so as to enable more creative approaches 
to market surveillance, foster industry collaboration, and augment 
regulatory efforts.\1158\
---------------------------------------------------------------------------

    \1155\ Fidelity Letter at 4.
    \1156\ UnaVista Letter at 4.
    \1157\ MFA Letter at 6.
    \1158\ Data Boiler Letter at 14.
---------------------------------------------------------------------------

    The Participants stated that they do not plan to make CAT Data 
available for use by the public (or academics or other third parties) 
at this time.\1159\ The Participants noted that there may be certain 
benefits to this type of expanded access, such as promoting academic 
evaluations of the economic costs and benefits of regulatory 
policy.\1160\ Nevertheless, the Participants believed that the privacy 
and security concerns raised by such public access would outweigh the 
potential benefits.\1161\ The Participants stated that this conclusion 
is ``in line with the SEC's statements in the adopting release for SEC 
Rule 613 that, in light of the privacy and security concerns, `it is 
premature to require that the NMS plan require the provision of data to 
third parties.' '' \1162\
---------------------------------------------------------------------------

    \1159\ Response Letter I at 44-45.
    \1160\ Id. at 45.
    \1161\ Id.
    \1162\ Id.
---------------------------------------------------------------------------

    The Commission agrees with the Participants and believes that it is 
reasonable to continue to limit access to CAT Data to regulatory 
authorities for regulatory and surveillance use.\1163\ As previously 
noted, the CAT is designed to be a regulatory tool. While the 
Commission recognizes that there may be benefits to expanding the 
distribution of CAT Data, the Commission also believes that limiting 
the use of CAT Data for regulatory and surveillance purposes is 
reasonable at this time, given the vast scope of the CAT Data and need 
to ensure the security and confidentiality of the CAT Data.\1164\
---------------------------------------------------------------------------

    \1163\ Such purposes include, among other things, analysis and 
reconstruction of market events, market analysis and research to 
inform policy decisions, market surveillance, examinations, 
investigations, and other enforcement functions. See supra note 586.
    \1164\ This limitation on the use of CAT Data for regulatory and 
surveillance purposes does not restrict the ability of a Participant 
from using the Raw Data that it reports for commercial or other 
purposes. See Section IV.D.6.k, infra.
---------------------------------------------------------------------------

    Although not raised by commenters, the Commission emphasizes that 
under the Plan the CCO must develop and implement a notification and 
escalation process to resolve and remediate any alleged non-compliance 
with the rules of the CAT by a Participant or Industry Member, which 
shall include appropriate notification and order of escalation to a 
Participant, the Operating Committee, or the Commission.\1165\ The 
Commission expects that any additional escalation procedures outlined 
by the CCO, once the CCO is selected, will adhere to this process.
---------------------------------------------------------------------------

    \1165\ See CAT NMS Plan, supra note 5, at Section 6.2(a)(v)(L).
---------------------------------------------------------------------------

f. Regulation SCI
    Several commenters discussed the applicability of Regulation SCI to 
the Central Repository.\1166\ One commenter stated that because the CAT 
is an ``SCI System'' and an SCI System of each of the SROs, all 
obligations associated with Regulation SCI must be complied with by the 
SROs to ensure the security and integrity of the CAT.\1167\ One 
commenter stated that Industry Members are not subject to Regulation 
SCI and the CAT NMS Plan should ``make clear that Regulation SCI would 
not be expanded to apply to an Industry Members [sic] by virtue of its 
reporting requirements under the CAT Plan.'' \1168\ Another commenter 
stated that because the CAT NMS Plan provides that the Plan Processor 
must be compliant with Regulation SCI requirements, compliance with 
Regulation SCI requirements should be ``an explicit evaluation 
criterion as part of the selection process for the CAT Processor.'' 
\1169\
---------------------------------------------------------------------------

    \1166\ See CAT NMS Plan, supra note 5, at Section 6.9(b)(xi).
    \1167\ SIFMA Letter at 21-22; see also MFA Letter at 4.
    \1168\ FSR Letter at 6. This commenter also noted that the Plan 
Processor should ensure access to the PII complies with Regulation 
SCI and any other applicable federal and state privacy laws. Id.
    \1169\ SIFMA Letter at 45.
---------------------------------------------------------------------------

    The Participants noted that the Plan Processor will need to satisfy 
all applicable regulations involving database security, including 
Regulation SCI, and the Participants have discussed with the Bidders 
their responsibilities under Regulation SCI on numerous 
occasions.\1170\ They added they do not believe that it is appropriate 
that the Plan provide details on how the Plan Processor will ensure 
that the Central Repository will comply with Regulation SCI.\1171\
---------------------------------------------------------------------------

    \1170\ Response Letter I at 58.
    \1171\ Id.
---------------------------------------------------------------------------

    The Central Repository, as a facility of each of the Participant 
SROs, is an SCI Entity \1172\ and the CAT System is an SCI system, and 
thus it must comply with Regulation SCI.\1173\ The CAT NMS Plan states 
that data security standards of the CAT System shall, at a minimum, 
satisfy all applicable regulations regarding database security, 
including provisions of Regulation SCI.\1174\ The Plan Processor thus 
must establish, maintain and enforce written policies and procedures 
reasonably designed to ensure that the CAT System has levels of 
capacity, integrity, resiliency,

[[Page 84759]]

availability, and security adequate to maintain its operational 
capability to comply with Regulation SCI.
---------------------------------------------------------------------------

    \1172\ An ``SCI Entity'' means an SCI self-regulatory 
organization, SCI alternative trading system, plan processor, or 
exempt clearing agency subject to the Commission's Automated Review 
Program (``ARP''). 17 CFR 242.1000.
    \1173\ An ``SCI System'' means all computer network, electronic, 
technical, or automated, or similar systems of, or operated by or on 
behalf of, an SCI entity that, with respect to securities, directly 
support trading, clearance and settlement, order routing, market 
data, market regulation, or market surveillance. 17 CFR 242.1000.
    \1174\ See CAT NMS Plan, supra note 5, at Section 6.9(b)(xi).
---------------------------------------------------------------------------

    According to Regulation SCI, the policies and procedures must 
require: (i) The establishment of reasonable current and future 
technology infrastructure capacity planning estimates; (ii) periodic 
capacity stress tests of such systems to determine their ability to 
process transactions in an accurate, timely, and efficient manner; 
(iii) a program to review and keep current systems development and 
testing methodology for such systems; (iv) regular reviews and testing, 
as applicable, of such systems, including backup systems, to identify 
vulnerabilities pertaining to internal and external threats, physical 
hazards, and natural or manmade disasters; (v) business continuity and 
disaster recovery plans that include maintaining backup and recovery 
capabilities sufficiently resilient and geographically diverse and that 
are reasonably designed to achieve next business day resumption of 
trading and two-hour resumption of critical SCI systems following a 
wide-scale disruption; (vi) standards that result in such systems being 
designed, developed, tested, maintained, operated, and surveilled in a 
manner that facilitates the successful collection, processing, and 
dissemination of market data; and (vii) monitoring of such systems to 
identify potential SCI events.\1175\ Compliance with Regulation SCI 
will also require the Plan Processor to periodically review the 
effectiveness of the policies and procedures and take prompt action to 
remedy deficiencies in such policies and procedures.\1176\
---------------------------------------------------------------------------

    \1175\ 17 CFR 242.1001(a)(2). ``SCI event'' means an event at an 
SCI entity that constitutes: (1) A systems disruption; (2) a systems 
compliance issue; or (3) a systems intrusion. 17 CFR 242.1000.
    \1176\ 17 CFR 242.1001(a)(3).
---------------------------------------------------------------------------

    For purposes of compliance with Regulation SCI, the Commission has 
stated that an SCI entity's policies and procedures shall be deemed to 
be reasonably designed if they are consistent with current SCI industry 
standards, which are required to be comprised of information technology 
practices that are widely available to information technology 
professionals in the financial sector and issued by an authoritative 
body that is a U.S. governmental entity or agency, association of U.S. 
governmental entities or agencies, or widely recognized organization, 
although compliance with current SCI industry standards is not the 
exclusive means to comply with the requirements of Regulation 
SCI.\1177\ To assist SCI entities in developing policies and procedures 
consistent with ``current SCI industry standards,'' Staff of the 
Commission issued Staff Guidance which lists examples of publications 
describing processes, guidelines, frameworks, or standards that an SCI 
entity could look to in developing reasonable policies and procedures 
to comply with Regulation SCI.\1178\ The standards under the Staff 
Guidance address nine subject areas, including application control; 
capacity planning; computer operations and production environment 
controls; contingency planning; information security and networking; 
audit; outsourcing; physical security; and systems development 
methodology.\1179\
---------------------------------------------------------------------------

    \1177\ 17 CFR 242.1001(a)(4).
    \1178\ See Staff Guidance on Current SCI Standards, issued on 
November 19, 2014, available at https://www.sec.gov/rules/final/2014/staff-guidance-current-sci-industry-standards.pdf.
    \1179\ Id.
---------------------------------------------------------------------------

    The Commission believes that compliance with Regulation SCI will 
help to reduce the occurrence of systems issues; improve the resiliency 
of the technological infrastructure when systems problems do occur; and 
enhance the Commission's oversight of the Central Repository. In 
response to a concern by a commenter about the potential of the Plan to 
expand the scope of Regulation SCI, the Commission clarifies that 
Industry Members will not be subject to Regulation SCI by virtue of 
reporting audit trail data to the Central Repository. In addition, in 
response to the commenter that stated that the Participants should use 
compliance with Regulation SCI as an explicit evaluation criterion as 
part of the selection process for the CAT Processor, the Commission 
expects that the Participants will evaluate a Bidder's ability to 
comply with Regulation SCI as part of its Bidder evaluation process, as 
compliance with Regulation SCI is an explicit criteria of the CAT NMS 
Plan.
g. Physical Security of CAT Systems
    The CAT NMS Plan requires the Plan Processor to provide a solution 
addressing physical security controls for corporate, data center and 
any leased facilities where any CAT Data is transmitted or 
stored.\1180\ One commenter stated that the data centers housing the 
CAT System must, at a minimum, be SOC 2 certified with such 
certification annually attested to by a qualified third-party auditor 
that is not affiliated with the SROs or the Plan Processor.\1181\ The 
Participants stated that they intended for data centers housing the CAT 
System to be AICPA SOC 2 certified.\1182\ In addition, the Participants 
recommended that the auditor provision should be amended to require a 
qualified third-party auditor that is not an affiliate of any of the 
Participants or the Plan Processor.\1183\
---------------------------------------------------------------------------

    \1180\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.4(a).
    \1181\ SIFMA Letter at 21.
    \1182\ Response Letter I at 58.
    \1183\ Id. at 58-59.
---------------------------------------------------------------------------

    The Commission believes that assuring the physical security of the 
data centers that house the CAT Data, including PII Data, is a critical 
component of the overall security program and the Commission believes 
that the Participants' recommendation to amend the standards applicable 
to ensure the physical security of the CAT System to reflect that it 
will be AICPA SOC 2 certified and audited by a qualified third-party 
auditor that is not an affiliate of any Participant or the Plan 
Processor is reasonable. The Commission therefore is amending the Plan 
accordingly.\1184\
---------------------------------------------------------------------------

    \1184\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.3.
---------------------------------------------------------------------------

h. Encryption of CAT Data
    Commenters discussed the CAT NMS Plan's provisions regarding 
encryption of CAT Data, including CAT Data that is PII. One commenter 
stated that the CAT NMS Plan's data encryption requirements alone were 
not sufficient to protect CAT Data at-rest and PII, and that many more 
detailed and technical issues must be considered for the encryption 
requirements for the CAT System and CAT Data to be sufficient.\1185\ 
The commenter also recommended that the CAT Plan require data to be 
encrypted both at-rest and in-flight, and that particularly sensitive 
pieces of data be isolated and compartmentalized.\1186\ Another 
commenter highlighted specific standards for in-transit data (e.g., 
asymmetric encryptions and transport layer security), data at-rest 
(e.g., NIST Special Publication 800-57), and data in-use (e.g., 
implementing data protection controls such as disclosing intended use 
and duration).\1187\
---------------------------------------------------------------------------

    \1185\ MFA Letter at 8.
    \1186\ Id.; see also SIFMA Letter at 20-21 (stating that ``[t]he 
CAT Processor should employ strong, evolving encryption and 
decryption standards that are continuously updated to meet the most 
stringent data encryption requirements possible'').
    \1187\ FSR Letter at 5-6; see also FIF Letter at 125 (suggesting 
that if given the option WORM (write once, read man) technology may 
be convenient and cost effective).
---------------------------------------------------------------------------

    One commenter requested that Section 4.1.2 of Appendix D of the 
Plan, which addresses the encryption of CAT Data, be amended to make 
clear that the monitoring, alerting, auditing, and any other 
requirements that apply with

[[Page 84760]]

respect to CAT Data also apply to archival CAT Data.\1188\ Another 
commenter opined that the encryption and decryption standards used by 
the Plan Processor should be continuously updated to meet the most 
stringent data encryption requirements possible, and designed to 
support end-to-end data encryption, with data decrypted at the desktop 
level.\1189\
---------------------------------------------------------------------------

    \1188\ MFA Letter at 8.
    \1189\ SIFMA Letter at 20-21.
---------------------------------------------------------------------------

    Commenters also focused on the particular necessity of encrypting 
PII, both when in-transit and at-rest, to ensure it remains secure and 
confidential.\1190\ One commenter noted the CAT NMS Plan's requirement 
that CAT Data provided to regulators that contains PII be ``masked,'' 
\1191\ and stated that PII should be masked unless users have 
permission to view the PII contained in the CAT Data that has been 
requested,\1192\ while another commenter believed that clarification is 
needed regarding the meaning of ``masked'' under the CAT NMS 
Plan.\1193\
---------------------------------------------------------------------------

    \1190\ FSR Letter at 5; MFA Letter at 8 (also stating that 
``[s]trong encryption should be at the heart of the CAT NMS Plan's 
efforts to protect data'').
    \1191\ FSR Letter at 4; see also CAT NMS Plan, supra note 5, at 
Section 6.10(c)(ii).
    \1192\ Id.
    \1193\ FIF Letter at 135.
---------------------------------------------------------------------------

    The Participants stated that ``given that all three remaining 
bidders propose cloud based solutions, all data will be encrypted in-
flight and at-rest.'' \1194\
---------------------------------------------------------------------------

    \1194\ Response Letter III at 5. The Commission notes that as 
filed, the CAT NMS Plan had stated that all CAT Data must be 
encrypted in-flight using industry best practices, and that PII must 
be encrypted both at-rest and in-flight; storage of unencrypted PII 
is not permissible; and non-PII CAT Data stored in a Plan Processor 
private environment is not required to be encrypted at-rest. See CAT 
NMS Plan, supra note 5, at Appendix D, Section 4.1.2; see also 
Response Letter I at 57.
---------------------------------------------------------------------------

    The Commission notes that the CAT NMS Plan requires the Plan 
Processor to describe how PII encryption is performed and the key 
management strategy. The CAT NMS Plan also requires that PII encryption 
methods include a secure documented key management strategy such as the 
use of HSM(s).
    The Commission agrees with commenters that encryption of CAT Data 
is a necessary and critically important means of protecting CAT Data, 
including PII. Therefore, given the role that encryption plays in 
maintaining the security of CAT Data, the Commission believes that all 
CAT Data must be encrypted and is amending the Plan accordingly.\1195\
---------------------------------------------------------------------------

    \1195\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.2.
---------------------------------------------------------------------------

    In response to the commenter that believed that encryption alone 
was not sufficient to protect CAT Data at-rest and PII, the Commission 
notes that the CAT NMS Plan provides several means of protecting CAT 
Data in addition to encryption, including provisions addressing 
connectivity and data transfer requirements, parameters for the storage 
of CAT Data in general, and PII in particular, and limitations on 
access to CAT Data by authorized users only. In addition, the Plan 
states that the Technical Specifications, which will be published one 
year before Industry Members must report CAT Data to the Central 
Repository, will include more details about the data security for 
CAT.\1196\ Thus, in response to the commenter that believed that more 
detailed and technical issues must be considered for the encryption 
requirements for the CAT System and CAT Data to be sufficient, the 
Commission believes that preparation and publication of the Technical 
Specifications referenced above commits the Participants to undertaking 
an analysis of security requirements, in addition to and as a 
supplement to, the existing encryption requirements. With respect to 
the issues raised by the commenter regarding the specific standards for 
in-transit data (including asymmetric encryptions and transport layer 
security), data at-rest (e.g., NIST Special Publication 800-57), and 
data in-use (e.g., implementing data protection controls such as 
disclosing intended use and duration), the Commission notes that, as 
amended by the Commission, the Plan requires the Participants to adhere 
to all relevant standards in the NIST Cyber Security Framework, which 
includes standards regarding encryption.\1197\
---------------------------------------------------------------------------

    \1196\ Id. at Section 6.9(b)(xi).
    \1197\ Response Letter III at 8.
---------------------------------------------------------------------------

    In response to the commenter that stated that encryption and 
decryption standards used by the Plan Processor should be continuously 
updated to meet the most stringent data encryption requirements 
possible, the Commission notes that the CAT NMS Plan provides that all 
CAT Data must be encrypted in-flight and at-rest using industry 
standard best practices, and that such industry standards may be 
replaced by successor publications, or modified, amended, or 
supplemented as approved by the Operating Committee.\1198\
---------------------------------------------------------------------------

    \1198\ See CAT NMS Plan, supra note 5, at Appendix D, Sections 
4.1.2 and 4.2.
---------------------------------------------------------------------------

    In response to commenters that discussed the need that PII be 
``masked,'' the Commission notes that the CAT NMS Plan mandates that 
all CAT Data that is returned in response to a regulatory inquiry will 
be encrypted, and that PII data returned shall be masked unless users 
have permission to view the CAT Data that has been requested.\1199\ The 
Commission believes that this requirement adds an additional, 
reasonable requirement that protects PII from view, unless the person 
seeking PII is authorized to view the PII.
---------------------------------------------------------------------------

    \1199\ Id. at Section 6.10(c).
---------------------------------------------------------------------------

i. Connectivity
    One commenter stated that accessing the CAT System must be done via 
secure methods, that the SROs should consider mandating the usage of 
private lines rather than encrypted internet connectivity, and that the 
CAT Processor's systems should be air-gapped from the internet, thereby 
eliminating access to the internet and/or any internal non-CAT systems 
used by the Plan Processor.\1200\
---------------------------------------------------------------------------

    \1200\ SIFMA Letter at 20.
---------------------------------------------------------------------------

    With respect to using private lines to connect to the CAT, the 
Participants stated that the Plan does not require CAT Reporters to use 
private lines to connect to the CAT due to cost concerns, particularly 
for smaller broker-dealers.\1201\ Noting that the Plan requires that 
CAT Reporters access the CAT via a secure, encrypted connection, the 
Participants also cited to Appendix D which states that ``CAT Reporters 
must connect to the CAT infrastructure using secure methods such as 
private lines or (for smaller broker-dealers) Virtual Private Network 
connection over public lines.'' \1202\
---------------------------------------------------------------------------

    \1201\ Response Letter III at 6.
    \1202\ Id.
---------------------------------------------------------------------------

    The Participants noted that pursuant to the Bidders' solutions, the 
core CAT architecture would not be accessible via the public 
internet.\1203\ The Participants cited to Appendix D, Section 4.1.1 of 
the Plan, which states that ``[t]he CAT databases must be deployed 
within the network infrastructure so that they are not directly 
accessible from external end-user networks. If public cloud 
infrastructures are used, Virtual Private Networking and firewalls/
access control lists or equivalent controls such as private network 
segments or private tenant segmentation must be used to isolate CAT 
Data from unauthenticated public access.'' \1204\
---------------------------------------------------------------------------

    \1203\ Id.
    \1204\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.1.
---------------------------------------------------------------------------

    The Commission believes that the CAT NMS Plan's provisions 
regarding connectivity to the Central Repository reflect a reasonable 
approach to ensuring secure access to the CAT Data residing within the 
Central Repository. The Commission believes that leaving

[[Page 84761]]

the option for connection via Virtual Private Network for smaller 
broker-dealers is reasonable, given the potential cost of mandating use 
of a private line. The Commission also believes that prohibiting access 
to the CAT System via the public internet is appropriate, given the 
potential risk to the security of the CAT Data residing in the Central 
Repository that might be caused by allowing direct access into the CAT 
using an unsecure method by unauthenticated users.
j. Breach of CAT Security
    Commenters also discussed the appropriate action to be taken in the 
event of a security breach. One commenter recommended that the 
Commission define a ``reportable incident'' that would trigger 
implementation of the cyber incident report plan.\1205\ Three 
commenters recommended that the CAT NMS Plan's cyber incident report 
plan include notification procedures in the event of a cyber 
incident.\1206\ One commenter specifically stated that the Plan should 
require that notice of an incident be provided to the Operating 
Committee, affected broker-dealers, other market participants and law 
enforcement within a designated period of time (e.g., 24 hours).\1207\ 
Another commenter agreed, noting that the Plan should provide a clear 
mechanism for promptly notifying all victims of a CAT data breach, 
including Customers.\1208\ Similarly, another commenter recommended 
that the Plan Processor ``release a protocol document describing the 
specific procedures it will take upon a breach of CAT, including the 
procedure for notifying [P]articipants and allowing them to suspend CAT 
submissions temporarily in the event of an ongoing breach.'' \1209\ 
This commenter also requested that the data security plan include a 
process for reviewing data incidents to determine what corrective 
actions are required to reduce the likelihood of recurrence.\1210\
---------------------------------------------------------------------------

    \1205\ MFA Letter at 8. This commenter also suggested that the 
Plan Processor adopt a ``bug bounty program'' which awards 
individuals who report software bugs. Id.
    \1206\ SIFMA Letter at 21; ICI Letter at 8; FSI Letter at 4.
    \1207\ SIFMA Letter at 21.
    \1208\ ICI Letter at 8; see also FSI Letter at 4 (recommending 
that investors be notified of a breach).
    \1209\ FSI Letter at 4.
    \1210\ Id.
---------------------------------------------------------------------------

    Some commenters discussed who should bear the cost of a data 
breach. One commenter stated that Industry Members should not bear the 
cost of a security breach that occurs on the systems of the Commission, 
the Participants, the Plan Processor, Central Repository, or ``in-
transit'' amongst the various parties.\1211\ Another commenter 
recommended that the CAT Processor, the SROs, and the Commission 
indemnify the broker-dealers from any and all liability in the event of 
a breach that is in no part the fault of the broker-dealers.\1212\ Two 
commenters added that CAT NMS, LLC should purchase an insurance policy 
that covers potential breaches and extends to Industry Members and 
their obligations vis-[agrave]-vis their clients whose CAT Data is 
required to be reported by the CAT Plan.\1213\
---------------------------------------------------------------------------

    \1211\ FSR Letter at 8.
    \1212\ SIFMA Letter at 22; see also FSI Letter at 5 (suggesting 
that the Plan Processor should bear responsibility in the event of a 
data breach and that the Plan Processor should expressly indemnify 
Participants for any costs or damages incurred as a result of a data 
breach occurring after they have provided data to the CAT).
    \1213\ FSR Letter at 8; see also SIFMA Letter at 22.
---------------------------------------------------------------------------

    In response to commenters, the Participants noted that the Plan 
Processor is required to work with the Operating Committee to develop a 
breach protocol in accordance with industry practices.\1214\ However, 
the Participants also stated that they believe that providing more 
details on these processes or procedures raises security issues.\1215\ 
Moreover, the Participants noted, the CAT System will be subject to 
applicable regulations involving database security, including 
Regulation SCI and its requirement to provide notice to the Commission 
and to disseminate information about SCI Events to affected CAT 
Reporters.\1216\
---------------------------------------------------------------------------

    \1214\ Response Letter I at 58.
    \1215\ Id.
    \1216\ Id.
---------------------------------------------------------------------------

    With respect to breaches of the CAT System and the accompanying 
protocols for dealing with breaches, the Commission notes that the CAT 
NMS Plan provides that the Plan Processor must develop policies and 
procedures governing its responses to systems or data breaches,\1217\ 
and the Participants added that the Plan Processor will work with the 
Operating Committee to develop a breach protocol in accordance with 
industry practices.\1218\ According to the CAT NMS Plan, such policies 
and procedures will include a formal cyber incident response plan and 
documentation of all information relevant to breaches.\1219\ The cyber 
incident response plan will provide guidance and direction during 
security incidents, and may include items such as guidance on crisis 
communications; security and forensic procedures; Customer 
notifications; ``playbook'' or quick reference guides that allow 
responders quick access to key information; insurance against security 
breaches; retention of legal counsel with data privacy and protection 
expertise; and retention of a public relations firm to manage media 
coverage.\1220\ The CAT NMS Plan further provides that documentation of 
information relevant to breaches should include a chronological 
timeline of events from the breach throughout the duration of the 
investigation; relevant information related to the breach (e.g., date 
discovered, who made the discovery, and details of the breach); 
response efforts, involvement of third parties, summary of meetings/
conference calls, and communication; and the impact of the breach, 
including an assessment of data accessed during the breach and impact 
on CAT Reporters.\1221\
---------------------------------------------------------------------------

    \1217\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.5.
    \1218\ Response Letter I at 58.
    \1219\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.5.
    \1220\ Id.
    \1221\ Id.
---------------------------------------------------------------------------

    In response to commenters that requested additional detail about 
the CAT NMS Plan breach management protocol, such as the definition of 
a ``reportable incident,'' the Commission notes that the Plan requires 
the Plan Processor to develop policies and procedures to govern its 
responses to systems or data breaches and the Commission expects the 
definition of a ``reportable incident'' will be clearly set forth in 
those policies and procedures. While the Plan does not explicitly 
require it, in response to the commenter that requested that notice of 
a breach be provided to the Operating Committee, the Commission expects 
that the CAT NMS Plan's cyber incident response plan will incorporate 
notice of the breach to the Operating Committee, because the Operating 
Committee is the body that manages the CAT LLC. As a Regulation SCI 
System, the Plan Processor must also notify the Commission in the event 
of an SCI Event.\1222\
---------------------------------------------------------------------------

    \1222\ Pursuant to Regulation SCI, the Commission must be 
notified within 24 hours of an SCI Event. See 17 CFR 242.1002(b).
---------------------------------------------------------------------------

    As for commenters that opined on the other parties that should be 
notified upon a breach, including affected parties such as Customers, 
the Commission notes that the Plan explicitly requires customer 
notifications to be included in the cyber incident response plan, and 
that the cyber incident response plan may list other market 
participants that will be notified upon a breach of the CAT System and 
the procedure for notifying

[[Page 84762]]

relevant participants of the breach.\1223\ In response to the commenter 
that requested that the breach protocol include a process for reviewing 
``data incidents'' to determine what corrective actions are required to 
reduce the likelihood of recurrence, the Commission notes that the Plan 
requires that the impact of the breach be assessed, and the Commission 
expects that such assessment will also help identify the corrective 
actions that must be taken to reduce the likelihood of recurrence.
---------------------------------------------------------------------------

    \1223\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.5.
---------------------------------------------------------------------------

    In response to the several commenters that discussed issues 
surrounding the cost of a breach, including which parties should bear 
the cost of a breach, and whether the Plan Processor, the Participants 
and the Commission should indemnify the broker-dealers from all 
liability in the event of a breach that is no fault of the broker, the 
Commission notes that the Plan requires that the Plan Processor's cyber 
incident response plan must address insurance issues related to 
security breaches and that as part of the discussions on insurance 
coverage and liability, further detail about the distribution of costs 
will be undertaken. The Commission believes that it is reasonable to 
require, at this stage, that the cyber incident response plan outline 
the key areas of breach management that must be addressed by the Plan 
Processor; further details on the breach management protocols, 
including details about who might bear the cost of a breach and under 
what specific circumstances, will follow once the Plan Processor is 
selected.
k. Use of Raw Data for Commercial or Other Purposes
    Commenters also discussed the CAT NMS Plan's provision permitting a 
Participant to use the Raw Data \1224\ it reports for commercial or 
other purposes as long as such use is not prohibited by applicable law, 
rule or regulation.\1225\ One commenter believed that the Plan should 
be amended to state specifically when a Participant may--or more 
importantly, according to the commenter, may not--use Raw Data or CAT 
Data for commercial purposes.\1226\ This commenter also noted 
inconsistencies in the Participants' commercial use of data.\1227\ 
Specifically, the commenter noted that Section 6.5(f)(i)(A) of the Plan 
states that each SRO may use ``the CAT Data it reports to the Central 
Repository for regulatory, surveillance, commercial or other purposes 
as permitted by applicable law, rule or regulation,'' and Section 
6.5(h) permits a Participant to ``use the Raw Data it reports to the 
Central Repository for regulatory, surveillance, commercial or other 
purposes as otherwise not prohibited by applicable law, rule or 
regulation.'' \1228\ Another commenter stated that the CAT NMS Plan 
should be amended to clarify that Participants may not use data stored 
in the Central Repository--beyond the data that the SROs submit to the 
CAT--for their own commercial purposes.\1229\ One commenter provided 
two recommendations designed to ensure that Participants do not use the 
CAT NMS Plan to ``enlarge the scope of data that they commercialize.'' 
\1230\ First, the commenter believed that the Plan should specify that 
no Participant may commercialize customer identifying information, 
regardless of whether applicable law expressly prohibits its 
commercialization. Second, the Plan should limit the scope of data 
subject to commercialization by narrowing the definition of Raw Data to 
include only data that a Participant must report under Rule 613 or the 
Plan.\1231\
---------------------------------------------------------------------------

    \1224\ ``Raw Data'' means Participant Data and Industry Member 
Data that has not been through any validation or otherwise checked 
by the CAT System. See CAT NMS Plan, supra note 5, at Section 1.1. 
The Commission notes that the Section 6.5(h) of the CAT NMS Plan 
also limits the use by a Participant of the Raw Data that the 
Participant has reported to the Central Repository; a Participant 
may not use the Raw Data reported by another Participant.
    \1225\ ICI Letter at 10; SIFMA Letter at 31.
    \1226\ SIFMA Letter at 31.
    \1227\ Id.
    \1228\ Id.
    \1229\ KCG Letter at 9.
    \1230\ ICI Letter at 10.
    \1231\ Id.
---------------------------------------------------------------------------

    In response to commenters, the Participants stated that they 
continue to believe that it is appropriate for the CAT NMS Plan to 
permit the Participants to use their Raw Data for commercial or other 
purposes.\1232\ Therefore, the Participants do not propose to prohibit 
such use.\1233\ Nevertheless, to address the concern raised by a 
commenter that the CAT NMS Plan inconsistently uses the terms ``Raw 
Data'' and ``CAT Data'' in Sections 6.5(f)(i)(A) Section 6.5(h) of the 
CAT NMS Plan, the Participants recommended that the term ``Raw Data'' 
replace the term ``CAT Data'' in Section 6.5(f)(i)(A) of the 
Plan.\1234\
---------------------------------------------------------------------------

    \1232\ Response Letter I at 43.
    \1233\ Id.
    \1234\ Id.
---------------------------------------------------------------------------

    As an initial matter, the Commission finds that it is reasonable to 
amend the Plan to replace the term ``CAT Data'' with ``Raw Data'' in 
Section 6.5(f)(i)(A) of the Plan, to remove any inconsistency and 
potential confusion. The Commission also finds that the CAT NMS Plan's 
provisions regarding the use of Raw Data by a Participant is a 
reasonable approach to the use of audit trail data that is reported by 
the Participant itself. In response to the commenter's request that the 
Commission define the circumstances under which a Participant cannot 
use its Raw Data, the Commission finds that the CAT NMS Plan's 
provision that the use must not be prohibited by applicable law, rule 
or regulation is sufficient guidance to Participants regarding their 
use of the Raw Data used for commercial or other purposes.\1235\ 
Similarly, the Commission believes that the CAT NMS Plan's definition 
of ``Raw Data'' is sufficiently clear and further addresses the 
comments that the Participants may expand the audit trail data that 
Participants may use for commercial or other purposes. The Commission 
notes that the CAT NMS Plan's definition of ``Raw Data'' limits such 
data to ``Participant Data'' or ``Industry Member Data.'' \1236\ In 
this regard, in response to the commenter with concerns about a 
Participant commercializing customer identifying information, the 
Commission notes that a Participant would never be in a position to 
report customer identifying information itself; therefore, a 
Participant could not use customer identifying information for 
commercial or other purposes. The Commission also believes that, 
pursuant to the CAT NMS Plan, the Participants may not use CAT Data for 
commercial purposes.
---------------------------------------------------------------------------

    \1235\ See CAT NMS Plan, supra note 5, at Section 6.5(f)(i)(A).
    \1236\ See id. at Section 1.1.
---------------------------------------------------------------------------

l. Ownership of CAT Data
    Several commenters discussed the ownership of CAT Data. Two 
commenters believed that the CAT NMS Plan should be amended to indicate 
that broker-dealers retain ownership rights in all of the data they 
report to the CAT.\1237\ In response to commenters, Participants stated 
that Rule 613 does not address broker-dealer CAT Reporters' ownership 
rights with respect to the CAT Data, and the Participants do not 
believe that it is appropriate to address such ownership rights in the 
Plan.\1238\
---------------------------------------------------------------------------

    \1237\ SIFMA Letter at 30; KCG Letter at 7-8.
    \1238\ Response Letter I at 44.
---------------------------------------------------------------------------

    The Commission believes that it is reasonable for the CAT NMS Plan 
not to address ownership rights to the data that broker-dealers report 
to the Central Repository. The resolution of legal questions regarding 
ownership rights to the data that is reported to the Central

[[Page 84763]]

Repository by broker-dealers is not required by Rule 613; is outside 
the scope of Rule 613; and is not necessary to find that the Plan meets 
the approval standard of Rule 608.
m. Bulk Access to an Industry Member's CAT Data
    A few commenters discussed whether Industry Members should be 
permitted access to their own reported audit trail data through bulk 
data exports. One commenter stated that it ``would be highly beneficial 
for CAT Reporters to have access to their own data'' to assist with 
error identification and correction, and stressed the importance of 
building such access into CAT as part of the initial design, even if 
CAT Reporters were not permitted such access during the initial phase 
of CAT.\1239\ To address security concerns, the commenter suggested 
that retrieval of PII data should be limited to a set of CAT Reporter 
personnel who are responsible for entering and correcting customer 
information.\1240\ Another commenter noted that broker-dealers should 
be permitted to access, export and use their data within the Central 
Repository at no charge and that ``[a]llowing broker-dealers to access 
their own data will be beneficial for surveillance and internal 
compliance programs and may incentivize firms to make other internal 
improvements including, among other things, reducing potential 
errors.'' \1241\ This commenter also argued that broker-dealers should 
not be subject to additional fees to simply retrieve data they already 
submitted to the CAT, noting that CAT is the only broker-dealer 
regulatory reporting service for which the SROs have proposed to impose 
system-specific fees on broker-dealers.'' \1242\ Another commenter 
stated that ``[a]llowing CAT Reporters to access their own data would 
be beneficial for surveillance and internal compliance programs. If 
data access is considered as part of the initial design of the Central 
Repository, we believe the benefits outweigh the cost.'' \1243\ One 
commenter argued that independent software vendors also should have 
fair, reasonable, and non-discriminatory access, at their client's 
request, to the data submitted or stored at the Central Repository on 
their client's behalf.\1244\ In support, this commenter noted that OATS 
permitted access to determine reporting accuracy by ``matching in both 
directions,'' so that reporters could address matching errors.\1245\
---------------------------------------------------------------------------

    \1239\ FIF Letter at 61.
    \1240\ Id.
    \1241\ SIFMA Letter at 30. In this regard, this commenter noted 
that broker-dealers could use their CAT reported data to run complex 
searches and generate reports to (1) meet their regulatory 
surveillance requirements; (2) conduct best execution analysis; and 
(3) conduct transaction costs analysis. Id.
    \1242\ Id.; see also KCG Letter at 7.
    \1243\ TR Letter at 8.
    \1244\ Bloomberg Letter at 7.
    \1245\ Id. (noting further that independent software vendors 
could build sophisticated analytics to aid this).
---------------------------------------------------------------------------

    In response to these comments, the Participants noted that during 
the development of the Plan, the SROs considered whether to provide 
Industry Members with access to their own data through bulk data 
exports.\1246\ Based on the data security and cost considerations, the 
Participants stated that they determined that such access was not a 
cost-effective requirement for the CAT.\1247\ Accordingly, the CAT NMS 
Plan was drafted to state that ``[n]on-Participant CAT Reporters will 
be able to view their submissions online in a read-only, non-exportable 
format to facilitate error identification and correction.'' \1248\
---------------------------------------------------------------------------

    \1246\ Response Letter I at 44.
    \1247\ Id.
    \1248\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
10.1.
---------------------------------------------------------------------------

    In light of the comments that the Commission received and further 
evaluation of the issue, however, in their response, the Participants 
stated that they now believe that there may be merit to providing 
Industry Members and their vendors with bulk access to the CAT 
Reporters' own unlinked CAT Data.\1249\ For example, the Participants 
stated that such access may facilitate the CAT Reporters' error 
analysis and internal surveillance and that it may expedite the 
retirement of duplicative reporting systems.\1250\ However, the 
Participants noted, providing bulk data access also raises a variety of 
operational, security, cost and other issues related to the CAT.\1251\ 
The Participants stated that they would need to address this additional 
functionality with the Plan Processor; in addition, the Participants 
stated that inclusion of this functionality would create additional 
burdens on the CAT and the Plan Processor and, therefore, may require 
additional funding from CAT Reporters for such access to the CAT 
Data.\1252\ Therefore, the Participants stated that they will consider 
this issue once the CAT is operational.\1253\
---------------------------------------------------------------------------

    \1249\ Response Letter I at 44.
    \1250\ Id.
    \1251\ Id.
    \1252\ Id.
    \1253\ Id.
---------------------------------------------------------------------------

    The Commission recognizes the commenters' desire for bulk access to 
their own data for surveillance and internal compliance purposes, as 
well as possible error correction purposes. The Commission also 
recognizes the Participants' initial approach of not permitting such 
access for security and cost purposes, as set forth in their response. 
Given the complexity of initially implementing the CAT, the Commission 
believes that the Participants' approach that limits Industry Members 
to only being able to view their submissions online in a read-only, 
non-exportable format to facilitate error identification and correction 
is a reasonable approach at the present time. The Commission notes the 
Participants' representation that they will consider offering bulk 
access to the audit trail data reported by Industry Members once CAT is 
operational. The Commission expects the Participants to fulfill this 
commitment and as part of their evaluation, the Commission expects that 
the Participants may consider whether a fee for such access would be 
appropriate and how such a fee might impact the funding of the 
CAT.\1254\
---------------------------------------------------------------------------

    \1254\ The Commission preliminarily believes that if the 
Participants decide to provide access to broker-dealer CAT 
Reporters, an amendment to the CAT Plan would be required as this 
would expand the Plan's restriction that CAT Data only be used by 
Participants for regulatory and surveillance purposes. See CAT NMS 
Plan, supra note 5, at Section 6.5(h).
---------------------------------------------------------------------------

    The Commission disagrees with the commenters that recommended 
providing access to CAT Data for independent software vendors.\1255\ 
Given the highly sensitive nature of the CAT Data, the Commission 
believes that it is reasonable to not allow access to parties other 
than the SROs and the Commission. If the Participants decide to propose 
granting such access after gaining experience with CAT operations, and 
are able to ensure the security of data, the Commission will consider, 
based on the analysis presented, whether granting access to CAT 
Reporters and other non-regulator industry members is reasonable.
---------------------------------------------------------------------------

    \1255\ Bloomberg Letter at 7.
---------------------------------------------------------------------------

    The Commission also notes that, as discussed in Section IV.H, the 
Commission is amending Section 6.6 of the Plan to require that, within 
24 months of effectiveness of the Plan, the Participants provide the 
Commission with a report discussing the feasibility, benefits, and 
risks of allowing an Industry Member to bulk download the Raw Data it 
submitted to the Central Repository.\1256\
---------------------------------------------------------------------------

    \1256\ See Section IV.H, supra.
---------------------------------------------------------------------------

n. Regulator Use Cases
    One commenter noted that the Plan does not provide any details on 
how

[[Page 84764]]

regulators will be able to perform their day-to-day analysis using CAT 
Data.\1257\ Specifically, this commenter analyzed the limitations of 
the CAT NMS Plan in light of the regulator use cases (``Regulator Use 
Cases'') contained in the Adopting Release, which provided further 
detail about how regulators envisioned using, accessing, and analyzing 
audit trail data under CAT.\1258\ This commenter made three 
recommendations that the commenter believed would provide additional 
clarity to the CAT NMS Plan: (i) The Plan should clearly specify the 
analytical capability requirements of the CAT to inform the SROs about 
the level and limits of the Central Repository's analytical 
capabilities; (ii) the Plan should precisely describe the technology 
enhancements required by the SROs and the Commission to effectively and 
efficiently use the CAT Data; and (iii) the Regulator Use Cases should 
be a key criteria in the selection of the Plan Processor, which would 
require Bidders to prove that their solution is capable of facilitating 
regulators' need to extract and analyze the data.\1259\
---------------------------------------------------------------------------

    \1257\ SIFMA Letter at 32-33.
    \1258\ Id. at 31-33.
    \1259\ Id. at 33.
---------------------------------------------------------------------------

    The Commission recognizes the commenter's concerns about the lack 
of details in the CAT NMS Plan regarding how regulators will be able to 
perform their day-to-day analysis using CAT Data, in light of the 
Regulator Use Cases. The Commission notes, however, that in the 
Adopting Release the Commission stated that it was not including the 
Regulator Use Cases and accompanying questions to endorse a particular 
technology or approach to the consolidated audit trail; rather, the 
Regulator Use Cases and accompanying questions were designed to aid the 
SROs' understanding of the types of useful, specific information that 
the CAT NMS Plan could contain that would assist the Commission in its 
evaluation of the Plan.\1260\ The Commission noted that its description 
of Regulator Use Cases includes a non-exclusive list of factors that 
SROs could consider when developing the NMS plan.\1261\ Thus, the 
Commission believes that the Regulator Use Cases were not intended to 
serve as a list of specific requirements regarding analytical 
capability or technological enhancements that should be addressed by 
the Participants in the CAT NMS Plan. In response to the comment that 
the Regulator Use Cases should be a key criteria in the selection of 
the Plan Processor, the Commission reiterates that the Regulator Use 
Cases were not intended to be used as selection criteria for the Plan 
but were meant to elicit the types of useful information from the 
bidders that would assist in the Commission in its evaluation of the 
CAT NMS Plan.
---------------------------------------------------------------------------

    \1260\ See Adopting Release, supra note 13, at 45798.
    \1261\ Id.
---------------------------------------------------------------------------

o. Obligations on Participants and the Commission Regarding Data 
Security and Confidentiality
    Under the CAT NMS Plan as noticed, certain obligations are imposed, 
or required to be imposed by the Plan Processor upon the Participants 
and the Commission regarding data security and confidentiality.\1262\ 
However, Commissioners and employees of the Commission are excluded 
from certain of these obligations.\1263\
---------------------------------------------------------------------------

    \1262\ See CAT NMS Plan, supra note 5, at Sections 6.5(f)(i)(A)-
(B), 6.5(f)(i)(D), 6.5(f)(iii), 6.5(f)(iv)(B), 6.5(g), Appendix D, 
Sections 4.1.4, 4.1.6, 11.3; see also supra Section III.25.
    \1263\ See CAT NMS Plan, supra note 5, at Section 6.5(f)(i)(A)-
(B).
---------------------------------------------------------------------------

    Two commenters opined on these provisions. One stated that ``the 
security of the confidential data stored in the Central Repository and 
other CAT systems must be of the highest quality and that no authorized 
users with access to CAT Data should be exempt from any provisions 
regarding security requirements and standards set forth in the Plan.'' 
\1264\ Another commenter expressed concern that the Plan does not 
require Commission Staff to abide by the same security protocols for 
handling PII that other users of CAT Data are required to follow and 
urged the Commission to adopt these safeguards.\1265\
---------------------------------------------------------------------------

    \1264\ NYSE Letter at 2-4 (noting that ``[i]f employees of the 
Commission with access to the data stored in the Central Repository 
or other CAT systems are subject to security standards less 
stringent than those applicable to other authorized users, the data 
obtained and held by those individuals may be subject to heightened 
risk of a data breach.'').
    \1265\ Garrett Letter at 1-2.
---------------------------------------------------------------------------

    Specifically, one commenter objected to the exclusion of 
Commissioners and employees of the Commission from Section 6.5(f)(i)(A) 
of the Plan, which provides that the Plan Processor must require 
individuals with access to the Central Repository to use appropriate 
confidentiality safeguards and to use CAT Data only for surveillance 
and regulatory purposes.\1266\ In addition, the commenter argued that 
Section 6.5(g) of the Plan, which requires the Participants to 
establish and enforce policies and procedures regarding CAT Data 
confidentiality, should also apply to the Commission.\1267\ Similarly, 
another commenter sees no reason why the Commission should not have to 
follow the requirements of Section 6.5(g) and emphasized that the 
Commission needs to follow adequate policies and procedures when 
handling PII.\1268\ However, the first commenter noted that it ``do[es] 
not believe that individuals performing their employment duties should 
be subject to personal liability and that such liability would not 
reduce security risks,'' and objected to Section 6.5(f)(i)(B) of the 
Plan, which requires the submission of a ``Safeguard of Information 
Affidavit'' providing for personal liability for misuse of data.\1269\
---------------------------------------------------------------------------

    \1266\ NYSE Letter at 3.
    \1267\ Id. at 3-4 (citing U.S. Government Accountability Office 
(``GAO'') report discussing certain weaknesses in the Commission's 
information security policies).
    \1268\ Garrett Letter at 1 (noting also that computer systems at 
the Federal Deposit Insurance Corporation, Internal Revenue Service, 
Federal Reserve, and Office of Personnel Management have all 
recently been compromised by cyberattacks and that an April 2016 GAO 
report identified several weaknesses related to the SEC's 
cybersecurity protocols that the Commission has not yet addressed).
    \1269\ NYSE Letter at 3 (also objecting to the terms ``misuse'' 
and ``data'' (rather than CAT Data) as overly broad and imprecise).
---------------------------------------------------------------------------

    In response to these comments, the Participants stated that they 
agree that the Plan's security program must take into consideration all 
users with access to CAT Data, including the Commission, and noted that 
Commission Staff had requested the exclusion of Commission employees 
and Commissioners from subsections (A) and (B) of Section 6.5(f)(i) of 
the Plan.\1270\ The Participants, nevertheless, recommended removing 
these exclusions and applying the requirements of Section 6.5(g) to the 
Commission.\1271\
---------------------------------------------------------------------------

    \1270\ Response Letter I at 60.
    \1271\ Id. at 60-61.
---------------------------------------------------------------------------

    The Commission takes very seriously concerns about maintaining the 
security and confidentiality of CAT Data and believes that it is 
imperative that all CAT users, including the Commission, implement and 
maintain a robust security framework with appropriate safeguards to 
ensure that CAT Data is kept confidential and used only for 
surveillance and regulatory purposes. However, the Commission is not a 
party to the Plan.\1272\ By statute, the Commission is the regulator of 
the Participants, and the Commission will oversee and enforce their 
compliance with the Plan.\1273\ To impose obligations

[[Page 84765]]

on the Commission under the Plan would invert this structure, raising 
questions about the Participants monitoring their own regulator's 
compliance with the Plan.\1274\ Accordingly, the Commission does not 
believe it is appropriate for its security and confidentiality 
obligations, or those of its personnel, to be reflected through Plan 
provisions.\1275\ Rather, the obligations of the Commission and its 
personnel with respect to the security and confidentiality of CAT Data 
should be reflected through different mechanisms than those of the 
Participants. The Commission reiterates that in each instance the 
purpose of excluding Commission personnel from these provisions is not 
to subject the Commission or its personnel to more lenient data 
security or confidentiality standards. Despite these differences in the 
origins of their respective obligations, the rules and policies 
applicable to the Commission and its personnel will be comparable to 
those applicable to the Participants and their personnel.
---------------------------------------------------------------------------

    \1272\ See 17 CFR 242.608(a)(1) (stating that NMS plans are 
filed by two or more SROs).
    \1273\ See 17 CFR 242.608(b)(2), (c), (d); 17 CFR 242.613(h).
    \1274\ Such an approach also has the potential to create tension 
with the existing oversight of the Commission conducted by the 
Office of the Inspector General and the Government Accountability 
Office.
    \1275\ Moreover, Commission employees are generally immune from 
personal liability for actions performed in the course of their 
duties. See, e.g., Gilbert v. Digress, 756 F.2d 1455, 1458 (9th Cir. 
1985) (``the bar of sovereign immunity cannot be avoided by naming 
officers and employees of the United States as defendants''); Clark 
v. Library of Congress, 750 F.2d 89, 103-04 (D.C. Cir. 1984) (absent 
a specific waiver by the government, sovereign immunity bars 
constitutional suits for money damages against government employees 
in their official capacity, even in cases where the employee acted 
outside his authority); 28 U.S.C. 2679 (barring claims against 
government employees under the Federal Tort Claims Act).
---------------------------------------------------------------------------

    The Commission and its personnel are subject to a number of 
existing federal and Commission rules and policies regarding the 
security and confidentiality of information that they encounter in the 
course of their employment. These rules and policies apply with equal 
force to data that Commission personnel can access in the CAT. For 
example, existing laws and regulations prohibit Commission personnel 
from disclosing non-public information \1276\ without 
authorization.\1277\ CAT Data available to Commission personnel will 
contain non-public information. Thus, Commission personnel who disclose 
or otherwise misuse this data would potentially be subject to criminal 
penalties (including fines and imprisonment), as well as disciplinary 
action (including termination of employment), civil injunction, and 
censure by professional associations (for attorneys and 
accountants).\1278\ The Commission believes that the protections 
described above provide as strong a deterrent against the possible 
misuse of CAT Data by Commission personnel as would the submission of 
the ``Safeguard of Information Affidavit'' required by Section 
6.5(f)(i)(B).\1279\
---------------------------------------------------------------------------

    \1276\ See, e.g., 5 CFR 2635.703(b) (``Nonpublic information is 
information that the employee gains by reason of Federal employment 
and that he knows or reasonably should know has not been made 
available to the general public.'').
    \1277\ See, e.g., 15 U.S.C. 78x(b) (``It shall be unlawful for 
any member, officer, or employee of the Commission to disclose to 
any person other than a member, officer, or employee of the 
Commission, or to use for personal benefit, any information 
contained in any application, statement, report, contract, 
correspondence, notice, or other document filed with or otherwise 
obtained by the Commission (1) in contravention of the rules and 
regulations of the Commission under [the Freedom of Information 
Act], or (2) in circumstances where the Commission has determined 
pursuant to such rules to accord confidential treatment to such 
information''); 17 CFR 200.735-3(b)(2)(i) (``A member or employee of 
the Commission shall not . . . [d]ivulge to any unauthorized person 
or release in advance of authorization for its release any nonpublic 
Commission document, or any information contained in any such 
document or any confidential information: (A) In contravention of 
the rules and regulations of the Commission promulgated under [the 
Freedom of Information Act], [the Privacy Act], and [the Sunshine 
Act]; or (B) in circumstances where the Commission has determined to 
accord such information confidential treatment''); 5 CFR 2635.703(a) 
(``An employee shall not engage in a financial transaction using 
nonpublic information, nor allow the improper use of nonpublic 
information to further his own private interest or that of another, 
whether through advice or recommendation, or by knowing unauthorized 
disclosure.'').
    \1278\ See, e.g., 18 U.S.C. 1905 (``Whoever, being an officer or 
employee of the United States or of any department or agency thereof 
. . . publishes, divulges, discloses, or makes known in any manner 
or to any extent not authorized by law any information coming to him 
in the course of his employment or official duties, . . . which 
information concerns or relates to the trade secrets, processes, 
operations, style of work, or apparatus, or to the identity, 
confidential statistical data, amount or source of any income, 
profits, losses, or expenditures of any person, firm, partnership, 
corporation, or association; . . . shall be fined under this title, 
or imprisoned not more than one year, or both; and shall be removed 
from office or employment''); 5 U.S.C. 552a(h)(i)(1) (``Criminal 
penalties--Any officer or employee of an agency, who by virtue of 
his employment or official position, has possession of, or access 
to, agency records which contain individually identifiable 
information the disclosure of which is prohibited by this section or 
by rules or regulations established thereunder, and who knowing that 
disclosure of the specific material is so prohibited, willfully 
discloses the material in any manner to any person or agency not 
entitled to receive it, shall be guilty of a misdemeanor and fined 
not more than $5,000'').
    \1279\ A comment from one Participant suggested that persons 
with access to the Central Repository--regardless of whether they 
are employed by the Plan Processor, the Commission, or a 
Participant--should not be subject to personal liability for the 
misuse of data. The Commission is not amending the Plan to remove 
personal liability from all categories of such persons. The 
inclusion in the Plan of a provision providing for personal 
liability for the misuse of data indicates that the Participants 
more broadly believe that this is an appropriate and potentially 
effective way of deterring misuse of data, including by their own 
employees. And, in the Commission's view, the Participants' belief 
is reasonable.
---------------------------------------------------------------------------

    In addition, the Commission already has robust information security 
policies and procedures developed in accordance with federal directives 
and NIST standards that prohibit the unauthorized disclosure and 
inappropriate use of confidential data. Moreover, the Commission will 
review and update, as necessary, its existing confidentiality and data 
use policies and procedures to account for access to the CAT, and, like 
the Participants, will periodically review the effectiveness of these 
policies and procedures and take prompt action to remedy deficiencies 
in such policies and procedures. Like other information security 
controls over information resources that support federal operations and 
assets, the Commission's policies and procedures applicable to CAT must 
comply with the Federal Information Security Modernization Act of 2014 
and the NIST standards required thereunder,\1280\ and will be subject 
to audits by the SEC Office of Inspector General and the GAO.
---------------------------------------------------------------------------

    \1280\ Public Law 113-283 (Dec. 18, 2014); NIST, Security and 
Privacy Controls for Federal Information Systems and Organizations, 
Special Publication 800-53, revision 4 (Gaithersburg, Md.: April 
2013); NIST, Contingency Planning Guide for Federal Information 
Systems, Special Publication 800-34, revision 1 (Gaithersburg, Md.: 
May 2010).
---------------------------------------------------------------------------

    Notwithstanding the existence of these protections, in light of the 
scope and nature of CAT Data, the Commission recognizes the need to 
ensure that it has in place a comprehensive framework for CAT data 
security. Accordingly, a cross-divisional steering committee of senior 
Commission Staff is being formed to design policies and procedures 
regarding Commission and Commission Staff access to, use of, and 
protection of CAT Data. The policies and procedures will consider, but 
not be limited to, access controls, appropriate background checks, 
usage and data protection, as well as incident response. In developing 
these policies and procedures, the steering committee will, of 
necessity, take into account how the data collection and other systems 
are developed in connection with the creation of the CAT. The 
Commission will ensure that its policies and procedures impose 
protections upon itself and its personnel that are comparable to those 
required under the provisions in the Plan from which the

[[Page 84766]]

Commission and its personnel are excluded.
    For these reasons, the Commission does not believe that the Plan 
should be amended to remove the exclusion of ``employees and 
Commissioners of the SEC'' from Section 6.5(f)(i)(A)-(B) or to extend 
the requirements of Section 6.5(g) to the Commission. Similarly, the 
Commission does not believe that the requirements in Section 6.5(g) 
that Participants establish and enforce policies and procedures 
designed to ensure the confidentiality of CAT Data obtained from the 
Central Repository and to limit the use of such data to surveillance 
and regulatory purposes can or should be extended to the Commission. 
Moreover, the Commission is further amending the Plan, as set forth 
below, to remove the Commission from certain other obligations.
    First, the Commission is amending the Plan to provide that Section 
6.5(f)(iii) does not apply to the Commission or its personnel. As 
proposed, this provision provided that the Participants and the 
Commission must, as promptly as reasonably practicable, but in any 
event within twenty-four hours, report instances of non-compliance with 
policies and procedures or breaches of the security of the CAT to the 
CCO. The Commission received no comments on this provision. The 
Commission notes that, consistent with presidential directives and 
guidance from the OMB and the Department of Homeland Security United 
States Computer Emergency Readiness Team (``US-CERT''), its existing 
incident response policies and procedures require Commission employees 
to promptly convey any known instances of non-compliance with data 
security and confidentiality policies and procedures or breaches of the 
security of its systems to the CISO of the Commission, and this policy 
will apply to any instances of non-compliance or breaches that occur 
with respect to the CAT. The Commission's policies and procedures 
regarding the CAT will also address conveying information regarding any 
such incidents to the CCO when appropriate.
    Second, for the reasons discussed above, the Commission is amending 
the Plan to clarify that Section 6.5(f)(iv)(B) does not apply to the 
Commission or its personnel. As proposed, this provision stated that 
the Plan Processor must ``require the establishment of secure controls 
for data retrieval and query reports by Participant regulatory Staff 
and the Commission.'' \1281\ The Commission received no comments on 
this provision. The Commission will ensure that comparable controls 
governing data retrieval and query reports from the CAT will be 
included, as applicable, in its policies and procedures.
---------------------------------------------------------------------------

    \1281\ See CAT NMS Plan, supra note 5, at Section 6.5(f)(iv)(B).
---------------------------------------------------------------------------

    Third, the Commission is amending the Plan to clarify that the 
requirement to test changes to CAT functionality in Appendix D, Section 
11.3 applies only to the Participants. As proposed, this provision 
stated that, with respect to changes to CAT functionality and 
infrastructure, the Plan Processor must ``[d]efine the process by which 
changes are to be tested by CAT Reporters and regulators.'' The 
Commission received no comments on this provision. For the reasons 
discussed above, the Commission is narrowing this provision so that it 
is applicable only to the Participants. However, the Commission intends 
to take part in the testing of changes in CAT functionality or 
infrastructure that would affect the way Commission personnel access 
and use the CAT System.
    Fourth, for the reasons discussed above, the Commission is amending 
the Plan to exclude the Commission and its personnel from certain CAT 
user access provisions in Appendix D, Sections 4.1.4 and 4.1.6 of the 
CAT NMS Plan. The Plan, as proposed, provided that the Plan Processor 
shall ``implement and maintain a mechanism to confirm the identity of 
all individuals permitted to access the CAT Data stored in the Central 
Repository and maintain a record of all instances where such CAT Data 
was accessed.'' \1282\ Specifically, Appendix D, Section 4.1.4 of the 
CAT NMS Plan provides: that ``[p]eriodic reports detailing the current 
list of authorized users and the date of their most recent access must 
be provided to Participants, the SEC and the Operating Committee,'' 
that the ``reports of the Participants and the SEC will include only 
their respective list of users,'' that the ``Participants and the SEC 
must provide a response to the report confirming that the list of users 
is accurate,'' and that the ``Plan Processor must log every instance of 
access to Central Repository data by users.''
---------------------------------------------------------------------------

    \1282\ See CAT NMS Plan, supra note 5, at Section 6.5(f)(i)(D).
---------------------------------------------------------------------------

    In addition, the CAT NMS Plan provides that ``[a] full audit trail 
of PII access (who accessed what data, and when) must be maintained,'' 
that ``[t]he Chief Compliance Officer and the Chief Information 
Security Officer shall have access to daily PII reports that list all 
users who are entitled for PII access, as well as the audit trail of 
all PII access that has occurred for the day being reported on,'' and 
that ``[t]he chief regulatory officer, or other such designated officer 
or employee at each Participant and the Commission must, at least 
annually, review and certify that people with PII access have the 
appropriate level of access for their role.'' \1283\
---------------------------------------------------------------------------

    \1283\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.6.
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission is amending the 
Plan to exclude the Commission from the provisions that require the 
Commission to ``provide a response to the report confirming that the 
list of users is accurate'' and to ``review and certify that people 
with PII access have the appropriate level of access for their role.'' 
\1284\ However, in accordance with Commission information security 
policies and procedures, the Commission will periodically review the 
appropriateness of CAT access by personnel and work with the Plan 
Processor to ensure the list of SEC users authorized to access CAT Data 
in the Central Repository is appropriate.
---------------------------------------------------------------------------

    \1284\ Id. at Appendix D, Sections 4.1.4 and 4.1.6.
---------------------------------------------------------------------------

7. Personally Identifiable Information
a. Protections Around PII, Regulatory Access to PII
    A number of commenters discussed the Plan Processor's provisions to 
protect the PII reported to and stored in the Central Repository. Two 
commenters noted that PII should be held to the ``highest'' or ``most 
stringent'' standards of information protection.'' \1285\ However, one 
commenter stated that ``the protection and security of PII in CAT is 
``good enough.'' \1286\ Another commenter recommended that the Plan 
provide further details as to how PII data will be treated and 
confidentiality maintained, specifically during extraction and 
transmission of the data.\1287\
---------------------------------------------------------------------------

    \1285\ TR Letter at 8; SIFMA Letter at 22; see also NYSE Letter 
at 3 (discussing CAT Data, including PII reported to the Central 
Repository, and noting that the security of the confidential data 
stored in the Central Repository and other CAT systems must be of 
the highest quality).
    \1286\ Data Boiler Letter at 29 (stating ``PII should properly 
be safeguarded . . . . but nothing will be absolutely ``bullet-
proof.'').
    \1287\ SIFMA Letter at 44 (suggesting that the Bidders should be 
evaluated on how their proposed solutions will meet the 
confidentiality requirements by a technical panel of experts with 
representation from broker-dealers).
---------------------------------------------------------------------------

    Commenters also discussed the Plan's provisions regarding access to 
PII. One commenter noted that ``access to PII data should be provided 
only in the rarest of instances (i.e., SEC investigations for 
securities law

[[Page 84767]]

violations), as regulators and other authorized users should be able to 
perform the majority, if not all, of their regulatory and oversight 
responsibilities by utilizing non-PII data, such as the CAT Customer-
ID.'' \1288\ Another commenter stated that there should be controls, 
policies and procedures to prohibit the downloading of certain 
sensitive information, such as PII, and suggested limiting Participant 
access to sensitive data only to specific enforcement actions.\1289\ 
One commenter recommended that PII data never be exported, extracted, 
copied or downloaded in any manner or form from the CAT 
environment.\1290\ This commenter added that PII data should not be 
included in email or other electronic communications, and advocated for 
use of a special CAT information management tool.\1291\ Another 
commenter believed the PII should be excluded from direct query tools, 
reports or bulk data extraction.\1292\
---------------------------------------------------------------------------

    \1288\ SIFMA Letter at 22.
    \1289\ FIF Letter at 134-135.
    \1290\ SIFMA Letter at 22.
    \1291\ Id.
    \1292\ FSI Letter at 3.
---------------------------------------------------------------------------

    In their response, the Participants noted that Section 
6.10(c)(i)(B) of the Plan provides that ``[t]he user-defined direct 
queries and bulk extracts will 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.'' \1293\ The 
Participants clarified that no customer-related information, including 
PII, will be included in response to queries of the broader order and 
transaction database, nor will it be available in bulk extract 
form.\1294\ Instead, the Participants stated that customer-related 
information, such as PII, will be stored in a separate database, which 
can be accessed only in accordance with heightened security 
protocols.\1295\ In such case, a regulatory user would have to be 
specifically authorized to access the database with PII and other 
customer-related information.\1296\ The Participants stated that they 
expect that the Plan Processor and the CISO will establish policies and 
procedures to identify abnormal usage of the database containing 
customer-related information, and to escalate concerns as necessary; 
and noted that the details regarding such policies and procedures will 
be determined once the Plan Processor has been selected.\1297\
---------------------------------------------------------------------------

    \1293\ Response Letter III at 10.
    \1294\ Id.
    \1295\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.6.
    \1296\ For example, in their Response Letter, the Participants 
noted that if a regulatory user received a tip about a particular 
person, such user, if he or she were appropriately authorized to do 
so, could search the customer-related information database and view 
unmasked information to identify the person's Customer-ID, and then 
use the Customer-ID to query the broader order and transaction 
database to view the relevant activity for that Customer-ID. 
Response Letter III at 10.
    \1297\ Id.
---------------------------------------------------------------------------

    With respect to the standards of protection for PII, the Commission 
notes that the Plan Processor must adhere to the NIST Risk Management 
Framework and implement baseline security controls identified in NIST 
Special Publication 800-53, which the Commission believes, when applied 
properly, are sufficiently rigorous industry standards for the 
protection of sensitive data such as PII.\1298\ The Commission also 
believes that the Participants' general approach to treating PII 
differently--and with more stringent protections--than other CAT Data 
is also reasonable, given the highly sensitive nature of PII, and the 
risk that an individual Customer's orders and transactions could be 
identified should the Central Repository's data security protections be 
breached. Thus, the Commission believes that the Plan's provisions 
which limit who can access PII and how PII can be accessed are a 
reasonable means of ensuring the protection of PII. Specifically, the 
Commission believes that requiring access to PII to follow RBAC, 
adhering to the ``least privileged'' practice of limiting access,\1299\ 
restricting access to PII to those with a ``need-to-know,'' and 
requiring that any login system that is able to access PII must be 
further secured via MFA, are reasonable.\1300\
---------------------------------------------------------------------------

    \1298\ See Section IV.D.6.b, supra.
    \1299\ The Commission understands that the ``least privileged'' 
practice entails limiting access to the minimal level of access to 
PII that will allow normal functioning.
    \1300\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.4.
---------------------------------------------------------------------------

    The Commission also believes that the Participants' approach to the 
use of PII is a reasonable means of protecting PII of Customers 
reported to the Central Repository. Specifically, the Commission 
believes that the Plan's provisions setting out specific parameters 
applicable to the inclusion of PII in queries, as described by the 
Participants, is a reasonable approach to controlling the disclosure of 
PII and helps to ensure that PII will only be used by regulators for 
regulatory and surveillance purposes and, as set out in the Plan, for 
market reconstruction and analysis.
    The Commission notes that the Plan and the Participants' response 
affirms that access to PII data will only be provided to a limited set 
of authorized individuals, and only for the limited purpose of 
conducting regulatory and surveillance activities.\1301\ The Plan also 
contains an explicit prohibition on the ability to bulk download 
sensitive information such as PII, and this protection must be 
reinforced through the Plan Processor's controls, policies and 
procedures.
---------------------------------------------------------------------------

    \1301\ The Commission notes that regulatory uses includes, among 
other things, analysis and reconstruction of market events, market 
analysis and research to inform policy decisions, market 
surveillance, examinations, investigations, and other enforcement 
functions. See supra note 586.
---------------------------------------------------------------------------

    Thus, the Commission believes that the Plan's provisions addressing 
the protections of PII, and the limitations on its access and use, 
provide a reasonable framework for the protection of PII. While it is 
concluding that the Plan sets forth a reasonable framework for the 
protection of PII, the Commission notes that the Plan Processor will 
continually assess, and the CISO and Operating Committee will 
vigorously oversee, the adequacy of the security of CAT Data, and in 
particular PII, and will promptly and thoroughly address any 
deficiencies that are identified.\1302\
---------------------------------------------------------------------------

    \1302\ See CAT NMS Plan, supra note 5, at Section 6.1(o)(ii) 
(requiring the Plan Processor to provide the Operating Committee 
regular reports addressing, among other things, data security issues 
for the Plan Processor and the Central Repository taking into 
account the data security requirements set forth in Appendix D).
---------------------------------------------------------------------------

b. PII Scope: Customer Identifying Information and Customer Account 
Information
    One commenter requested clarification on the scope of PII, stating 
``[t]he exact scope of PII should be defined, i.e., are all fields 
associated with a customer included as PII?'' \1303\ In their response, 
the Participants provided additional clarification on their 
interpretation of PII, as well as on the scope of the Plan's 
protections for all customer-related information.\1304\ Specifically, 
the Participants clarified that they view all customer-related 
information--not only PII, but also Customer Identifying Information 
and Customer Account Information--as the type of highly sensitive 
information that requires the highest level of protection under the 
Plan.\1305\ The Participants further stated that because there is some 
inconsistency in how these terms are used in the Plan, to the extent 
that any statement in the Plan, including Section 6.10(c) of the Plan, 
and Appendices C or D thereto, are inconsistent with the above 
description, the Participants recommend that the Commission amend

[[Page 84768]]

the Plan to address any potential confusion.\1306\
---------------------------------------------------------------------------

    \1303\ FIF Letter at 135.
    \1304\ Response Letter III at 9-10.
    \1305\ Response Letter III at 9.
    \1306\ Response Letter III at 10.
---------------------------------------------------------------------------

    The Commission agrees with the Participants and believes that the 
security of Customer Identifying Information and Customer Account 
Information, irrespective of whether it meets a common understanding of 
the definition of PII, should be subject to the highest standards of 
protection. Accordingly, the Commission is amending the definition of 
PII in Section 1.1 of the CAT NMS Plan to provide that PII means 
``personally identifiable information, including a social security 
number or tax identifier number or similar information; Customer 
Identifying Information and Customer Account Information.'' The 
Commission believes that this amendment is reasonable in that it will 
ensure that all information that identifies a Customer will be afforded 
the same high levels of protection as data that the Participants 
initially defined as PII.
c. Storage of PII
    Commenters also discussed the policies and procedures addressing 
storage of PII as a means to enhance the security and confidentiality 
of PII reported to the Central Repository. A few commenters stated that 
PII should be stored separately from other CAT Data.\1307\ One 
commenter stated that ``PII must be segregated from other transactional 
data that will be stored by the CAT Processor.'' \1308\ Another 
commenter opined that, while it does not believe that the CAT NMS Plan 
should mandate a particular storage method, it supported requiring PII 
to be stored separately, given its sensitive nature and the potential 
for identify theft or fraud.\1309\
---------------------------------------------------------------------------

    \1307\ FSR Letter at 4; FSI Letter at 3; SIFMA Letter at 22; see 
also MFA Letter at 8 (stating that particularly sensitive pieces of 
data should be isolated or compartmentalized).
    \1308\ FIF Letter at 125. Similarly, another commenter 
recommended that PII data not overlap with access to the other 
transaction data available in the CAT. See SIFMA Letter at 23.
    \1309\ FSI Letter at 3.
---------------------------------------------------------------------------

    In their response, the Participants clarified that they view all 
customer-related information (i.e., PII, including Customer Identifying 
Information and Customer Account Information) as highly sensitive 
information that requires the highest level of protection and, as such, 
all customer-related information will be stored in a different, 
physically separated architecture.\1310\
---------------------------------------------------------------------------

    \1310\ Response Letter III at 9.
---------------------------------------------------------------------------

    The Commission believes that the CAT NMS Plan's provisions 
regarding the storage of PII set forth a reasonable framework for the 
security of such data. The Plan further provides that the CAT 
infrastructure may not be commingled with other non-regulatory systems, 
including being segmented to the extent feasible on a network level, 
and data centers housing CAT systems must be AICPA SOC-2 certified by a 
qualified third party auditor that is not an affiliate of any 
Participant or the Plan Processor.\1311\
---------------------------------------------------------------------------

    \1311\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.3; see also Response Letter I at 58-59.
---------------------------------------------------------------------------

8. Implementation Schedule
    The CAT NMS Plan sets forth timeframes for key CAT implementation 
events and milestones, such as when the Plan Processor will release the 
Technical Specifications, begin accepting data from Participants, begin 
accepting data from Industry Members for testing purposes, and when 
Industry Members must begin reporting to CAT.\1312\
---------------------------------------------------------------------------

    \1312\ See Section III.27, supra.
---------------------------------------------------------------------------

a. Specificity and Timing of Implementation Milestones
    One commenter stated that the CAT NMS Plan does not provide 
sufficient detail to allow for implementation planning.\1313\ Another 
commenter argued that the CAT development milestones are unacceptable 
because they do not promote the objective of facilitating improved 
market surveillance.\1314\
---------------------------------------------------------------------------

    \1313\ FIF Letter at 43.
    \1314\ Data Boiler Letter at 17.
---------------------------------------------------------------------------

    Other commenters suggested extending the implementation schedule 
for CAT.\1315\ One commenter suggested that there should be additional 
time to reassess and more carefully tailor the schedules and milestones 
that are included in the Plan to make the roll-out of the CAT as 
efficient as possible.\1316\ Another commenter suggested extending the 
implementation schedule for a period of at least six to twelve months 
beyond the timeframe in the Plan as filed, particularly in light of the 
fact that many Industry Members will be working to comply with the 
Department of Labor's new fiduciary duty regulation as well as T+2 
implementation during this same timeframe.\1317\ This commenter noted 
that such an extended implementation timetable would also allow for 
additional testing and synchronization, which would result in a more 
accurate reporting environment on the ``go-live'' date.\1318\ Another 
commenter noted that the CAT implementation schedule is more aggressive 
than the actual timeframes for implementing OATS for NMS or large 
trader reporting, which could lead to, among other things, poorly built 
systems and an inferior quality of data reporting.\1319\ This commenter 
also presented a detailed alternative implementation and milestone 
schedule that provides more time for Industry Members to prepare for 
CAT reporting.\1320\
---------------------------------------------------------------------------

    \1315\ See, e.g., FSR Letter at 10 (noting that the 
implementation schedule should be extended to provide the industry a 
sufficient amount of time to comply with the new reporting structure 
under the CAT NMS Plan, including the ability to report CAT Data in 
a timely and accurate manner with a reduced error rate); FIF Letter 
at 7, 40-41, 45 (stating that FIF could not support the Plan's 
implementation milestones as proposed and that the Plan lacks 
appropriate risk-mitigating strategies for CAT Reporters to cope 
with the ``aggressive'' implementation schedule and suggesting 
several such strategies).
    \1316\ SIFMA Letter at 23.
    \1317\ FSR Letter at 10. The Commission notes that, as of the 
date of this Order, a T+2 standard settlement cycle has been 
proposed, but not adopted. See Securities Exchange Act Release No. 
78962 (September 28, 2016), 81 FR 69240 (October 5, 2016).
    \1318\ FSR Letter at 10.
    \1319\ FIF Letter at 36.
    \1320\ Id. at 41-50. For example, FIF suggested that the 
Participants should select the Plan Processor prior to Plan approval 
and that the test environment should be available to CAT Reporters 
twelve months prior to the start of Industry Member reporting 
(rather than six months prior to the start of Industry Member 
reporting as proposed in the Plan). Id. at 42-43.
---------------------------------------------------------------------------

    On the other hand, another commenter believed that the 
implementation schedule is too protracted, noting that the phased-in 
approach of requiring CAT reporting first from Participants and then 
from Industry Members, combined with the fact that market participants 
typically request additional time to create systems to comply with new 
recordkeeping requirements, will render the CAT system incomplete for 
several years.\1321\
---------------------------------------------------------------------------

    \1321\ Anonymous Letter I at 3.
---------------------------------------------------------------------------

    Several commenters addressed the CAT NMS Plan's development and 
testing milestones. One commenter noted that a robust testing period 
should be included in the implementation schedule and that currently 
the Plan does not allow sufficient time for thorough testing for 
broker-dealers or third-party service providers.\1322\ This commenter 
also suggested a trial period to permit industry-wide testing of CAT 
readiness to ensure that the Plan Processor is capable of meeting 
reporting and linkage requirements outlined in the Plan.\1323\ Another

[[Page 84769]]

commenter recommended that the CAT NMS Plan include ``acceptance 
criteria'' for the completion of each CAT development milestone to 
ensure that the implementation of the CAT and the completion of 
subsequent milestones are not hindered by poor quality at earlier 
development stages.\1324\
---------------------------------------------------------------------------

    \1322\ SIFMA Letter at 24.
    \1323\ Id.; see also TR Letter at 6 (emphasizing the importance 
of the testing period and noting that the three-month period 
included in the Plan for testing the customer definition process and 
order data process is inadequate based on the commenter's experience 
with projects of lesser complexity than the CAT and because 
continuous reporting of customer and options data will be entirely 
new processes).
    \1324\ FIF Letter at 41.
---------------------------------------------------------------------------

    This commenter further supported an earlier start to the 
development of the Technical Specifications and stated that the six-
month period contemplated by the CAT NMS Plan for the industry to test 
software that will interface with the Plan Processor is insufficient, 
particularly for third-party service providers and service 
bureaus.\1325\ This commenter suggested, among other things, 
accelerating the availability of the CAT test environment to earlier in 
the implementation cycle and allowing a minimum of twelve months of 
access to the CAT test environment for the first group of Industry 
Member reporters.\1326\ Another commenter proposed a twelve-month 
testing period with clear criteria established before moving into 
production, including coordinated testing across industry participants 
and the vendors that support them.\1327\ This commenter also noted that 
the testing plans that will be used for any potential move to T+2 would 
be useful in developing industry testing for the CAT and that error 
rates should be consistent with OATS for reports that are currently 
reported to OATS.\1328\ This commenter further suggested that robust 
testing that mirrors production will be necessary to ensure that the 
Plan Processor is capable of meeting the reporting and linkage 
requirements outlined in the Plan.\1329\
---------------------------------------------------------------------------

    \1325\ Id. at 37-38; see also id. at 38-39 (highlighting other 
development and testing issues, noting in particular that linkage 
testing across multiple CAT Reporters is one of the most complex 
pieces of logic for the CAT System and CAT Reporters).
    \1326\ FIF Letter at 39.
    \1327\ TR Letter at 6.
    \1328\ Id.
    \1329\ Id. at 2.
---------------------------------------------------------------------------

    In response to these commenters, the Participants explained that in 
light of their experience with testing timelines for other system 
changes, discussions with the Bidders, and other considerations, they 
continue to believe that the Plan sets forth an achievable testing 
timeline.\1330\ The Participants also acknowledged the importance of 
the development process for the Technical Specifications for all CAT 
Reporters and noted that they have emphasized this as a high priority 
with the Bidders.\1331\
---------------------------------------------------------------------------

    \1330\ Response Letter I at 39.
    \1331\ Id. at 41.
---------------------------------------------------------------------------

    The Participants stated that they ``do not propose to amend the 
Plan to reflect an expedited schedule for the Industry Member Technical 
Specifications.'' \1332\ In addition, the Participants indicated that 
while strategies to mitigate any risks in meeting the implementation 
milestones will be a necessary part of promoting the successful 
implementation of the CAT, they believe that formulating specifics 
regarding risk mitigation strategies will depend on the selected Plan 
Processor and its solution.\1333\ Therefore, the Participants stated 
their belief that such risk mitigation strategies will be addressed as 
a part of the agreement between the Plan Processor and the CAT LLC, and 
implemented thereafter.\1334\
---------------------------------------------------------------------------

    \1332\ Id.
    \1333\ Id. at 39.
    \1334\ Id.
---------------------------------------------------------------------------

    The Commission agrees that prompt availability of Technical 
Specifications that provide detailed instructions on data submission 
and a robust period of testing CAT reporting functionality are 
important factors in ensuring that Industry Members are able to timely 
transition to CAT reporting and accurately report data to the Central 
Repository. In this regard, the Commission expects the Participants to 
ensure that the Technical Specifications will be published with 
sufficient time for CAT Reporters to program their systems, and 
strongly encourages the Participants and the Plan Processor to provide 
the earliest possible release of the initial Technical Specifications 
for Industry Member reporting and to begin accepting Industry Member 
data for testing purposes as soon as practicable. In addition, the 
Commission is amending Appendix C, Section C.10 of the Plan to ensure 
that the completion dates for the Technical Specifications, testing, 
and other development milestones designate firm outer limits, rather 
than ``projected'' completion dates, for the completion of these 
milestones. For example, as amended, the Plan will provide that the 
Plan Processor will begin developing Technical Specifications for 
Industry Member submission of order data no later than fifteen months 
before Industry Members are required to begin reporting this data, and 
will publish the final Technical Specifications no later than one year 
before Industry Members are required to begin reporting. Moreover, the 
Commission is amending Appendix C, Section C.10 of the Plan to clarify 
that the CAT testing environment will be made available to Industry 
Members on a voluntary basis no later than six months prior to when 
Industry Members are required to report data to the CAT and that more 
coordinated, structured testing of the CAT System will begin no later 
than three months prior to when Industry Members are required to report 
data to the CAT.
    The Commission acknowledges that the transition to CAT reporting 
will be a major initiative that should not be undertaken hastily, that 
Industry Members and service bureaus will need sufficient time to make 
the preparations necessary to comply with the reporting requirements of 
the Plan and the Technical Specifications, and the importance of 
thorough testing. However, the Commission does not believe that the 
Plan's Technical Specification and testing timeframes are unachievable. 
Therefore, the Commission believes it is premature--one year before the 
Technical Specifications for Industry Members will be finalized, 
eighteen months before testing will begin, and before any problem with 
achieving these milestones has actually arisen--to consider amending 
the CAT NMS Plan to mandate a more protracted implementation schedule.
    Similarly, the Commission continues to believe that the 
implementation dates that are explicitly provided in Rule 613--for 
example, that Industry Members and Small Industry Members will begin 
reporting Industry Member data to the Central Repository within two or 
three years, respectively, of Plan approval \1335\--are reasonable. As 
discussed above, the Plan provides appropriate interim milestones, such 
as iterative drafts of the Technical Specifications and a testing 
period, which will help prepare Industry Members to transition to CAT 
reporting pursuant to the implementation schedule set forth in the CAT 
NMS Plan. No issues complying with these dates have actually arisen, 
and the Commission is not altering these dates at this time.\1336\ In 
addition, with

[[Page 84770]]

respect to the comment that strategies to mitigate the risks imposed by 
an ``aggressive'' implementation schedule--such as delays, poorly built 
systems, and an inferior quality of data reporting--should be included 
in the Plan, the Commission agrees with the Participants that 
formulating detailed risk mitigation strategies will depend upon the 
selected Plan Processor and its specific solution and will be addressed 
in the agreement between the Plan Processor and CAT NMS, LLC. 
Therefore, the Commission is not amending the Plan to require specific 
risk mitigation strategies at this time.
---------------------------------------------------------------------------

    \1335\ 17 CFR 242.613(a)(3).
    \1336\ See also Adopting Release, supra note 14, at 45744, 45805 
(stating that phasing CAT implementation to allow broker-dealers to 
begin reporting to the CAT after the SROs will ``allow members 
additional time to, among other things, implement the systems and 
other changes necessary to provide the required information to the 
[C]entral [R]epository, including capturing customer and order 
information that they may not have previously been required to 
collect'' and that ``the Commission encourages plan sponsors to 
propose in the NMS plan a requirement that small broker-dealers 
report data to the [C]entral [R]epository within three years after 
effectiveness of the NMS plan, as the Commission believes that 
providing small broker-dealers a longer implementation time should 
assist such broker-dealers in identifying the most cost-effective 
and the most efficient manner in which to procure third-party 
software or make any systems modifications or other changes to 
comply with Rule 613.'').
---------------------------------------------------------------------------

b. Impact of Technical Specifications on Implementation Milestones
    In addition, several commenters suggested that reasonable 
timeframes for implementing the CAT can only be established once the 
Plan Processor publishes--and CAT Reporters review--the Technical 
Specifications.\1337\ Similarly, one commenter suggested that the CAT 
NMS Plan should establish a milestone for amending the CAT NMS Plan 
based on a review of the final Technical Specifications and that these 
amendments should set forth the CAT implementation schedule.\1338\ 
Another commenter argued that the Plan does not currently include 
critical information, such as interface details and other key technical 
specifications, and that broker-dealers must understand these 
specifications in order to establish a reasonable implementation 
schedule.\1339\
---------------------------------------------------------------------------

    \1337\ SIFMA Letter at 23-24; FSR Letter at 10 (stating that the 
release of final Technical Specifications should drive the 
implementation timeline and that Industry Members should be provided 
with the Technical Specifications and given an opportunity to review 
and provide feedback to the Plan Processor in an effort to determine 
an appropriate implementation schedule); TR Letter at 3-6 (stating 
that rule-making should begin once final Technical Specifications 
are published and noting that, in keeping with the SEC's Equity 
Market Structure Advisory Committee's Rule Change Implementation 
timing recommendation, the timing of CAT implementation should be 
based on a review of the Technical Specifications); FIF Letter at 6-
7 (recommending that an implementation schedule be established only 
after publication of the Technical Specifications and that the 
process for SRO and Commission rulemaking should begin upon 
publication of the final Technical Specifications).
    \1338\ See TR Letter at 6.
    \1339\ SIFMA Letter at 23-24.
---------------------------------------------------------------------------

    Several commenters suggested that the implementation schedule 
should be designed to provide more time for iterative interactions 
between Industry Members and the Plan Processor in terms of developing 
and executing system specifications, particularly as those 
specifications relate to listed options transactions and customer 
information.\1340\ In addition, one commenter suggested that a 
technical committee should be established to work with the Plan 
Processor on refining the specifications and making necessary 
adjustments or accommodations as the specifications are developed and 
implemented.\1341\ Another commenter suggested including a 
``Specifications Date'' in the NMS Plan, which would be the date by 
which final Technical Specifications are released, at which point the 
industry would work with the Plan Processor to assess implementation 
timeframes.\1342\ This commenter also urged the Commission to take a 
data-driven approach to implementation timing, leveraging prior 
experience with OATS, EBS and large trader reporting to fashion an 
implementation plan that is achievable.\1343\
---------------------------------------------------------------------------

    \1340\ Id. at 24; see also FIF Letter at 7, 40-41 (noting that 
there should be more time for testing and iterative specification 
reviews for CAT reporting).
    \1341\ SIFMA Letter at 24.
    \1342\ TR Letter at 5.
    \1343\ Id. at 6.
---------------------------------------------------------------------------

    Two commenters suggested that the Participants and the Commission, 
prior to the creation of the Technical Specifications, should provide 
the Plan Processor with additional detail on how they intend to use 
trade and order data.\1344\ These commenters argued that this will 
ensure that the CAT is designed to provide all the functionality of 
existing systems with the initial implementation of CAT.\1345\
---------------------------------------------------------------------------

    \1344\ FIF Letter at 6; TR Letter at 3.
    \1345\ FIF Letter at 6; TR Letter at 3-4.
---------------------------------------------------------------------------

    In their response, the Participants explained that while the 
Technical Specifications will be important drivers of the 
implementation timeline, Rule 613 mandates certain compliance 
dates.\1346\ According to the Participants, delaying the assessment and 
definition of implementation milestones until the availability of the 
Technical Specifications would jeopardize the ability of the 
Participants to meet their obligations under Rule 613.\1347\ However, 
the Participants also explained that ``the steps leading up to the 
compliance dates set forth in SEC Rule 613 can be tailored to the 
Technical Specifications'' leaving room to accommodate specific 
developments related to the Technical Specifications.\1348\ The 
Participants also expect the Plan Processor to provide more specific 
guidance as to steps toward implementation with the Technical 
Specifications and, to the extent that such guidance would require an 
amendment to the Plan's implementation timelines, the Participants will 
propose to amend the Plan accordingly.\1349\ With respect to the 
comments recommending an iterative process between broker-dealers and 
the Plan Processor in developing final Technical Specifications, the 
Participants noted that the Plan, as drafted, already contemplates the 
publication of iterative drafts as needed before the final Technical 
Specifications are published.\1350\
---------------------------------------------------------------------------

    \1346\ Response Letter I at 39-40.
    \1347\ Id. at 40.
    \1348\ Id.
    \1349\ Id.
    \1350\ Id. at 41.
---------------------------------------------------------------------------

    As noted, the Commission does not believe it is necessary to tie 
completion dates for CAT implementation events or milestones to the 
release and review of Technical Specifications. The Commission believes 
that setting forth specific timeframes in the CAT NMS Plan for 
completing the various CAT implementation stages and tying these 
timeframes to the Effective Date rather than to subsequent events such 
as the release, review, or finalization of the Technical 
Specifications, is a reasonable approach to achieve a timely 
implementation of the CAT. Therefore, and the Commission is not 
deferring or reducing the specificity of these timeframes at this time.
    In response to the comments suggesting that the Plan should provide 
for a more iterative process between Industry Members and the Plan 
Processor in the development of the Technical Specifications, as the 
Participants' response pointed out, the CAT NMS Plan provides that the 
Plan Processor will publish iterative drafts of the Technical 
Specifications as needed prior to the publication of the final 
Technical Specifications.\1351\ However, the Commission recognizes the 
importance of workable Technical Specifications, and notes that the 
Plan requires the Participants and the Plan Processor to work with 
Industry Members in an iterative process, as necessary, to develop 
effective final Technical Specifications.\1352\
---------------------------------------------------------------------------

    \1351\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
C.10(b).
    \1352\ See also Section IV.D.15, infra.
---------------------------------------------------------------------------

    Regarding the comment that the Participants and the Commission 
should provide the Plan Processor, prior to the creation of the 
Technical Specifications,

[[Page 84771]]

with additional details on how they use trade and order data, the 
Commission understands that the Participants have provided the Bidders 
with their use cases and those of the Commission \1353\ and have 
indicated that they will ``work with the Plan Processor and the 
industry to develop detailed Technical Specifications.'' \1354\ The 
Commission and its Staff will work with the Participants and the Plan 
Processor to facilitate the development and implementation of the 
Technical Specifications and the CAT System more broadly, including by 
providing the Plan Processor with appropriate information on its 
current and prospective use of trade and order data.
---------------------------------------------------------------------------

    \1353\ See Response Letter II at 27 (``[T]he Participants have 
provided the Bidders with specific use cases that describe the 
surveillance and investigative scenarios that the Participants and 
the SEC would require for the CAT.'').
    \1354\ See id. at 21.
---------------------------------------------------------------------------

c. Phasing of Industry Member Reporting
    The CAT NMS Plan provides that Small Industry Members--broker-
dealers whose capital levels are below a certain limit defined by 
regulation--must report Industry Member Data to the Central Repository 
within three years of the Effective Date, as opposed to the two years 
provided to other Industry Members.\1355\
---------------------------------------------------------------------------

    \1355\ See Section III.27, supra.
---------------------------------------------------------------------------

    Several commenters noted the impact the CAT NMS Plan's 
implementation schedule would have on small broker-dealers, clearing 
firms, and service bureaus. One commenter emphasized the need for 
sufficient lead time to enable small firms previously exempt from OATS 
reporting to establish the internal structure, technical expertise, 
systems, and contractual arrangements necessary for CAT 
reporting.\1356\ Other commenters suggested that only those firms that 
are exempt or excluded from OATS reporting obligations--rather than 
Small Industry Member firms based on capital levels as set forth in the 
CAT NMS Plan--should have an additional year to begin reporting to CAT, 
arguing that such a change would allow existing systems to be retired 
earlier at a significant cost savings.\1357\ Similarly, another 
commenter noted the impact the phased implementation schedule would 
have upon third-party vendors, service bureaus, and correspondent 
clearing firms with both large and small clients, and suggested that 
dividing Industry Members based on whether or not they currently report 
to OATS is preferable to the capital level-based division proposed in 
the CAT NMS Plan.\1358\
---------------------------------------------------------------------------

    \1356\ SIFMA Letter at 23.
    \1357\ TR Letter at 3-4 (recommending that the definition of 
Small Industry Member be based on FINRA Rules 7470 and 7410(o)); see 
also Wachtel Letter at 1-2 (arguing that OATS-exempt firms should be 
granted Small Industry Member status and that metrics other than 
capital level such as number of registered persons, revenue, or 
number of orders routed may be better ways of assessing a firm's 
actual activity level and market impact); FIF Letter at 49 
(supporting the Plan's approach to require Participants to report to 
the CAT first but suggesting that CAT reporting obligations be 
phased in first for OATS reporters and then non-OATS reporters, or, 
in the alternative, phasing reporting obligations based on 
functionality, such as equities, options and allocations); Section 
V.F.2.b, infra.
    \1358\ FIF Letter at 40 (suggesting, in the alternative, that 
the CAT NMS Plan should permit Small Industry Members to report 
concurrently with Large Industry Members).
---------------------------------------------------------------------------

    In response to these comments, the Participants explained their 
understanding that the Commission permitted additional compliance time 
for smaller firms because ``small broker-dealers may face greater 
financial constraints in complying with Rule 613 as compared to larger 
broker-dealers'' and that the Participants have based the 
implementation timeline on that framework.\1359\ However, the 
Participants explained that they believe that Rule 613 and the Plan 
already permit Small Industry Members to commence reporting to the CAT 
when large Industry Members begin reporting to the CAT on a voluntary 
basis.\1360\ In addition, the Participants stated that accelerating the 
reporting requirements for all Small Industry Members that are OATS 
reporters to require them to begin reporting to the Central Repository 
two years after Plan approval, when Large Industry Members are required 
to report, may enable FINRA to retire OATS on a more expedited basis 
and that the Participants will consider including in their Compliance 
Rules a requirement to accelerate reporting for Small Industry Members 
that are OATS reporters.\1361\
---------------------------------------------------------------------------

    \1359\ Response Letter II at 19-20 (citing Adopting Release).
    \1360\ Id.
    \1361\ Id.
---------------------------------------------------------------------------

    The Commission acknowledges that the capital-level based definition 
contained in the Plan is not the only way to define Small Industry 
Members for the purposes of the implementation schedule. However, this 
definition is derived from Exchange Act Rule 0-10,\1362\ which defines 
small entities under the Exchange Act for purposes of the Regulatory 
Flexibility Act, and reflects an ``existing regulatory standard that is 
an indication of small entities for which regulators should be 
sensitive when imposing regulatory burdens.'' \1363\ In addition, the 
group of firms that do not currently report to OATS is diverse, and 
includes some large broker-dealers and entities that--although they are 
not FINRA members and hence do not have regular OATS reporting 
obligations--nevertheless engage in a significant volume of trading 
activity.\1364\ Therefore, the Commission continues to believe, at this 
time, that the definition of Small Industry Member in the Plan is a 
reasonable means to identify market participants for which it would be 
appropriate to provide, and that would benefit from, an additional year 
to prepare for CAT reporting due to their relatively limited resources.
---------------------------------------------------------------------------

    \1362\ 17 CFR 240.0-10.
    \1363\ Adopting Release, supra note 14, at 45804.
    \1364\ See Notice, supra note 5, at 30715, 30793.
---------------------------------------------------------------------------

    In addition, the Commission encourages the Participants and the 
Plan Processor to work with Small Industry Members that are also OATS 
reporters to enable them to begin reporting to CAT, on a voluntary 
basis, at the same time that large Industry Members are required to 
begin reporting, particularly if the Participants believe that this 
would facilitate more expeditious retirement of OATS. Accordingly, the 
Commission is amending Appendix C, Section C.9 of the Plan to require 
the Participants to consider, in their rule change filings to retire 
duplicative systems,\1365\ 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. In 
addition, the Commission notes that FINRA is considering whether it can 
integrate CAT Data with OATS data in such a way that ``ensures no 
interruption in FINRA's surveillance capabilities,'' and that FINRA 
will consider ``exempting firms from the OATS Rules provided they 
report data to the Central Repository pursuant to the CAT NMS Plan and 
any implementing rules.'' \1366\ The Commission encourages the other 
Participants to consider similar measures to exempt firms from 
reporting to existing systems once they are accurately reporting 
comparable data to the CAT and to enable the usage of CAT Data to 
conduct their regulatory activities.\1367\ The Commission believes that 
this approach will reduce or eliminate the duplicative reporting costs

[[Page 84772]]

of Industry Members prior to the commencement of Small Industry Member 
reporting.
---------------------------------------------------------------------------

    \1365\ See Section IV.D.9.a(1), infra.
    \1366\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
C.9.
    \1367\ See Section IV.D.9.a(1), infra (requiring the 
Participants to consider, in their rule change filings to retire 
duplicative systems, whether individual Industry Members can be 
exempted from reporting to duplicative systems once their CAT 
reporting meets specified accuracy and reliability standards).
---------------------------------------------------------------------------

    The Commission remains open to other approaches to phasing in CAT 
reporting obligations that will promote the earlier retirement of 
reporting systems that will be rendered duplicative by the CAT. 
However, for the reasons discussed above, the Commission believes that, 
at this time, the Plan's definition of Small Industry Member is 
reasonable, and is therefore not amending the Plan to change this 
definition or to otherwise change the phased approach to CAT 
implementation.
9. Retirement of Existing Trade and Order Data Rules and Systems
a. SRO Rules and Systems \1368\
---------------------------------------------------------------------------

    \1368\ See also Section V.F.2.b, infra (discussing comments on 
the costs of duplicative reporting).
---------------------------------------------------------------------------

    As discussed above, the CAT NMS Plan provides that the Participants 
will conduct analyses of which existing trade and order data rules and 
systems require the collection of information that is duplicative, 
partially duplicative, or non-duplicative of CAT.\1369\ Among other 
things, the Participants, in conducting these analyses, will consider 
whether information collected under existing rules and systems should 
continue to be collected or whether that information should be 
incorporated into CAT, and, in the case of retiring OATS, whether the 
Central Repository contains complete and accurate CAT Data that is 
sufficient to ensure that FINRA can effectively conduct surveillance 
and investigations of its members for potential violations of FINRA 
rules and federal laws and regulations.\1370\ Under the Plan, as 
proposed, each Participant should complete its analysis of which of its 
systems will be duplicative of CAT within twelve months of when 
Industry Members are required to report to the Central Repository, and 
should complete its analyses of which of its systems will be partially 
duplicative and non-duplicative of CAT within eighteen months of when 
Industry Members are required to report to the Central Repository, 
although these timeframes could be extended if the Participants 
determine that more time is needed.\1371\ In addition, the Plan 
requires each Participant to analyze the most appropriate and 
expeditious timeline and manner for eliminating duplicative and 
partially duplicative rules and systems and to prepare rule change 
filings with the Commission within six months of determining that an 
existing system or rule should be modified or eliminated.\1372\
---------------------------------------------------------------------------

    \1369\ See Section III.20, supra.
    \1370\ Id.
    \1371\ Id.
    \1372\ Id.
---------------------------------------------------------------------------

(1) Timing
    Several commenters addressed the timeframes proposed by the 
Participants for retiring systems that will be rendered duplicative by 
CAT. One commenter noted that the CAT NMS Plan does not contain a 
detailed approach for retiring duplicative reporting systems and 
thereby fails to meet the directives of Rule 613.\1373\ This commenter 
suggested that the CAT NMS Plan should be amended to provide a detailed 
framework for elimination of reporting systems that will be rendered 
duplicative and outdated by CAT implementation, and to set forth a 
prioritized timetable for retirement of such duplicative systems.\1374\ 
Similarly, another commenter expressed disappointment regarding the 
plan to eliminate duplicative systems, noting that the Plan merely sets 
forth a ``loose commitment'' from the Participants to complete their 
analyses of which rules and systems may be duplicative of CAT, rather 
than an actual retirement schedule.\1375\
---------------------------------------------------------------------------

    \1373\ KCG Letter at 2-3; see also DAG Letter at 2.
    \1374\ KCG Letter at 2-3.
    \1375\ DAG Letter at 2; see also STA Letter at 1 (supporting the 
DAG Letter's elimination of systems recommendations).
---------------------------------------------------------------------------

    Several commenters emphasized the importance of eliminating 
duplicative systems as soon as possible and suggested that the current 
proposal to allow up to two and a half years for the Participants to 
consider system elimination is too long in light of the additional 
expenses that will be incurred during the period of duplicative 
reporting.\1376\ One commenter noted that without a regulatory 
obligation driving systems retirement, the Participants lack an 
incentive to retire existing systems, and that the Plan should not 
enable the Participants to move to planning for fixed income or primary 
market transaction reporting prior to mapping out the elimination of 
redundant systems.\1377\ Another commenter presented a detailed 
alternative schedule--with significantly more aggressive timelines--for 
analyzing and retiring duplicative systems.\1378\
---------------------------------------------------------------------------

    \1376\ SIFMA Letter at 5-6; Bloomberg Letter at 7; Data Boiler 
Letter at 16-17, 36 (noting that the timing to retire duplicative 
reporting systems should be ``now or never'' and that CAT should 
have a milestone target of sun-setting OATS on the first day CAT 
goes live); FSR Letter at 10; TR Letter at 2-3; FIF Letter at 4 
(noting that lack of an aggressive, detailed and committed 
retirement plan will result in excessive costs for CAT Reporters); 
Fidelity Letter at 2, 4-5 (noting that the Plan should establish a 
fixed date for retiring regulatory compliance systems that overlap 
with the CAT or, in the alternative, duplicative rules should sunset 
automatically once the CAT reaches certain performance metrics).
    \1377\ SIFMA Letter at 5-6.
    \1378\ FIF Letter at 26, 31-34. For example, FIF suggests that 
the Participants should complete their analyses of duplicative and 
partially duplicative rules and systems upon approval of the CAT NMS 
Plan and that the Participants should file rule changes to implement 
rule modifications or deletions when the Technical Specifications 
are released. Id.
---------------------------------------------------------------------------

    In addition, several commenters suggested replacing or modifying 
the duplicative reporting period with a ``test period'' or ``trial 
period.'' \1379\ In this regard, one commenter suggested modifying the 
CAT NMS Plan to include a trial period of no more than six months, 
after which duplicative systems are retired or firms are exempted from 
duplicative reporting if they have met certain error rate 
requirements.\1380\ Similarly, another commenter recommended replacing 
the duplicative reporting period with a trial period mirroring 
production, lasting no longer than six months, and providing that the 
actual launch of CAT functionality be linked to the retirement of 
existing systems and the end of the trial period.\1381\ Other 
commenters suggested that the launch of CAT should be linked to the 
retirement of existing reporting systems, noting that it is important 
to maintain a single audit trail of record to avoid duplicative 
reporting.\1382\
---------------------------------------------------------------------------

    \1379\ See, e.g., FSR Letter at 10 (recommending the replacement 
of the currently contemplated duplicative reporting period with a 
test period of the new CAT reporting system).
    \1380\ FIF Letter at 6, 25-28, 39 (recommending that there 
should be no penalties, archiving requirements or regulatory 
inquiries related to CAT reporting during this trial period).
    \1381\ TR Letter at 2.
    \1382\ FSR Letter at 10; TR Letter at 2.
---------------------------------------------------------------------------

    One commenter suggested that the Participants should provide 
detailed requirements regarding retirement of existing systems to the 
Plan Processor after the Plan Processor is selected to ensure that the 
Technical Specifications include all functionality necessary to retire 
existing systems.\1383\ Similarly, other commenters noted that the CAT 
should be designed in the first instance to include all data field 
information necessary to allow prompt elimination of redundant 
systems.\1384\ One

[[Page 84773]]

commenter noted that the CAT should be so designed even if it means 
that CAT includes information, products, or functionality not necessary 
to meet the minimum initial CAT requirements under Rule 613.\1385\ This 
commenter also proposed that the CAT should be designed to allow the 
ready addition of data fields over time to enhance the ability to 
retire other systems and capture additional necessary 
information.\1386\
---------------------------------------------------------------------------

    \1383\ TR Letter at 4.
    \1384\ SIFMA Letter at 5-6; DAG Letter at 2 (suggesting that the 
Technical Specifications and functional requirements should include 
certain data attributes to assist in retiring duplicative systems 
and that the inclusion of OTC equities will more readily allow for 
the retirement of duplicative systems) ; see also STA Letter at 1 
(supporting the DAG Letter's elimination of systems 
recommendations).
    \1385\ SIFMA Letter at 5-6.
    \1386\ Id. at 5-6.
---------------------------------------------------------------------------

    One commenter outlined the steps that it believes are necessary to 
retire OATS and COATS.\1387\ This commenter stated that these systems 
cannot be eliminated until FINRA and CBOE can seamlessly continue 
performing their current surveillance on their member firms and that 
the relevant data elements needed by FINRA and CBOE to perform the 
current surveillance would need to be retained as part of CAT's 
Technical Specifications.\1388\
---------------------------------------------------------------------------

    \1387\ Id. at 10-12.
    \1388\ Id.
---------------------------------------------------------------------------

    In response to the comments recommending that the Participants 
accelerate the timeline to identify their existing rules and systems 
that are duplicative of CAT requirements and that CAT should be 
designed in the first instance to include all data field information 
necessary to allow prompt elimination of such redundant systems, the 
Participants explained that they recognize the importance of 
eliminating duplicative reporting requirements as rapidly as 
possible.\1389\ The Participants also stated that to expedite the 
retirement of duplicative systems, the Participants with duplicative 
systems have already completed gap analyses for systems and rules 
identified for retirement (in full or in part), and confirmed that data 
that would need to be captured by the CAT to support retirement of 
these systems will be included in the CAT.\1390\ Specifically, the 
relevant Participants have evaluated each of the following systems/
rules: FINRA's OATS Rules (7400 Series),\1391\ COATS and associated 
rules, NYSE Rule 410(b), PHLX Rule 1022, CBOE Rule 8.9, EBS and 
associated rules, C2 Rule 8.7 and CHX BrokerPlex reporting (Rule 
5).\1392\ In addition, the Participants stated that a broader review of 
the Participants' rules intended to identify any other impact that the 
CAT may have on the Participants' rules and systems generally is 
ongoing.\1393\ The Participants also explained that once the Plan 
Processor is selected, the Participants will work with the Plan 
Processor and the industry to develop detailed Technical Specifications 
that ensure that by the time Industry Members are required to report to 
the CAT, the CAT will include all data elements necessary to facilitate 
the rapid retirement of these duplicative systems.\1394\
---------------------------------------------------------------------------

    \1389\ Response Letter II at 21.
    \1390\ Id.
    \1391\ The Participants stated that this review also would cover 
the rules of other Participants that incorporate FINRA's OATS 
requirements. Response Letter II at 21 (citing NASDAQ Rule 7000A 
Series, BX Rule 6950 Series, PHLX Rule 3400 Series, NYSE Rule 7400 
Series, NYSE Arca Equities Rule 7400 Series, NYSE MKT Rule 7400 
Series).
    \1392\ Response Letter II at 21.
    \1393\ Id. (noting that descriptions of OATS and EBS gap 
analyses created on behalf of the Participants are available for 
public review on the CAT NMS Plan Web site and that Participants 
have worked to keep these gap analyses up-to-date by including 
newly-added data fields in these duplicative systems, such as the 
new OATS data fields related to the tick size pilot and ATS order 
book changes, in the gap analyses).
    \1394\ Id. at 20-21.
---------------------------------------------------------------------------

    To reflect these efforts, the Participants recommended an 
acceleration of the timelines for analyzing duplicative rules and 
systems by recommending amendments to Appendix C of the CAT NMS Plan to 
change the completion dates for their analyses of: (1) Duplicative 
rules and systems to nine to twelve months from Plan approval (rather 
than 12 months from the onset of Industry Member reporting) and (2) 
partially duplicative and non-duplicative rules and systems to nine to 
twelve months from Plan approval (rather than 18 months from the onset 
of Industry Member reporting).\1395\ However, the Participants noted 
that these proposed timelines are based on the Plan Processor's 
appropriate and timely implementation of the CAT and the CAT Data being 
sufficient to meet the surveillance needs of each Participant.\1396\
---------------------------------------------------------------------------

    \1395\ Id. at 22-26.
    \1396\ Id. at 22.
---------------------------------------------------------------------------

    In response to the comments recommending that duplicative systems 
be retired on a fixed date, the Participants explained that they cannot 
commit to retiring any duplicative systems by a designated date because 
the retirement of a system depends on a variety of factors.\1397\ For 
example, the Participants explained that they would need to ensure that 
the CAT Data is sufficiently extensive and of high quality before they 
could rely on it for regulatory oversight purposes and that they would 
be unable to retire any of their duplicative systems until any rule 
changes related to such systems retirements are approved by the 
Commission.\1398\ The Participants also noted that the elimination of 
potentially duplicative requirements established by the Commission 
(e.g., EBS reporting pursuant to SEC Rule 17a-25 and large trader 
reporting pursuant to SEC Rule 13h-1) are outside the Participants' 
purview.\1399\ In addition, in response to the comment that the 
Participants lack an incentive to retire duplicative systems, the 
Participants explained that they are incented to eliminate systems that 
would be extraneous for regulatory purposes after CAT is operational 
due to the significant costs Participants face in running such 
systems.\1400\
---------------------------------------------------------------------------

    \1397\ Id. at 20-21.
    \1398\ See id.
    \1399\ Id.; see also Section IV.D.9.b, infra, discussing the 
Commission's plans to retire certain aspects of EBS and large trader 
reporting and other SEC rules once CAT is operational.
    \1400\ Response Letter II at 20.
---------------------------------------------------------------------------

    In response to the comments suggesting the use of a trial period to 
transition to the CAT, the Participants stated that they recognize the 
concerns regarding the potential for disciplinary actions during the 
commencement of reporting to the CAT when, despite good faith efforts, 
reporting errors may develop due to the lack of experience with the 
CAT.\1401\ Accordingly, the Participants stated that they will take 
into consideration the lack of experience with the CAT when evaluating 
any potential regulatory concerns with CAT reporting during the first 
months after such reporting is required.\1402\ In addition, the 
Participants stated that they intend to work together with Industry 
Members to facilitate their CAT reporting; for example, the CAT's 
testing environments will provide an opportunity for Industry Members 
to gain experience with the CAT, and the Plan Processor will provide 
Industry Members with a variety of resources to assist them during 
onboarding and once CAT reporting begins, including user support and a 
help desk.\1403\
---------------------------------------------------------------------------

    \1401\ Id. at 27.
    \1402\ Id.
    \1403\ Id.
---------------------------------------------------------------------------

    The Commission acknowledges that a protracted period of duplicative 
reporting would impose significant costs on broker-dealers and 
recognizes the importance of retiring duplicative rules and systems as 
soon as possible and of setting forth an appropriate schedule to 
achieve such retirement in the CAT NMS Plan. As discussed above, 
although a broader review of the Participants' rules intended to 
identify any other impact that the CAT may have on the Participants' 
rules and systems generally is ongoing, the Participants have completed 
gap analyses for

[[Page 84774]]

systems and rules identified for full or partial retirement, including 
larger systems such as OATS and COATS. The Participants have confirmed 
that the data needed to support the retirement of these key systems 
will be included in the CAT,\1404\ and have proposed to accelerate the 
projected dates for completing these analyses of duplicative, partially 
duplicative, and non-duplicative rules and systems to nine to twelve 
months after Plan approval.
---------------------------------------------------------------------------

    \1404\ Id. at 21.
---------------------------------------------------------------------------

    Although the Commission appreciates these efforts to accelerate the 
retirement of existing data reporting rules and systems that are 
duplicative of the CAT, the Commission believes that stronger Plan 
amendments than those recommended by the Participants should be made to 
ensure that such rules and systems are eliminated, modified, or retired 
as soon as practicable after the CAT is operational so that the period 
of duplicative reporting is kept short. Therefore, the Commission is 
amending Section C.9 of Appendix C of the Plan to reflect the 
Participants' representation that their analyses of key duplicative 
systems are already complete and to provide that proposed rule changes 
to effect the retirement of duplicative systems, effective at such time 
as CAT Data meets minimum standards of accuracy and reliability, shall 
be filed with the Commission within six months of Plan approval.
    Based on the Participants' statement in their response to comments 
that their gap analyses are complete with respect to the major existing 
trade and order data reporting systems, the Commission believes that 
the process of assessing which systems can be retired after CAT is 
operational is in an advanced stage. Rather than amending the Plan to 
state that these analyses for duplicative systems will be complete 
within nine to twelve months of the Commission's approval of the CAT 
NMS Plan, as recommended by the Participants, the Commission believes 
that the milestones listed in Appendix C should include the 
Participants' representation that they have completed gap analyses for 
key rules and systems and should enumerate those specific systems 
because this more accurately reflects, and more prominently and clearly 
conveys to market participants and the public, the status of the 
Participants' planning for the transition from existing systems to CAT.
    For these reasons, the Commission is also amending Section C.9 of 
Appendix C of the Plan to require the Participants to file with the 
Commission rule change proposals to modify or eliminate duplicative 
rules and systems within six months of the Effective Date. These 
filings will not effectuate an immediate retirement of duplicative 
rules and systems--the actual retirement of such rules and systems must 
depend upon the availability of comparable data in CAT of sufficient 
accuracy and reliability for regulatory oversight purposes, as 
specified in the Participants' rule change proposals. The Commission 
also is amending the Plan to require the Participants, in their rule 
change proposals, to discuss 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. Although these amendments were not suggested by the 
Participants, the Commission believes that the rule change filing 
milestone should be changed to six months from Plan approval given the 
status of the Participants' gap analyses and because the actual 
retirement of rules and systems will only occur once CAT Data meets 
minimum standards of accuracy and reliability. In addition, the 
Commission believes that an explicit statement in the Appendix C 
milestones that the retirement of systems that are duplicative of CAT 
shall occur once CAT Data meets minimum standards of accuracy and 
reliability will provide greater clarity regarding how the transition 
from existing reporting systems to the CAT will proceed. In addition, 
these amendments will better align the systems retirement schedule with 
the broader CAT implementation schedule. For example, requiring rule 
change proposals to be submitted to the Commission within six months 
will ensure that public comments, and Commission review of these 
comments, which could inform the development of the Technical 
Specifications, will be in progress as the Technical Specifications for 
Industry Member data submission are being developed (i.e., at least 
fifteen months before Industry Members are required to report to CAT).
    The Commission believes that, taken together, these amendments may 
facilitate an accelerated retirement of existing data reporting rules 
and systems that are duplicative of CAT and thus reduce the length of 
the duplicative reporting period as compared to the Plan as filed. 
Given that their requisite analytical work is already substantially 
complete, the Commission believes that the milestones, as amended, are 
achievable without a substantial increase in the burdens imposed on the 
Participants. Given the importance of retiring existing systems as 
rapidly as possible to reduce the substantial burdens on Industry 
Members that come with an extended period of duplicative reporting, the 
Commission believes that these amendments are appropriate. The CAT NMS 
Plan, as amended, recognizes that the Participants' requisite 
analytical work is already substantially complete and explicitly 
conditions the elimination of duplicative reporting only on the 
availability of accurate and reliable CAT Data that will enable the 
SROs to carry out their regulatory and oversight responsibilities. The 
amended Plan also accelerates the initiation of the formal process of 
retiring duplicative rules and systems by requiring that rule change 
filings be filed within six months of the Effective Date.
    The Commission believes that the CAT NMS Plan, as amended, contains 
an appropriate level of detail regarding the process of retiring 
duplicative rules and systems. However, the Commission is not amending 
the Plan to include fixed or mandatory dates for the retirement of 
existing rules and systems at this time. As the Participants noted in 
their response to comments, retiring a system depends upon many 
factors, including the availability of sufficiently extensive and high 
quality CAT Data.\1405\ The Commission and the SROs will continue to 
rely on the information collected through existing regulatory reporting 
systems to reconstruct market events, conduct market analysis and 
research in support of regulatory decision-making, and conduct market 
surveillance, examinations, investigations, and other enforcement 
functions until sufficiently complete, accurate, and reliable data is 
available through CAT. Therefore, precise dates for retiring these 
rules and systems cannot be determined prospectively. However, the 
Commission agrees with the Participants that they have incentives to 
retire extraneous systems after CAT is operational due to the desire to 
avoid the costs associated with maintaining such systems; the 
Commission believes that these incentives will mitigate any delay that 
would otherwise result from the difficulty of setting forth specific 
system retirement dates in advance.
---------------------------------------------------------------------------

    \1405\ Response Letter II at 20.
---------------------------------------------------------------------------

    As discussed above, the gap analyses completed by the Participants 
regarding the key existing trade and order data systems have confirmed 
that the CAT contains the data fields necessary to retire these 
systems, and the

[[Page 84775]]

Commission has amended the Plan to ensure that any additional analysis 
related to duplicative rule and system retirement is completed in a 
timely manner. The Participants also explained that once the Plan 
Processor is selected, the Participants will work with the Plan 
Processor and Industry Members to develop detailed Technical 
Specifications that ensure that by the time Industry Members are 
required to report to the CAT, the CAT will include all data elements 
necessary to facilitate the rapid retirement of duplicative 
systems.\1406\ The Commission agrees that the Participants should work 
with the Plan Processor and Industry Members in this manner and provide 
appropriate information about how they use trade and order data 
collected through existing rules and systems to ensure that the 
Technical Specifications are developed with these requirements in mind. 
In addition, with respect to the comment that CAT should be designed to 
permit the inclusion of additional data fields, the Commission notes 
that the Plan contains provisions regarding periodic reviews and 
upgrades to CAT that could lead to proposing additional data fields 
that are deemed important,\1407\ and does not believe any changes to 
the Plan are necessary.
---------------------------------------------------------------------------

    \1406\ Id. at 20-21.
    \1407\ See Notice, supra note 5, at 30700.
---------------------------------------------------------------------------

(2) Proposed Alternative Approaches to Systems Retirement
    Several commenters suggested linking the retirement of duplicative 
systems to the error rate or quality of data reported to CAT. For 
example, one commenter suggested that the CAT NMS Plan should be 
amended to include an exemption from duplicative reporting obligations 
for individual broker[hyphen]dealers based on meeting certain CAT 
reporting quality metrics.\1408\ Similarly, another commenter suggested 
that a ``Retirement Error Rate'' should be defined as the acceptable 
error rate for discontinuing reporting to a duplicative system, and 
that the Retirement Error Rate should be based on comparable data in 
CAT (e.g., OATS equivalent data reported to CAT should meet the 
reporting and quality criteria required by FINRA, but higher error 
rates associated with data elements that are outside the scope of 
existing systems should not prevent the retirement of such 
systems).\1409\ One commenter suggested reducing the error rate as 
quickly as possible to facilitate the elimination of duplicative 
systems by including a test period to bring reporting near a 1% error 
rate when CAT is launched in production.\1410\ This commenter also 
noted that disparities in error rate tolerance between CAT and other 
existing regulatory reporting systems should not serve as a pretext for 
prolonging the lifespan of those legacy systems.\1411\ Several 
commenters suggested that the error rates used for elimination of 
duplicative systems should be post-correction error rates and that when 
a firm meets the necessary standards, the Plan should allow for 
individual firm exemptions from duplicative reporting.\1412\
---------------------------------------------------------------------------

    \1408\ KCG Letter at 2-3.
    \1409\ FIF Letter at 5, 24-26; see also Bloomberg Letter at 8 
(noting that the Commission should specify an appropriate error rate 
for CAT NMS reporting such that, once met, CAT reporters can retire 
superseded systems).
    \1410\ SIFMA Letter at 6-7.
    \1411\ Id.
    \1412\ Id. at 7; see also FIF Letter at 5, 24 (corrected data 
should be used for error rates and individual firms should be 
allowed to retire duplicative systems once the Retirement Error Rate 
is achieved); TR Letter at 5-6; FSR Letter at 9 (stating that the 
error rate should only apply to post-correction data on equities). 
Section IV.D.11, infra, discusses the Commission's response to 
commenters suggesting the use of post-correction error rates.
---------------------------------------------------------------------------

    One commenter also noted that the Participants have not adequately 
incorporated the 14-month milestone associated with the requirement 
that they enhance their surveillance systems \1413\ into their 
milestones for the retirement of existing systems, noting that if the 
Participants are prepared to use CAT Data after 14 months, there should 
be no obstacles to retiring existing systems once the Retirement Error 
Rates are met.\1414\ If the 14-month milestone is insufficient to 
obligate the Participants to use CAT Data in place of existing systems, 
this commenter would recommend a new milestone be created such that by 
the end of a trial period, the Participants must use CAT Data in place 
of existing systems.\1415\
---------------------------------------------------------------------------

    \1413\ 17 CFR 242.613(a)(3)(iv).
    \1414\ FIF Letter at 6, 24-25.
    \1415\ Id.
---------------------------------------------------------------------------

    Several commenters expressed support for the Plan's exemption from 
OATS reporting for CAT Reporters as long as there would be no 
interruption in FINRA's surveillance capabilities and urged the SROs to 
consider a similar approach for firms that meet certain error rate 
thresholds.\1416\
---------------------------------------------------------------------------

    \1416\ DAG Letter at 2; FIF Letter at 23; see also STA Letter at 
1 (supporting the DAG Letter's elimination of systems 
recommendations).
---------------------------------------------------------------------------

    Similarly, one commenter suggested a ``principles-based framework'' 
for eliminating potentially duplicative systems.\1417\ This framework 
would include: (i) A ``phased'' elimination program in which reporters 
that have achieved sufficient accuracy in CAT reporting can 
individually retire their systems; (ii) designing the Central 
Repository from the outset to include the ability to implement all of 
the surveillance methods and functions currently used by SROs; (iii) 
rather than relying on a simple field-mapping exercise to determine 
which systems can be eliminated, considering whether all the data 
elements currently reported under existing systems are really needed 
for the types of surveillance and other analyses typically undertaken 
by the Participants, whether the Central Repository can use alternative 
methods of surveillance or analysis that do not rely on those data 
elements, and whether data elements currently collected by an existing 
reporting system that are not available in the Central Repository could 
be derived or computed from data that is in the Central Repository; and 
(iv) requiring that questions to broker-dealers regarding their 
reported data should be directed though the process created for the 
Central Repository, not through previously-established channels based 
on legacy systems.\1418\
---------------------------------------------------------------------------

    \1417\ SIFMA Letter at 7-10.
    \1418\ Id. SIFMA also applied this framework to the retirement 
of OATS, EBS, and COATS. See id. at 10-12.
---------------------------------------------------------------------------

    Several commenters suggested that the Commission should impose a 
moratorium on changes to existing systems to coincide with the launch 
of CAT to enable firms to dedicate resources to the successful launch 
and operation of CAT rather than the maintenance of legacy 
systems.\1419\ In addition, several commenters suggested that the Plan 
should allow for elimination of individual systems as they become 
redundant or unnecessary once production commences in CAT.\1420\
---------------------------------------------------------------------------

    \1419\ Id. at 5-6; see also TR Letter at 5 (calling for such a 
moratorium to commence once the Technical Specifications are in 
development to ensure that the Technical Specifications are 
sufficiently robust and to avoid enhancing systems that will be 
retired); Fidelity Letter at 2, 4-5 (noting that the Plan should 
call for an immediate cessation of enhancements to existing broker-
dealer reporting systems which will retire once the CAT is 
operational); KCG Letter at 3 (noting that there should be a 
cessation of any changes to duplicative reporting systems during the 
period leading up to the CAT compliance date and once 
broker[hyphen]dealers have to begin reporting to the CAT and any 
such changes should be built in to the CAT); FIF Letter at 27.
    \1420\ SIFMA Letter at 5-6; FSR Letter at 10 (stating that to 
the extent that any subset of data collected under the CAT NMS Plan 
is otherwise collected under a different reporting regime, the 
existing reporting regime should be amended as soon as possible to 
remove the duplicative reporting requirement).
---------------------------------------------------------------------------

    In response to the comments recommending that exemptions be granted 
for individual Industry Member CAT Reporters from duplicative reporting 
obligations if they meet a

[[Page 84776]]

specified data reporting quality threshold, the Participants explained 
that this would implicate the rules of the individual Participants and 
would be dependent upon the availability of extensive and high quality 
CAT Data, as well as Commission approval of rule change proposals by 
the Participants and the elimination of Commission data reporting rules 
such as Rules 17a-25 and 13h-1.\1421\ Therefore, the Participants did 
not recommend an amendment to the Plan to incorporate such an exemption 
from the individual Participants' rules.\1422\
---------------------------------------------------------------------------

    \1421\ Response Letter II at 26.
    \1422\ Id.
---------------------------------------------------------------------------

    Nevertheless, the Participants explained that they have been 
exploring whether the CAT or the duplicative systems would require 
additional functionality to permit cross-system regulatory analyses 
that would minimize the duplicative reporting obligations.\1423\ The 
Participants stated that FINRA remains committed to working with the 
Plan Processor to integrate CAT Data with data collected by OATS if it 
can be accomplished in an efficient and cost effective manner.\1424\ 
However, the Participants stated that FINRA anticipates that CAT 
Reporters who are FINRA members and report to OATS will need to report 
to both OATS and the CAT for some period until FINRA can ensure that 
CAT Data is of sufficient quality for surveillance purposes and FINRA 
is able to integrate CAT Data with the remaining OATS data in a way 
that permits it to continue to perform its surveillance 
obligations.\1425\ In addition, the Participants stated that FINRA 
believes that requiring all current OATS reporters to submit data to 
the Central Repository within two years after the Commission approves 
the Plan may reduce the amount of time that OATS and CAT will need to 
operate concurrently and may help facilitate the prompt retirement of 
OATS.\1426\
---------------------------------------------------------------------------

    \1423\ Id.
    \1424\ Id. (noting that the Plan states that FINRA would 
consider exempting firms from the OATS requirements if the data 
submitted to the CAT is of sufficient quality for surveillance 
purposes and FINRA is able to integrate CAT Data with the remaining 
OATS data in a way that permits it to continue to perform its 
surveillance obligations).
    \1425\ Id.
    \1426\ Id.
---------------------------------------------------------------------------

    In response to the comment that the CAT should be designed from the 
outset to include the ability to implement all of the surveillance 
methods and functions currently used by the Participants, the 
Participants explained that CAT is not intended to be the sole source 
of surveillance for each Participant, and, therefore, would not cover 
all surveillance methods currently employed by the Participants.\1427\ 
However, the Participants stated that, with the goal of using the CAT 
rather than duplicative systems for surveillance and other regulatory 
purposes, the Participants have provided the Bidders with specific use 
cases that describe the surveillance and investigative scenarios that 
the Participants and the Commission would require for the CAT, and that 
during the bidding process each Bidder has been required to demonstrate 
its ability to meet these criteria.\1428\ In addition, the Participants 
noted that they have had multiple discussions with the Bidders 
regarding the query capabilities that each Bidder would provide, and 
the Participants believe that the selected Plan Processor will have the 
capability to provide the necessary surveillance methods and functions 
to allow for the retirement of duplicative systems.\1429\ The 
Participants also stated that the Plan Processor will provide support, 
including a trained help-desk staff and a robust set of testing, 
validation, and error correction tools, to assist CAT Reporters as they 
transition to CAT reporting.\1430\
---------------------------------------------------------------------------

    \1427\ Id. at 27.
    \1428\ Id.
    \1429\ Id.
    \1430\ Response Letter I at 38-39.
---------------------------------------------------------------------------

    In response to comments concerning a moratorium on changes to new 
systems, the Participants explained that they plan to minimize the 
number of changes that are rolled out to duplicative systems to the 
extent possible.\1431\ The Participants, however, cannot commit to 
making no changes to the duplicative systems as some changes may be 
necessary before these systems are retired--for example, changes to 
these duplicative systems may need to be made to address Commission 
initiatives, new order types or security-related changes.\1432\
---------------------------------------------------------------------------

    \1431\ Response Letter II at 28.
    \1432\ Id.
---------------------------------------------------------------------------

    The Commission agrees with the commenters that the accuracy of the 
data reported to CAT, as in part measured by CAT Reporters' Error Rate, 
should be a factor in determining whether and when duplicative trade 
and order data rules and systems should be eliminated. As discussed 
above, the rule change proposals regarding duplicative systems 
retirement that the Participants will file with the Commission within 
six months of the Effective Date must condition the elimination of 
existing data reporting systems on CAT Data meeting minimum standards 
of accuracy and reliability. The Commission believes that this approach 
may incentivize accurate CAT reporting because it could potentially 
allow Industry Members to retire redundant, and costly to maintain, 
systems sooner. The Commission believes that any such improvements in 
accuracy, together with the amended Plan's reduction of the period for 
the Participants to complete their analyses of duplicative, partially 
duplicative, and non-duplicative rules and its acceleration of the 
requirement to file system elimination rule change proposals, should 
facilitate an earlier retirement of duplicative systems. However, the 
Commission does not believe that a specific Error Rate that would 
automatically trigger the elimination of the collection of data through 
an existing, duplicative system can be set in advance, through a Plan 
amendment at this time. Rather, the more flexible standard set forth in 
the Plan, as amended--that duplicative systems will be retired as soon 
as possible after data of sufficient accuracy and reliability to ensure 
that the Participants can effectively carry out their regulatory 
obligations is available in CAT--recognizes the primacy of ensuring 
that CAT Data can be used to perform all regulatory functions before 
existing systems are retired, and is therefore more appropriate.
    In response to the comments regarding individual exemptions from 
reporting to duplicative systems for Industry Members whose CAT 
reporting meets certain quality thresholds, the Commission supports the 
Participants' efforts to explore whether this can be feasibly 
accomplished by adding functionality to permit cross-system regulatory 
analyses that would minimize duplicative reporting obligations or, in 
the case of OATS, integrating CAT Data with data collected by OATS. 
Accordingly, the Commission is amending Section C.9 of Appendix C of 
the Plan to require that the Participants consider, in their rule 
filings to retire duplicative systems, whether individual Industry 
Members can be exempted from reporting to duplicative systems once 
their CAT reporting meets specified accuracy 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. However, 
the Commission does not believe that it would be appropriate, at this 
time, to amend the Plan to require the Participants to grant such 
individual

[[Page 84777]]

exemptions because, as noted by the Participants, it may not be 
feasible to implement the technological and organizational mechanisms 
that would obviate the need for duplicative reporting by ensuring that 
the Participants can effectively carry out their regulatory obligations 
using CAT Data.
    In response to the comment that the CAT should be designed from the 
outset to include the ability to implement all of the surveillance 
methods and functions currently used by the Participants, the 
Commission notes that the Participants have indicated that they have 
provided the Bidders with their surveillance and investigative use 
cases, that each Bidder has been required to demonstrate its ability to 
meet these criteria, and that the selected Plan Processor will have the 
capability to provide the necessary surveillance methods and functions 
to allow for the retirement of duplicative systems. Therefore, the 
Commission believes that the CAT is being designed to include the 
ability to implement all of the surveillance methods and functions 
currently used by the Participants, and is not amending the Plan in 
response to this comment.
    In response to the commenter that suggested a specific principles-
based framework for retiring duplicative systems,\1433\ the Commission 
believes that, in general, the principles outlined in the CAT NMS Plan 
for retiring potentially duplicative rules and systems are reasonable. 
The principles outlined in the Plan recognize that the Participants and 
the Commission will continue to rely on information collected through 
existing regulatory reporting systems to reconstruct market events, 
conduct market analysis and research in support of regulatory decision-
making, and conduct market surveillance, examinations, investigations, 
and other enforcement functions until analogous information is 
available through CAT. Some period of duplicative reporting may be 
necessary to ensure that regulators can obtain accurate and reliable 
information through CAT to carry out these functions. However, the 
Commission also agrees that the CAT Reporter support, testing, and 
validation tools created for the CAT--rather than similar tools 
associated with legacy reporting systems--should be used to assist 
Industry Members as they transition to CAT reporting.\1434\
---------------------------------------------------------------------------

    \1433\ SIFMA Letter at 7-10.
    \1434\ See supra notes 1403, 1430 and accompanying text.
---------------------------------------------------------------------------

    The Commission agrees with the Participants that there cannot be a 
moratorium on changes to existing systems in connection with the launch 
of CAT. As discussed above, the Commission and the SROs use the 
information collected through existing regulatory reporting systems to 
carry out a variety of regulatory functions. Until these systems are 
fully retired, the Commission and the SROs will continue to rely upon 
these systems to obtain the information they need to perform these 
functions. Therefore, because changes to these systems may be necessary 
for the Commission or the SROs to obtain such information, the 
Commission does not believe a moratorium should be imposed on changes 
to these systems. However, the Commission supports the Participants' 
commitment to minimizing changes to existing systems and encourages the 
Participants to consider the necessity of any such changes and any 
additional burden such changes would impose on their members during the 
period in which members are transitioning to CAT reporting. 
Accordingly, the Commission is amending Section C.9 of Appendix C of 
the Plan to state that between the Effective Date and the retirement of 
the Participants' duplicative systems, each Participant, to the extent 
practicable, will attempt to minimize changes to those duplicative 
systems.
b. Retirement of Systems Required by SEC Rules
    The CAT NMS Plan also discusses specific Commission rules that 
potentially can be eliminated in connection with CAT implementation. 
Specifically, the Plan states that, based on preliminary industry 
analyses, large trader reporting requirements under SEC Rule 13h-1 
could be eliminated. In contrast, the Plan states that ``[l]arge trader 
reporting responsibilities on Form 13H and self-identification would 
not appear to be covered by the CAT.'' \1435\
---------------------------------------------------------------------------

    \1435\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
C.9.
---------------------------------------------------------------------------

    One commenter suggested that the Commission should eliminate 
requirements such as Rule 13h-1 and Form 13H regarding large trader 
filings, noting that Commission Staff will have access to the same 
information that they are receiving through Form 13H through CAT.\1436\ 
Another commenter recommended the elimination of the EBS system, under 
SEC Rule 17a-25,\1437\ with respect to equity and option data.\1438\
---------------------------------------------------------------------------

    \1436\ MFA Letter at 9.
    \1437\ 17 CFR 240.17a-25.
    \1438\ SIFMA Letter at 10-11. This commenter also explained that 
in order to retire EBS, the relevant data elements that are included 
in an EBS report need to be retained as part of CAT's Technical 
Specifications and the accuracy of the CAT Data reported by member 
firms should meet an acceptable threshold for its error/rejection 
rate. Id. The commenter also noted that fixed income data, since it 
will not be available initially through CAT, will still need to be 
requested through the EBS system and that historical equity and 
option data will have to be retained and archived to accommodate 
requests for this data through EBS. Id.
---------------------------------------------------------------------------

    In their response, the Participants noted that ``the elimination of 
potentially duplicative requirements established by the SEC (e.g., SEC 
Rule 17a-25 regarding electronic submission of securities transactions 
[the EBS system] and SEC Rule 13h-1 regarding large traders) are 
outside the Participants' purview.'' \1439\
---------------------------------------------------------------------------

    \1439\ Response Letter II at 21.
---------------------------------------------------------------------------

    The Commission acknowledges that duplicative reporting will impose 
significant burdens and costs on broker-dealers, that certain SEC rules 
require the reporting of some information that will also be collected 
through CAT, and that certain SEC rules may need to be modified or 
eliminated in light of CAT. Specifically, the Commission believes that, 
going forward, CAT will provide Commission Staff with much of the 
equity and option data that is currently obtained through equity and 
option cleared reports \1440\ and EBS,\1441\ including the additional 
transaction data captured in connection with Rule 13h-1 concerning 
large traders.\1442\ Accordingly, Commission Staff is directed to 
develop a proposal for Commission consideration, within six months of 
the Effective Date, to: (i) Amend Rule 17a-25 to eliminate the 
components of EBS that are redundant of CAT, and (ii) amend Rule 13h-
1,\1443\ the large trader Rule, to eliminate its transaction reporting 
requirements, in each case effective at such time as CAT Data meets 
minimum standards of accuracy and reliability. In addition, as part of 
this proposal, Commission Staff will recommend whether there will 
continue to be any need for the

[[Page 84778]]

Commission to make requests for equity and option cleared reports, 
except for historical data, once CAT is fully operational and CAT Data 
meets minimum standards of accuracy and reliability.\1444\ The 
Commission notes that the EBS system will still be used to collect 
historical equity and options data--i.e., for executions occurring 
before CAT is fully operational--and data on asset classes not 
initially covered by CAT, such as fixed income, municipal, or other 
government securities, and that the components of the EBS system 
necessary to enable such usage will need to be retained. However, to 
the extent that CAT is expanded to include data on additional asset 
classes, the Commission will consider whether the components of the EBS 
system related to the retention and reporting of data on these asset 
classes can also be eliminated.\1445\
---------------------------------------------------------------------------

    \1440\ See Notice, supra note 5, at 30660 (discussing equity and 
option cleared reports).
    \1441\ See id. (discussing the EBS system).
    \1442\ 17 CFR 240.13h-1; see also Adopting Release, supra note 
14, at 45734 (``The Commission . . . note[s] . . . that . . . 
aspects of Rule 13h-1 may be superseded by Rule 613. Specifically, 
the trade reporting requirements of Rule 13h-1 are built upon the 
existing EBS system. To the extent that . . . data reported to the 
central repository under Rule 613 obviates the need for the EBS 
system, the Commission expects that the separate reporting 
requirements of Rule 13h-1 related to the EBS system would be 
eliminated.'')
    \1443\ 17 CFR 240.13h-1(e).
    \1444\ At this time, the Commission does not anticipate that 
there will be a need to make such requests.
    \1445\ In addition, the Commission does not anticipate that it 
will make requests for equity and option cleared reports, except for 
historical data, once CAT is fully operational.
---------------------------------------------------------------------------

    The Commission does not agree with the comment that SEC Staff will 
have access through CAT to the ``same information'' that it receives 
through Form 13H.\1446\ Form 13H collects information to identify a 
large trader, its securities affiliates, and its operations, and does 
not collect audit trail data on effected transactions. The self-
identification and other Form 13H filing requirements of Rule 13h-1 
will not be duplicated by or redundant of CAT.
---------------------------------------------------------------------------

    \1446\ To cite one example, Item 4 of Form 13H requires large 
traders to provide an ``Organizational Chart'' that will not be 
reported under CAT.
---------------------------------------------------------------------------

c. Record Retention
    The CAT NMS Plan states that certain broker-dealer recordkeeping 
requirements could be eliminated once the CAT is operational.\1447\ The 
Plan also requires that information reported to the Central Repository 
be retained in a convenient and usable standard electronic data format 
that is directly available and searchable electronically without any 
manual intervention by the Plan Processor for a period of not less than 
six years.\1448\
---------------------------------------------------------------------------

    \1447\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
C.9.
    \1448\ See id. at Section 6.5(b).
---------------------------------------------------------------------------

    One commenter suggested that record retention by the CAT should be 
established for periods long enough to satisfy regulatory requirements 
associated with other regulatory systems (e.g., the seven year record 
retention requirement for EBS) and that the Commission should consider 
the extent to which CAT reporting could fulfill recordkeeping 
obligations for a CAT Reporter.\1449\
---------------------------------------------------------------------------

    \1449\ SIFMA Letter at 5-6.
---------------------------------------------------------------------------

    The Participants explained that the Plan's six-year retention 
period exceeds the record retention period applicable to national 
securities exchanges and national securities associations under SEC 
Rules 17a-1(b) and 17a-6(a),\1450\ which require that documents be kept 
for at least five years.\1451\ The Participants further explained that 
they do not believe that the Plan's record retention requirements 
should be expanded beyond six years since such expansion would impact 
Bidder solutions and the maintenance costs associated with the 
CAT.\1452\ With respect to the comment regarding CAT Reporters using 
the CAT to satisfy their recordkeeping obligations, the Participants 
maintained that it would be inappropriate for CAT Reporters to fulfill 
their recordkeeping obligations by relying on the Central Repository in 
the initial phase of CAT reporting because permitting this use of the 
Central Repository would impose additional regulatory and resource 
obligations on the Central Repository.\1453\ In the longer term, the 
Participants recognized that the Central Repository could be a useful 
tool to assist CAT Reporters in satisfying their recordkeeping and 
record retention obligations, and stated that after the implementation 
of CAT, the Operating Committee will review whether it may be possible 
for CAT Reporters to use the CAT to assist in satisfying certain 
recordkeeping and record retention obligations.\1454\
---------------------------------------------------------------------------

    \1450\ 17 CFR 240.17a-1(b), 17a-6(a).
    \1451\ Response Letter I at 27.
    \1452\ Id.
    \1453\ Id.
    \1454\ Id.
---------------------------------------------------------------------------

    The Commission disagrees with the suggestion from commenters that 
the CAT NMS Plan should be amended to extend its six-year record 
retention timeframe to satisfy the requirements of existing reporting 
systems. In addition to exceeding the five year retention period 
applicable to national securities exchanges and associations under 
Rules 17a-1(b) and 17a-6(a), as pointed out by the Participants, the 
Commission notes that the six-year timeframe set forth in the CAT NMS 
Plan reflects the six-year data retention requirement of Rule 17a-
4(a).\1455\ The Commission does not anticipate that any variation 
between the retention periods for existing systems and the CAT system 
will hinder the potential retirement of existing systems that are 
duplicative of CAT. In addition, while the Commission believes it is 
important to implement the initial phases of CAT reporting first, once 
CAT is fully operational, the Participants, the Plan Processor, and the 
Commission can consider further enhancements to the CAT system, 
including enhancements that could potentially enable the Central 
Repository to satisfy certain broker-dealer recordkeeping requirements, 
such as those set forth in Rules 17a-3 and 17a-4.\1456\
---------------------------------------------------------------------------

    \1455\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
D.12(m).
    \1456\ 17 CFR 240.17(a)(3)-(4).
---------------------------------------------------------------------------

10. Primary Market Transactions and Futures
a. Primary Market Transactions
    The CAT NMS Plan provides that the Participants jointly, within six 
months of the CAT NMS Plan's approval by the Commission, will provide a 
document (the ``Discussion Document'') to the Commission that will 
include a discussion of how Primary Market Transactions could be 
incorporated into the CAT.\1457\ In Appendix C of the CAT NMS Plan, the 
Participants conclude that the Discussion Document should be limited to 
sub-account allocations for Primary Market Transactions.\1458\ 
Moreover, the CAT NMS Plan does not require any specific timetable for 
Primary Market Transaction data to be reported to the CAT.
---------------------------------------------------------------------------

    \1457\ See CAT NMS Plan, supra note 5, at Section 6.11; see also 
infra note 3059. The CAT NMS Plan specifies that the Discussion 
Document will include details for (i) each order and Reportable 
Event that may be required to be provided, (ii) which market 
participants may be required to provide the data, (iii) the 
implementation timeline, and (iv) a cost estimate.
    \1458\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.6.
---------------------------------------------------------------------------

    The Participants explained that for Primary Market Transactions 
there are generally two key phases: A ``book building'' phase and an 
allocation phase (which includes top-account allocations and sub-
account allocations).\1459\ According to the Participants, the ``book 
building phase involves the process by which underwriters gather and 
assess investor demand for an offering of securities and seek 
information important to their determination as to the size and pricing 
of an issue. Using this and other information, the underwriter will 
then decide how to allocate IPO shares to purchasers.'' \1460\ The 
Participants' understanding is ``that these are so-called `top account' 
allocations--allocations to institutional clients or retail broker-
dealers, and that such allocations are conditional and may fluctuate 
until the offering

[[Page 84779]]

syndicate terminates. Sub-account allocations occur subsequently, and 
are made by top-account institutions and broker-dealers prior to 
settlement.'' \1461\
---------------------------------------------------------------------------

    \1459\ Id.
    \1460\ Id.
    \1461\ Id.
---------------------------------------------------------------------------

    In reaching their decision to limit Primary Market Transactions 
data for CAT reporting to sub-account allocations, the Participants 
noted that sub-account allocations are ``maintained by broker-dealers 
in a manner that would allow for reporting to the Central Repository 
without unreasonable costs and could assist the Commission and the 
Participants in their regulatory obligations.'' \1462\ The Participants 
argued, however, that because top-account allocations are not firm and 
may fluctuate, reporting this information to the Central Repository 
``would involve significantly more costs which, when balanced against 
the marginal benefit, is not justified at this time.'' \1463\
---------------------------------------------------------------------------

    \1462\ Id.
    \1463\ Id.
---------------------------------------------------------------------------

    The Commission received two comments advocating for delaying the 
inclusion of all Primary Market Transactions data in the CAT (and for 
excluding top-account allocation data),\1464\ and one comment 
supporting the inclusion of Primary Market Transaction data in the CAT, 
for both top-account and sub-account allocation data.\1465\ 
Specifically, the two commenters who advocated that Primary Market 
Transactions should be delayed until OATS and other regulatory 
reporting systems are retired cited ``mounting regulatory expenses'' 
and limited and different resources being required to address this 
element.\1466\ These commenters added that regulatory and surveillance 
requirements should be defined before adding Primary Market Transaction 
data to the CAT and disputed the Commission's assessment in the Notice 
of the CAT NMS Plan that top-account allocation should be a CAT data 
element.\1467\ One of these commenters noted that significant analysis 
and data modelling would be required to effectively and efficiently 
include Primary Market Transaction data.\1468\ The other commenter 
cited a DAG recommendation that if Primary Market Transaction data were 
required that only sub-account allocation data should be included due 
to operational feasibility.\1469\ The same commenter also requested 
clarification as to what is meant by Primary Market Transaction 
``allocations,'' and described its understanding that ``allocations'' 
under Rule 613(a)(1)(vi) only apply to the final step in the allocation 
process (i.e., not the preliminary book building allocations but the 
actual placement into a customer's account).\1470\
---------------------------------------------------------------------------

    \1464\ See SIFMA Letter at 36; FIF Letter at 13, 118-20.
    \1465\ See Hanley Letter.
    \1466\ SIFMA Letter at 36; FIF Letter at 13 (noting that ``the 
primary market and the secondary market are inherently different . . 
. different rules and reporting requirements, . . . business 
processes, . . . vendors, . . . and systems with different 
technology personnel.'').
    \1467\ SIFMA Letter at 36; FIF Letter at 13; see also Notice, 
supra note 5, at 30772 (``The Commission preliminarily believes that 
the potential benefits of including top-account information in the 
CAT could be significant and that the costs of including top-account 
information could be lower than what is described in the CAT NMS 
Plan and appropriate in light of significant potential benefits. For 
these reasons, the Commission preliminarily believes that top-
account information should not be excluded from the Discussion 
Document.'').
    \1468\ FIF Letter at 13.
    \1469\ SIFMA Letter at 36.
    \1470\ Id.
---------------------------------------------------------------------------

    The third commenter, however, advocated for including Primary 
Market Transaction data (both top-account and sub-account) in the 
CAT.\1471\ The commenter believed that regulators would benefit from 
having both sub-account and top-account Primary Market Transaction 
data, noting that such data would help regulators understand the 
economics of the offering process and could promote efficient capital 
formation.\1472\ The commenter reviewed academic literature related to 
the book building allocation process and suggested that the collection 
and analysis of Primary Market Transaction data could address open 
questions as to potential capital formation inefficiencies, including 
potential manipulation and/or violations of Rule 105 and fund 
manipulation.\1473\ The commenter stated that Form 13F data cannot 
fully capture primary market allocations because it is limited to 
institutional investment managers with investment discretion over $100 
million, and because secondary market transactions may occur before the 
filing of Form 13F is required.\1474\ The commenter also recommended 
that the SROs and the Commission require indications of interest during 
preliminary book building to be made available in an easily accessible 
format for both regulators and academics outside of CAT.\1475\
---------------------------------------------------------------------------

    \1471\ Hanley Letter.
    \1472\ Id. at 1.
    \1473\ Id. at 2-3.
    \1474\ Id. at 1 (noting ``[t]op-account allocations refer to 
allocations during the book-building process to institutional 
clients and retail broker-dealers . . . the subsequent sub-account 
allocations to the actual accounts receiv[e] the shares'').
    \1475\ Id. at 5-6. The commenter, however, stated that it is not 
requesting that CAT include pre-offer changes in tentative 
allocations. Hanley Letter at 4-6 (noting that during the pre-
offering stage of a book-building process, preliminary indications 
of interest while gathered are believed to be subject to change).
---------------------------------------------------------------------------

    The commenter advocating for the inclusion of both top-account and 
sub-account allocation Primary Market Transaction data also cited and 
disputed a FIF estimate that it would cost broker-dealers approximately 
$704,200 per firm to provide initial allocation information, stating 
that ``manually entering top-account allocation information into CAT 
(if available) should cost substantially less than estimated.'' \1476\ 
The commenter estimated costs to be $2,400 per offering for providing 
top-account allocation information, and argued such costs would be ``de 
minimis with respect to the overall cost of issuance.'' \1477\ The 
commenter also contested FIF's cost estimate of $58.7 million for 
providing sub-account information, noting that if CAT were to replace 
EBS \1478\ then the incremental cost of providing sub-account 
allocation information should also be de minimis.\1479\
---------------------------------------------------------------------------

    \1476\ Id. at 4.
    \1477\ Id. at 5.
    \1478\ EBS are trading records requested by the Commission and 
SROs from broker-dealers that are used in regulatory investigations 
to identify buyers and sellers of specific securities.
    \1479\ Hanley Letter at 5.
---------------------------------------------------------------------------

    In response to commenters, the Participants maintained their 
support for including in the CAT sub-account allocations but did not 
support reporting, or discussing in the Discussion Document, top-
account allocations.\1480\ The Participants reiterated that top-account 
allocation reporting for Primary Market Transactions would ``likely 
impose significant costs to CAT Reporters while only providing a 
marginal additional regulatory benefit over sub-account allocation 
data.'' \1481\ The Participants further stated that they have not 
determined a timeline for reporting Primary Market Transaction 
allocations, but have committed to not require it during the initial 
implementation phase of CAT.\1482\
---------------------------------------------------------------------------

    \1480\ Response Letter I at 49.
    \1481\ Id.
    \1482\ Id. at 50. In response to a commenter seeking 
clarification on the meaning of certain aspects of Primary Market 
Transactions, the Participants identified the relevant Plan 
provisions for the commenter. Id. at 50-51.
---------------------------------------------------------------------------

    Consistent with the reasoning stated in the adoption of Rule 613, 
the Commission believes that the Discussion Document should discuss the 
potential costs and benefits of expansion of CAT to include both top-
account and sub-account allocations for Primary Market Transactions. At 
the

[[Page 84780]]

same time, the Commission acknowledges that mandating the inclusion of 
Primary Market Transaction data, either top-account or sub-account, 
would require Commission action following public notice and comment. 
The Commission discusses the Primary Market Transaction cost comments 
in its economic analysis below.\1483\
---------------------------------------------------------------------------

    \1483\ See Section V.H.8, infra.
---------------------------------------------------------------------------

b. Futures
    Rule 613 and the CAT NMS Plan do not require the reporting of audit 
trail data on the trading of futures. One commenter, noting that the 
CAT NMS Plan does not require any information about stock index futures 
or options on index futures, stated that incorporating futures data 
into CAT would ``create a more comprehensive audit trail, which would 
further enhance the SROs' and Commission's surveillance programs.'' 
\1484\
---------------------------------------------------------------------------

    \1484\ CBOE Letter at 2; see also Better Markets Letter at 7.
---------------------------------------------------------------------------

    As noted above, the Participants, within six months of the CAT NMS 
Plan's approval by the Commission, will provide the Discussion Document 
that will include a discussion of how additional securities and 
transactions could be incorporated into CAT.\1485\ In their response, 
the Participants recognized that ``the reporting of additional asset 
classes and types of transactions is important for cross-market 
surveillance.'' \1486\ Further, the Participants stated their belief 
that the Commission also recognizes ``the importance of gradually 
expanding the scope of the CAT,'' and cited the Adopting Release, 
wherein the Commission directed the Commission Staff ``to work with the 
SROs, the CFTC staff, and other regulators and market participants to 
determine how other asset classes, such as futures, might be added to 
the consolidated audit trail.'' \1487\ Accordingly, the Participants 
stated that they intend to assess whether it would be appropriate to 
expand the scope of the CAT to include futures, at a later date.
---------------------------------------------------------------------------

    \1485\ See CAT NMS Plan, supra note 5, at Section 6.11.
    \1486\ Response Letter I at 26. The CAT NMS Plan specifies that 
the Discussion Document will include a discussion of debt securities 
and Primary Market Transactions, but does not expressly require that 
futures be in the Discussion Document. See CAT NMS Plan, supra note 
5, at Section 6.11.
    \1487\ Response Letter I at 26-27 (citing Adopting Release, 
supra note 14 at 45745 n.241).
---------------------------------------------------------------------------

    The Commission believes that the omission of futures data from the 
CAT NMS Plan is reasonable, particularly in light of limitations on the 
Commission's jurisdiction.
11. Error Rate
    CAT Data reported to the Central Repository must be timely, 
accurate and complete.\1488\ The CAT NMS Plan specifies the maximum 
Error Rate for CAT Reporters.\1489\ As noted in Section III.19, the 
term Error Rate is defined as ``the percentage of [R]eportable [E]vents 
collected by the [C]entral [R]epository in which the data reported does 
not fully and accurately reflect the order event that occurred in the 
market.'' \1490\ The Error Rate will apply to CAT Data as it is 
initially submitted to the Central Repository, before it has undergone 
the correction process.\1491\
---------------------------------------------------------------------------

    \1488\ See CAT NMS Plan, supra note 5, at Section 6.5(d)(2).
    \1489\ Id. at Section 6.5(d)(i). The Participants expect that 
post-correction Error Rates will be de minimis. See id. at Appendix 
C, Section A.3(b), n.102.
    \1490\ See id. at Section 1.1; see also 17 CFR 242.613(j)(6).
    \1491\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.3(a) (stating, ``[T]he initial step in ensuring the reliability 
and accuracy of data in the Central Repository is the validation 
checks made by the Plan Processor when data is received and before 
it is accepted into the Central Repository.'')
---------------------------------------------------------------------------

a. Definition of Error
    Some commenters sought additional information about the meaning of 
the term ``Error Rate'' and how Error Rates would be calculated. One 
commenter suggested that there should be clarification as to whether 
all errors would be treated equally.\1492\ Another commenter questioned 
whether there would be a minimum number of reports submitted before 
Error Rate calculations would take place, and whether all data 
submissions would be covered.\1493\ One commenter suggested that Error 
Rates be calculated daily on a rolling average, comparing a CAT 
Reporter's error rate to an aggregate Error Rate, so as to take into 
account daily fluctuations in Error Rates.\1494\ One commenter did not 
believe that all errors should be treated with the same severity, 
noting that some errors can be auto-corrected by CAT, and some errors 
(such as late reporting) can be immediately resolved, while other 
errors, such as linkage errors, are more problematic.\1495\ Three 
commenters suggested that the Error Rate should apply only to post-
correction, not pre-correction, data.\1496\ One of these commenters 
expressed support for the eventual goal of a de minimis post-correction 
Error Rate, but could not predict how long this would take to be 
achieved.\1497\
---------------------------------------------------------------------------

    \1492\ SIFMA Letter at 6.
    \1493\ UnaVista Letter at 4.
    \1494\ FIF Letter at 51.
    \1495\ Id. at 57. This commenter also stated that importance of 
data quality could consider whether the same data is available from 
multiple sources, noting that if two or more CAT Reporters are 
supplying the same information, regulators could effectively surveil 
if only one source of the data was correct. See id. at 58.
    \1496\ FSR Letter at 9; SIFMA Letter at 7; FIF Letter at 51.
    \1497\ FIF Letter at 52, 60. The commenter also noted that 
currently OATS does not have a de minimis error rate, and questioned 
how the CAT Plan Processor could detect errors that OATS cannot 
correct. Id. at 60.
---------------------------------------------------------------------------

    The Participants responded by explaining that the CAT NMS Plan 
adopted the definition of Error Rate from Rule 613, which does not 
distinguish among order events and focuses on cases where data ``does 
not fully and accurately reflect the order event that occurred in the 
market.'' \1498\ The Participants stated that they believe this 
definition is appropriate.\1499\ The Participants disagreed with 
commenters who suggested that the maximum Error Rate should be based on 
post-correction data,\1500\ and noted that a maximum Error Rate based 
on pre-corrected data is intended to encourage CAT Reporters to submit 
accurate data initially and to reduce the need for error corrections, 
as well as allow regulators more timely access to accurate data.\1501\
---------------------------------------------------------------------------

    \1498\ Response Letter I at 45 (citing 17 CFR 242.608(j)(6)).
    \1499\ Id.
    \1500\ FSR Letter at 9; SIFMA Letter at 7; FIF Letter at 51.
    \1501\ Response Letter I at 47.
---------------------------------------------------------------------------

    The Commission believes that the proposed, uniform definition of 
Error Rate is reasonable. The Commission also agrees with the 
Participants that Error Rates should be calculated based on pre-
correction, and not post-correction, data. The Commission believes that 
assessing Error Rates on a pre-correction basis is important to ensure 
that CAT Reporters submit CAT Data in compliance with the Plan and 
applicable rules of the Participants, and develop and maintain their 
reporting systems in a way that minimizes errors. In addition, focusing 
on Error Rates for pre-corrected data should reduce reliance on the 
error correction process, and improve the accuracy of the 
``uncorrected'' CAT Data available to regulators in circumstances where 
immediate action is required. The Commission also believes it critical 
that the error correction process be effective, so that errors in post-
correction CAT Data will be de minimis, as contemplated by the 
Participants.
b. Maximum Error Rate
    Several commenters expressed opinions regarding the initial maximum 
Error Rate. Two commenters supported

[[Page 84781]]

a 5% initial maximum Error Rate.\1502\ One of these commenters believed 
that a 5% Error Rate would permit an appropriate level of flexibility 
for CAT Reporters while still ensuring that CAT Data would be useable 
for market reconstructions.\1503\ Another commenter, however, disagreed 
and argued that, given the industry's experience with OATS, the maximum 
Error Rates should be lower than those proposed by the 
Participants.\1504\
---------------------------------------------------------------------------

    \1502\ UnaVista Letter at 3-4; FSR Letter at 9.
    \1503\ UnaVista Letter at 3.
    \1504\ Better Markets Letter at 9.
---------------------------------------------------------------------------

    Several commenters expressed views on how the initial maximum Error 
Rate should be adjusted over time.\1505\ Two commenters supported the 
Plan's requirement to evaluate Error Rates at least annually.\1506\ One 
of these commenters also believed that lowering the maximum Error Rate 
to 1% after one year of reporting was acceptable based on the current 
OATS error rates and the commenter's own experience with regulatory 
reporting.\1507\ Another commenter stated that it was difficult to 
assess whether a maximum Error Rate of 1% after one year of reporting 
was appropriate, and indicated that it would prefer a more gradual rate 
decrease.\1508\ The commenter recommended that the Operating Committee 
establish maximum Error Rates for the second and third years of 
reporting after reviewing the first year's Error Rate data.\1509\ Two 
commenters recommended that the maximum Error Rate be reviewed whenever 
there are significant changes to the CAT (e.g., the addition of 
security classes) \1510\ or applicable regulations.\1511\
---------------------------------------------------------------------------

    \1505\ UnaVista Letter at 3-4, Better Markets Letter at 9, FIF 
Letter at 50-52, SIFMA Letter at 6; FSR Letter at 9; see also 
Section IV.D.9, supra, for a summary of comment letters that discuss 
how error rates impact the retirement of duplicative systems.
    \1506\ UnaVista Letter at 3-4; FSR Letter at 9.
    \1507\ UnaVista Letter at 3-4.
    \1508\ FIF Letter at 56, 58.
    \1509\ Id. The commenter stated the objective should be an Error 
Rate that meets the regulators' surveillance objectives, and is 
achievable by CAT Reporters at a reasonable cost. Id. at 57.
    \1510\ Id. at 52, 55.
    \1511\ UnaVista Letter at 4.
---------------------------------------------------------------------------

    In response to concerns that the Participants do not have 
sufficient information or experience to determine the initial maximum 
Error Rate, \1512\ the Participants explained that they established 
this maximum Error Rate after performing a detailed analysis of OATS 
error rates over time, and believed that such analysis provided a sound 
basis for their determination.\1513\ The Participants stressed the 
importance of evaluating a CAT Reporter's actual experience, in setting 
an appropriate maximum Error Rate, and noted that the CAT NMS Plan 
requires the Operating Committee to review the maximum Error Rate at 
least annually.\1514\
---------------------------------------------------------------------------

    \1512\ FIF Letter at 50, SIFMA Letter at 6-7.
    \1513\ Response Letter I, at 45-46. This analysis considered the 
initial error rates for reporting by market participants that were 
reporting audit trail information to OATS for the first time, and 
assumed a similar learning curve would be experienced by CAT 
Reporters who have not previously reported audit trail information, 
such as options market participants.
    \1514\ Id.
---------------------------------------------------------------------------

    With respect to the comments recommending that the maximum Error 
Rate also be reviewed upon significant changes to the CAT or 
regulations, the Participants noted that the required testing and other 
management processes surrounding CAT systems changes should mitigate 
concerns about their impact on Error Rates, and that the periodic 
updates on Error Rates provided to the Operating Committee should alert 
them if there is a need to change the maximum Error Rate.\1515\
---------------------------------------------------------------------------

    \1515\ Id. at 46-47.
---------------------------------------------------------------------------

    The Commission believes that the proposed 5% initial maximum Error 
Rate is reasonable and strikes an appropriate balance between: (1) 
Ensuring that the initial submissions to the Central Repository by CAT 
Reporters are sufficiently accurate for regulatory use; and (2) 
providing CAT Reporters with time to adjust to the new more 
comprehensive regulatory reporting mechanism. The Commission 
understands that the Participants considered relevant historical 
information related to OATS reporting error rates, particularly when 
new reporting requirements were introduced, and believes this is a 
reasonable basis for setting the initial maximum Error Rates for CAT 
Data.\1516\ The Commission understands that CAT Reporters who currently 
report to OATS report with a significantly lower Error Rate, but 
recognizes that more flexibility may be necessary during the 
transition, and notes the 1% maximum Error Rate applicable to each CAT 
Reporter one year after their reporting obligation has begun is 
comparable to current OATS reporting error rates.\1517\
---------------------------------------------------------------------------

    \1516\ Participants have considered the industry's experience 
with the OATS system over the last 10 years, including three 
significant additions to OATS: (1) Requirement that manual orders be 
reported to OATS; (2) requirement that OTC Equity Securities be 
reported to OATS; and (3) requirement that all NMS stocks be 
reported to OATS. Each of these changes resulted in significant 
updates to the required formats which required OATS reporters to 
update and test their reporting systems and infrastructure. See CAT 
NMS Plan, supra note 5, at Appendix C, Section A.3(b).
    \1517\ See id. at Appendix C, Section A.3(b), n.99.
---------------------------------------------------------------------------

    The Commission also believes that the process established by the 
CAT NMS Plan for reducing the maximum Error Rate over time is 
reasonable, and emphasizes the important roles of both the Plan 
Processor and the Operating Committee in ensuring that Error Rates are 
steadily reduced over time. The Plan requires the Plan Processor 
regularly to provide information and recommendations regarding Error 
Rates to the Operating Committee,\1518\ and requires the Operating 
Committee to review and reset the maximum Error Rate at least on an 
annual basis.\1519\ Given the importance to regulators of audit trail 
information that meets high standards of accuracy, the Commission 
expects the Plan Processor and Participants to closely monitor Error 
Rates, particularly in the early stages of CAT implementation, so that 
steps can be taken to reduce the maximum Error Rate as promptly as 
possible. The Commission also encourages the Plan Processor and 
Participants to assess the impact of significant changes to the CAT or 
applicable regulations on the maximum Error Rate, at least on a 
transitional basis, and provide additional flexibility as warranted. As 
described in Section IV.H, the Commission is amending Section 6.6 of 
the Plan to require that, prior to the implementation of any Material 
Systems Change, the Participants provide the Commission with an 
assessment of the projected impact of any Material Systems Change on 
the maximum Error Rate.
---------------------------------------------------------------------------

    \1518\ Id. at Appendix C, Section A.3(b).
    \1519\ See id. at Section 6.5(d)(i); Appendix C, Section A.3(b).
---------------------------------------------------------------------------

c. Different Error Rates for Different Products and Data Elements
    The CAT NMS Plan imposes the same Error Rate on all products and 
data elements. Commenters suggested differentiation in this area. One 
commenter recommended that the Error Rate only apply to equities.\1520\ 
Another commenter suggested that Error Rates for equities, options and 
customer data should be calculated separately.\1521\ A third commenter 
expressed the view that, as new products are covered by CAT, they 
should be subject to a more liberal Error Rate for an appropriate 
transition period.\1522\ Two commenters did not believe there is enough 
information to set an appropriate maximum Error Rate for options market 
making, customer information or allocations, given that there is little 
or

[[Page 84782]]

no reporting history for them, and suggested applying the Error Rate on 
a post-correction basis for these products and data elements, at least 
for a transitional period.\1523\
---------------------------------------------------------------------------

    \1520\ FSR Letter at 9.
    \1521\ SIFMA Letter at 6.
    \1522\ FIF Letter at 52.
    \1523\ FIF Letter at 51, SIFMA Letter at 6-7.
---------------------------------------------------------------------------

    In response, the Participants stated that they continue to believe 
that a single overall Error Rate for all products and data elements is 
appropriate.\1524\ They acknowledged the importance of gathering more 
granular information about Error Rates, including differences among 
products, and noted that the CAT NMS Plan requires the Plan Processor 
to provide the Operating Committee with regular reports that show more 
detailed Error Rate data.\1525\
---------------------------------------------------------------------------

    \1524\ Response Letter I at 47.
    \1525\ Id. (referencing CAT NMS Plan Section 6.1(o)(v)).
---------------------------------------------------------------------------

    The Commission believes that it is reasonable, at this time, to 
apply the same maximum Error Rate to all products and data elements, in 
the Plan filed by the Participants. The Commission notes that the 
initial 5% maximum Error Rate, which substantially exceeds the OATS 
error rates, was established in recognition of the fact that certain 
products (e.g., options) and data elements (e.g., market maker quotes, 
customer information) had not previously been reported in OATS. The 
Commission, however, notes that the Participants may assess, as the CAT 
is developed and implemented, whether it is appropriate to impose Error 
Rates that vary depending on the product, data element, or other 
criteria.\1526\ As discussed in Section IV.H, the Commission is 
amending the Plan to require that the Participants provide the 
Commission with an annual evaluation that addresses the application of 
Error Rates based on product, data elements or other criteria.
---------------------------------------------------------------------------

    \1526\ Section 6.5(d) of the CAT NMS Plan contemplates a single 
Error Rate for all data. If the Participants determine that it is 
appropriate to establish different Error Rates for different 
products, data elements, or other criteria, a Plan amendment, 
subject to notice and comment, would be required.
---------------------------------------------------------------------------

d. Compliance With Maximum Error Rate During the Initial Implementation 
Period
    Two commenters suggested that CAT Reporters not be required to 
comply with the maximum Error Rate during the initial implementation 
period for the CAT.\1527\ One of these commenters explained that this 
would provide CAT Reporters a window of time to better understand the 
types of errors that are being returned by the CAT, and adjust their 
processes accordingly, without incurring liability for exceeding the 
maximum Error Rate.\1528\ Another commenter stressed the importance of 
receiving feedback from the Plan Processor so that CAT Reporters can 
identify weaknesses and improve the accuracy of their CAT 
reporting.\1529\ This commenter recommended that the Plan Processor 
provide CAT Reporters with a detailed daily error report, as well as 
monthly report cards.\1530\
---------------------------------------------------------------------------

    \1527\ SIFMA Letter at 6-7, UnaVista Letter at 4. One commenter 
also stated that small broker-dealers should not be excused from 
error rate requirements if they begin reporting voluntarily at the 
same time large broker-dealers begin reporting. This commenter 
argued that if small broker-dealers are permitted to report to CAT 
with limitless errors during the phase designed for large broker-
dealers to report without being subject to an error rate, the 
utility of CAT will be diminished. See Better Markets Letter at 9. 
The Commission believes that a maximum Error Rate would apply to 
anyone reporting to CAT, whether mandated to do so to be in 
accordance with the CAT NMS Plan or voluntarily.
    \1528\ SIFMA Letter at 6.
    \1529\ FIF Letter at 52.
    \1530\ FIF Letter at 54; see also SIFMA Letter at 7. This 
commenter also recommended that the CAT include a robust toolset and 
customer service model to assist CAT Reporters in meeting the 
established error rates. See FIF Letter at 126-127.
---------------------------------------------------------------------------

    The Participants responded by noting that Rule 613(g) requires the 
Participants to enforce compliance by their members with the provisions 
of the Plan at all times it is in effect.\1531\ The Participants also 
pointed out that the Plan provides that CAT Reporters will be provided 
tools to facilitate testing and error correction, as well as have 
access to user support. With respect to the importance of feedback from 
the Plan Processor,\1532\ the Participants noted that the Plan requires 
the Plan Processor to provide CAT Reporters with error reports, 
including details on the reasons for rejection, as well as daily and 
monthly statistics from which CAT Reporters can compare their 
performance with their peers.\1533\ As discussed in Section IV.H, the 
Commission is amending the Plan to require that the Participants 
provide the Commission with an annual evaluation of how the Plan 
Processor and the Participants are monitoring Error Rates.
---------------------------------------------------------------------------

    \1531\ Response Letter I at 47-48.
    \1532\ FIF Letter at 52, 55, 57.
    \1533\ See Response Letter I at 48 (referencing CAT NMS Plan, 
Appendix D, Section 1.2).
---------------------------------------------------------------------------

    The Commission believes that the implementation period for Error 
Rates is reasonable and that it is not necessary to establish a grace 
period, as suggested by commenters, during which Error Rates would not 
apply. Ensuring the accuracy of CAT Data is critical to regulators and, 
as noted above, the initial maximum Error Rates have been set at levels 
to accommodate the fact that CAT Reporters will be adjusting to a new 
regulatory reporting system.\1534\ In addition, the Commission notes 
that the CAT NMS Plan provides for testing periods,\1535\ as well as 
tools and other support, to facilitate initial compliance by CAT 
Reporters. As noted by the Participants, the Plan Processor will 
provide regular feedback to CAT Reporters with respect to their 
reporting weaknesses to assist them in reducing their Error 
Rates.\1536\
---------------------------------------------------------------------------

    \1534\ In response to the commenter that noted that if two or 
more CAT Reporters are supplying the same information, regulators 
could effectively surveil if only one source of the data was 
correct, see FIF Letter at 58, the Commission believes that it is 
important that the audit trail contains consistently accurate 
information from all sources obligated to report data and that 
errors not be permitted to exist in the audit trail just because 
they were correctly reported by one party.
    \1535\ See Section IV.D.8, supra, for a description of testing 
periods.
    \1536\ The Plan requires the Plan Processor to define and design 
a process to efficiently and effectively communicate with CAT 
Reporters to identify errors, so that they can work to ensure that 
they get feedback to improve their reporting. See CAT NMS Plan, 
supra note 5, at Appendix C, Section A(3)(b).
---------------------------------------------------------------------------

e. Error Correction Timeline
    The CAT NMS Plan sets forth a timeline with deadlines for providing 
raw data and corrected data to the CAT. CAT Reporters must submit data 
to the CAT by 8:00 a.m. ET on T+1.\1537\ By 12:00 p.m. ET on T+1, the 
CAT must perform checks for initial validations and lifecycle linkages, 
and communicate errors to CAT Reporters.\1538\ CAT Reporters must 
resubmit corrected data to the CAT by 8:00 a.m. ET on T+3.\1539\ The 
Plan Processor must ensure that regulators have access to corrected and 
linked order and Customer data by 8:00 a.m. ET on T+5.\1540\
---------------------------------------------------------------------------

    \1537\ See id. at Sections 6.3(b)(ii), 6.4(b)(ii).
    \1538\ Id. at Appendix C, Section A.1(a)(iv).
    \1539\ Id.
    \1540\ Id. at Appendix C, Section A.2(a).
---------------------------------------------------------------------------

    Two commenters believed the error correction timeline was too 
aggressive, and that at least initially, the CAT should use the current 
error correction timelines for systems such as OATS, which is 
T+5.\1541\ One commenter specifically suggested that the timeline for 
error corrections should remain at T+5 for the first year of CAT 
reporting.\1542\ This commenter also noted that, because the Plan 
Processor is required to communicate errors to CAT Reporters by 5:00 
p.m. ET on T+1,

[[Page 84783]]

staffing adjustments may be necessary to ensure that the appropriate 
personnel are available after 5:00 p.m. ET to analyze and correct data, 
and if communications with a customer were necessary to correct an 
error, the CAT Reporter could not satisfy the 8:00 a.m. ET T+2 timeline 
for providing corrected data.\1543\ This commenter also recommended 
that the Plan Processor identify errors in customer information data by 
noon on T+1, the same time as the Plan Processor identifies errors in 
transaction reports, instead of by 5:00 p.m. ET on T+1, to assist with 
prompt analysis of linking errors.\1544\ Another commenter suggested 
that the use of ``pre-validation checks,'' prior to the formal 
submission of data to the CAT, could enhance the accuracy and integrity 
of the CAT Data.\1545\
---------------------------------------------------------------------------

    \1541\ KCG Letter at 9; FIF Letter at 52.
    \1542\ FIF Letter at 52. The commenter also noted that CAT 
Reporters do not have access to their reported data using a bulk 
extract format, which would facilitate error validation and 
correction. Id. The commenter also suggested that the five-day error 
correction timeline begin from the time the CAT Reporter receives a 
reject message. Id. at 53.
    \1543\ Id. at 53. The Commission notes that time by which a CAT 
Reporter must report corrected Customer data is 5:00 p.m. ET on T+3.
    \1544\ Id. This commenter also suggested that CAT provide an 
``incident'' error functionality, similar to the one available for 
OATS. This functionality would allow CAT Reporters that are 
experiencing a systematic issue with reporting to submit an incident 
report to CAT and receive a case number, so the CAT Reporter's data 
reported could be tracked and referenced when considering the 
Reporter's error rate compliance. See FIF Letter at 130.
    \1545\ UnaVista Letter at 4. The commenter also noted that a T+5 
timeframe for regulatory access is feasible but that uniform 
formatting or pre-validation checks may reduce the timeframe for 
regulatory access. Id.
---------------------------------------------------------------------------

    In response to commenters who believed the timeframe for correction 
of CAT Data was too short, the Participants stressed the importance to 
regulators of the prompt availability of accurate data.\1546\ The 
Participants stated that the three day window for correction provided 
in the CAT NMS Plan appropriately balances the need for regulators to 
have prompt access to accurate data with the burdens imposed on the 
industry by the shorter error correction timeframe.\1547\ The 
Participants noted that the shorter three-day error correction 
timeframe would allow better regulatory surveillance and market 
oversight in accordance with Rule 613.\1548\ In response to the 
commenter that requested additional time to correct errors in customer 
data, the Participants expressed the view that the two-day timeframe 
provided by the Plan is sufficient to accommodate any communications 
with customers that might be necessary to correct errors in customer 
data.\1549\ With respect to the suggestion to use pre-validation 
checks, the Participants acknowledged their value, and stated that they 
have discussed with the Bidders making tools, such as pre-validation 
checks, available to CAT Reporters to assist with data 
submission.\1550\
---------------------------------------------------------------------------

    \1546\ Response Letter I at 30.
    \1547\ Id.
    \1548\ Id.
    \1549\ Id.
    \1550\ Id.
---------------------------------------------------------------------------

    The Commission believes that the error correction timeline set 
forth in the CAT NMS Plan is reasonable. Improved accuracy and 
timeliness of regulatory data are key goals of Rule 613 and the CAT NMS 
Plan.\1551\ In response to commenters that suggested that the error 
correction timeline is too aggressive, the Commission believes that the 
error correction tools and processes to be established by the Plan 
Processor, and the accommodations to facilitate the use of existing 
systems by CAT Reporters, should ease the burden of complying with 
shorter error correction timelines than exist today in OATS.\1552\ The 
Commission believes any incremental compliance burden in this area is 
offset by the benefits of faster availability to regulators of 
corrected CAT Data for important regulatory purposes, such as 
surveillance, oversight and enforcement, as well as market 
reconstructions, in today's high-speed electronic markets.
---------------------------------------------------------------------------

    \1551\ See Adopting Release, supra note 13, at 45727.
    \1552\ The timeline in the CAT NMS Plan improves the timeliness 
of regulators' access to data they use for much of their 
surveillance by several days because the corrected and linked CAT 
Data would be accessible on T+5, compared to OATS Data, which is not 
available until T+8.
---------------------------------------------------------------------------

    In response to the commenter that stated that additional staffing 
may be needed to assist in addressing error correction information that 
is received from the Plan Processor at 5:00 p.m. ET on T+1, the 
Commission believes, as noted above, the regulatory benefits of a 
shorter error correction timeframe justify the incremental compliance 
costs, including the potential hiring of additional staff in some 
cases.\1553\ The Commission also believes that CAT Reporters would have 
sufficient time to contact customers in the event customer feedback was 
necessary to correct errors.\1554\ In this regard, the Commission notes 
that the CAT NMS Plan provides that corrected order data is not 
required to be reported until 8:00 a.m. ET on T+3, and corrected 
Customer data is not required to be reported until 5:00 p.m. ET on 
T+3.\1555\
---------------------------------------------------------------------------

    \1553\ See Section V.F.3.a(7), infra.
    \1554\ FIF Letter at 53.
    \1555\ In Response Letter I, the Participants noted an 
inadvertent error in Appendix D relating the Error Rate correction 
time. Specifically, the Plan incorrectly states that the Plan 
Processor must validate customer data and generate error reports no 
later than 5:00 p.m. ET on T+3. The Plan should state that such 
validations and error reports must occur no later than 5:00 p.m. ET 
on T+1. The Commission is amending the Plan to correct this error.
---------------------------------------------------------------------------

12. Business Continuity and Disaster Recovery
    The CAT NMS Plan requires the Plan Processor to implement efficient 
and cost-effective business continuity and disaster recovery 
capabilities that will ensure no loss of data and will support the data 
availability requirements and anticipated volumes of the Central 
Repository.\1556\
---------------------------------------------------------------------------

    \1556\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.3(f); Appendix D, Sections 5.1-5.4.
---------------------------------------------------------------------------

    Commenters discussed the CAT NMS Plan's provisions regarding 
business continuity and disaster recovery for the CAT.\1557\ One 
commenter noted that the Plan does not include an explanation of how 
the primary and the secondary sites will remain synchronized at all 
times to provide a seamless transition from primary site to secondary 
site in the event of a failure.\1558\ This commenter suggested that the 
Plan should specify additional details regarding the expected elapsed 
time for the secondary site to become live if the primary site goes 
down due to a technical failure or a disaster.\1559\ The commenter also 
noted that the requirement for disaster recovery plans does not address 
whether regulators will have uninterrupted access to the CAT Data, 
although the commenter acknowledged that it can be inferred that the 
secondary site should provide all the functionalities of the primary 
site in the event of primary site outage.\1560\ Further, the commenter 
recommended that while the CAT NMS Plan states that the goal of 
disaster recovery is to achieve next day recovery after an event, the 
Plan should provide a list of scenarios and the expectation of the 
recovery times for each scenario.\1561\
---------------------------------------------------------------------------

    \1557\ SIFMA Letter; Data Boiler Letter (also noting that, if 
the markets deem acceptable that exchanges experience downtime 
without going into a contingency mode or halting trading, then 
standards comparable to those required of exchanges, but not 
tighter, are sufficient, due to cost); FSI Letter; FIF Letter. One 
commenter requested clarification of the requirement for a bi-annual 
test of the CAT systems at the disaster recovery site. This 
commenter noted that ``bi-annual'' is commonly understood to mean 
twice a year, but can also mean once every two years. The commenter 
believed that clarification is necessary to ensure that the site is 
tested twice a year. It also believed that secondary equipment and 
critical personnel should be tested at least once a year. See FSI 
Letter at 5. In their response, the Participants affirmed that the 
bi-annual disaster recovery test of CAT operations at the secondary 
facility is required to be conducted twice a year. See Response 
Letter I at 51.
    \1558\ SIFMA Letter at 45.
    \1559\ Id.
    \1560\ Id.
    \1561\ Id.

---------------------------------------------------------------------------

[[Page 84784]]

    One commenter recommended that the CAT NMS Plan state that the Plan 
Processor must support 24x7 production and test environments, provide 
test and validation tools to result in a higher quality audit trail, 
provide a consistent and comprehensive data security program, and 
provide an adequate level of help desk staffing, especially during 
industry testing and when Industry Members are being on-boarded.\1562\ 
This commenter also stated that large firms that already have the 
staffing capability for a 24x7 operating schedule could benefit from 
24x7 production support, explaining that it would permit added 
flexibility in error processing or recovery scenarios, as well as the 
use of off-shore staffing.\1563\ Another commenter recommended that the 
CAT NMS Plan should not mandate a particular industry testing process, 
stating that ``appropriate management flexibilities/discretions are 
needed.'' \1564\
---------------------------------------------------------------------------

    \1562\ FIF Letter at 13, 49, 125-26.
    \1563\ Id. at 123.
    \1564\ Data Boiler Letter at 42.
---------------------------------------------------------------------------

    The Participants argued that the Plan provisions with respect to 
business continuity and disaster recovery are appropriate, but did note 
that they intend to discuss with the Bidders requiring test 
environments to be available 24x7 instead of 24x6.\1565\
---------------------------------------------------------------------------

    \1565\ See Response Letter I at 51.
---------------------------------------------------------------------------

    The Commission has considered the business continuity and disaster 
recovery requirements set forth in the CAT NMS Plan, as well as the 
comments received addressing these requirements and believes that the 
Participants' approach is reasonable. The Commission believes that the 
CAT NMS Plan's business continuity and disaster recovery provisions 
establish a framework that is reasonably designed to ensure that the 
CAT business processes can continue despite a failure or disaster 
scenario.\1566\ In particular, the CAT will be subject to all 
applicable requirements of Regulation SCI, as it will be an ``SCI 
system'' \1567\ of each of the Participants, and the Participants, as 
``SCI entities,'' \1568\ are required to establish, maintain and 
enforce written policies and procedures for their SCI systems that 
comply with the technology standards and other requirements of 
Regulation SCI, including with respect to the business continuity and 
disaster recovery plans for the CAT.\1569\ In addition, the CAT will be 
subject to certain additional requirements with respect to business 
continuity and disaster recovery that are set forth in the CAT NMS 
Plan.\1570\
---------------------------------------------------------------------------

    \1566\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
5.4.
    \1567\ See supra note 1173.
    \1568\ See supra note 1172.
    \1569\ 17 CFR 242.1001(a)(2). See Section IV.D.6.f, supra, for a 
discussion of Regulation SCI.
    \1570\ For example, Appendix D requires a bi-annual test of CAT 
operations from the secondary site; an effective telecommuting 
solution for all critical CAT operations staff; and a secondary site 
with the same level of availability, capacity, throughput and 
security (physical and logical) as the primary site. See CAT NMS 
Plan, supra note 5, at Sections 5.3 and 5.4.
---------------------------------------------------------------------------

    With respect to the commenter that noted that the Plan does not 
explain how the primary and the secondary sites will remain 
synchronized,\1571\ and that additional detail should be provided 
regarding the failover times between primary and secondary sites,\1572\ 
the CAT NMS Plan expressly requires recovery and restoration of 
services within 48 hours, but with a goal of next-day recovery. While 
data will not be synchronized in real time, sufficient synchronization 
will be maintained to support these recovery timeframes. Although, as 
noted above, the Commission believes the Participants' approach is 
reasonable, the Commission encourages the Plan Processor and 
Participants to strive to reduce the time it will take to restore and 
recover CAT Data at a backup site. As discussed in Section IV.H., the 
Commission is amending the Plan to require the Participants to submit 
to the Commission an annual evaluation of the time necessary to restore 
and recover CAT Data at a back-up site.
---------------------------------------------------------------------------

    \1571\ SIFMA Letter at 45.
    \1572\ Id.
---------------------------------------------------------------------------

    With respect to the commenter that recommended that the Plan 
Processor support 24x7 testing and production environments,\1573\ the 
Commission recognizes that this could facilitate disaster recovery and 
other important processes by Industry Members, and believes that the 
Participants' commitment to discuss requiring test environments to be 
available 24x7 with the Bidders is reasonable.\1574\
---------------------------------------------------------------------------

    \1573\ FIF Letter at 13, 49. In response to the commenter's 
suggestions that the Plan Processor provide a consistent and 
comprehensive data security program, and an adequate level of help 
desk staffing, especially during industry testing and on-boarding, 
the Commission notes that the Plan Processor will support industry 
testing and provide help desk support during industry testing, and 
that the same information security policies applicable to the 
production environment will apply to the industry test environment. 
See CAT NMS Plan, supra note 5, at Appendix D, Section 1.2.
    \1574\ Response Letter I at 51.
---------------------------------------------------------------------------

13. Business Clock Synchronization and Timestamp Granularity
a. Business Clock Synchronization
(1) Industry Standard
    Rules 613(d)(1) and (2) require CAT Reporters to synchronize their 
Business Clocks \1575\ to the time maintained by NIST, consistent with 
industry standards. In the CAT NMS Plan, the Participants determined 
that the industry standard for the synchronization of Business Clocks 
is within 50 milliseconds of the time maintained by NIST, except for 
Manual Order Events.\1576\ For Business Clocks used solely for Manual 
Order Events, the Participants determined that the industry standard 
for clock synchronization is within one second of NIST. To ensure that 
clock synchronization standards remain consistent with industry 
standards, as they evolve, the CAT NMS Plan requires the Operating 
Committee to annually review the clock synchronization standard to 
determine whether it should be shortened.
---------------------------------------------------------------------------

    \1575\ For purposes of the CAT NMS Plan, ``Business Clock'' 
means a clock used to record the date and time of any Reportable 
Event required to be reported under SEC Rule 613. See CAT NMS Plan, 
supra note 5, at Section 1.1.
    \1576\ See Exemption Order, supra note 21. In this Order, the 
Commission is also amending the Plan to allow Business Clocks used 
solely for the time of an allocation to synchronize to within one 
second of NIST. See Section IV.D.4.d, supra.
---------------------------------------------------------------------------

    In determining the current industry standard for clock 
synchronization, the Participants and Industry Members reviewed their 
respective clock synchronization technology practices,\1577\ and the 
results of a clock synchronization survey conducted by FIF.\1578\ After 
completing these reviews, the Participants concluded that a 50 
millisecond clock synchronization standard represented an aggressive, 
but achievable, standard.\1579\
---------------------------------------------------------------------------

    \1577\ CAT NMS Plan, supra note 5, at Appendix C, Section 
D.12(p).
    \1578\ Id. at Appendix C, n.236. See FIF Clock Offset Survey, 
supra note 247.
    \1579\ Id. at Appendix C, Section D.12(p).
---------------------------------------------------------------------------

    The Commission received a number of comments on the CAT NMS Plan's 
provisions relating to clock synchronization. Several commenters agreed 
with the Participants that 50 milliseconds was a reasonable 
standard.\1580\ Four commenters specifically recommended that the clock 
synchronization standard for OATS--also 50 milliseconds--and CAT should 
be aligned for regulatory reporting purposes.\1581\ One commenter 
argued for a finer standard for Industry Members, noting that they 
accept data

[[Page 84785]]

feeds from exchanges that have more precise clock synchronization, some 
to the microsecond.\1582\
---------------------------------------------------------------------------

    \1580\ SIFMA Letter at 34-35; FIF Letter at 110-111, 115; TR 
Letter at 7; Data Boiler Letter at 9, 20; FSR Letter at 8-9. Three 
of these commenters stated that there should be a uniform clock 
synchronization standard for Industry Members. SIFMA Letter at 34; 
FIF Letter at 97-98; FSR Letter at 8.
    \1581\ Data Boiler Letter at 9 (noting that FINRA's current 
clock synchronization for Industry Members is 50 milliseconds); TR 
Letter at 7; SIFMA Letter at 34; FSR Letter at 8.
    \1582\ Better Markets Letter at 8. The commenter recommended 
that exchanges and Industry Members should be required to use the 
same--presumably finer--clock synchronization standard for CAT 
purposes as they use for internal or commercial purposes.
---------------------------------------------------------------------------

    Other commenters opposed mandating a standard finer than the 50 
millisecond clock synchronization standard.\1583\ One commenter argued 
that a finer synchronization standard could not be met without 
dramatically increasing costs,\1584\ and expressed the view that the 50 
millisecond standard is reasonable given the geographically dispersed 
market.\1585\ In particular, this commenter believed that, while a 
finer standard may create the illusion of a more accurate time sequence 
of events, in practice geographically dispersed market events could 
still be sequenced incorrectly.\1586\ This commenter stated that it is 
better to allow for clock synchronization standards to be tightened 
voluntarily, based on business needs rather than regulatory 
requirements.\1587\ Finally, one commenter expressed the view that 
clock synchronization was less important for certain types of orders, 
and suggested that the clock synchronization standard for manual 
orders, orders that have both a manual and electronic component, and 
orders that are not time-critical (e.g., post-trade events such as 
allocations) should be one second rather than 50 milliseconds.\1588\
---------------------------------------------------------------------------

    \1583\ FIF Letter at 102, TR Letter at 7.
    \1584\ FIF Letter at 110. This commenter revisited the cost 
estimates for clock synchronization presented in the commenter's 
Clock Offset Survey, noting in particular that the industry will 
face increased costs with a finer clock synchronization standard as 
industry has already been working toward a clock synchronization 
standard of 50 milliseconds, and would need another two years of 
lead time to comply with a finer standard than 50 milliseconds. FIF 
Letter at 108, 114; see also SIFMA Letter at 34.
    \1585\ FIF Letter at 99, 110-111. FIF recommended a pilot study 
be conducted to test the boundaries of clock synchronization and its 
accuracies across a broad geographic region at different tolerances 
for the purpose of event sequencing. Id. at 100, 112.
    \1586\ Id. at 102. FIF also noted that timestamps together with 
the daisy chain approach to linking orders and events will allow 
sequencing of events. Id. at 101.
    \1587\ Id. at 104-05. This commenter also argued that Industry 
Member CAT Reporters that synchronize their clocks to a finer 
standard voluntarily should not be required to maintain that clock 
synchronization under CAT as it would create an uneven playing 
field. Id. at 99, 112, 115. Similarly, another commenter noted that 
finer standards are already in place at exchanges and ATSs that 
maintain an order book and since they are already in place for 
commercial reasons, there is no reason to mandate them. TR Letter at 
7.
    \1588\ SIFMA Letter at 34-35.
---------------------------------------------------------------------------

    One commenter noted that stricter clock synchronization standards 
are already in place at exchanges and ATSs.\1589\ Another commenter 
stated that, if exchanges maintained finer clock synchronization 
standards than currently required by the CAT NMS Plan, the ability to 
sequence Reportable Events that occur across markets could be 
improved.\1590\
---------------------------------------------------------------------------

    \1589\ TR Letter at 7.
    \1590\ FIF Letter at 97.
---------------------------------------------------------------------------

    In their response, the Participants stated that they continue to 
believe that the clock synchronization standard for Industry Members 
should be within 50 milliseconds of the time maintained by NIST, except 
for with regard to Manual Order Events.\1591\ The Participants noted 
that they discussed this topic with Industry Members and conducted a 
survey of Industry Members to better understand current clock 
synchronization practices.\1592\ The Participants represented that they 
considered various clock synchronization options, which ranged from 
microseconds to one second, before settling on a 50 millisecond 
standard, which they believe represents the current industry standard 
for Industry Members.\1593\ The Participants stated that, based on 
their analysis, imposing a finer clock synchronization standard for 
Industry Members as part of the initial implementation of the CAT would 
significantly increase the cost of compliance for some segments of the 
industry,\1594\ but emphasized that the Operating Committee will be 
reviewing the synchronization standard annually and will reduce the 
standard as appropriate.\1595\
---------------------------------------------------------------------------

    \1591\ Response Letter II at 4.
    \1592\ Id.
    \1593\ Id. In response to the commenters that suggested that the 
CAT clock synchronization should be same as the OATS standard, the 
Participants agreed that there is value in consistency between these 
standards. See Response Letter I at 20. See also Securities Exchange 
Act Release No. 77565 (April 8, 2016), 72 FR 22136 (April 14, 2016) 
(approving a 50 millisecond clock synchronization requirement for 
FINRA members).
    \1594\ Response Letter II at 4 (noting CAT NMS Plan Appendix C, 
Section D.12(p)).
    \1595\ Response Letter II at 4 (noting CAT NMS Plan Section 
6.8(c)).
---------------------------------------------------------------------------

    The Participants, however, represented that they all currently 
operate pursuant to a clock synchronization standard that is within 100 
microseconds of the time maintained by NIST, at least with respect to 
their electronic systems. Accordingly, the Participants recommended 
that the Commission amend the Plan to require that Participants adhere 
to the 100 microsecond standard of clock synchronization with regard to 
their electronic systems, but not their manual systems, such as the 
manual systems operated on the trading floor, manual order entry 
devices, and certain other systems.\1596\
---------------------------------------------------------------------------

    \1596\ Response Letter II at 4-5. In response to the commenters 
that argued that CAT Reporters would need lead time to address any 
changes made to the clock synchronization in the future, the 
Participants explained that Section 6.8(c) of the CAT NMS Plan 
requires that, in conjunction with Participants' and other 
appropriate Industry Member advisory groups, the CCO must annually 
evaluate and recommend to the Operating Committee whether technology 
has evolved such that the standard should be shortened. The 
Participants further explained they will take the time required for 
CAT Reporters to update and test their systems for any changes to 
the clock synchronization standard into consideration when 
determining when changes to the standard are necessary. Response 
Letter I at 21.
---------------------------------------------------------------------------

    After reviewing the CAT NMS Plan, and considering the commenters' 
statements and the Participants' response thereto, the Commission 
believes that it is appropriate for the Participants to consider the 
type of CAT Reporter (e.g., Participant, Industry Member), the type of 
Industry Member (e.g., ATS, small broker-dealer), and type of system 
(e.g., order handling, post-execution) when establishing appropriate 
industry standards. The Commission does not believe that one industry 
standard should apply across all CAT Reporters and systems. Therefore, 
the Commission is amending Section 6.8(c) of the Plan to state that 
industry standards for purposes of clock synchronization should be 
determined based on the type of CAT Reporter, type of Industry Member 
and type of system.
    For the initial implementation of the CAT, however, the Commission 
believes a 50 millisecond clock synchronization standard for Industry 
Members is reasonable at this time. While the Commission believes that 
regulators' ability to sequence orders accurately in certain cases 
could improve if the clock synchronization for Industry Members were 
finer, the Commission is sensitive to the costs associated with 
requiring a finer clock synchronization for Industry Members at this 
time, and believes that a standard of 50 milliseconds for Industry 
Members will allow regulators to sequence orders and events with a 
level of accuracy that is acceptable for the initial phases of CAT 
reporting.
    Although the Commission understands that certain Industry Members, 
such as ATSs and broker-dealers that internalize off-exchange order 
flow, today adhere to a finer clock synchronization standard, the 
Commission is not imposing a finer standard than 50 milliseconds for 
such Industry Members at this time. The Commission believes that it is

[[Page 84786]]

reasonable to expect that finer clock synchronization for Industry 
Members, or certain categories or systems thereof, will evolve over 
time. As described in Section IV.H, the Commission is amending the Plan 
to require that the Participants provide the Commission an assessment 
of clock synchronization standards, including consideration of industry 
standards based on the type of Industry Member or type of system, 
within six (6) months of effectiveness of the Plan.
    With regard to the Participants, however, the Commission notes that 
the Participants have acknowledged that they currently synchronize 
their Business Clocks to within 100 microseconds of NIST, and 
recommended that the Commission amend the Plan to require the 
Participants to adhere to that finer standard for their non-manual 
systems.\1597\ Accordingly, the Commission is amending Section 
6.8(a)(i) of the Plan, consistent with this recommendation, to impose a 
clock synchronization standard of 100 microseconds on exchanges' 
electronic systems. The Commission believes that because the 
Participants already synchronize their clocks to this standard,\1598\ 
any costs to comply with this standard are not likely to be 
substantial.\1599\ In addition, the Commission believes that a finer 
clock synchronization requirement for exchanges generally should allow 
regulators to better sequence orders and order events across multiple 
exchanges.\1600\ The Commission agrees with the Participants that it 
would not be appropriate to impose this finer standard with regard to 
Participants' manual systems, given that the timing of manual events is 
inherently less precise and the timestamp requirement for manual events 
is only to the second.\1601\ Accordingly, the Commission believes the 
one-second clock synchronization standard set forth in the Plan with 
respect to Manual Order Events, whether generated by the Participants 
or Industry Members, is reasonable.
---------------------------------------------------------------------------

    \1597\ Response Letter II at 4-5. In the Notice, the Commission 
explained that, according to FIF, all exchange matching engines meet 
a clock synchronization standard of 50 milliseconds, and NASDAQ 
stated that all exchanges that trade NASDAQ securities have clock 
offset tolerances of 100 microseconds or less. See Notice, supra 
note 5, at 30760.
    \1598\ Response Letter II at 4-5.
    \1599\ See Section V.F.3.a(5), infra.
    \1600\ See Section V.E.1.b(3)B, infra. A commenter agreed, 
noting that if exchanges were required to maintain finer clock 
synchronization standards than what the CAT NMS Plan currently 
requires, sequencing of the events in the lifecycle of an order 
across firms could be improved. FIF Letter at 97.
    \1601\ See Section IV.D.13.b(1), infra.
---------------------------------------------------------------------------

    The Commission believes the requirement that the Participants 
annually review the clock synchronization standard to determine whether 
it should be shortened, in light of the evolution of technology, is 
reasonable to ensure that clock synchronization standards remain as 
tight as practicable in light of technological developments. In 
particular, as technology advances over time, the Commission believes 
that it will be appropriate for the Participants to consider whether 
some CAT Reporters should be required to maintain a finer clock 
synchronization than required by the Plan today. As the Participants 
conduct their annual reviews, the Commission expects them to consider 
proposing new clock synchronization standards whenever they determine 
the industry standard for CAT Reporters, or certain categories or 
systems thereof, has become more granular than required by the Plan at 
that time.\1602\ As discussed in Section IV.H., the Commission is 
amending Section 6.6 of the Plan to require that the Participants 
provide the Commission with a copy of the annual assessment performed 
by the Plan Processor pursuant to Section 6.8(c) of the Plan.
---------------------------------------------------------------------------

    \1602\ The Participants should consider the amount of time the 
industry may need to implement and test a newly imposed clock 
synchronization standard, and notes that any change to the clock 
synchronization standard will need to be submitted to the Commission 
as a proposed amendment to the Plan pursuant to Rule 608. 17 CFR 
242.608(a)(ii)(A) and (B), (b)(1). Therefore, the Commission, as 
well as commenters, will have an opportunity to assess any proposed 
change to the clock synchronization requirements, including the 
related implementation time frames.
---------------------------------------------------------------------------

    Compliance with the clock synchronization standards is vital to the 
accuracy of the CAT. To this end, the Operating Committee is required 
to adopt policies and procedures, including standards, that require 
that the CAT Data reported be timely, accurate, and complete, and to 
ensure the integrity of CAT Data.\1603\ The Plan Processor is 
responsible for implementing these policies and procedures,\1604\ and 
the CCO is tasked with regularly monitoring them.\1605\ The 
Participants represented that they are developing their clock 
synchronization compliance rules, and will keep the industry informed 
as their efforts progress.\1606\
---------------------------------------------------------------------------

    \1603\ See CAT NMS Plan, supra note 5, at Section 6.5(d)(ii).
    \1604\ Id.
    \1605\ Id. at Section 6.2(a)(v)(k).
    \1606\ Response Letter I at 20-21.
---------------------------------------------------------------------------

(2) Documentation Requirements
    The CAT NMS Plan also requires CAT Reporters to document their 
clock synchronization procedures, and maintain a log of each time they 
synchronize their clocks and the results of such synchronization. This 
log must specifically identify each synchronization event and note 
whenever the time of the CAT Reporter's Business Clock and the time 
maintained by the NIST differs by more than the permitted amount.\1607\
---------------------------------------------------------------------------

    \1607\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.3.(c).
---------------------------------------------------------------------------

    One commenter objected to the requirement that each instance of 
clock synchronization be logged, and took the position that doing so 
would be costly.\1608\ This commenter instead suggested that CAT 
Reporters should only be required to log instances of clock 
synchronization exceptions, and not all clock synchronization 
events.\1609\ In response, the Participants reaffirmed that the Plan 
requires each Participant and Industry Member to maintain a log of all 
instances of clock synchronization.\1610\
---------------------------------------------------------------------------

    \1608\ FIF Letter at 108.
    \1609\ Id. This commenter also recommended that reasonable 
policies and procedures be in place to ensure compliance with the 
clock synchronization requirements. See id. at 104-05. As noted 
above, the Plan requires that the Operating Committee adopt policies 
and procedures, including standards, that require that the CAT Data 
reported be timely, accurate, and complete, and to ensure the 
integrity of CAT Data.
    \1610\ Response Letter I at 20.
---------------------------------------------------------------------------

    The Commission acknowledges that there could be cost savings if the 
Plan did not require CAT Reporters to log every clock synchronization 
event,\1611\ but it believes that having this information at the outset 
of the operation of the CAT should facilitate compliance with, and 
oversight of, the clock synchronization standards. To the extent the 
Participants find that a complete log of clock synchronization events 
is not required to effectively surveil for compliance with these 
standards, they may at a later date seek to amend the Plan to reduce 
the logging obligation as appropriate.
---------------------------------------------------------------------------

    \1611\ See Section V.H.5, supra.
---------------------------------------------------------------------------

b. Timestamp Granularity
    The CAT NMS Plan reflects the requirements in Rule 613 regarding 
timestamps, as modified by an exemption for Manual Order Events granted 
by the Commission.\1612\ Specifically, the Plan requires CAT

[[Page 84787]]

Reporters to record and report the time of each Reportable Event using 
timestamps reflecting current industry standards (which must be at 
least to the millisecond) or, if a CAT Reporter uses timestamps in 
increments finer than milliseconds, such finer increments, when 
reporting to the Central Repository. For Manual Order Events, the Plan 
provides that such events must be recorded in increments up to and 
including one second, provided that CAT Reporters record and report the 
time the event is captured electronically in an order handling and 
execution system (``Electronic Capture Time'') in milliseconds 
(``Manual Order Event Approach'').\1613\ Under the CAT NMS Plan, the 
CCO, in conjunction with the Participants and Industry Member advisory 
groups, must annually review the timestamp granularity requirements of 
the CAT and determine whether to require finer timestamp granularity in 
light of the evolution of industry standards.\1614\
---------------------------------------------------------------------------

    \1612\ See Exemption Order, supra note 21, at 51. For purposes 
of the CAT NMS Plan, ``Manual Order Event'' is defined as a non-
electronic communication of order-related information for which CAT 
Reporters must record and report the time of the event.
    \1613\ See CAT NMS Plan, supra note 5, at Section 6.8(b); see 
also Exemption Order, supra note 21. In this Order, the Commission 
is amending the Plan to allow the time of an allocation reported on 
an Allocation Report to be timestamped to the second. See Section 
IV.D.4.d, supra.
    \1614\ See CAT NMS Plan, supra note 5, at Section 6.8(c).
---------------------------------------------------------------------------

(1) Manual Order Event Approach
    According to the Participants, the Manual Order Event Approach 
would not have an adverse effect on the various ways in which, and 
purposes for which, regulators would use, access, and analyze the CAT 
Data.\1615\ In particular, the Participants stated that they do not 
believe that the Manual Order Event Approach will compromise the 
linking of order events, or alter the time and method by which 
regulators may access the data.\1616\ The Participants also stated that 
the Manual Order Event Approach would not negatively impact the 
reliability and accuracy of the CAT Data.\1617\ Further, the 
Participants represented that one second is the industry standard for 
reporting the time of Manual Order Events.\1618\ The Participants 
conducted a cost-benefit analysis of the Manual Order Event Approach 
and concluded that this approach would impose a much smaller cost 
burden, if any, on market participants, than would transitioning to 
technology that has the capability to record timestamps for Manual 
Order Events to the millisecond.\1619\
---------------------------------------------------------------------------

    \1615\ See Exemption Request, supra note 21, at 36.
    \1616\ See id. at 36.
    \1617\ See id. at 35.
    \1618\ See id. at 32.
    \1619\ See id. at 36-37.
---------------------------------------------------------------------------

    Two commenters supported the CAT NMS Plan's requirement that Manual 
Order Events be recorded and reported with a timestamp granularity of 
up to and including one second.\1620\ One commenter stated that the 
requirement to record timestamps at one-second levels for manual orders 
was appropriate, and that it was not logical to require a finer 
timestamp given that attempting to record Manual Order Events at 
subsecond increments would be inherently imprecise.\1621\ Another 
commenter stated that a manual order timestamped to the second coupled 
with a daisy chain of other order events timestamped to the millisecond 
should create ``a fairly clear sequence of events with the order 
lifecycle for the regulator.'' \1622\
---------------------------------------------------------------------------

    \1620\ DAG Letter at 2; see also STA Letter at 1 (supporting the 
DAG Letter's Exemptive Request Letter recommendations). These 
commenters also supported a clock synchronization standard of one 
second for Manual Order Events. See Section IV.D.13, supra.
    \1621\ SIFMA Letter at 35.
    \1622\ FIF Letter at 80. The commenter supported use of a daisy 
chain approach for linking orders, noting that it is successfully 
used by OATS and its logic is well-known by the industry. Id. at 96-
97.
---------------------------------------------------------------------------

    One commenter expressed the view that there would be cost savings 
if a less stringent timestamp requirement for manual orders was 
imposed.\1623\ Another commenter suggested using a more relaxed 
timestamp initially for manual orders, and to consider tightening the 
standard in the future.\1624\ Another commenter suggested that anti-
gaming provisions should be developed to ensure that CAT Reporters do 
not program their systems to generate orders that imitate manual orders 
to take advantage of the one second timestamp requirement.\1625\
---------------------------------------------------------------------------

    \1623\ Id. at 79, 116-117.
    \1624\ Data Boiler Letter at 21-22.
    \1625\ Better Markets Letter at 8.
---------------------------------------------------------------------------

    The Commission believes it is reasonable to permit Manual Order 
Events to be timestamped to the second, provided that CAT Reporters 
record and report the Electronic Capture Time in milliseconds. The 
Commission understands that the timing of Manual Order Events is 
inherently imprecise, and believes that requiring a timestamp to a 
level of granularity finer than one second is not likely to provide any 
additional information that will be useful to regulators. The 
Commission believes, however, that requiring the timestamp for the 
Electronic Capture Time to be recorded to the millisecond would not be 
burdensome and would help facilitate the reconstruction of Manual Order 
Events once the order is handled by an electronic system. While the 
Commission is not aware of any credible means or rationale to disguise 
electronic orders as manual orders to take advantage of the one second 
timestamp granularity, as suggested by a commenter, the Commission 
believes that the Participants should address potential methods of 
avoiding compliance generally as they develop their Compliance 
Rules.\1626\
---------------------------------------------------------------------------

    \1626\ See CAT NMS Plan, supra note 5, at Section 3.11.
---------------------------------------------------------------------------

(2) Millisecond (or Finer) Timestamp Requirement for All Other Order 
Events
    Commenters generally supported the proposed requirement that the 
timestamps for non-Manual Order Events be recorded to the 
millisecond.\1627\ Two commenters also agreed with the requirement to 
provide timestamps in increments finer than milliseconds, to the extent 
a CAT Reporter already uses more granular timestamps.\1628\ Two other 
commenters disagreed, however, arguing that costly systems changes 
would be required for regulatory reporting of these finer timestamps 
used in its normal practice, and that they would not be useful for 
regulatory purposes.\1629\ Finally, two commenters took the position 
that certain post-trade events should not be required to have a 
timestamp, or have a less granular timestamp than a millisecond, as 
this information is less time-sensitive than fully-electronic trading 
events.\1630\
---------------------------------------------------------------------------

    \1627\ SIFMA Letter at 35; DAG Letter at 2; see also FIF Letter 
at 12, 80; STA Letter at 1 (supporting the DAG Letter's Exemptive 
Request Letter recommendations).
    \1628\ Better Markets Letter at 8; Data Boiler Letter at 21-22.
    \1629\ SIFMA Letter at 35; FIF Letter at 12. One commenter also 
requested clarification that the timestamp granularity requirement 
would be based on the functionality of the applicable CAT reporting 
system. See TR Letter at 7.
    \1630\ FIF Letter at 79, 99, 111, 116-17; SIFMA Letter at 35. 
FIF listed Reportable Events in a descending level of sensitivity: 
(1) Fully electronic trading events; (2) electronic orders requiring 
manual intervention; (3) manual order events; (4) post-trade events. 
See FIF Letter at 116. However, another commenter stated that no one 
particular reportable event is more time-sensitive than the others 
for surveillance purposes. See Data Boiler Letter at 21.
---------------------------------------------------------------------------

    In response, the Participants maintained that the Plan's timestamp 
requirements for non-Manual Order Events were appropriate, but also 
noted that as CAT Reporters incorporate finer timestamps in their 
systems, the quality of CAT Data will increase correspondingly.\1631\
---------------------------------------------------------------------------

    \1631\ Response Letter I at 29.
---------------------------------------------------------------------------

    The Commission believes that requiring that non-manual Reportable 
Events be reported with timestamp of at least a millisecond in 
granularity will help ensure that regulators can sequence

[[Page 84788]]

events with a reasonable degree of accuracy. Given the speed with which 
the industry currently handles orders and executes trades, it is 
important that the CAT utilize a timestamp that will enable regulators 
to reasonably sequence the order in which Reportable Events 
occur.\1632\ The Commission believes that timestamps in increments 
greater than a millisecond would undermine the improved ability to 
sequence events with any reasonable degree of reliability.\1633\ In 
response to commenters' suggestions that timestamps should not be 
required on manual orders and other post-execution events,\1634\ the 
Commission notes that it has provided flexibility for Manual Order 
Events and for post-execution allocations to be reported with one 
second timestamps.\1635\
---------------------------------------------------------------------------

    \1632\ For example, the ability to reconstruct market activity, 
perform other detailed market analyses, or determine whether a 
series of orders rapidly entered by a particular market participant 
is manipulative or otherwise violates SRO rules or federal 
securities laws requires the audit trail to sequence each order and 
event accurately.
    \1633\ See Adopting Release, supra note 14, at 45762.
    \1634\ FIF Letter at 79, 99, 111, 116-17; SIFMA Letter at 35.
    \1635\ See Section IV.D.4.d, supra.
---------------------------------------------------------------------------

    In response to the commenters that stated it would be costly for 
CAT Reporters to report using timestamps to the same granularity they 
use in their normal practice,\1636\ the Commission believes it is 
appropriate to make a clarifying change to the Plan. The CAT NMS Plan 
provides that to the extent that any CAT Reporter utilizes timestamps 
in increments finer than one millisecond such CAT Reporter must utilize 
such finer increment when reporting CAT Data to the Central 
Repository.\1637\ Rule 613(d)(3), however, required that a finer 
increment must be used only to the extent that ``the relevant order 
handling and execution systems of any CAT Reporter utilizes timestamps 
finer that a millisecond.'' \1638\ Accordingly, the Commission is 
amending Section 6.8(b) of the Plan to limit the circumstances in which 
a CAT Reporter must report using an increment finer than a millisecond 
to when a CAT Reporter utilizes a finer increment for its order 
handling and execution systems. The Commission finds that, this 
modification is appropriate in light of the increased burdens placed on 
CAT Reporters by the additional systems changes that would otherwise be 
required in order to report in finer increments. With this 
modification, reporting in a finer increment than a millisecond would 
not be a costly undertaking, and the Commission therefore believes that 
this approach will improve the accuracy of order event records, 
particularly those occurring rapidly across multiple markets, without 
imposing undue burdens on market participants.
---------------------------------------------------------------------------

    \1636\ SIFMA Letter at 35; FIF Letter at 12.
    \1637\ See CAT NMS Plan, supra note 5, at Section 6.8(b).
    \1638\ 17 CFR 242.613(d)(3).
---------------------------------------------------------------------------

14. Upgrades and New Functionalities
    Under Article VI of the CAT NMS Plan, the Plan Processor is 
responsible, in consultation with the Operating Committee, for 
establishing policies and procedures for implementing potential changes 
and upgrades to the CAT System and infrastructure, including ``business 
as usual'' changes and the addition of new functionalities.\1639\ The 
CAT NMS Plan also requires that the Plan Processor ensure that the 
technical infrastructure is scalable from a capacity standpoint, 
adaptable to future technology developments, and technologically 
current.\1640\
---------------------------------------------------------------------------

    \1639\ See CAT NMS Plan, supra note 5, at Sections 6.1(d)(iv), 
(h)(i), (j), and (k). Appendix D provides additional detail about 
the obligations of the Plan Processor with respect to CAT Functional 
Changes, CAT Infrastructure Changes, and Testing of New Changes. See 
id. at Appendix D, Section 11.
    \1640\ See id. at Appendix C, Section A.5(a).
---------------------------------------------------------------------------

    The Commission received two comments on the Plan provisions 
pertaining to upgrades and new functionalities. The first commenter 
expressed concern that the Plan provisions apply only to infrastructure 
improvements and not also to regulatory tools.\1641\ The second 
commenter, noting the importance of scalability, suggested that the 
Plan Processor be required to meet certain capacity requirements 
recommended by Industry Members.\1642\ The Participants did not respond 
to these comments.
---------------------------------------------------------------------------

    \1641\ See Data Boiler Letter at 34.
    \1642\ See SIFMA Letter at 45.
---------------------------------------------------------------------------

    The Commission believes that the Plan's provisions with respect to 
potential upgrades and new functionalities are reasonable. The 
Commission notes that the Plan Processor is responsible for overseeing 
the day-to-day operations of CAT and, as such, should be well-
positioned and informed to consider whether and when systems changes or 
upgrades are necessary, subject to consultation and approval by the 
Operating Committee.\1643\ With respect to the development of new 
regulatory tools, the Commission notes that the Participants, as SROs, 
are responsible for developing appropriate regulatory tools and, to the 
extent they identify necessary enhancements to the CAT, the Commission 
expects the Participants to direct the Plan Processor to implement 
them.\1644\ With respect to a commenter's recommendation that the Plan 
Processor be required to meet certain capacity requirements to assure 
scalability, the Commission notes that one of the key considerations 
for the CAT is that it be flexible and scalable,\1645\ and that the CAT 
NMS Plan already requires that the Plan Processor ensure that the 
Central Repository's infrastructure is scalable to handle increased 
reporting volumes and enhancements to technology over time.\1646\ As 
discussed in Section IV.H, the Commission is amending Section 6.6 of 
the Plan to require the Participants to submit to the Commission an 
annual evaluation of potential technology upgrades based on a review of 
technological developments over the preceding year, drawing on internal 
or external technological expertise.
---------------------------------------------------------------------------

    \1643\ See CAT NMS Plan, supra note 5, at Section 6.1(i)-(k), 
Appendix D, Section 11.
    \1644\ Rule 613(f) requires the Participants to develop and 
implement a surveillance system, or enhance existing surveillance 
systems that are reasonably designed to make use of the CAT Data. 17 
CFR 242.613(f); see also CAT NMS Plan, supra note 5, at Section 
6.9(c), Appendix D, Section 11.
    \1645\ See CAT NMS Plan, supra note 5, at Appendix C, Section 5.
    \1646\ See id. at Appendix C, Section A.5(a).
---------------------------------------------------------------------------

15. Technical Specifications
    The CAT NMS Plan provides that the Plan Processor will publish 
Technical Specifications regarding the submission of data to the 
Central Repository that must be consistent with the requirements of 
Appendices C and D of the Plan.\1647\ Under the Plan, as filed, the 
Plan Processor (i) will begin developing Technical Specifications for 
the submission of order data by Industry Members fifteen months before 
Industry Members are required to begin reporting to the Central 
Repository, (ii) will publish these Technical Specifications one year 
before Industry Members are required to begin reporting to the Central 
Repository, and (iii) will begin connectivity testing and accepting 
order data from Industry Members for testing purposes six months before 
Industry Members are required to begin reporting to the Central 
Repository.\1648\ With respect to Customer Account Information, the 
Plan Processor will publish the Technical Specifications six months 
before Industry Members are required to report data to the Central 
Repository, and will begin connectivity and acceptance testing three 
months before Industry Members are required to report data to the 
Central

[[Page 84789]]

Repository.\1649\ The development of Technical Specifications for 
Participant submission of order data will commence ten months before 
Participants are required to report to the Central Repository, and will 
be published six months before Participants are required to report to 
the Central Repository.\1650\ Commenters raised several concerns 
regarding the Technical Specifications.\1651\
---------------------------------------------------------------------------

    \1647\ See id. at Section 6.9.
    \1648\ See id. at Appendix C, Section C.10(b).
    \1649\ See id. at Appendix C, Section C.10(a).
    \1650\ See id. at Appendix C, Section C.10(b).
    \1651\ FIF Letter at 36-38, 43-44; TR Letter at 4-6; UnaVista 
Letter at 2; Fidelity Letter at 3, 5-6.
---------------------------------------------------------------------------

a. Industry Input and Timing of Technical Specifications
    One commenter emphasized the importance of having comprehensive 
Technical Specifications that incorporate feedback from industry.\1652\ 
Another commenter stated that because CAT is new and complex, time 
should be built into the schedule to permit two iterative reviews of 
the Technical Specifications before they are considered final.\1653\ 
This commenter suggested that this review period should be no less than 
six months, arguing that the current timeframes to develop and test the 
Technical Specifications for the reporting of information to identify a 
Customer, in particular, are insufficient.\1654\ Another commenter 
suggested that the review process with respect to Technical 
Specifications for reporting order data and information to identify a 
Customer should begin two months after a Plan Processor is selected and 
continue for nine months.\1655\
---------------------------------------------------------------------------

    \1652\ TR Letter at 4.
    \1653\ FIF Letter at 37, 43-44. More specifically, the commenter 
recommended that the Plan Processor provide technical specifications 
for order processes and Customer and allocation reporting within two 
months after the Effective Date and allow CAT Reporters six months 
to review and comment on the Technical Specifications before they 
are finalized. FIF Letter at 37-38.
    \1654\ FIF Letter at 38.
    \1655\ TR Letter at 5. Thomson Reuters noted the review of 
Technical Specifications related to the expansion of OATS to all NMS 
equities took four months, and specifications for changes to EBS to 
support large trader reporting took ten months to finalize. Id.
---------------------------------------------------------------------------

    One commenter recommended that the Technical Specifications for 
Industry Members be prepared concurrently with the Technical 
Specifications for Participants to provide them with more time to 
review and implement any necessary changes, particularly with regard to 
interfaces that the Participants and Industry Members will use.\1656\ 
The commenter also recommended that the implementation schedule address 
allocation reporting and suggested that Technical Specifications for 
allocation reporting be provided at the same time as those for 
reporting order data and information to identify a Customer.\1657\ The 
commenter also stated that very detailed and timely information 
regarding CAT interfaces, message, and file formats in the Technical 
Specifications are essential due to the aggressive timeline for 
implementation of CAT.\1658\
---------------------------------------------------------------------------

    \1656\ FIF Letter at 36, 37-38; see also SIFMA Letter at 24.
    \1657\ FIF Letter at 37.
    \1658\ Id. at 91.
---------------------------------------------------------------------------

    In response to these commenters, the Participants acknowledged the 
importance of the development process for the Technical Specifications 
for all CAT Reporters and emphasized that in their discussions with the 
Bidders, they have made development of Technical Specifications a high 
priority.\1659\ Although the Participants noted that the Plan would not 
prohibit the Plan Processor from concurrently developing the 
Participant and Industry Member Technical Specifications, they 
explained that ``in light of various practical issues raised by the 
pending decisions regarding the selection of the Plan Processor, the 
Participants do not propose to amend the Plan to reflect an expedited 
schedule for the Industry Member Technical Specifications.'' \1660\
---------------------------------------------------------------------------

    \1659\ Response Letter I at 41.
    \1660\ Id.
---------------------------------------------------------------------------

    In their response to comments regarding industry input on the 
Technical Specifications, the Participants stated that they believe 
that iterative interactions regarding the Technical Specifications 
would be beneficial in optimizing the efficiency and quality of the 
final Technical Specifications.\1661\ The Participants further 
explained that Appendix C of the Plan contemplates the publication of 
iterative drafts of the Technical Specifications, with respect to the 
submission of order data, as needed before the final Technical 
Specifications are published, noting that this language provides the 
flexibility for iterative drafts, as necessary.\1662\
---------------------------------------------------------------------------

    \1661\ Id.
    \1662\ Id.
---------------------------------------------------------------------------

    In their response to comments, the Participants also recommended 
amendments to the Plan to better align the milestones related to the 
submission of order data to the Central Repository with the milestones 
for the submission of Customer Account Information to the Central 
Repository. Specifically, the Participants recommended explicitly 
including milestones for the beginning of the Plan Processor's 
development of Technical Specifications for the submission of Customer 
Account Information and for the publication of iterative drafts of such 
Technical Specifications.\1663\ However, the Participants did not 
recommend aligning the timeframe for the publication of Technical 
Specifications for the submission of Customer Account Information (six 
months prior to when Industry Members are required to begin reporting 
to the Central Repository) with the timeframe for the publication of 
Technical Specifications for the submission of order data (one year 
prior to when Industry Members are required to begin reporting to the 
Central Repository), explaining that reporting order data to the CAT 
will be a significantly more complex process than reporting Customer 
Account Information and that therefore it is appropriate to allow 
Industry Members more time to review Technical Specifications and to 
begin testing their systems with regard to order data.\1664\
---------------------------------------------------------------------------

    \1663\ Response Letter II at 7-8.
    \1664\ Response Letter III at 12-13.
---------------------------------------------------------------------------

    The Commission recognizes the importance of providing sufficient 
opportunity for CAT Reporters to provide input as the Technical 
Specifications are developed. As noted by the Participants, Appendix C 
of the CAT NMS Plan, as recommended to be amended by the Participants 
in their response to comments,\1665\ provides that, for the submission 
processes for both order data and information to identify a Customer, 
the Plan Processor will begin developing the Technical Specifications 
fifteen months prior to Industry Member reporting and will publish 
iterative drafts of the Technical Specifications as needed prior to the 
publication of the final Technical Specifications.\1666\ In addition, 
the Participants stated that they will ``work with the Plan Processor 
and the industry to develop detailed Technical Specifications.'' \1667\
---------------------------------------------------------------------------

    \1665\ See supra note 1663 and accompanying text.
    \1666\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
C.10.
    \1667\ Response Letter II at 21.
---------------------------------------------------------------------------

    Based on these provisions of the Plan and the Participants' 
statements in their response, the Commission understands that the 
Participants will work with and consider input from Industry Members 
during the Technical Specification drafting and development processes. 
The Commission further understands that the milestones in the Plan 
regarding the development of the Technical Specifications will keep 
Industry Members reasonably informed as to the status and content of 
the Technical Specifications and will permit Industry

[[Page 84790]]

Members, whether through the Advisory Committee or other, more informal 
mechanisms, to provide input on the Technical Specifications as they 
are being developed. As discussed above, the Plan requires the 
Participants and the Plan Processor to work with Industry Members in an 
iterative process, as necessary, to develop effective final Technical 
Specifications.\1668\ However, the Commission believes that providing 
the Plan Processor with some flexibility regarding the mechanics of the 
Technical Specification development process is appropriate, and that it 
would be premature at this time to provide for mandatory iterative 
interactions or to require a specific number of iterations.
---------------------------------------------------------------------------

    \1668\ See Section IV.D.8.b, supra.
---------------------------------------------------------------------------

    In addition, the Commission believes it will be beneficial for the 
milestones for the submission of order data and information to identify 
a Customer to be as aligned as possible so that all stakeholders can 
identify issues and present solutions on these related processes 
simultaneously. The Commission believes that the Participants' 
recommendations to include specific milestones for the commencement of 
the development of Technical Specifications for the submission of 
Customer Account Information and for the publication of iterative 
drafts of such Technical Specifications are reasonable, and is 
therefore amending the Plan accordingly.\1669\ Although not 
specifically recommended in the Participant's response, the Commission 
is also amending the Plan to clarify that the milestones for the 
submission of information to identify a Customer apply to Customer 
Identifying Information as well as Customer Account Information.\1670\ 
The Commission understands that the term Customer Identifying 
Information was inadvertently omitted from Appendix C, Section C.10(a), 
and therefore believes it is appropriate to amend the Plan to add this 
term to the milestones applicable to the development of Technical 
Specifications for Customer data submission.
---------------------------------------------------------------------------

    \1669\ Specifically, the Commission is amending Appendix C, 
Section C.10(a) of the Plan to state that the Plan Processor will 
begin developing the Technical Specifications for Industry Member 
reporting of Customer Account Information and Customer Identifying 
Information no later than fifteen months before Industry Members are 
required to begin reporting data to the Central Repository. The Plan 
Processor will also begin developing the Technical Specifications 
for order data reporting at that time. In addition, the Commission 
is amending Appendix C, Section C.10(a) of the Plan to state that 
the Plan Processor will publish iterative drafts of the Technical 
Specifications for Industry Member reporting of Customer Account 
Information and Customer Identifying Information, as well as 
Industry Member reporting of order data, as needed before the final 
versions of these Technical Specifications are published.
    \1670\ The milestones listed in Appendix C, Section C.10(a) 
apply to the customer definition process described in Section 
6.4(d)(iv), which requires Industry Members to submit both Customer 
Account Information and Customer Identifying Information. See 
Section IV.D.4.a(1), supra.
---------------------------------------------------------------------------

    The Commission agrees with the Participants that the reporting of 
order data to the Central Repository is likely to be significantly more 
complex than the reporting of Customer Account Information and Customer 
Identifying Information to the Central Repository because of the 
greater number of data elements and reporting requirements for order 
data.\1671\ Therefore, the Commission believes it is reasonable for the 
milestones in Appendix C of the Plan to state that the Plan Processor 
will publish the Technical Specifications for the submission of order 
data prior to the publication of Technical Specifications for the 
submission of Customer Account Information and Customer Identifying 
Information to permit Industry Members to spend additional time 
reviewing the order data Technical Specifications and testing their 
order data submission systems and processes.
---------------------------------------------------------------------------

    \1671\ See Section III.5.d, supra.
---------------------------------------------------------------------------

    In response to the comments recommending that Technical 
Specifications for Participants and Industry Members be developed 
concurrently, the Commission agrees with the Participants that the 
completion dates associated with the development, iterative drafting, 
and final release of the Technical Specifications for both Participants 
and Industry Members set forth outer limits on when such milestones 
must be completed,\1672\ which would not preclude the concurrent 
development of Participant and Industry Member Technical 
Specifications. The Commission further agrees that such concurrent 
development could be beneficial since it would permit all stakeholders 
to be apprised of issues and to offer solutions simultaneously and, 
accordingly, encourages the Participants and the Plan Processor to 
develop the Technical Specifications in this manner, if feasible. 
However, given that the Plan Processor, which will be primarily 
responsible for developing the Technical Specifications, will not be 
selected until after the Plan is approved, and that the Plan Processor 
has a variety of other responsibilities related to the development of 
the CAT, the Commission believes that providing the Plan Processor with 
flexibility regarding the mechanics of the Technical Specification 
development process is reasonable and is not amending the Plan to 
require concurrent development of Participant and Industry Member 
Technical Specifications. Moreover, the Commission believes that the 
sequencing of Technical Specification milestones in the Plan--for 
example, that development of Technical Specifications for Participant 
reporting of order data to the Central Repository should begin ten 
months before Participants are required to begin reporting data to the 
Central Repository while development of Technical Specifications for 
Industry Member reporting of order data to the Central Repository 
should begin fifteen months before Industry Members are required to 
begin reporting data to the Central Repository \1673\--reflects a 
reasonable prioritization in light of the phased implementation of 
Participant and Industry Member reporting.
---------------------------------------------------------------------------

    \1672\ See Section IV.D.8.a, supra (discussing Commission 
amendments to the Technical Specifications and other milestones set 
forth in Section C.10 of Appendix C).
    \1673\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
C.10.
---------------------------------------------------------------------------

    Similarly, with respect to the period of time that Industry Members 
will have to review and provide input on the Technical Specifications 
for Industry Member data reporting, the Commission notes that, because 
the Plan Processor may begin developing the Technical Specifications 
earlier than fifteen months prior to Industry Member reporting, and 
because the Plan Processor may seek Industry Member comment on draft 
Technical Specifications, there may in effect be a period of Technical 
Specification review that is longer than suggested by a strict 
interpretation of the milestones in Appendix C. Therefore, the 
Commission is not amending the Plan to revise these timeframes.
    However, as discussed above, the Commission expects that the 
Technical Specifications will be published with sufficient time for CAT 
Reporters to program their systems to satisfy their reporting 
obligations under the Plan and is amending Appendix C, Section C.10 of 
the Plan to ensure that the completion dates for the Technical 
Specification development milestones designate firm outer limits, 
rather than ``projected'' completion dates, for the completion of these 
milestones.\1674\ Therefore, the Commission is amending the Plan to 
provide for a minimum period of three months during which the Plan 
Processor and Industry

[[Page 84791]]

Members will work together to develop the Technical 
Specifications.\1675\
---------------------------------------------------------------------------

    \1674\ See Section IV.D.8.a, supra.
    \1675\ As amended, the Plan will require that the Plan Processor 
will begin developing Technical Specifications for Industry Member 
submission of order data no later than fifteen months before 
Industry Members are required to begin reporting this data and will 
publish the final Technical Specifications no later than one year 
before Industry Members are required to begin reporting. Id.
---------------------------------------------------------------------------

b. Impact on Industry Members
    One commenter stated that changes that SROs require of their 
members' systems and processes can be costly in terms of both dollars 
and human capital.\1676\ The commenter also noted that these changes 
are often subject to short implementation time periods and there is a 
lack of opportunity for discussion of concerns about the extent to 
which such new requirements can potentially expose the markets and 
investors to unnecessary risk.\1677\ This commenter recommended that 
any new CAT requirements that will be imposed by the Participants on 
broker-dealers should be done through the SRO rulemaking process to 
afford market participants the opportunity to discuss any proposed 
changes with the Participants and the Commission, and to provide a 
sufficient lead time to implement necessary systems and coding 
changes.\1678\
---------------------------------------------------------------------------

    \1676\ Fidelity Letter at 6.
    \1677\ Id. at 3, 5-6.
    \1678\ Id.
---------------------------------------------------------------------------

    The Participants explained in their response that they do not 
believe, generally, that the Technical Specifications are required to 
be filed with the Commission under Rule 608,\1679\ and cautioned that 
requiring rule filings may introduce significant delays in the process 
of developing the Technical Specifications. The Participants stated 
that in the normal course they do not intend to file the Technical 
Specifications with the Commission, but noted that to the extent that a 
change to the Technical Specifications is significant enough to require 
a change to the Plan, then such an amendment to the Plan would be filed 
pursuant to Rule 608.\1680\
---------------------------------------------------------------------------

    \1679\ The Participants noted that technical specifications for 
other NMS plans, such as the Tick Size Pilot Plan, have not been 
filed with the SEC. Response Letter I at 42.
    \1680\ Response Letter I at 42.
---------------------------------------------------------------------------

    As discussed above, the Commission recognizes the importance of 
providing sufficient opportunity for all CAT Reporters to provide input 
as the initial Technical Specifications are developed, and believes 
that the Technical Specification development process outlined in the 
Plan, as amended--including the iterative interactions discussed 
above--will provide such an opportunity.\1681\ The Commission believes 
that the completion dates for the availability of final Technical 
Specifications--e.g., no later than one year before Industry Members 
are required to report data to the Central Repository for the release 
of Technical Specifications governing Industry Member reporting of 
order data--are reasonable and provide Industry Members with sufficient 
lead time to adjust their systems or make other preparations necessary 
to comply with the Technical Specifications, particularly since drafts 
of the Technical Specifications will likely have been available even 
earlier and Industry Members will have been involved in the process of 
developing the Technical Specifications.\1682\
---------------------------------------------------------------------------

    \1681\ See Section IV.D.15.a, supra.
    \1682\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
C.10. The Commission also believes that the details regarding data 
reporting and recording included in the CAT NMS Plan itself are 
sufficient for CAT Reporters to begin the process of preparing their 
systems for CAT reporting.
---------------------------------------------------------------------------

    The Commission recognizes that there may be costs associated with 
complying with technical or operational changes in reporting 
requirements. The Commission notes that Material Amendments to the 
Technical Specifications--i.e., amendments that would ``require a 
Participant or an Industry Member to engage in significant changes to 
the coding necessary to submit information to the Central 
Repository''--must be approved by a Supermajority Vote of the Operating 
Committee, so the Plan provides additional controls with respect to 
changes to the Technical Specifications that could potentially be 
costly.\1683\ In addition, the Advisory Committee, which includes 
Industry Member representation, will be able to raise Industry Member 
concerns regarding any unexpected or costly requirements in the 
Technical Specifications with the Operating Committee. Moreover, while 
the Commission agrees with the Participants that changes to the 
Technical Specifications generally will not be required to be filed 
with the Commission, the Participants must comply with the CAT NMS Plan 
as approved by the Commission,\1684\ which constrains the ability of 
the Operating Committee to approve major changes that would alter the 
scope of the CAT NMS Plan through Technical Specifications. In 
addition, the Commission will oversee the Participants' compliance with 
the Plan,\1685\ which provides an additional protection against the 
Participants or Plan Processor attempting to include changes in the 
Technical Specifications that properly should be filed as Plan 
amendments.
---------------------------------------------------------------------------

    \1683\ See id. at Section 6.9(c).
    \1684\ 17 CFR 242.613(h)(1).
    \1685\ See 17 CFR 242.608(b)(2), (c), (d); 17 CFR 242.613(h).
---------------------------------------------------------------------------

c. Technical Specifications Content
    Several commenters noted that the Technical Specifications for CAT 
must be robust and comprehensive.\1686\ Some commenters recommended 
that specific elements be included in the Technical 
Specifications.\1687\ One commenter recommended that the Participants 
ensure the Technical Specifications include provisions to ensure that 
multiple service providers are able to connect to CAT to report CAT 
Data.\1688\ Another commenter stressed the importance of including 
connectivity requirements in the Technical Specifications.\1689\ This 
commenter also stated that achievement of the CAT NMS Plan's reporting 
requirement would be dependent on the details in the Technical 
Specifications.\1690\ Another commenter stated that while it supports 
the reporting procedures identified in the CAT NMS Plan, ``clearly 
defined technical guidelines for field specifications under different 
trading scenarios'' are also needed.\1691\ A different commenter stated 
that the items to be included in the Technical Specifications 
``inappropriately constrain'' the design of the CAT system to ``too 
rigidly follow a traditional SQL database design'' to the exclusion of 
more sophisticated analytical approaches.\1692\
---------------------------------------------------------------------------

    \1686\ TR Letter at 5; FIF Letter at 91; UnaVista Letter at 2.
    \1687\ TR Letter at 5 (recommending that the CAT Technical 
Specifications should include all scenarios currently covered in the 
OATS technical specification as well as additional scenarios on new 
processes related to the Customer definition process and options 
order reporting and that all scenarios required to meet the CAT NMS 
Plan Appendix D, Reporting & Linkage Requirements should be 
considered including step-outs, cancel-rebills, bunched orders and 
manual order processing); UnaVista Letter at 2.
    \1688\ TR Letter at 5.
    \1689\ FIF Letter at 124, 128.
    \1690\ Id. at 124.
    \1691\ UnaVista Letter at 2 (noting further that CAT 
certification courses, webinars, user groups and a forum for FAQs 
may improve knowledge transfer).
    \1692\ Data Boiler Letter at 9-10.
---------------------------------------------------------------------------

    In response, the Participants explained that they believe that each 
of these items are more appropriately addressed in the Technical 
Specifications, and should not be incorporated as requirements of the 
Plan. Nevertheless, the Participants explained that they believe that 
each of

[[Page 84792]]

the elements identified by the commenters will be incorporated into the 
Technical Specifications developed by the Plan Processor.\1693\
---------------------------------------------------------------------------

    \1693\ Response Letter I at 40.
---------------------------------------------------------------------------

    The Commission acknowledges the importance of timely, 
comprehensive, and detailed Technical Specifications that will provide 
all CAT Reporters with effective guidance on how to report data to the 
Central Repository. The Commission notes that the CAT NMS Plan 
specifies a number of parameters for what the Technical Specifications 
must contain, including specifications for the layout of files and 
records submitted to the Central Repository and the process for file 
submissions.\1694\ The Commission believes that it may be beneficial to 
include the elements referenced by the commenters, such as details 
regarding the submission of data for the Customer definition process 
and options order reporting, in the Technical Specifications, but 
believes that it is reasonable to allow the Plan Processor, with input 
from Industry Members during the iterative drafting process, to have 
some flexibility in determining these details of the Technical 
Specifications. In addition, the Participants have indicated that the 
elements referenced by the commenters will be incorporated into the 
Technical Specifications, and therefore the Commission does not believe 
it is necessary to amend the Plan to require these elements.
---------------------------------------------------------------------------

    \1694\ See CAT NMS Plan, supra note 5, at Section 6.9(b).
---------------------------------------------------------------------------

    In response to the comment that the Plan's parameters regarding the 
content of the Technical Specifications are too rigid and limit the 
ability of the Plan Processor to offer certain design solutions, the 
Commission believes that the parameters strike an appropriate balance 
between providing the Bidders flexibility to offer a variety of 
solutions on the one hand and including some baseline requirements for 
the Technical Specifications on the other, and does not believe these 
parameters will inappropriately constrain the solutions that the Plan 
Processor can develop.

E. Capital Accounts, Allocations of Income and Loss, and Distributions 
(Articles VII and VIII)

    As filed, the CAT NMS Plan provides that the Operating Committee 
must approve by Supermajority Vote a distribution of cash and property 
of the Company to the Participants.\1695\ To the extent a distribution 
is made, all Participants must participate equally in any such 
distribution, except as otherwise provided in the CAT NMS Plan.\1696\ 
The CAT NMS Plan, as filed, also includes provisions relating to each 
Participant's Capital Account, and how net profits and net losses (and 
any other item allocable to the Participants) shall be allocated to the 
Participants.\1697\
---------------------------------------------------------------------------

    \1695\ See CAT NMS Plan, supra note 5, at Section 8.5(a).
    \1696\ Id.
    \1697\ See id. at Article VIII.
---------------------------------------------------------------------------

    Three commenters raised concerns about the CAT NMS Plan's proposed 
allocations of profit and loss, particularly concerning the ability of 
the Participants to profit from CAT.\1698\ Two commenters argued that 
the CAT NMS Plan should be amended to state that any profits arising 
out of the CAT may not be used to fund the Participants' other 
operations.\1699\ One of the commenters also stated that the CAT should 
operate at-cost \1700\ and that funding related to the CAT should not 
create a surplus for the Participants.\1701\
---------------------------------------------------------------------------

    \1698\ SIFMA Letter; KCG Letter; DAG Letter.
    \1699\ SIFMA Letter at 19; DAG Letter at 5.
    \1700\ SIFMA Letter at 29.
    \1701\ Id. at 14.
---------------------------------------------------------------------------

    Another commenter noted that the proposed funding model would 
allocate net profits or net losses only to Participants, even though 
both Participants and broker-dealers would be funding the Central 
Repository.\1702\ The commenter deemed this inequitable and suggested 
that any profits should be distributed back to all entities that fund 
the CAT, not just the Participants.\1703\ This commenter believed that 
the CAT should function as a non-profit industry utility, distributing 
profits to all entities funding the CAT and raising fees if there are 
any losses.\1704\
---------------------------------------------------------------------------

    \1702\ KCG Letter at 5.
    \1703\ Id.
    \1704\ Id.
---------------------------------------------------------------------------

    In response, the Participants stated that the Company is expected 
to be operated on a ``break-even'' basis, with fees imposed to cover 
costs and an appropriate reserve, and explained that any surpluses 
would be treated as an operational reserve to offset future fees and 
would not be distributed to the Participants as profits.\1705\ In 
addition, the Participants stated that they received advice from 
counsel to CAT NMS, LLC that the Company could qualify for tax exempt 
status as a ``business league'' under Section 501(c)(6) of the Internal 
Revenue Code and decided to have the Company apply for such status to 
allow it to establish reserves from the fees paid to the Company 
without incurring income taxes on those amounts.\1706\ Accordingly, to 
ensure that the Company can qualify for the business league exemption, 
the Participants proposed that the Commission amend the Plan so that 
the Company is treated as a corporation for U.S. tax purposes, that 
distributions, if any, are made consistent with the purposes of Section 
501(c)(6) of the Internal Revenue Code, and that certain other Plan 
provisions related to distributions to the Participants or to the 
taxation of the Company as a partnership for U.S. tax purposes be 
eliminated.\1707\ In particular, the Participants suggested that the 
Commission amend the Plan to delete in its entirety Article VII, which 
pertains to Capital Accounts maintained by the Company for each 
Participant, and to replace Article VIII, which pertains to allocations 
of income and loss and distributions, with a provision stating that the 
Company intends to operate in a manner such that it qualifies as a 
business league within the meaning of Section 501(c)(6) of the Internal 
Revenue Code, and requiring the Operating Committee to submit an 
application to the Internal Revenue Service to attain such status for 
the Company.\1708\
---------------------------------------------------------------------------

    \1705\ Participants' Letter I at 1.
    \1706\ Id.
    \1707\ Id.
    \1708\ See id. The Participants also suggested conforming 
amendments to: Article I, to remove the definition of Capital 
Account; Article II, to state that the Company's activities also 
shall be consistent with its tax exempt status; Articles III, IX, 
and XII and Appendix C to eliminate certain references to the 
Participants' Capital Accounts and provisions regarding the 
Company's potential taxation as a partnership and its distributions 
and allocations; and Article X, to state that certain distributions 
after an event of dissolution shall be made to such persons or 
institutions as is consistent with the purposes of the Company and 
with Section 501(c)(6) of the Internal Revenue Code. See id.
---------------------------------------------------------------------------

    The Commission believes that the Participants' stated intent to 
operate the CAT on a break-even basis is appropriate. Inasmuch as the 
CAT is a regulatory tool mandated under Rule 613, it should not be used 
to fund the SROs' other operations. To ensure the CAT is operated in 
this manner, the Commission is amending Section 11.1(c) of the CAT NMS 
Plan to require that any surplus of the Company's revenues over its 
expenses will be treated as an operational reserve to offset future 
fees. The Commission believes this amendment is reasonable because it 
formalizes the representation made by the Participants, and provides 
certainty that the Participants' operation of the CAT will not 
contribute to the funding of their other operations. The Commission 
notes that, under the Exchange Act, any fees proposed to be charged by 
the Participants to fund the CAT must be filed as proposed rule changes 
pursuant to Rule 19b-4(f)(2) or

[[Page 84793]]

filed pursuant to Rule 608(b)(3)(i) \1709\ with the Commission, 
published for public comment, and meet statutory standards with respect 
to reasonableness, equitable allocation, and other matters.\1710\
---------------------------------------------------------------------------

    \1709\ See 15 U.S.C. 78s(b)(3)(A)(ii); 17 CFR 242.608(b)(3)(i). 
The Commission notes that, although Section 11.1(b) of the CAT NMS 
Plan states that the Participants will file fees for Industry 
Members pursuant to Section 19(b) of the Exchange Act, the 
Participants could choose to submit the proposed fee schedule to the 
Commission as individual SROs pursuant to Rule 19b-4 under the 
Exchange Act or jointly as Participants to an NMS plan pursuant to 
Rule 608 of Regulation NMS. See 17 CFR 240.19b-4; 17 CFR 242.608. 
Because the proposed fee schedule would establish fees, whether the 
Participants individually file it pursuant to Section 
19(b)(3)(A)(ii) of the Act, or jointly file it pursuant to Rule 
608(b)(3)(i) of Regulation NMS, the proposed fee filings will be 
eligible for immediate effectiveness. See 15 U.S.C. 
78s(b)(3)(A)(ii); 17 CFR 242.608(b)(3)(i). The Commission also notes 
that publication will be subject to the filing of the fee proposal 
by the Participants that satisfies the requirements of the Exchange 
Act. If the Participants file the proposed fee schedule pursuant to 
Rule 19b-4(f)(2) and the Commission deems such fees not to meet 
applicable statutory standards, the Commission summarily may 
temporarily suspend the fees 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 Exchange Act. See 15 U.S.C. 78s(b)(3)(C). If the 
Commission takes such action, the Commission shall institute 
proceedings under Section 19(b)(2)(B) to determine whether the 
proposed rule should be approved or disapproved. See 15 U.S.C. 
78s(b)(3)(A). If the Participants file the proposed fee schedule 
pursuant to Rule 608(b)(3)(i), the Commission may summarily abrogate 
the fees and require them to be refiled in accordance with Rule 
608(a)(1) and reviewed in accordance with Rule 608(b)(2) if it 
appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, 
or the maintenance of fair and orderly markets, to remove 
impediments to, and perfect the mechanisms of, a national market 
system or otherwise in furtherance of the purposes of the Exchange 
Act. See 17 CFR 242.608(b)(3)(iii).
    \1710\ Id.
---------------------------------------------------------------------------

    The Commission believes that it is reasonable to amend the Plan as 
filed by the Participants to treat CAT NMS, LLC as a tax exempt 
business league under Section 501(c)(6) of the Internal Revenue 
Code.\1711\ The Commission believes that allowing the Company to 
establish reserves from the fees paid to the Company without incurring 
income taxes on those reserves would be more efficient and could 
potentially make more funding available to pay for the development and 
operation of the CAT or reduce fees. Further, the Commission believes 
that that the Company's application for Section 501(c)(6) business 
league status addresses issues raised by commenters about the Plan's 
proposed allocations of profit and loss by mitigating concerns that the 
Company's earnings could be used to benefit individual 
Participants.\1712\ Accordingly, the Commission is amending the Plan as 
filed by the Participants to delete in its entirety Article VII, which 
pertains to Capital Accounts maintained by the Company for each 
Participant, and to replace Article VIII, which pertains to allocations 
of income and loss and distributions, with a provision stating that the 
Company intends to operate in a manner such that it qualifies as a 
business league and that the Operating Committee will apply to attain 
such status for the Company. The Commission is also amending the Plan 
to make the conforming amendments to Articles I-III, IX, X, and XII and 
Appendix C as suggested by the Participants.\1713\
---------------------------------------------------------------------------

    \1711\ The Commission defers, however, to the Internal Revenue 
Service regarding whether CAT NMS, LLC meets all the necessary 
requirements to so qualify.
    \1712\ To qualify as a business league, an organization must 
``not [be] organized for profit and no part of the net earnings of 
[the organization can] inure[ ] to the benefit of any private 
shareholder or individual.'' 26 U.S.C. 501(c)(6).
    \1713\ See supra note 1708.
---------------------------------------------------------------------------

F. Funding of the Company (Article XI)

    The CAT NMS Plan contemplates a bifurcated funding model, where 
costs associated with building and operating the Central Repository 
would be borne by (1) Participants and Industry Members that are 
``Execution Venues'' \1714\ through fixed tier fees, and (2) Industry 
Members (other than ATSs), through fixed tier fees based on message 
traffic.\1715\ With respect to Execution Venues, the Operating 
Committee will establish at least two, and no more than five, tiers of 
fixed fees based on the Execution Venue's NMS Stock and OTC Equity 
Securities market share, as calculated by share volume.\1716\ Execution 
Venues that execute transactions in Listed Options will pay a fixed fee 
depending on the Listed Options market share of such Execution Venue, 
with the Operating Committee establishing at least two, and no more 
than five, tiers of fixed fees based on an Execution Venue's Listed 
Options market share, as calculated by contract volume.\1717\ With 
respect to Industry Members, the Plan provides that the Operating 
Committee will establish fixed fees to be payable by Industry Members 
based on the message traffic generated by such Industry Member. In 
addition to the message traffic fees for the non-ATS activities of 
Industry Members, the Plan provides that message traffic fees will be 
assessed on message traffic generated by: (i) An ATS that does not 
execute orders and that is sponsored by such Industry Member; and (ii) 
routing orders to and from any ATS sponsored by such Industry Member. 
The Operating Committee will establish at least five, and no more than 
nine, tiers of fixed fees based on message traffic.\1718\
---------------------------------------------------------------------------

    \1714\ The CAT NMS Plan defines ``Execution Venue'' as ``a 
Participant or an alternative trading system (``ATS'') (as defined 
in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of 
Regulation ATS (excluding any such ATS that does not execute 
orders).'' See CAT NMS Plan, supra note 5, at Section 1.1. The CAT 
NMS Plan categorizes FINRA as an Execution Venue because it has 
trades reported by its members to its trade reporting facilities 
(``TRFs'') for reporting transactions effected otherwise than on an 
exchange. See id. at Section 11.3(i).
    \1715\ See id. at Section 11.3(a)(i)-(ii); Section 11.3(b); 
Appendix C, at Section B.7(b)(iv)(B).
    \1716\ See id. at Section 11.3(a)(i).
    \1717\ See id. at Section 11.3(a)(ii).
    \1718\ See id. at Section 11.3(b); Appendix C, Section 
B.7(b)(iv)(B).
---------------------------------------------------------------------------

1. Funding Model Generally
    Several commenters argued that the proposed funding model unfairly 
or inappropriately allocates costs to Industry Members and away from 
Participants.\1719\ One commenter believed that the Commission should 
consider whether Industry Members should fund the costs of CAT at 
all.\1720\
---------------------------------------------------------------------------

    \1719\ KCG Letter at 3; DAG Letter at 4; see also FSR Letter at 
9-10 (noting the ultimate cost of the CAT will be in the billions of 
dollars, ``which will be passed-down to the Industry Members and 
investors through new fees'').
    \1720\ DAG Letter at 4; see also STA Letter at 1 (supporting the 
DAG Letter's cost and funding recommendations).
---------------------------------------------------------------------------

    Some commenters stated that requiring the creation and maintenance 
of a Participant-owned and -operated system like CAT to be partially 
funded by Industry Members would be a significant departure from the 
funding models currently used for existing regulatory systems.\1721\ 
One of these commenters believed that the Participants should justify 
the need for Industry Members to fund the creation and ongoing costs of 
the CAT.\1722\ The commenter opposed any Participant-imposed fee for 
the CAT,\1723\ and stated that the CAT NMS Plan does not distinguish 
between the costs of the CAT that are associated with Industry Member 
data reporting and costs associated with the Participants' regulatory 
uses.\1724\ This commenter

[[Page 84794]]

further stated that the funding authority of the CAT should extend only 
to expenses directly related to the reasonable implementation and 
operating costs of the CAT system, such as costs related to the 
management of the business of the CAT, and the direct costs of building 
and maintaining of the Central Repository.\1725\ The commenter 
specifically opposed the Participants' proposal to recover the costs of 
the creation or development of the CAT NMS Plan, such as legal and 
consulting costs, and expressed the view that these costs are solely 
the responsibility of the Participants as part of their regulatory cost 
of doing business.\1726\ Further, this commenter suggested that the 
governance structure include an audit committee to assure that the 
CAT's revenue is used for regulatory purposes.\1727\
---------------------------------------------------------------------------

    \1721\ SIFMA Letter at 14 (noting that the Participants fund 
similar systems like OATS themselves and then a portion of those 
costs are borne by Industry Members through fees); DAG Letter at 5.
    \1722\ SIFMA Letter at 14.
    \1723\ Id.
    \1724\ Id. at 17. The commenter further noted that the Plan does 
not address how new costs resulting from regulatory research needs 
are allocated, providing as an example if the Commission requested a 
significant increase in the Central Repository's processing 
capability to facilitate a large-scale analysis related to a market 
structure study, opining that it would be inappropriate to require 
Industry Members to pay for Participant-specific system enhancements 
through the general allocation of CAT costs. Id. at 18.
    \1725\ Id. at 15.
    \1726\ Id.; see also DAG Letter at 4-5.
    \1727\ SIFMA Letter at 29.
---------------------------------------------------------------------------

    Finally, two commenters believed that, to the extent the CAT 
generates cost savings for the Participants, that cost savings should 
be used first to fund the CAT before fees are imposed on Industry 
Members.\1728\
---------------------------------------------------------------------------

    \1728\ SIFMA Letter, DAG Letter; see also STA Letter at 1 
(supporting the DAG Letter's cost and funding recommendations).
---------------------------------------------------------------------------

    In response, the Participants stated that Rule 613 specifically 
contemplated the allocation of the costs of the creation, 
implementation and maintenance of the CAT among both the Participants 
and their members, and that the Adopting Release for Rule 613 discussed 
and permitted the recovery of such costs by Participants from their 
members.\1729\ Additionally, with respect to the comments that objected 
to Participants using fees under the Plan to recover development costs 
of the Plan, and in particular legal and consulting costs, the 
Participants explained that Rule 613 permitted the Participants to 
propose to recover such costs.\1730\ The Participants stated their 
belief that it is equitable that the Industry Members as well as 
Participants contribute to the funding of the CAT, including the 
development of the Plan governing the CAT,\1731\ because both benefit 
from the enhanced market oversight afforded regulators by the 
CAT,\1732\ and noted that adopting CAT-specific fees would provide 
greater transparency for market participants than a general regulatory 
fee.\1733\
---------------------------------------------------------------------------

    \1729\ Response Letter II at 9-10 (citing 17 CFR 
242.613(a)(1)(vii)(D) and Adopting Release, supra note 14, at 
45795).
    \1730\ Response Letter II at 13.
    \1731\ Id.
    \1732\ Id. at 10.
    \1733\ Id.
---------------------------------------------------------------------------

    In response to the commenters that suggested that the CAT be 
funded, at least in part, by cost savings,\1734\ the Participants 
acknowledged that cost savings from retiring existing systems will 
partially offset their expenses associated with the CAT, but declined 
to make any specific funding commitments.\1735\
---------------------------------------------------------------------------

    \1734\ SIFMA Letter at 17-18; DAG Letter at 4.
    \1735\ Response Letter II at 16. Specifically, the Participants 
stated that they expect to realize approximately $10.6 million in 
cost savings associated with the retirement of existing systems when 
moving to the CAT. However, they also said that they will incur 
approximately $17.9 million in expenses associated with complying 
with the CAT reporting requirements, and an additional $23.2 million 
in expenses related to the implementation of surveillance programs.
---------------------------------------------------------------------------

    The Participants, as SROs, have traditionally recovered their 
regulatory costs through the collection of fees from their members, and 
such fees are specifically contemplated by the Exchange Act.\1736\ The 
Participants currently collect certain regulatory and other fees, dues 
and assessments from their members to fund their SRO responsibilities 
in market and member regulation; such fees must be consistent with 
applicable statutory standards under the Exchange Act, including being 
reasonable, equitably allocated \1737\ and not unfairly 
discriminatory.\1738\
---------------------------------------------------------------------------

    \1736\ Sections 6(b)(1) and 15A(b)(2) of the Exchange Act 
require that an exchange or association have the capacity to be able 
to carry out the purposes of the Exchange Act, the rules and 
regulations thereunder, and the rules of the exchange or 
association. 15 U.S.C. 78f(b)(1); 15 U.S.C. 78o-3(b)(2). See e.g., 
Schedule A to the By-Laws of FINRA, Section 1(a) (stating ``FINRA 
shall, in accordance with this section, collect member regulatory 
fees that are designed to recover the costs to FINRA of the 
supervision and regulation of members, including performing 
examinations, financial monitoring, and policy, rulemaking, 
interpretive, and enforcement activities''). As SROs, the 
Participants have an obligation to be so organized and have the 
capacity to be able to carry out the purposes of the Exchange Act, 
and to enforce compliance by their members with the Exchange Act and 
their rules. 15 U.S.C. 78f(b)(1); 15 U.S.C. 78o-3(b)(2).
    \1737\ 15 U.S.C. 78f(b)(4); 15 U.S.C. 78o-3(b)(5).
    \1738\ 15 U.S.C. 78f(b)(5); 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The Commission believes that the proposed funding model reflects a 
reasonable exercise of the Participants' funding authority to recover 
the Participants' costs related to the CAT. The CAT is a regulatory 
facility jointly owned by the Participants and, as noted above, the 
Exchange Act specifically permits the Participants to charge members 
fees to fund their self-regulatory obligations. The Commission further 
believes that the proposed funding model is designed to impose fees 
reasonably related to the Participants' self-regulatory obligations 
because the fees would be directly associated with the costs of 
establishing and maintaining the CAT, and not unrelated SRO services. 
The Commission emphasizes that the CAT NMS Plan does not set forth, and 
the Commission is not hereby approving, the specific fees to be charged 
by the Participants; rather, such fee proposals later will be 
separately filed with the Commission by the Participants, published for 
public comment, and assessed by the Commission for consistency with 
applicable Exchange Act standards, including whether they are 
reasonable and equitably allocated,\1739\ and not unfairly 
discriminatory.\1740\
---------------------------------------------------------------------------

    \1739\ 15 U.S.C. 78f(b)(4); 15 U.S.C. 78o-3(b)(5).
    \1740\ 15 U.S.C. 78f(b)(5); 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

2. Funding Model's Allocation of Costs
    Several commenters expressed concern about the proposed allocation 
of CAT costs between the Participants and Industry Members.\1741\ Some 
expressed concern that the majority of the costs of the CAT would be 
allocated to Industry Members, with some estimating that Industry 
Members would pay approximately 88% of the ongoing annual costs of the 
CAT.\1742\ One commenter stated that the funding model is ``excessively 
and unjustifiably weighted to broker-dealers,'' \1743\ and requested to 
review proposed CAT fees to ensure they are reasonable and 
equitable.\1744\ Another commenter

[[Page 84795]]

expressed concern that the costs and funding of CAT might not be 
allocated equitably among Industry Members and Participants, given that 
the Participants are sole voting members of the Plan.\1745\
---------------------------------------------------------------------------

    \1741\ KCG Letter; SIFMA Letter; Fidelity Letter; FSR Letter; 
DAG Letter; Data Boiler Letter; Wachtel Letter.
    \1742\ See DAG Letter at 4 (noting that the CAT NMS Plan 
estimates that 88% of the annual costs of CAT would be allocated to 
Industry Members, and that the Participants additionally intend to 
require Industry Members to help fund the creation and ongoing costs 
of CAT, significantly increasing the burden on Industry Members); 
KCG Letter at 4; SIFMA Letter at 12-13 (noting that the total 
estimated annual cost of the CAT NMS Plan would be $1.7 billion, of 
which $1.5 billion, or 88% of the costs for the operation of CAT, 
would be borne by Industry Members). One of these commenters stated 
that, although not mentioned in the CAT NMS Plan, it believed the 
Participants anticipate allocating 75% of CAT Central Repository 
build and operational costs to Industry Members and 25% to Execution 
Venues, thereby shifting the majority of CAT costs away from the 
SROs and on the Industry Members, and increasing the Industry Member 
portion of annual CAT-related costs from approximately 88% to more 
than 96%. KCG Letter at 4. That commenter stated that ``[t]his 
methodology is inequitable and serves to underscore the inherent 
conflicts of interest the SROs face with respect to CAT funding and 
the effects of precluding broker-dealers from meaningfully 
participating in management of the CAT.'' KCG Letter at 4-5.
    \1743\ SIFMA Letter at 13.
    \1744\ Id. at 18.
    \1745\ Fidelity Letter at 5.
---------------------------------------------------------------------------

    More generally, two commenters believed that the CAT NMS Plan's 
funding model lacks sufficiently detailed information.\1746\ One of the 
commenters stated that the Plan's funding model does not adequately 
represent the industry feedback that the group provided to the 
Participants, and noted that the CAT NMS Plan lacks an analysis of how 
a CAT fee would fit into the existing funding model for regulation, 
including whether FINRA trading activity fees would be reduced after 
OATS is retired.\1747\ Another commenter stated that the information 
made publicly available in the CAT NMS Plan is insufficient for it to 
provide meaningful analysis on the funding model.\1748\
---------------------------------------------------------------------------

    \1746\ SIFMA Letter; DAG Letter.
    \1747\ DAG Letter at 5.
    \1748\ SIFMA Letter at 16. This commenter noted that the CAT NMS 
Plan provides only a high-level description of a funding model that 
reflects no input from broker-dealers and contains very little 
information on how costs will be allocated between broker-dealers 
and Participants. Id. at 13.
---------------------------------------------------------------------------

    The Participants disputed the estimate quoted by several commenters 
that Industry Members would bear 88% of the costs of the CAT, stating 
that this calculation referred to Industry Member compliance costs, and 
does not directly reflect CAT fees to be imposed pursuant to the 
Plan.\1749\
---------------------------------------------------------------------------

    \1749\ Response Letter II at 10. The Participants stated that 
the funding model provides a framework for the recovery of the costs 
to create, develop and maintain the CAT, and is not meant to address 
the cost of compliance for Industry Members and Participants with 
the reporting requirements of Rule 613.
---------------------------------------------------------------------------

    In response to the commenter that asked whether existing regulatory 
fees would be reduced once the CAT is implemented,\1750\ the 
Participants stated that each SRO will consider potential revisions to 
its existing regulatory fees once the CAT begins operation and legacy 
systems are retired.\1751\ The Participants also disagreed with the 
commenters that expressed concern that the funding model does not 
adequately reflect industry input,\1752\ and stressed that the funding 
model was discussed with the DAG many times and that the funding model 
was developed taking into account their input.\1753\
---------------------------------------------------------------------------

    \1750\ DAG Letter at 5.
    \1751\ Response Letter II at 17-18.
    \1752\ SIFMA Letter at 13; DAG Letter at 4.
    \1753\ Response Letter II at 18.
---------------------------------------------------------------------------

    The Commission believes that the proposed funding model is 
reasonably designed to allocate the costs of the CAT between the 
Participants and Industry Members. The Commission notes that the 
proposed funding model set forth in the Plan does not specify that the 
Participants or Industry Members would bear any particular percentage 
allocation of the costs associated with building and operating the 
Central Repository. As noted above, the Participants are permitted to 
recoup their regulatory costs under the Exchange Act through the 
collection of fees from their members, as long as such fees are 
reasonable, equitably allocated \1754\ and not unfairly discriminatory, 
and otherwise are consistent with Exchange Act standards.\1755\ The 
Commission will have the opportunity, at a later date, to review, and 
Industry Members and other interested persons will have the opportunity 
to comment upon, the specific fees the Participants intend to impose 
pursuant to the general funding model discussed herein.\1756\
---------------------------------------------------------------------------

    \1754\ 15 U.S.C. 78f(b)(4); 15 U.S.C. 78o-3(b)(5).
    \1755\ 15 U.S.C. 78f(b)(5); 15 U.S.C. 78o-3(b)(6).
    \1756\ See Section IV.F.1, supra.
---------------------------------------------------------------------------

3. Message Traffic and Market Share Distinction
    Two commenters addressed the proposed allocation of costs between 
Execution Venues and Industry Members based on market share and message 
traffic, respectively.\1757\ One of the commenters questioned the 
allocation of costs to Industry Members by message-traffic tiers, 
noting that market makers in exchange-traded products (``ETPs'') could 
incur much greater allocated costs than market makers in corporate 
stocks, given that market makers in ETPs may generate ten times the 
amount of message traffic per executed trade as market makers in 
corporate stocks.\1758\ The commenter also noted that Industry Members 
that primarily take liquidity do not generate significant quote-message 
traffic, so that ``any mechanism that allocates costs to broker-dealers 
strictly based on message traffic would unfortunately disadvantage 
broker-dealers that typically provide liquidity compared to those that 
may only take liquidity,'' \1759\ thereby discouraging the display of 
quotes. The commenter expressed concern that the Plan does not explain 
how much the Participants would charge per message or per market share 
percentage, or how they would assign the fixed-fee tiers to exchanges 
and Industry Members.\1760\
---------------------------------------------------------------------------

    \1757\ SIFMA Letter at 16-17; Data Boiler Letter at 15; see also 
DAG Letter at 5 (urging additional transparency related to the 
funding model based on market share and message traffic).
    \1758\ SIFMA Letter at 17.
    \1759\ Id.
    \1760\ Id. at 16.
---------------------------------------------------------------------------

    This commenter also noted that the CAT NMS Plan does not 
distinguish between costs of the CAT that are related to Industry 
Member data collection and processing, and costs of the CAT related to 
SRO surveillance and research, and expressed the view that allocating 
CAT costs simply based on message traffic or market share would make 
Industry Members subsidize Participant surveillance systems and other 
regulatory functions that currently are funded by the Participants 
through other regulatory fees imposed on Industry Members.\1761\ 
Finally, this commenter stated that the CAT NMS Plan does not explain 
why the SROs propose to allocate costs by message-traffic tiers for 
non-ATS Industry Members and by market share for exchanges and ATSs, 
and expressed concern that the market share approach applicable to 
exchanges and ATSs is primarily driven by their ability to pay, as 
opposed to the actual costs they impose on the Central 
Repository.\1762\
---------------------------------------------------------------------------

    \1761\ Id. at 17-18.
    \1762\ Id. at 16-17. The commenter urged the Participants to 
explain why they would not use the market share method of allocation 
for non-ATS Industry Members.
---------------------------------------------------------------------------

    Another commenter expressed the view that the proposed allocation 
of fees among Participants, other types of Execution Venues and 
Industry Members is not fair,\1763\ and that assessing fees based on 
message traffic and market share is not appropriate or 
reasonable.\1764\ This commenter stated that charging for message 
traffic would amount to a ``financial transaction tax'' that would 
negatively impact the financial markets, and recommended that charges 
instead be based on ``quarantine or red-flag of suspicious trade 
messages.'' \1765\
---------------------------------------------------------------------------

    \1763\ Data Boiler Letter at 15.
    \1764\ Id.
    \1765\ Id.
---------------------------------------------------------------------------

    In response, the Participants explained that ``[i]n designing a 
funding model, the Participants have sought to ensure an equitable 
allocation of fees such that large broker-dealers or broker-dealer 
complexes and large Participants or Participant complexes pay more than 
small broker-dealers and small exchanges.'' \1766\ The Participants 
believe that there is a strong correlation between message traffic and 
the size of an Industry Member, and that Industry Members increase 
their message traffic volume as they grow.\1767\ The

[[Page 84796]]

Participants stated that message traffic is a key component of the 
costs of operating the CAT, so they believe that message traffic is an 
appropriate criterion for placing Industry Members in a certain fee 
tier.\1768\ The Participants also expressed the view that the 
correlation between message traffic and size does not apply to 
Execution Venues, which they describe as producing similar amounts of 
message traffic regardless of size. They explained that charging 
Execution Venues based on message traffic would make large and small 
Execution Venues pay comparable fees, which they believe would be an 
inequitable result,\1769\ so the Participants decided to treat 
Execution Venues differently from Industry Members in the funding 
model.\1770\ The Participants estimated that the result of the funding 
model would be that fees for the smallest Execution Venues would be 
comparable to the largest Industry Members, and that aggregate fees for 
Participant complexes\1771\ would be at least comparable to those of 
large Industry Members.\1772\
---------------------------------------------------------------------------

    \1766\ Response Letter II at 11.
    \1767\ Id.
    \1768\ Id.
    \1769\ Id.
    \1770\ Id. at 12.
    \1771\ ``Participant complexes'' refers to Affiliated 
Participants, which include single entities that hold self-
regulatory licenses for multiple exchanges. The Plan defines 
``Affiliated Participant'' as ``any Participant controlling, 
controlled by, or under common control with another Participant.'' 
See CAT NMS Plan, supra note 5, at Section 1.1.
    \1772\ Response Letter II at 12.
---------------------------------------------------------------------------

    In response to the commenter that stated that the funding model 
should distinguish between the costs of Industry Member data collection 
and processing and the costs related to SRO surveillance and 
research,\1773\ and to the commenter that recommended that fees be 
based on suspicious trade messages,\1774\ the Participants noted that 
the Bidders cited data ingestion and processing as the primary driver 
of CAT costs and thus believe that data collection and processing 
requirements are a reasonable basis for allocating costs to CAT 
Reporters.\1775\ As to concerns that a fee based on message traffic 
would discourage the display of quotes,\1776\ the Participants 
explained that ``one of the reasons for proposing a tiered, fixed fee 
funding model was to limit the disincentives to providing liquidity to 
the market,'' as might be the case with a strictly variable funding 
model.\1777\
---------------------------------------------------------------------------

    \1773\ SIFMA Letter at 17-18.
    \1774\ Data Boiler Letter at 15.
    \1775\ Response Letter II at 14.
    \1776\ SIFMA Letter at 17.
    \1777\ Response Letter II at 16. As an example, the Participants 
stated that a firm with a large volume of quotes would likely be 
categorized by the proposed funding model in an upper fee tier 
instead of being assessed a fee for its message traffic directly as 
it would be under ``a more directly metered model.''
---------------------------------------------------------------------------

    The Commission expressed concern in the Notice that the structure 
of the funding model could provide a competitive advantage to exchanges 
over ATSs.\1778\ Under the proposed funding model, for an execution 
occurring on an exchange, the exchange would pay an Execution Venue fee 
based on its market share to the CAT. For an execution that occurs on 
an ATS, the Industry Member operating the ATS would pay an Execution 
Venue fee based on its market share \1779\ and the national securities 
association also would pay an Execution Venue fee based on its market 
share when the ATS trade is reported to it.\1780\ In the Notice, the 
Commission expressed concern that, under the Plan, ATS volume would 
effectively be charged once to the Industry Member operating the ATS 
and a second time to FINRA, which would result in ATS volumes 
contributing twice as much to CAT funding as exchange volumes. The 
Commission further inquired whether the funding model would 
disadvantage ATSs relative to registered exchanges, and whether trading 
volume could migrate to exchanges in response.\1781\
---------------------------------------------------------------------------

    \1778\ See Notice, supra note 5, at 30740.
    \1779\ The Commission notes that the Industry Member that 
operates an ATS also will be subject to message traffic fees. 
Section 11.3(b) of the CAT NMS Plan states: ``The Operating 
Committee will establish fixed fees to be payable by Industry 
Members, based on the message traffic generated by such Industry 
Member. . . . For the avoidance of doubt, the fixed fees payable by 
Industry Members pursuant to this paragraph shall, in addition to 
any other applicable message traffic, include message traffic 
generated by: (i) An ATS that does not execute orders that are 
sponsored by such Industry Member, and (ii) routing orders to and 
from any ATS sponsored by such Industry Member.'' See CAT NMS Plan, 
supra note 5, at Section 11.3(b).
    \1780\ Section 11.3(a)(i) of the CAT NMS Plan states: ``Each 
Execution Venue that: (A) Executes transactions; or (B) in the case 
of a national securities association, has trades reported by its 
members to its trade reporting facility or facilities for reporting 
transactions effected otherwise than on an exchange, in NMS Stock or 
OTC Equity Securities will pay a fixed fee depending on the market 
share of that Execution Venue in NMS Stock and OTC Equity Securities 
. . .'' Section 11.3(b) applies to Execution Venues transacting in 
Listed Options, stating: ``Each Execution Venue that executes 
transactions in Listed Options will pay a fixed fee depending on the 
Listed Options market share of that Execution Venue . . .'' See CAT 
NMS Plan, supra note 5, at Section 11.3(a)(i)-(ii).
    \1781\ See Notice, supra note 5, at 30740. The Commission 
solicited comment on two Commission-proposed alternatives pertaining 
to fees imposed on ATSs. In the first alternative, the Commission 
proposed excluding ATS volume from TRF volume. The Commission stated 
that this alternative would allow SROs that operate TRFs (currently 
only FINRA) to avoid paying Execution Venue fees for volume 
originating from an ATS execution and would avoid double-counting 
ATS volume as share volume. See id. at 30768. The Commission also 
solicited comment on not charging Industry Members for message 
traffic to and from their ATSs while still assessing fees to ATSs as 
Execution Venues or exchange Industry Members for their message 
traffic. The Commission explained that this alternative would 
mitigate incentives for Industry Members to route their orders in 
order to minimize costs under the proposed funding model. Id.
---------------------------------------------------------------------------

    To address this concern, the Participants recommended modifying the 
proposed funding model to exclude from the charges applicable to a 
national securities association any market share attributable to 
transactions reported to it by an ATS.\1782\
---------------------------------------------------------------------------

    \1782\ Response Letter II at 13.
---------------------------------------------------------------------------

    The Commission finds reasonable the suggested modification to the 
funding model by the Participants and, accordingly, is amending Section 
11.3(a)(i) of the CAT NMS Plan so that the share volume of trades in 
NMS Stocks or OTC Equity Securities reported by an ATS to a national 
securities association shall not be included in the calculation of the 
national securities association's market share for purposes of 
determining its Execution Venue fee. The Commission believes this 
amendment helps to mitigate concerns that this aspect of the proposed 
funding model, by effectively double-counting ATS transactions, would 
result in an inequitable allocation of fees, unfair discrimination and 
an unnecessary burden on competition.
    With this change, the Commission believes that the funding model 
set forth in the CAT NMS Plan is reasonable. The Participants have 
offered a credible justification for using different criteria to charge 
Execution Venues (market share) and Industry Members (message traffic). 
The Participants also have offered a reasonable basis for establishing 
a funding model based on broad tiers, in that it may be easier to 
implement and less likely to have an incremental deterrent effect on 
liquidity provision.\1783\
---------------------------------------------------------------------------

    \1783\ Further, the Commission believes that the tiered fee 
structure effectively mitigates a concern expressed by a commenter 
that charging for message traffic would amount to a ``financial 
transaction tax'' that would negatively impact the financial 
markets. See Data Boiler Letter at 15.
---------------------------------------------------------------------------

    In response to concerns that the funding model could make Industry 
Members subsidize Participant surveillance systems and functions that 
currently are funded through regulatory fees on Industry Members,\1784\ 
the Commission reiterates that the Exchange Act permits the 
Participants to assess fees among their members to recoup their 
regulatory costs, as long as such fees meet the applicable Exchange Act

[[Page 84797]]

standards, including that they be reasonable and equitably 
allocated,\1785\ and are not unfairly discriminatory.\1786\ When such 
fee proposals are filed with the Commission, they will be published for 
public comment,\1787\ and the Commission will have the opportunity to 
assess the fees.
---------------------------------------------------------------------------

    \1784\ SIFMA Letter at 17-18.
    \1785\ See 15 U.S.C. 78f(b)(4); 15 U.S.C. 78o-3(b)(5).
    \1786\ See 15 U.S.C. 78f(b)(5); 15 U.S.C. 78o-3(b)(6).
    \1787\ See supra note 1709.
---------------------------------------------------------------------------

4. Transparency and Alternatives to the Funding Model
    Five commenters advocated for greater transparency into CAT 
funding.\1788\ One commenter recommended that the CAT's costs and 
financing be completely transparent and that the CAT should have 
``publicly disclosed annual reports, audited financial statements, and 
executive compensation disclosure.'' \1789\ The commenter also 
recommended that the Participants engage an independent third party to 
design the funding model, determine any CAT fees to be charged by 
Participants,\1790\ and audit their regulatory revenues and the 
allocation thereof. It also believed that the Commission should publish 
the results of the audit.\1791\ Another commenter similarly recommended 
that the Commission require the Participants to engage an independent 
third party to review and make recommendations for a transparent and 
equitable funding model.\1792\ Another commenter urged transparency in 
the process of calculating any fees assessed on Participants to make 
sure they are related to the costs to build, operate, and administer 
the CAT.\1793\ One commenter suggested a greater role in CAT NMS Plan 
governance for Industry Members and institutional investors to help 
ensure that the costs and funding of CAT are allocated equitably among 
Industry Members and SROs.\1794\
---------------------------------------------------------------------------

    \1788\ SIFMA Letter; FSI Letter; KCG Letter; Fidelity Letter at 
5; DAG Letter. One commenter generally supported additional 
transparency into the funding model with respect to market share and 
message traffic. See DAG Letter at 5; see also STA Letter at 1 
(supporting the DAG Letter's cost and funding recommendations).
    \1789\ SIFMA Letter at 29.
    \1790\ Id. at 14.
    \1791\ Id.
    \1792\ KCG Letter at 5.
    \1793\ FSI Letter at 6.
    \1794\ Fidelity Letter at 5.
---------------------------------------------------------------------------

    Two commenters offered alternative funding models.\1795\ One 
commenter suggested that CAT fees be set by an independent advisory 
committee, rather than by the Operating Committee.\1796\ The other 
commenter recommended a centralized funding mechanism for the CAT, with 
the Participants collectively charging Industry Members a single CAT 
fee instead of each creating their own independent fees, believing it 
to be the most efficient and consistent way to collect CAT fees.\1797\ 
The commenter also suggested that, before the Participants impose any 
CAT fees on Industry Members, they should provide a public accounting 
of their current revenues and how that money is spent.\1798\
---------------------------------------------------------------------------

    \1795\ Data Boiler Letter; SIFMA Letter.
    \1796\ Data Boiler Letter at 15.
    \1797\ SIFMA Letter at 18.
    \1798\ Id.
---------------------------------------------------------------------------

    Four commenters recommended imposing certain specific fees to fund 
the CAT.\1799\ Three of the commenters suggested that the Participants 
and the Commission pay a user fee for the CAT, since they are direct 
beneficiaries of the system.\1800\ Another commenter suggested that the 
costs of building and maintaining the CAT should be borne by CAT 
Reporters through a filing or technology fee,\1801\ and recommended 
charging CAT Reporters with high cancellation rates and those that add 
``noise'' to the CAT system a special usage fee.\1802\
---------------------------------------------------------------------------

    \1799\ SIFMA Letter; Better Markets Letter; FSR Letter; DAG 
Letter; see also STA Letter at 1 (supporting the DAG Letter's cost 
and funding recommendations).
    \1800\ SIFMA Letter at 18, 30 (stating that if Industry Members 
must pay a user fee to access their own CAT data, then there should 
be also be a user fee for the Participants); FSR Letter at 10; DAG 
Letter at 5; see also STA Letter at 1 (supporting the DAG Letter's 
cost and funding recommendations).
    \1801\ Better Markets Letter at 5.
    \1802\ Id. at 6.
---------------------------------------------------------------------------

    In response, the Participants stated that they did not believe that 
an independent third party should be hired to evaluate CAT fees, noting 
that all CAT fees would be filed with the Commission pursuant to the 
Exchange Act, so that Industry Members and other interested persons 
would have an opportunity to comment, and the Commission would evaluate 
whether they are consistent with the statutory standards.\1803\ The 
Participants also noted that the funding model is intended to operate 
the CAT on a break-even basis, without creating profits for individual 
Participants.\1804\ In addition, the Participants stressed that they 
are prohibited from using regulatory fees for commercial 
purposes.\1805\ The Participants concluded that employing an 
independent third party would be unnecessary in light of these 
provisions.\1806\
---------------------------------------------------------------------------

    \1803\ Response Letter II at 17.
    \1804\ Id.
    \1805\ Id. at 17 n.60.
    \1806\ Id. at 17.
---------------------------------------------------------------------------

    In response to the commenter that recommended a centralized funding 
mechanism,\1807\ the Participants indicated that they intend for fees 
to be billed and collected centrally through the CAT LLC, so that each 
Industry Member will receive one invoice instead of separate invoices 
from each Participant.\1808\ In response to the suggestion that the 
Participants charge a regulatory usage fee, the Participants noted that 
the CAT NMS Plan authorizes the imposition of such a fee, and stated 
that they plan to evaluate the implementation of usage fees within a 
year after the Participants begin using the CAT.\1809\
---------------------------------------------------------------------------

    \1807\ SIFMA Letter at 15.
    \1808\ Response Letter II at 15.
    \1809\ Id.
---------------------------------------------------------------------------

    The Commission believes that the funding model proposed by the 
Participants, as amended by the Commission, is consistent with Rule 
613(a)(1)(vii)(D) and is reasonable. Rule 613(a)(1)(vii)(D) requires 
the Participants to discuss in the CAT NMS Plan how they propose to 
fund the creation, implementation and maintenance of the CAT, including 
the proposed allocation of estimated costs among the Participants, and 
between the Participants and Industry Members.\1810\ In the CAT NMS 
Plan, the Participants set forth a funding model that establishes a 
framework for the allocation of CAT costs across Participants and 
Industry Members. At this time, the Commission believes that the 
Exchange Act rule filing process, described above, will provide 
sufficient transparency into the fees charged by the Participants that 
are associated with CAT.\1811\
---------------------------------------------------------------------------

    \1810\ See 17 CFR 242.613(a)(1)(vii)(D).
    \1811\ See 17 CFR 240.19b-4(f)(2); see also 15 U.S.C. 
78s(b)(3)(A); 17 CFR 242.608; supra note 1756.
---------------------------------------------------------------------------

    With respect to the suggested imposition of a regulatory user 
fee,\1812\ a fee for high cancellation rates and ``noise,'' \1813\ or a 
specific technology fee, \1814\ the Commission notes that nothing in 
the Plan prohibits such fees from being charged and, if the 
Participants determine such fees to be appropriate, they may file a 
proposed rule change that would be subject to public comment and 
Commission review.\1815\
---------------------------------------------------------------------------

    \1812\ SIFMA Letter at 18; FSR Letter at 10, DAG Letter at 5; 
see also STA Letter at 1 (supporting the DAG Letter's cost and 
funding recommendations).
    \1813\ Better Markets Letter at 6.
    \1814\ Id. at 5.
    \1815\ See Section V.F.3.b, infra, for additional discussion of 
these comments. As it relates to fees that the Operating Committee 
may impose for access to and use of the CAT for regulatory and 
oversight purposes, the Commission interprets the provisions in the 
Plan relating to the collection of fees as applying only to 
Participants and Industry Members, and thus the Commission would not 
be subject to such fees.

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[[Page 84798]]

5. Miscellaneous
    The Commission notes that it is amending Section 11.1(d) of the CAT 
NMS Plan, which currently states that the Operating Committee shall 
adopt policies, procedures, and practices regarding, among other 
matters, the assignment of fee tiers, and that, as part of its regular 
review of fees for the CAT, the Operating Committee shall have the 
right to change the tier assigned to any particular Person in 
accordance with Article XI, and such changes will be effective upon 
reasonable notice to such Person. The Commission is amending this 
section to provide that the Operating Committee shall have the right to 
change the tier assigned to any particular Person in accordance with 
fee schedules previously filed with the Commission by the Operating 
Committee that are reasonable, equitable and not unfairly 
discriminatory and subject to notice and comment. The Commission 
believes this amendment to Section 11.1(d) is appropriate because it 
limits the discretion of the Operating Committee to change the tier 
assigned to a particular Person to objective standards previously filed 
with the Commission that are consistent with Exchange Act standards, 
and provides notice of any changes to the objective standards and the 
opportunity for public comment.

G. Dispute Resolution

    As noted above, the Plan does not include a general provision 
addressing the method by which disputes arising in connection with the 
operation of the Plan will be resolved.\1816\ The Plan does, however, 
provide the means for resolving disputes regarding the Participation 
Fee in Articles III and XI of the Plan.\1817\ The Commission did not 
receive any comments regarding these general dispute resolution 
provisions. However, the Commission is amending Article III to make it 
consistent with Article XI.
---------------------------------------------------------------------------

    \1816\ See Notice, supra note 5, at 30635.
    \1817\ CAT NMS Plan, supra note 5, at Section 3.3.
---------------------------------------------------------------------------

    Specifically, Article III, Section 3.3(b) of the Plan states that, 
in the event that the Company and a prospective Participant do not 
agree on the amount of the Participation Fee, such amount will be 
subject to the review by the Commission. The Plan currently cites to 
Section 11A(b)(5) of the Exchange Act \1818\ as the authority by which 
the Commission can review such disputes. However, Section 11A(b)(5) of 
the Exchange Act is not the appropriate authority for Commission review 
under these circumstances because the CAT is not a ``registered 
securities information processor.'' Accordingly, the Commission is 
making a technical amendment to the Plan (consistent with Article XI, 
Section 11.5) to provide that in the event that the Company and a 
prospective Participant do not agree on the amount of the Participation 
Fee, such amount will be subject to review by the Commission pursuant 
to SEC Rule 608 \1819\ or in any other appropriate forum.
---------------------------------------------------------------------------

    \1818\ See id. at Section 3.3(b); see also, Exchange Act Section 
11A(b)(5), 15 U.S.C. 78k-l(b)(5) (which provides that a prohibition 
or limitation on access to services by a registered securities 
information processor must be reviewed by the Commission upon 
application by an aggrieved person).
    \1819\ 17 CFR 242.608(d).
---------------------------------------------------------------------------

H. Written Assessments, Audits and Reports

    Section 6.6 of the Plan as filed, pursuant to Rule 613(b)(6), 
requires the Participants to provide the Commission with a written 
assessment of the operation of the CAT at least every two years or more 
frequently in connection with any review of the Plan Processor's 
performance.\1820\ The Plan requires that such written assessment 
include, at a minimum: (i) An evaluation of the Plan Processor's 
performance; (ii) a detailed plan for any potential improvements to its 
performance; (iii) an estimate of the costs associated with any such 
potential improvements; and (iv) an estimated implementation timeline 
for any such potential improvements.\1821\
---------------------------------------------------------------------------

    \1820\ See CAT NMS Plan, supra note 5, at Section 6.6.
    \1821\ Id.
---------------------------------------------------------------------------

    The Commission believes that it is important that the CAT keep pace 
with technological developments and changes to industry business 
practices, which can occur very rapidly. As such, the Commission 
believes that assessments more frequent than biannually of the CAT's 
standards and processes could ensure that the Plan Processor and the 
Participants remain current in their knowledge of technological and 
business developments and facilitate enhancements to the CAT as 
appropriate. The Commission believes that the preparation of reports 
and assessments on an annual basis, rather than a biannual basis, will 
help ensure that CAT technology and operations continue to provide 
timely, accurate, complete and accessible data, and that it is 
collected in a cost-effective manner. Accordingly, the Commission is 
amending Section 6.6 of the Plan to change the frequency of the 
assessment contemplated by Rule 613(b)(6) from biannual to annual.
    The Commission is also amending Section 6.6 of the Plan to provide 
further detail regarding elements of the written assessment to be 
conducted by the Participants. Specifically, as amended, the 
Participants' annual written assessment must also include: (1) An 
evaluation of the information security program of the CAT to ensure 
that the program is consistent with the highest industry standards for 
protection of data; \1822\ (2) an evaluation of potential technological 
upgrades based upon a review of technological developments over the 
preceding year, drawing on necessary technological expertise, whether 
internal or external; \1823\ (3) an assessment of efforts to reduce the 
time to restore and recover CAT Data at a back-up site; \1824\ (4) an 
assessment of how the Plan Processor and SROs are monitoring Error 
Rates and addresses the application of Error Rates based on product, 
data element or other criteria; \1825\ (5) a copy of the evaluation 
required by Section 6.8(c) of the Plan as to whether industry standards 
have evolved such that: (i) The clock synchronization standard in 
Section 6.8(a) should be shortened; or (ii) the required timestamp in 
Section 6.8(b) should be in finer increments; and (6) an assessment of 
whether any data elements should be added, deleted or changed.\1826\ 
The Commission believes that requiring these specific issues to be 
addressed in the Participants' annual assessment will focus the Plan 
Processor and Participants on critical technological and other 
developments, and should help ensure that CAT technology is up-to-date, 
resilient and secure, and provides accurate CAT Data.
---------------------------------------------------------------------------

    \1822\ See Section IV.D.6.a, supra.
    \1823\ See Section IV.D.14, supra.
    \1824\ See Section IV.D.12, supra.
    \1825\ See Section IV.D.11, supra.
    \1826\ See Section IV.D.13, supra.
---------------------------------------------------------------------------

    Section 6.6 of the Plan as filed also requires the Participants to 
provide an estimate of the costs associated with any potential 
improvements to the performance of the CAT, including an assessment of 
the potential impact on competition, efficiency and capital formation. 
The Commission believes, however, that it is important that the 
Participants consider not just the costs but also the potential 
benefits associated with any improvements to the performance of the 
CAT, including the impact on investor protection. Accordingly, the 
Commission is also amending Section 6.6 of the Plan to

[[Page 84799]]

require the annual assessment to consider the benefits of potential 
improvements to the CAT, including to investor protection.
    The Commission is further amending Section 6.6 of the Plan to 
require that the Participants provide the Commission with certain 
written reports on a one-time basis. First, the Participants must 
provide the Commission, and make public, at least one month prior to 
submitting any rule filing to establish initial fees for CAT Reporters, 
an independent audit of the fees, costs, and expenses incurred by the 
Participants on behalf of the Company prior to the Effective Date of 
the Plan.\1827\ The Commission notes that any such filing will be 
published for public notice and comment. As the Commission understands 
that the Participants intend to recover through CAT fees the amounts 
spent on the development of the CAT to date, to facilitate public 
comment and Commission review of such fee filings,\1828\ the Commission 
believes it is appropriate for the Participants to obtain an audit of 
the fees, costs and expenses incurred by the Participants on behalf of 
the Company prior to the Effective Date.
---------------------------------------------------------------------------

    \1827\ See Section III.6., supra.
    \1828\ See supra note 1709.
---------------------------------------------------------------------------

    Second, the Commission is amending the Plan to require the 
Participants to provide the Commission with a written assessment of the 
clock synchronization standards in the Plan \1829\ within six months of 
effectiveness of the Plan. As noted above, the Commission believes that 
the Participants should consider the type of CAT Reporter, the type of 
Industry Member, and type of system when determining industry 
standards, and is amending the Plan to clarify this more granular 
approach. The Commission believes the Participants should consider the 
Plan's clock synchronization standards in light of this clarification 
promptly, and propose any appropriate amendments, and that a six-month 
timeframe to do so is reasonable.
---------------------------------------------------------------------------

    \1829\ See Section IV.D.13, supra.
---------------------------------------------------------------------------

    Third, the Commission is amending the Plan to require the 
Participants to provide the Commission with a written report that 
discusses the Participants' assessment of implementing coordinated 
surveillance, whether through 17d-2 agreements, RSAs, or some other 
approach, within 12 months of effectiveness of the Plan.\1830\ The 
Commission notes that the CAT is designed to facilitate the ability of 
regulators to conduct cross-market surveillances and to review conduct 
that occurs across the market. As a result, the Commission believes 
that it may be efficient for the Participants to coordinate to conduct 
cross-market surveillances.
---------------------------------------------------------------------------

    \1830\ See Section IV.B.4., supra. This assessment can be 
provided in conjunction with an annual written assessment required 
by Rule 6.6 of the Plan.
---------------------------------------------------------------------------

    Fourth, the Commission is amending the Plan to require the 
Participants to submit to the Commission a written report, within 24 
months of effectiveness of the Plan, discussing the feasibility, 
benefits, and risks of allowing an Industry Member to bulk download the 
Raw Data that it has submitted to the Central Repository.\1831\ 
Commenters expressed a desire to have bulk access to their own data for 
surveillance and internal compliance purposes, as well as to facilitate 
the error correction process. While, the Participants did not permit 
such access in the Plan, citing security and cost concerns, they did 
represent that they would consider allowing bulk access to the audit 
trail data reported by Industry Members once CAT is operational. The 
Commission believes it is important to consider the potential 
efficiencies of allowing Industry Members bulk access to their own CAT 
data, so long as such access does not impact the security of the CAT 
Data, and accordingly believes that requiring a report discussing this 
issue by the date Industry Members first begin reporting to the CAT, is 
appropriate.
---------------------------------------------------------------------------

    \1831\ See Section IV.D.6.m, supra. This report may be provided 
in conjunction with an annual written assessment required by Rule 
6.6 of the Plan.
---------------------------------------------------------------------------

    Fifth, the Commission is amending the Plan to require the 
Participants to provide the Commission with a written assessment, 
within 36 months of effectiveness of the Plan, of the nature and extent 
of errors in the Customer information submitted to the Central 
Repository and whether the correction of certain data fields over 
others should be prioritized.\1832\ The Commission believes that 
requiring such an assessment, which will coincide with the date all 
Industry Members are reporting to the CAT, could help ensure that the 
accuracy of CAT Data is achieved in the most prompt and efficient 
manner.
---------------------------------------------------------------------------

    \1832\ See Section IV.D.4.a, supra. This assessment may be 
provided in conjunction with an annual written assessment required 
by Rule 6.6 of the Plan.
---------------------------------------------------------------------------

    Sixth, the Commission is amending the Plan to require the 
Participants to provide the Commission with a written report, 36 months 
after effectiveness of the Plan, on the impact of tiered fees on market 
liquidity, including an analysis of the impact of the tiered-fee 
structure on Industry Members' provision of liquidity.\1833\ One 
commenter expressed concern that use of a tiered fee structure could 
discourage displayed quotes and, in response, the Participants 
explained that one of the reasons they chose to use a tiered-fee 
funding model was to limit disincentives to provide liquidity. To help 
determine whether the Plan's funding model actually achieves the 
Participants' stated objective, the Commission believes it appropriate 
to require them to prepare such an assessment of the impact of tiered 
fees once the CAT becomes fully operational.
---------------------------------------------------------------------------

    \1833\ See Section IV.F.3., supra.
---------------------------------------------------------------------------

    Finally, the Commission is amending the Plan to require the 
Participants to provide the Commission a written assessment of the 
projected impact of any Material Systems Change on the Maximum Error 
Rate, prior to the implementation of any Material Systems Change.\1834\ 
The Commission believes that Material Systems Changes either could 
result in new challenges for CAT Reporters or simplify the means for 
reporting data. In either case, the appropriateness of the Maximum 
Error Rate could be impacted, and thus warrant a change. Accordingly, 
the Commission believes it appropriate to require the Participants to 
provide the Commission an assessment of the projected impact on the 
Maximum Error Rate, including any recommended changes thereto, prior to 
the implementation of any Material Systems Change.
---------------------------------------------------------------------------

    \1834\ See Section IV.D.11.b., supra.
---------------------------------------------------------------------------

V. Economic Analysis

A. Introduction

    The Commission is sensitive to the economic effects of the CAT NMS 
Plan,\1835\ including its costs and benefits and its impact on 
efficiency, competition and capital formation. In accordance with the 
approach articulated by the Commission in the Adopting Release, the 
Commission published its preliminary economic analysis of the CAT NMS 
Plan in the Notice, and solicited comment on its analysis and on all 
aspects of the proposed Plan. The Commission has considered the 
comments received, along with the Participants' responses, and has 
modified certain aspects of the Plan, as discussed above.
---------------------------------------------------------------------------

    \1835\ See CAT NMS Plan, supra note 5.
---------------------------------------------------------------------------

    This Section reflects the Commission's analysis and conclusions 
regarding the economic effects of the creation, implementation and 
maintenance of the CAT pursuant to the details in the CAT NMS Plan, as 
amended and hereby approved by the

[[Page 84800]]

Commission. The analysis is divided into seven topics: (1) A summary of 
the expected economic effects of approving the CAT NMS Plan; (2) a 
description of the economic framework for analyzing the economic 
effects of approving the CAT NMS Plan; (3) a discussion of the current, 
or ``Baseline,'' audit trail data available to regulators, and the 
sources of such data; (4) a discussion of the potential benefits of 
approving the CAT NMS Plan; (5) a discussion of the potential costs of 
approving the CAT NMS Plan; (6) a discussion of the CAT NMS Plan's 
potential impact on efficiency, competition, and capital formation; and 
(7) a discussion of alternatives to various features of the CAT NMS 
Plan and to the CAT NMS Plan itself.

B. Summary of Expected Economic Effects

    The Commission has analyzed the expected economic effects of the 
CAT NMS Plan in light of the existing shortcomings in the regulatory 
data infrastructure and the goal of improving the ability of SROs and 
the Commission to perform their regulatory activities to the benefit of 
investors and the markets.\1836\ In general, the Commission believes 
that the CAT NMS Plan will result in benefits by improving the quality 
of the data available to regulators in four areas that affect the 
ultimate effectiveness of core regulatory efforts--completeness, 
accuracy, accessibility and timeliness.\1837\ The Commission believes 
that the improvements in these data qualities that will be realized 
from approval of the CAT NMS Plan will substantially improve 
regulators' ability to perform analysis and reconstruction of market 
events, market analysis and research to inform policy decisions, and 
other regulatory activities including market surveillance, 
examinations, investigations, and other enforcement functions. 
Regulators depend on data for many of these activities and the 
improvements in the data qualities will thus improve the efficiency and 
effectiveness of such regulatory activities. As explained further 
below, these improvements could benefit investors by giving regulators 
more and better regulatory tools to provide investors with a more 
effectively regulated trading environment,\1838\ which could increase 
capital formation, liquidity, and price efficiency. Data improvements 
could enhance regulators' ability to provide investors and the public 
with more timely and accurate analysis and reconstruction of market 
events, and to develop more effective responses to such events. 
Improved understanding of emerging market issues resulting from 
enhanced market analysis and research could inform regulatory policies 
that improve investor protection through better market quality, more 
transparency, and more efficient prices. Improvements in quality and 
quantity of order events could lead to improvements in developing and 
targeting policy approaches to ensure a fair and orderly market.
---------------------------------------------------------------------------

    \1836\ The Commission noted current SRO audit trail limitations 
in the Proposing Release and the Adopting Release. See Proposing 
Release, supra note 14, at 32563-68; Adopting Release, supra note 
14, at 45726-30. Rule 613 is designed to address these limitations.
    \1837\ See Adopting Release, supra note 14, at 45727 (discussing 
four ``qualities'' of trade and order data that impact the 
effectiveness of core SRO and Commission regulatory efforts: 
Accuracy, completeness, accessibility, and timeliness); see also 
Section V.E. infra, for a detailed discussion of the expected 
benefits of the CAT NMS Plan.
    \1838\ See Section V.E.2, infra.
---------------------------------------------------------------------------

    In terms of completeness, the Plan requires the reporting of 
certain additional data fields, events, and products.\1839\ More 
importantly, the CAT NMS Plan requires data elements useful for 
regulatory analysis to be available from a single data source. Having 
relevant data elements available from a single source will simplify and 
expedite regulators' data collection process and facilitate more 
efficient analyses and surveillances that incorporate cross-market and 
cross-product data.
---------------------------------------------------------------------------

    \1839\ See CAT NMS Plan, supra note 5, at Sections 6.3, 6.4; see 
also 17 CFR 242.613(c)(7).
---------------------------------------------------------------------------

    With respect to the accuracy of available data, the Commission 
believes that the requirements in the Plan will improve data accuracy 
significantly. For example, the Commission expects that the 
requirements to store the CAT Data in a uniform linked format and the 
use of consistent identifiers for customers and market participants 
will result in fewer inaccuracies as compared to current data sources. 
These accuracy improvements should significantly reduce the time 
regulators spend processing the data and finding solutions when faced 
with inaccurate data. The Commission believes that the requirements in 
the Plan for clock synchronization and timestamp granularity will 
improve the accuracy of data with respect to the timing of market 
events. The Commission believes that the Plan will improve regulators' 
ability to determine the sequence of some market events relative to all 
surrounding events.\1840\
---------------------------------------------------------------------------

    \1840\ The CAT NMS Plan requires that CAT Reporters who are 
Industry Members synchronize their business clocks to within 50 
milliseconds of the time maintained by the NIST, which will increase 
the precision of the timestamps provided by the 39% of broker-
dealers who currently synchronize their clocks with less precision 
than what is called for by the Plan. See FIF Clock Offset Survey, 
supra note 247. Further, the Commission has amended the Plan to 
require exchanges to synchronize their business clocks to within 100 
microseconds. While this is similar to current practice, this 
requirement should still provide the greater ability for regulators 
to sequence unrelated events in a market reconstruction by anchoring 
lifecycles to events at exchanges. Independent of the potential time 
clock synchronization benefits, the order linking data that will be 
captured in CAT should increase the proportion of events that could 
be sequenced accurately. This reflects the fact that some records 
pertaining to the same order could be sequenced by their placement 
in an order lifecycle (e.g., an order submission must have occurred 
before its execution) without relying on timestamps. This 
information may also be used to partially sequence surrounding 
events, particularly with the Plan modifications.
---------------------------------------------------------------------------

    The Commission also believes that the Plan will increase the 
accessibility of data for SROs and the Commission, because regulators 
will be able to access the CAT Data directly.\1841\ This, coupled with 
the improvements in completeness, will vastly increase the scope of 
information readily available to regulators and significantly reduce 
the number of data requests from the several hundred thousand requests 
regulators make each year. The increased scope of readily available 
information should facilitate more data-driven regulatory policy 
decisions, broaden the potential surveillances, expand the 
opportunities for SRO and Commission analysis to help target broker-
dealers and investment advisers for examinations and help to perform 
those examinations.
---------------------------------------------------------------------------

    \1841\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.2, Appendix D, Section 8.1; see also 17 CFR 242.613(e)(2).
---------------------------------------------------------------------------

    Finally, the Commission believes that the CAT NMS Plan will improve 
the timeliness of available data. Because regulators will be able to 
access uncorrected data the day after an order event and will be able 
to access corrected and linked data five days after an order 
event,\1842\ many data elements will be available to regulators more 
quickly than they are currently. Accordingly, the amount of time 
regulators would need to acquire and process data before running 
analyses would be reduced. For example, the corrected and linked data 
available on T+5 will identify the customer account

[[Page 84801]]

associated with all order events, information that currently takes ten 
days or longer for regulators to obtain and then need to link to other 
data sources for use. These improvements in timeliness, combined with 
improvements in completeness, accessibility, and accuracy discussed 
above, will improve the efficiency of regulatory analysis and 
reconstruction of market events, as well as market analysis and 
research that informs policy decisions, and make market surveillance, 
examinations, investigations, and other enforcement functions more 
efficient, allowing, for example, the SROs and the Commission to review 
tips and complaints more effectively.
---------------------------------------------------------------------------

    \1842\ CAT Data will be reported by 8:00 a.m. ET on T+1 and made 
available to regulators in raw form after it is received and passes 
basic formatting validations with an error correction process 
completed by 8:00 a.m. ET on T+5. While the Plan does not specify 
exactly when these validations would be complete, the requirement to 
link records by 12:00 p.m. ET on T+1 gives a practical upper bound 
on this timeline. See CAT NMS Plan, supra note 5, at Appendix C, 
Sections A.2(a), A.3(a), Appendix D, Section 6.2.
---------------------------------------------------------------------------

    The Commission notes that the Plan lacks information regarding the 
details of certain elements of the Plan likely to affect the costs and 
benefits associated with it, primarily because those details have not 
yet been determined, and this lack of information creates some 
uncertainty about the expected economic effects. As discussed further 
below, lack of specificity surrounding the processes for converting 
data formats and linking related order events creates uncertainty as to 
the anticipated improvements in accuracy because such processes have 
the potential to create new data inaccuracies. Lack of specificity 
surrounding the process for regulators to access the CAT Data also 
creates uncertainty around the expected improvements in accessibility. 
For example, while the Plan indicates that regulators would have an 
online targeted query tool and a tool for user-defined direct queries 
or bulk extraction,\1843\ the Plan itself does not provide an 
indication for how user-friendly the tools would be or the particular 
skill set needed to use the tools for user-defined direct queries. 
However, the Commission has analyzed the expected economic effects of 
the Plan to the extent possible with the information available, noting 
areas of uncertainty in its analysis where applicable. The Commission 
has also considered whether certain provisions related to the operation 
and administration of the Plan could mitigate some of the 
uncertainties.\1844\
---------------------------------------------------------------------------

    \1843\ Id. at Appendix D, Sections 8.1.1, 8.1.2.
    \1844\ See Section V.E.3.d, infra.
---------------------------------------------------------------------------

    The Commission also believes that more effective and efficient 
regulation of securities markets and market participants resulting from 
implementation of the CAT NMS Plan could significantly benefit 
investors and the integrity of the market. For example, the Commission 
believes that more effective and efficient surveillance and enforcement 
should detect a higher proportion of violative market activity. This 
additional detection could not only reduce violative behavior through 
potential enforcement actions, but through deterrence if market 
participants believe violative activities are more likely to be 
detected. Because violative activity degrades market quality and 
imposes costs on investors and market participants, reductions in 
violative activity would benefit investors and market integrity. 
Likewise, more effective and efficient risk assessment and risk-based 
examinations should facilitate the selection of market participants for 
examination who have characteristics that elevate their risk of 
violating the rules. Decreasing the amount of violative activity by 
targeting exams in this way should provide investors with a more 
effectively regulated trading environment and hence better market 
quality. Further, access to audit trail data that is comprehensive, 
accurate, and timely should improve regulatory reconstruction of market 
events, market analysis, and research, resulting in an improved 
understanding of emerging market issues and regulatory policies that 
better encourage industry competition, thus improving investor 
protection through better transparency and more efficient prices.\1845\ 
Regulatory initiatives that are based on a more thorough understanding 
of underlying events and their causes, and that are narrowly tailored 
to address any market deficiency, should improve market quality and 
benefit investors. Access to more complete and linked audit trail data 
will improve regulators' ability to analyze and reconstruct market 
events, allowing regulators to provide investors and the public with 
more accurate explanations of market events, to develop more effective 
responses to such events, and to use the information to assist in 
retrospective analyses of their rules and pilots.
---------------------------------------------------------------------------

    \1845\ See Section V.E.2, infra.
---------------------------------------------------------------------------

    The Commission has also evaluated the potential costs that will 
result from the approval of the CAT NMS Plan. The Commission's cost 
analysis is based on the preliminary analysis in the Notice, which 
analyzed information included in the Plan, information gathered from 
market participants through discussions, surveys of market 
participants, and other relevant information to estimate the potential 
costs associated with building and maintaining the Central Repository 
as well as the costs to report data to the Central Repository. The 
Commission has considered the comments received on its preliminary 
analysis, the Participants' response to the comments, and the impact of 
the Commission's modifications to the Plan and has revised its analysis 
and estimates accordingly.\1846\ Currently, the 21 Participants spend 
$170.3 million annually on reporting regulatory data and performing 
surveillance, while the approximately 1,800 broker-dealers anticipated 
to have CAT reporting responsibilities spend $1.6 billion annually on 
regulatory data reporting, for total current industry costs of $1.7 
billion annually for regulatory data reporting and surveillance by 
SROs. Having considered the comments, the Participants' response and 
the Commission's modifications to the Plan, the Commission now 
estimates the cost of the Plan as approximately $2.4 billion in initial 
aggregate implementation costs and recurring annual costs of $1.7 
billion.\1847\ Furthermore, the Commission acknowledges that during the 
period of duplicative reporting, during which CAT Reporters will report 
to both current regulatory data reporting systems and CAT, industry 
will face duplicative reporting costs that the Commission estimates at 
$1.7 billion per year, the cost of industry's current data reporting.
---------------------------------------------------------------------------

    \1846\ See Section V.F.1 and Section V.F.2, infra for discussion 
of comments received on cost estimates, and revisions the Commission 
made to those estimates in response.
    \1847\ See Section V.F.2, infra.
---------------------------------------------------------------------------

    Commenters had numerous comments on individual estimates of costs, 
particularly as they related to requirements to report allocation 
timestamps in milliseconds, the costs of duplicative reporting, and 
generally about the uncertainty surrounding cost estimates. The primary 
driver of the annual costs is the data reporting cost for broker-
dealers, which is estimated to be $1.5 billion per year. For both large 
and small broker-dealers, the primary driver of both the current $1.6 
billion reporting costs and projected $1.5 billion CAT reporting costs 
is costs associated with staffing. Bidder estimates of the costs to 
build the Central Repository vary from $37.5 million to $65 million and 
annual operating costs range from $36.5 to $55 million. The eventual 
magnitude of Central Repository costs depends on the Participants' 
selection of the Plan Processor, and may ultimately differ from 
estimates discussed above if Bids are revised as the bidding process 
progresses. Furthermore, the Plan anticipates a period of duplicative 
reporting responsibilities preceding the

[[Page 84802]]

retirement of potentially duplicative regulatory data reporting 
systems; these duplicative reporting costs are likely to be 
significant.\1848\
---------------------------------------------------------------------------

    \1848\ The economic analysis discusses duplicative reporting 
costs in Section V.F.2, infra.
---------------------------------------------------------------------------

    Drawing from the discussion in the CAT NMS Plan, the comments 
received, and the Participants' response to the comments,\1849\ the 
Commission expects that the Plan will have a number of additional 
economic effects, including effects on efficiency, competition, and 
capital formation. The Commission believes that the Plan generally 
promotes competition. However, the Commission recognizes that the Plan 
could increase barriers to entry because of the costs to comply with 
the Plan. Further, the Commission's analysis identifies several 
limiting factors to competition; however, Plan provisions and 
Commission oversight could mitigate such limiting factors. The 
Commission believes that the Plan will result in significant 
improvements in efficiency related to how regulatory data is collected 
and used. Specifically, the approval of the Plan will result in 
improved data becoming available to regulators, which will increase the 
efficiency of regulatory activities such as market surveillance, 
examinations, investigations, and other enforcement functions that 
could enhance market efficiency by reducing violative activity that 
harms market efficiency. In addition, the availability of this data 
should improve regulatory analysis and reconstruction of market events, 
as well as market analysis and research that informs policy decisions. 
Finally, the Commission believes that the Plan could have positive 
effects on capital formation and allocative efficiency and that the 
threat of a security breach at the Central Repository is unlikely to 
significantly harm capital formation. The Commission recognizes that 
the Plan's likely effects on competition, efficiency and capital 
formation are dependent to some extent on the performance and decisions 
of the Plan Processor and the Operating Committee in implementing the 
Plan, and thus there is necessarily some uncertainty in the 
Commission's analysis. Nonetheless, the Commission believes that the 
Plan contains certain governance provisions, as well as provisions 
relating to the selection and removal of the Plan Processor, that 
mitigate this uncertainty by promoting decision-making that could, on 
balance, have positive effects on competition, efficiency, and capital 
formation.
---------------------------------------------------------------------------

    \1849\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.8; see also Section V.G, infra.
---------------------------------------------------------------------------

    As part of its economic analysis, the Commission has also 
considered the likely economic effects of a number of alternatives to 
the approaches taken in the CAT NMS Plan. The Commission has analyzed 
certain alternatives that could have a direct and significant impact on 
costs or benefits deriving from at least one of the four data qualities 
discussed above: Accuracy, completeness, accessibility, and timeliness. 
This analysis includes alternatives proposed by commenters.

C. Framework for Economic Analysis

    As discussed above, the Commission has conducted an economic 
analysis of the CAT NMS Plan, including the modifications made by the 
Commission, as anticipated in the Adopting Release for Rule 613.\1850\ 
In particular, the Commission has carefully evaluated the information 
in the CAT NMS Plan, including the twelve considerations required by 
Rule 613 \1851\ and the details of the decisions left to the discretion 
of the SROs. The Commission has also considered information drawn from 
outside the Plan, but that was included in its preliminary economic 
analysis in the Notice and subject to public comment,\1852\ in order to 
assess potential economic effects not addressed therein. Finally, the 
Commission considered comments submitted in response to its Notice. To 
provide context for this analysis, this Section describes the economic 
framework for the analysis and seeks to identify uncertainties within 
that framework.
---------------------------------------------------------------------------

    \1850\ See Adopting Release, supra note 14, at 45789.
    \1851\ 17 CFR 242.613(a)(1).
    \1852\ See Notice, supra note 5, at 30651-30797.
---------------------------------------------------------------------------

    The framework for the Commission's final economic analysis is 
largely the same as the framework set out in the economic analysis of 
the Notice,\1853\ though the Commission has revised its discussion of 
uncertainty to recognize comments.\1854\ This Section includes a high-
level summary of those comments, which are addressed in the economic 
analysis to follow.
---------------------------------------------------------------------------

    \1853\ Id. at 30654-30656.
    \1854\ See Data Boiler Letter at 9, 30; SIFMA Letter at 6, 13, 
15-16, 23-24,32, 39, 40, 42, 44-45; FSR Letter at 9-10; Fidelity 
Letter at 6; TR Letter at 4; FSI Letter at 5-6; DAG Letter at 5; 
UnaVista Letter at 2.
---------------------------------------------------------------------------

1. Economic Framework
a. Benefits
    The CAT NMS Plan will create a new data source that should 
modernize and eventually replace the use of some disparate current data 
sources for many regulatory activities. As such, the economic benefits 
of the CAT NMS Plan will come from any expanded and more efficient 
regulatory activities facilitated by improvements to the data 
regulators use. Therefore, the framework for examining benefits in this 
economic analysis involves first considering whether and to what degree 
the CAT Data will improve on the Baseline of current trading and order 
data in terms of the four qualities of accuracy, completeness, 
accessibility, and timeliness.\1855\
---------------------------------------------------------------------------

    \1855\ See Adopting Release, supra note 14, at 45727.
---------------------------------------------------------------------------

    Through these improvements in the data, the economic analysis then 
considers the degree to which the Plan will result in improvements to 
regulatory activities such as the analysis and reconstruction of market 
events, in addition to market analysis and research conducted by SROs 
and Commission Staff, as well as market surveillance, examinations, 
investigations, and other enforcement functions. These potential 
improvements, based on the regulatory objectives of the CAT NMS Plan 
described in the Adopting Release,\1856\ relate to the overall goal of 
substantially enhancing the ability of the SROs and the Commission to 
oversee securities markets and fulfill their regulatory 
responsibilities under the securities laws. The economic framework 
explores how the improvements to these regulatory activities provide 
economic benefits to investors and the market. Among other things, 
potential benefits that could result from the CAT NMS Plan include 
benefits rooted in changes in the behavior of market participants. For 
example, requirements to report certain data elements or events to the 
CAT could have the beneficial effect of detecting and deterring rule 
violations because the inclusion of certain data fields and 
improvements in the ability to surveil for violations could increase 
the perceived costs of violating rules and regulations. Potential 
benefits could also stem from improved investor protection, such as 
from more effective surveillance and more informed, data-driven 
rulemaking. In addition, potential benefits could stem from future 
reduced costs due to more targeted, data-driven policy choices.
---------------------------------------------------------------------------

    \1856\ Id. at 45730.
---------------------------------------------------------------------------

(1) Data Qualities
    In assessing the potential benefits of the CAT NMS Plan, the 
Commission's economic analysis compares the data that will be available 
under the Plan to the trading and order data currently

[[Page 84803]]

available to regulators to determine whether and to what degree the 
Plan will improve the available data with respect to the four qualities 
of accuracy, completeness, accessibility, and timeliness.\1857\
---------------------------------------------------------------------------

    \1857\ Id. at 45727. Accuracy refers to whether the data about a 
particular order or trade is correct and reliable. Completeness 
refers to whether a data source represents all market activity of 
interest to regulators, and whether the data is sufficiently 
detailed to provide the information regulators require. While 
current data sources provide the trade and order data required by 
existing rules and regulations, those sources generally do not 
provide all of the information of interest to regulators in one 
consolidated audit trail. Accessibility refers to how the data is 
stored, how practical it is to assemble, aggregate, and process the 
data, and whether all appropriate regulators could acquire the data 
they need. Timeliness refers to when the data is available to 
regulators and how long it would take to process before it could be 
used for regulatory analysis. As explained in the Baseline, Section 
V.D.2, infra, the trading and order data currently available to 
regulators suffers from deficiencies in all four dimensions.
---------------------------------------------------------------------------

(2) Regulatory Activities
    Any economic benefits will derive from how such improved data will 
affect regulatory activities. Therefore, to analyze the potential 
benefits of the CAT NMS Plan, the economic analysis also evaluates the 
potential of the CAT NMS Plan to meet the regulatory objectives set out 
in the Adopting Release for Rule 613. The objectives are: Improvements 
in the analysis and reconstruction of broad-based market events; 
improvements in market analysis in support of regulatory decisions; and 
improvements in market surveillance, investigations, and other 
enforcement activities.\1858\
---------------------------------------------------------------------------

    \1858\ See Adopting Release, supra note 14, at 45730.
---------------------------------------------------------------------------

A. Analysis and Reconstruction of Broad-Based Market Events
    The economic analysis considers whether and to what extent the CAT 
NMS Plan will facilitate regulators' performance of analysis and 
reconstruction of market events, potentially helping to better inform 
both regulators and investors about such market events and speeding the 
regulatory response following market events. Regulators perform 
reconstructions of market events so that they and the public can be 
informed by an accurate accounting of what happened (and, possibly, why 
it happened). As discussed in the Benefits Section,\1859\ market 
reconstructions currently can take a significant amount of time, in 
large measure due to various deficiencies in the currently available 
trading and order data.\1860\ The sooner regulators complete a 
reconstruction and analysis of a market event, the sooner investors can 
be informed and the sooner regulators can begin reviewing the event to 
determine what happened, who was affected and how, and whether the 
analysis supports potential regulatory responses.\1861\ In addition, 
the improved ability for regulators to generate prompt and complete 
market reconstructions could provide improved market knowledge, which 
could assist regulators in conducting retrospective analysis of their 
rules and pilots.
---------------------------------------------------------------------------

    \1859\ See Section V.E.2.a, infra.
    \1860\ See Section V.D.2.b, infra.
    \1861\ See Adopting Release, supra note 14, at 45732.
---------------------------------------------------------------------------

B. Market Analysis in Support of Regulatory Decisions
    The economic analysis considers whether and to what extent the CAT 
NMS Plan will enhance the ability of the SROs and the Commission to 
conduct market analysis and research, including analysis of market 
structure, and the degree to which it will improve regulators' market 
knowledge and facilitate consideration of policy questions of interest. 
The SROs and Commission Staff conduct data-driven analysis on market 
structure, in direct support of both rulemaking and other regulatory 
decisions such as SRO rule approvals. The Commission also relies on 
such analysis to improve understanding of market structure in ways that 
could inform policy. Finally, SROs conduct market analysis and research 
on their own regulatory initiatives. Improvements in the ability to 
conduct market analysis could further improve analysis related to 
regulatory decisions and potentially influence those regulatory 
decisions to the benefit of investors and the markets more generally.
C. Market Surveillance and Investigations
    The economic analysis examines whether the CAT NMS Plan will 
improve market surveillance and investigations, potentially resulting 
in more effective oversight of trading, better investor protection, and 
deterrence of violative behavior. As described in more detail in the 
Baseline Section,\1862\ both SROs and the Commission conduct market 
surveillance, examinations, investigations, and other enforcement 
functions targeting illegal activities such as insider trading, wash 
sales, or manipulative practices. Improvements in market surveillance 
and investigations could come in the form of ``facilitating risk-based 
examinations, allowing more accurate and faster surveillance for 
manipulation, improving the process for evaluating tips, complaints, 
and referrals . . . , and promoting innovation in cross-market and 
principal order surveillance.'' \1863\
---------------------------------------------------------------------------

    \1862\ See Section V.D.1.c.(1) and Section V.D.1.c.(3), infra.
    \1863\ See Adopting Release, supra note 14, at 45730.
---------------------------------------------------------------------------

b. Costs
    The economic analysis evaluates the costs of building and operating 
the Central Repository; the costs of CAT reporting for Participants, 
broker-dealers, and service bureaus; and other CAT-related costs. Where 
the CAT NMS Plan provides estimates of these costs, the economic 
analysis evaluates those estimates and re-estimates them when 
necessary. The economic analysis also discusses the drivers of these 
costs, and whether broker-dealers may or may not pass these costs down 
to their customers. As a part of its consideration of the costs of the 
CAT NMS Plan, the economic analysis considers costs from duplicative 
reporting for some period of time as well as potential cost savings 
from the retirement of duplicative regulatory reporting systems.\1864\
---------------------------------------------------------------------------

    \1864\ Rule 613 requires the Plan to discuss ``[a] plan to 
eliminate existing rules and systems (or components thereof) that 
would be rendered duplicative by the consolidated audit trail.'' 17 
CFR 242.613(a)(1)(ix); see also CAT NMS Plan, supra note 5, at 
Appendix C Section C.9.
---------------------------------------------------------------------------

    The economic analysis also considers whether the CAT NMS Plan could 
result in second order effects, such as changes to the behavior of 
market participants, that impose certain costs. For example, the CAT 
NMS Plan's tiered funding model could lead to efforts by market 
participants to try to control their tiers in order to affect their fee 
payments, such as reducing activity levels near the end of an activity 
level measuring period to avoid being classified as a higher activity 
level firm. In addition, Participants, their members, and investors 
could incur costs if their private information were accessed in the 
event of a security breach of the Central Repository. The economic 
analysis considers these and other elements of the Plan that could lead 
to distortions in behavior by market participants.
2. Existing Uncertainties
    In the Notice, the Commission described how it analyzed the 
information in the CAT NMS Plan, as well as other relevant data,\1865\ 
in order

[[Page 84804]]

to assess the economic effects of the Plan. As discussed throughout the 
analysis in the Notice, in certain cases the Commission lacked 
information needed to evaluate all of the potential economic effects of 
the CAT NMS Plan, creating uncertainty in some potential benefits and 
costs. The primary drivers of uncertainty included the fee schedule 
applicable to funding the Central Repository (the ``Funding Model''), 
which has not yet been finalized, the deferral of decisions on certain 
discretionary elements including the Technical Specifications 
applicable to the CAT, and a lack of detailed information that would 
enable the Commission to assess certain economic effects with greater 
precision.\1866\ The Notice discussed implications of each primary area 
of uncertainty.\1867\
---------------------------------------------------------------------------

    \1865\ In addition to the CAT NMS Plan, the economic analysis in 
the Notice analyzed, for example, the Exemptive Relief Letter (see 
supra note 21), a survey of clock synchronization practices and 
costs (see supra note 247), discussions with members of the industry 
and service bureaus (see Section V.F.1.c and Section V.F.1.d, 
infra), data from FINRA (see Section V.F.1.c.(2).B., infra), and 
academic literature. See Notice, supra note 5, at 30655-56.
    \1866\ As discussed below, the Commission notes that many of the 
uncertainties that existed at the time of the Notice will continue 
upon approval of the Plan. For example, the Funding Model and 
Technical Specifications will be determined after a Plan Processor 
is selected.
    \1867\ See Notice, supra note 5, at 30655-56.
---------------------------------------------------------------------------

    First, the economic analysis in the Notice evaluated information 
provided in the CAT NMS Plan on the economic effects of the Plan, as 
well as information drawn from outside of the Plan. However, the 
Commission lacked detailed information regarding some of the individual 
costs and discretionary decisions in the Plan, including the Funding 
Model. Specifically, the Plan does not outline the proportion of CAT 
costs that will be allocated to Participants versus broker-dealers. 
This uncertainty limited the Commission's ability to evaluate the 
economic effects of the Plan in some cases. However, the Commission 
analyzed the expected economic effects of the Plan to the extent 
possible with the information available, and where the Commission 
identified such areas of uncertainty, the economic analysis addressed 
this uncertainty.
    Second, the Commission pointed out that certain elements of the CAT 
NMS Plan will not be finalized until after the selection of a ``Plan 
Processor.'' \1868\ Among these are the security and confidentiality 
procedures of the Central Repository,\1869\ the precise methods by 
which regulators will access data in the Central Repository,\1870\ and 
the complete Technical Specifications.\1871\ The Plan also provides the 
Plan Processor the ``sole discretion'' to publish interpretations of 
the Technical Specifications, including interpretations of permitted 
values in data elements.\1872\
---------------------------------------------------------------------------

    \1868\ See CAT NMS Plan, supra note 5, at Article VI. The Plan 
Participants have engaged in a bidding process to select a Plan 
Processor, and the leading candidate bidders have proposed different 
solutions. In certain instances, the Plan Participants have decided 
to adopt the solutions proposed by whichever bidder they select.
    \1869\ See Section V.F.4.b, infra, for additional discussion of 
risks and uncertainties related to data security.
    \1870\ Rule 613(e)(1) requires the CAT NMS Plan to create a 
Central Repository to collect, link, and store CAT Data and to make 
that data available to regulators. See 17 CFR 242.613(e)(1).
    \1871\ The CAT NMS Plan contains minimum standards and 
principles for setting many of Technical Specifications, see CAT NMS 
Plan, supra note 5, at Section 6.9, and the Commission's economic 
analysis reflects those minimum standards and principles. However, 
because the detailed Technical Specifications are not yet finalized 
by the Participants, the Commission cannot fully assess any 
corresponding costs and benefits.
    \1872\ Id. at Section 6.9.
---------------------------------------------------------------------------

    Because these and other elements of the Plan had not yet been 
finalized, the Commission could not assess how and to what extent the 
elements could affect the overall economic effects of the Plan. The 
Commission's economic analysis was therefore limited to the extent that 
the economic effects of the Plan depend on decisions that will be made 
after approval of the Plan. However, the Commission identified these 
areas of uncertainty and assessed the economic effects of the Plan to 
the best of its ability in light of these existing uncertainties.
    Given the range of possible outcomes with respect to both the costs 
and benefits of the CAT NMS Plan that depend on future decisions, the 
Commission also recognized in the Notice the importance of provisions 
of the Plan related to the operation and administration of the CAT. In 
particular, the Commission stated that governance provisions of the 
Plan related to voting by the Operating Committee and the involvement 
of the Advisory Committee may help promote better decision-making by 
the relevant parties. Such provisions could mitigate concerns about 
potential uncertainty in the economic effects of the Plan by giving the 
Commission greater confidence that its expected benefits would be 
achieved in an efficient manner and that costs resulting from 
inefficiencies will be avoided. Nevertheless, commenters rightly 
observed that uncertainties remain, and will continue to remain until 
selection of the Plan Processor, the publication of Technical 
Specifications, and/or the implementation of CAT reporting.\1873\
---------------------------------------------------------------------------

    \1873\ Many commenters identified uncertainties related to the 
economic effects of the Plan that were consistent with those 
mentioned in the Notice. See SIFMA Letter at 6, 13, 15-16, 23, 32, 
39, 40, 42, 44, 45; FIF Letter at 36, 50, 84-85, 86-90; FSI Letter 
at 5-6; FSR Letter at 9-10; DAG Letter at 5; UnaVista Letter at 2; 
TR Letter at 4; Fidelity Letter at 6; Data Boiler Letter at 9, 26, 
30. Commenters also discussed several implications of the 
uncertainty in the Plan that were consistent with the Commission's 
statement in the Notice that it cannot assess how and to what extent 
these elements of the Plan could affect the overall economic effects 
of the Plan. See FSR Letter at 9; FSI Letter at 5-6; TR at 4. Others 
highlighted implications for the Commission to consider. See, e.g., 
Fidelity Letter at 6; SIFMA Letter at 23-24, 44.
---------------------------------------------------------------------------

    The Commission has considered the comments it received relevant to 
the potential uncertainties in its analysis of the economic effects of 
the CAT NMS Plan, the Participants' response, and the effect of Plan 
modifications on such uncertainties and has revised its economic 
analysis accordingly. Throughout this economic analysis, the Commission 
recognizes these uncertainties, including the ones raised by 
commenters. In particular, the economic analysis described below 
recognizes uncertainties as they relate to the baseline, benefits, and 
costs and as they relate to the analysis of alternatives, efficiency, 
competition, and capital formation. In some cases, the Plan 
modifications and the Participants' response letters reduce the 
uncertainty in the Commission's analysis. However, the Commission 
continues to believe that governance provisions of the Plan could 
mitigate concerns about many of the sources of potential uncertainty in 
the economic effects of the Plan.\1874\
---------------------------------------------------------------------------

    \1874\ For a full discussion of the governance provisions and 
how they may mitigate concerns about many of the sources of 
potential uncertainty in the economic effects of the Plan, see 
Section V.E.3.d, infra.
---------------------------------------------------------------------------

D. Baseline

    To assess the overall economic impact of the CAT NMS Plan, the 
economic analysis in the Notice used as the Baseline the current state 
of regulatory activity and the current state of trade and order 
data.\1875\ The Baseline discussed the currently available sources of 
data, limitations in available data that could impact regulatory 
activity, how regulators currently use the available data, and the 
burden that producing that data imposes on SROs and broker-dealers. As 
discussed in more detail below, the Commission has revised certain 
aspects of its Baseline to incorporate new information from commenters, 
but the Baseline remains

[[Page 84805]]

largely the same as that described in the Notice.
---------------------------------------------------------------------------

    \1875\ See Notice, supra note 5, at 30656-59.
---------------------------------------------------------------------------

1. Current State of Regulatory Activities
    As addressed in detail in the Notice, SROs and the Commission use 
data to analyze and reconstruct market events, conduct market analysis 
and research in support of regulatory decision-making, and conduct 
market surveillance, examinations, investigations, and other 
enforcement functions.\1876\ The trend in this area is to use more 
automated and data-intensive methods as regulators' activities adjust 
to the data and technology available. The Notice described these 
regulatory activities and how regulators currently use data. While the 
Commission did not receive any comments on its description of the 
current state of regulatory activities, the Participants did confirm 
the use of real-time surveillance and monitoring tools by SROs. The 
Commission continues to believe that the current state of regulatory 
activity, as described in detail in the Notice and as summarized below, 
reflects the Baseline for the CAT NMS Plan.
---------------------------------------------------------------------------

    \1876\ Id.
---------------------------------------------------------------------------

a. Analysis and Reconstruction of Market Events
    In the Notice, the Commission discussed how regulators currently 
analyze and reconstruct market events.\1877\ In terms of market 
reconstructions, currently, regulators aim to provide an accurate and 
factual accounting of what transpired during a market event of interest 
by conducting a thorough analysis of the available market data.\1878\ 
Market events often encompass activity in many securities across 
multiple trading venues, and analysis and reconstruction of these 
market events requires linking data from multiple sources.\1879\ 
Examples of recent market reconstructions include the Commodity Futures 
Trading Commission (``CFTC'') and SEC's analysis of the May 6, 2010 
``Flash Crash,'' \1880\ analysis of equity market volatility on August 
24, 2015,\1881\ and the multi-agency report on the U.S. Treasuries 
market on October 15, 2014.\1882\
---------------------------------------------------------------------------

    \1877\ Id. at 30656-57.
    \1878\ Id.
    \1879\ Id. Examples of recent market reconstructions include the 
Commodity Futures Trading Commission (``CFTC'') and SEC's analysis 
of the May 6, 2010 ``Flash Crash,'' analysis of equity market 
volatility on August 24, 2015, and the multi-agency report on the 
U.S. Treasuries market on October 15, 2014.
    \1880\ See Findings Regarding the Market Events of May 6, 2010: 
Report of the Staffs of the CFTC and SEC to the Joint Advisory 
Committee on Emerging Regulatory Issues (September 30, 2010) 
(``Flash Crash Analysis''), available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
    \1881\ See Staff of the Office of Analytics and Research, 
Division of Trading and Markets, Research Note: Equity Market 
Volatility on August 24, 2015 (Dec. 2015), available at http://www.sec.gov/marketstructure/research/equity_market_volatility.pdf; 
see also Austin Gerig and Keegan Murphy, The Determinants of ETF 
Trading Pauses on August 24th, 2015, White Paper (February 2016), 
available at http://www.sec.gov/marketstructure/research/determinants_eft_trading_pauses.pdf.
    \1882\ See U.S. Department of the Treasury, Board of Governors 
of the Federal Reserve System, Federal Reserve Bank of New York, 
U.S. Securities and Exchange Commission, and U.S. Commodity Futures 
Trading Commission, Joint Staff Report: The U.S. Treasury Market on 
October 15, 2014 (July 13, 2015), available at http://www.sec.gov/reportspubs/special-studies/treasury-market-volatility-10-14-2014-joint-report.pdf.
---------------------------------------------------------------------------

b. Market Analysis and Research
    In the Notice, the Commission discussed how regulators currently 
perform market analysis and research.\1883\ In terms of market analysis 
and research, as addressed in detail in the Notice, the Commission and 
SRO Staffs currently conduct data-driven analysis on market structure, 
in direct support of both rulemaking and other regulatory decisions 
such as SRO rule approvals as well as retrospective analyses of rules 
and pilots.\1884\ The Commission relies on data analysis to inform its 
market structure policy, and SROs also conduct market analysis and 
research on their own regulatory initiatives. Examples of data-driven 
market analysis include reports on OTC trading,\1885\ small 
capitalization stock trading,\1886\ the Limit Up-Limit Down 
Pilot,\1887\ short selling,\1888\ and high frequency trading.\1889\
---------------------------------------------------------------------------

    \1883\ See Notice, supra note 5, at 30657.
    \1884\ Id.
    \1885\ See Laura Tuttle, Alternative Trading Systems: 
Description of ATS Trading in National Market System Stocks (October 
2013) available at http://www.sec.gov/divisions/riskfin/whitepapers/alternative-trading-systems-10-2013.pdf; Laura Tuttle, OTC Trading: 
Description of Non-ATS OTC Trading in National Market System Stocks 
(March 2014), available at http://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
    \1886\ See Securities Exchange Act Release No. 74892, Order 
Approving the National Market System Plan to Implement a Tick Size 
Pilot Program (May 6, 2015), 80 FR 27514, 27534, 27541 (May 13, 
2015); see also Charles Collver, A Characterization of Market 
Quality for Small Capitalization US Equities (September 2014), 
available at http://www.sec.gov/marketstructure/research/small_cap_liquidity.pdf.
    \1887\ See SRO Supplemental Joint Assessment, available at 
http://www.sec.gov/comments/4-631/4-631.shtml; Memo to File from the 
Division of Economic and Risk Analysis regarding the Cornerstone 
Analysis of the Impact of Straddle States on Options Market Quality 
(February 8, 2016), available at http://www.sec.gov/comments/4-631/4631-42.pdf; see also Gerig and Murphy, supra note 1881.
    \1888\ See Memo to Chairman Christopher Cox from Daniel Aromi 
and Cecilia Caglio regarding an Analysis of Short Selling Activity 
during the First Weeks of September 2008, (December 16, 2008), 
available at http://www.sec.gov/comments/s7-08-09/s70809-369.pdf; 
Memo to Chairman Christopher Cox from Daniel Aromi and Cecilia 
Caglio regarding an Analysis of a Short Sale Price Test Using 
Intraday Quote and Trade Data (December 17, 2008), available at 
http://www.sec.gov/comments/s7-08-09/s70809-368.pdf; Memo from the 
Office of Economic Analysis regarding an Analysis of the July 
Emergency Order Requiring a Pre-borrow on Short Sales (January 14, 
2009) available at http://www.sec.gov/spotlight/shortsales/oeamemo011409.pdf.
    \1889\ See Austin Gerig, High-Frequency Trading Synchronizes 
Prices in Financial Markets, (January 2015), available at http://www.sec.gov/dera/staff-papers/working-papers/dera-wp-hft-synchronizes.pdf; see also Staff of the Office of Analytics and 
Research, Division of Trading and Markets, Research Note: Equity 
Market Volatility on August 24, 2015 (December 2015), available at 
http://www.sec.gov/marketstructure/research/equity_market_volatility.pdf.
---------------------------------------------------------------------------

c. Market Surveillance and Investigations
    As explained in detail in the Notice, regulators perform market 
surveillance and investigation functions that rely on access to 
multiple types of market data.\1890\ The following Sections summarize 
the discussion from the Notice describing the current state of SRO 
surveillance and SRO and Commission examinations and enforcement 
investigations.
---------------------------------------------------------------------------

    \1890\ See Notice, supra note 5, at 30657-59.
---------------------------------------------------------------------------

(1) Current SRO Surveillance
    Rule 613(f) requires the SROs to develop and implement a 
surveillance system, or enhance existing surveillance systems, 
reasonably designed to make use of the CAT Data.\1891\ For the purposes 
of the economic analysis in the Notice, the Commission considered 
surveillance to involve SROs running automated processes on routinely 
collected or in-house data to identify potential violations of rules or 
regulations.\1892\ For instance, SROs use surveillance systems, 
developed internally or by a third party, to detect violations of 
trading rules, market abuse, or unusual behavior, in real time, within 
one day, or within a few weeks of the activity in question. As 
discussed in the Notice, SRO surveillance can help

[[Page 84806]]

protect investors by detecting fraudulent behavior and anomalous 
trading.
---------------------------------------------------------------------------

    \1891\ 17 CFR 242.613(f).
    \1892\ See Notice, supra note 5, at 30657-58.
---------------------------------------------------------------------------

    Currently, exchange-operating SROs use surveillance systems and are 
responsible for surveillance of their own market. As discussed in the 
Notice, FINRA conducts off-exchange and cross-market surveillance 
\1893\ and oversees and regulates OTC trading of exchange-listed and 
non-exchange-listed securities, as well as trading in corporate and 
municipal debt instruments and other fixed income instruments. FINRA 
also provides surveillance services to U.S. equity and options 
exchanges through regulatory services agreements with nearly every 
equity market and all options exchanges. Additional surveillance is 
conducted by exchange-operating SROs and some of this additional 
surveillance is conducted as trading activity occurs. This surveillance 
can include detection of market manipulation, violations of trading 
rules, and other unusual behavior.
---------------------------------------------------------------------------

    \1893\ FINRA conducts cross-market surveillance for 
approximately 99% of the listed equity market and approximately 70% 
of the listed options market. See Notice, supra note 5, at 30657.
---------------------------------------------------------------------------

    While there were no explicit comments pertaining to the current 
practices regarding SRO surveillance, the Participants' responses 
confirm that they have real-time surveillance and monitoring tools in 
place for their respective markets.\1894\
---------------------------------------------------------------------------

    \1894\ Response Letter I at 31.
---------------------------------------------------------------------------

(2) Examinations
    In the Notice, the Commission discussed how regulators currently 
perform examinations.\1895\ As addressed in detail in the Notice, SROs 
currently conduct exams of broker-dealers for violations of trading-
related federal laws, rules, and regulations and for violations of SRO 
rules and regulations.\1896\ In 2015, FINRA's Member Regulation 
Department conducted approximately 2,400 broker-dealer 
examinations.\1897\ Currently, the Commission conducts exams of broker-
dealers, transfer agents, investment advisers, investment companies, 
municipal advisers, clearing agencies, the national securities 
exchanges, other SROs such as FINRA and the Municipal Securities 
Rulemaking Board, and the Public Company Accounting Oversight Board 
(``PCAOB'').\1898\ For example, the Commission conducted 493 broker-
dealer examinations in 2014 and 484 in 2015, and 70 exams of the 
national securities exchanges and FINRA in 2014 and 21 in 2015. In 
addition, the Commission conducted 1,237 investment adviser and 
investment company examinations in 2014 and 1,358 in 2015. Virtually 
all investment adviser examinations and a significant proportion of the 
Commission's other examinations involve analysis of trading and order 
data. Examinations of broker-dealers and investment advisers involve 
intensive analysis of trading data. Examinations seek to determine 
whether the entity being examined is: Conducting its activities in 
accordance with the federal securities laws, rules adopted under these 
laws, and SRO rules; adhering to the disclosures it has made to its 
clients, customers, the general public, SROs and/or the Commission; and 
implementing supervisory systems and/or compliance policies and 
procedures that are reasonably designed to ensure that the entity's 
operations are in compliance with the applicable legal 
requirements.\1899\ In order to select candidates for examination, the 
Commission and certain SROs, including FINRA,\1900\ use a risk-based 
approach. ``Risk-based examinations'' seek to increase regulatory 
efficiency by using preliminary data analysis to direct examination 
resources towards entities and activities where risks of violative or 
illegal activity are the highest. The Commission uses risk and data 
analysis before opening an exam to identify broker-dealers and 
investment advisers for areas of focus such as suspicious trading, as 
well as during an exam to identify the particular activities of a 
broker-dealer or investment adviser that could trigger certain 
compliance and supervisory risks.
---------------------------------------------------------------------------

    \1895\ See Notice, supra note 5, at 30658.
    \1896\ Id.
    \1897\ Id. This estimate was based on Staff discussions with 
FINRA. See also FINRA Overview of Member Regulation, available at 
http://www.finra.org/industry/member-regulation.
    \1898\ Id.
    \1899\ See SEC, Examination Information for Entities Subject to 
Examination or Inspection by the Commission (June, 2014), available 
at http://www.sec.gov/about/offices/ocie/ocie_exambrochure.pdf.
    \1900\ FINRA conducts regulatory examinations by contract on 
behalf of all the options and equities exchanges, except for the 
Chicago Stock Exchange, Inc. (``CHX'') and the National Stock 
Exchange, Inc. (``NSX''). Accordingly most exchanges also employ a 
risk-based approach to examination selection and scope. CHX examines 
members on a cycle basis. NSX recently resumed operations in 
December 2015. See Securities Exchange Act Release No. 76640 
(December 14, 2015), 80 FR 79122 (December 18, 2015).
---------------------------------------------------------------------------

(3) Enforcement Investigations
    In the Notice, the Commission discussed how regulators currently 
approach enforcement investigations.\1901\ As explained in detail in 
the Notice, the Commission and SROs undertake numerous investigations 
to enforce the securities laws and related rules and regulations, 
including investigations of market manipulation, insider trading, and 
issuer repurchase violations.\1902\ The Commission estimates that 30-
50% of enforcement investigations use trade and order data. In 2015, 
the Commission filed 807 enforcement actions, including 39 related to 
insider trading, 43 related to market manipulation, 124 related to 
broker-dealers, 126 related to investment advisers/investment 
companies, and one related to exchange or SRO duties. In 2014, the 
Commission filed 755 enforcement actions, including 52 related to 
insider trading, 63 related to market manipulation, 166 related to 
broker-dealers, and 130 related to investment advisers/investment 
companies, many of which involved trade and order data.
---------------------------------------------------------------------------

    \1901\ See Notice, supra note 5, at 30658.
    \1902\ Id. Examples of investigations of market manipulations 
include marking the close, order layering and spoofing, wash sales, 
and trading ahead. Layering and spoofing are manipulations where 
orders are placed close to the best buy or sell price with no 
intention to trade in an effort to falsely overstate the liquidity 
in a security.
---------------------------------------------------------------------------

    The Commission initiates enforcement investigations when SROs or 
others submit reliable tips, complaints, or referrals, or when the 
Commission becomes aware of anomalies indicative of manipulation. After 
the detection of potential anomalies, a tremendous amount of time and 
resources are expended in gathering and interpreting trade and order 
data to construct an accurate picture of when trades were actually 
executed, what market conditions were in effect at the time of the 
trade, which traders participated in the trade, and which beneficial 
owners were affected by the trade. The Commission also explained in the 
Notice that SROs rely primarily on surveillance to initiate 
investigations based on anomalies in the trading of securities. FINRA 
brought 1,397 disciplinary actions in 2014 and 1,512 in 2015.
(4) Tips and Complaints
    In the Notice, the Commission discussed how regulators currently 
analyze and investigate tips and complaints.\1903\ Market participants 
or those with experience in analyzing market data sometimes notice 
atypical trading or quoting patterns in publicly available market data, 
and these observations sometimes result in a tip or complaint to a 
regulator. As the Commission discussed in the Notice, regulators 
investigate thousands of tips and complaints each year.\1904\ In fiscal

[[Page 84807]]

years 2014 and 2015, the Commission received around 15,000 entries in 
its Tips, Complaints and Referrals (``TCR'') system, approximately one 
third of which related to manipulation, insider trading, market events, 
or other trading and pricing issues. Analysis of tips and complaints 
generally follow three stages. First, regulators ensure that the tip or 
complaint contains sufficient information to facilitate analysis. 
Second, regulators use directly accessible data or make phone calls and 
other informal queries to determine if the tip or complaint is 
credible. Third, for tips and complaints that seem credible, regulators 
then perform a more in-depth investigation or examination, which 
follows the processes described above for examinations and enforcement 
investigations.
---------------------------------------------------------------------------

    \1903\ See Notice, supra note 5, at 30659.
    \1904\ Id.
---------------------------------------------------------------------------

2. Current State of Trade and Order Data
    To assess how and to what degree the CAT NMS Plan would affect the 
trade and order data available to regulators, the economic analysis in 
the Notice considered what data regulators use currently and the 
limitations in that data. The Commission did not receive any comments 
on its description of the current sources of trade and order data. The 
Commission received some comments on its description of the current 
limitations on trade and order data, which are discussed below. 
However, the Commission continues to believe that the current state of 
trade and order data, as described in detail in the Notice and as 
summarized below, reflects the relevant baseline for its economic 
analysis of the CAT NMS Plan.
a. Current Sources of Trade and Order Data
    In the Notice, the Commission stated that SROs and the Commission 
currently use a range of trading and order data sources \1905\ for 
their regulatory activities. The types of data and ease of use of these 
sources of data can vary widely. The Notice reviewed the primary 
sources of data currently available to regulators, describing the 
content of the data provided and examples of their specialized uses.
---------------------------------------------------------------------------

    \1905\ Id. at 30659-62.
---------------------------------------------------------------------------

(1) SRO Data
    As discussed in detail in the Notice, SROs maintain audit trails 
that contain trade and order data that they obtain from their members. 
Currently, regulators have access to at least three sources of audit 
trail data. First, the National Association of Securities Dealers 
(``NASD'') established its OATS in 1998, which required NASD (n/k/a 
FINRA) members to report certain trade and order data regarding NASDAQ-
listed equity securities. OATS was later expanded to include OTC Equity 
Securities and all NMS stocks. Second, beginning in 2000, several of 
the current options exchanges implemented the Consolidated Options 
Audit Trail System (``COATS''). Finally, each equities and options 
exchange keeps an audit trail of orders and trades that occur on its 
market.\1906\
---------------------------------------------------------------------------

    \1906\ Id. at 30659.
---------------------------------------------------------------------------

    The Commission explained that for each of these stages in the life 
of an order, FINRA Rule 7440 requires the recording and reporting of 
the following information, as applicable, including but not limited to: 
For the receipt or origination of the order, the date and time the 
order was first originated or received by the reporting member, a 
unique order identifier, the market participant symbol of the receiving 
reporting member, and the material terms of the order; for the internal 
or external routing of an order, the unique order identifier, the 
market participant symbol of the member to which the order was 
transmitted, the identification and nature of the department to which 
the order was transmitted if transmitted internally, the date and time 
the order was received by the market participant or department to which 
the order was transmitted, the material terms of the order as 
transmitted, the date and time the order was transmitted, and the 
market participant symbol of the member who transmitted the order; for 
the modification or cancellation of an order, a new unique order 
identifier, original unique order identifier, the date and time a 
modification or cancellation was originated or received, and the date 
and time the order was first received or originated; and for the 
execution of an order, in whole or in part, the unique order 
identifier, the designation of the order as fully or partially 
executed, the number of shares to which a partial execution applies and 
the number of unexecuted shares remaining, the date and time of 
execution, the execution price, the capacity in which the member 
executed the transaction, the identification of the market where the 
trade was reported, and the date and time the order was originally 
received. FINRA Rule 7440 also requires reporting of the account type, 
the identification of the department or terminal where an order is 
received from a customer, the identification of the department or 
terminal where an order is originated by a reporting member, and the 
identification of a reporting agent if the agent has agreed to take on 
the responsibilities of a reporting member under Rule 7450.\1907\
---------------------------------------------------------------------------

    \1907\ Id. at 30659-60. The Notice provided further details on 
the reporting requirements of FINRA Rule 7440. Id. at 30659-60 
nn.354-57.
---------------------------------------------------------------------------

    The Commission also explained that a majority of options exchanges 
require their members to provide the following information with respect 
to orders entered onto their exchange: (1) The material terms of the 
order; (2) order receipt time; (3) account type; (4) the time a 
modification is received; (5) the time a cancellation is received; (6) 
execution time; and (7) the clearing member identifier of the parties 
to the transaction.\1908\
---------------------------------------------------------------------------

    \1908\ Id. at 30660. The Notice provided further details on the 
reporting requirements of options exchanges. Id. at 30660 nn.358-59. 
The Notice also outlined the reporting requirements of other SRO 
audit trails. Id. at 30660 n.364.
---------------------------------------------------------------------------

    As discussed in the Notice, SRO audit trail data is used for market 
reconstructions and market analyses, and to inform policy decisions, 
both by the Commission and by SROs. Regulators also use SRO audit trail 
data extensively for surveillance, examinations, investigations, and 
other enforcement functions. Current SRO market surveillance relies 
primarily on data from the SRO audit trails, generated directly from 
the exchange servers and from OATS. Likewise, SRO examinations and 
investigations pull information from their own audit trails before 
seeking data from others. Commission examinations and investigations 
also rely heavily on SRO audit trails to start the process of tracing a 
particular trade from its execution to the order initiation and 
customer information, and the audit trails can be useful for 
manipulation investigations or other regulatory activities that require 
analyses of microcap securities trading activity.\1909\
---------------------------------------------------------------------------

    \1909\ Id. at 30660.
---------------------------------------------------------------------------

(2) Equity and Option Cleared Reports
    The SROs and the Commission also have access to equity and option 
cleared reports. In the Notice, the Commission noted that clearing 
broker-dealers report their equity and option cleared data on a daily 
basis and the NSCC and the OCC aggregate the data across the market and 
generate the reports.\1910\ Equity and

[[Page 84808]]

option cleared reports provide a way for regulators to directly access 
a dataset to see how much trading volume is accounted for by a 
particular clearing broker. As such, these data are often used at the 
beginning of an examination or investigation to start identifying the 
market participants that may have additional data needed to pinpoint a 
particular activity.
---------------------------------------------------------------------------

    \1910\ Equity and option cleared reports show ``the number of 
trades and daily cleared trade and share volume, by clearing member, 
for each equity and listed option security in which transactions 
took place. Regulators can query these reports directly through an 
internal online system that interfaces with the Depository Trust and 
Clearing Corporation (``DTCC'') data by security name and CUSIP 
number.'' A CUSIP number is a ``unique alphanumeric identifier 
assigned to a security and facilitates the clearance and settlement 
of trades in the security.'' Id.
---------------------------------------------------------------------------

(3) Electronic Blue Sheets
    As the Commission discussed in the Notice, broker-dealers also 
provide detailed data to regulators in the form of Electronic Blue 
Sheets (``EBS''). The EBS data, provided pursuant to Rule 17a-25 under 
the Act, facilitate investigations by the SROs and Commission Staff, 
particularly in the areas of insider trading and market manipulations. 
The EBS system provides certain detailed execution information in its 
electronic format upon request by SRO or Commission Staff. This 
information often includes the employer of the beneficial owner of an 
account, which can be important to insider trading investigations, and 
in some cases, a tax identification number.\1911\
---------------------------------------------------------------------------

    \1911\ Id. at 30661. The Notice provided further details on Rule 
17a-25 and its reporting requirements. Id. at 30661, notes 368-369.
---------------------------------------------------------------------------

    The EBS system also provides additional information on market 
participants who meet the definition of ``large traders'' and have 
self-identified to the Commission as required by Rule 13h-1. Large 
trader data provide the Commission with a way to acquire information 
about the activities of large traders and allow the activities of large 
traders to be more readily aggregated across or partitioned by multiple 
broker-dealers.\1912\
---------------------------------------------------------------------------

    \1912\ Id. The Notice provided the definition of a ``large 
trader'' and further details on the reporting requirements of Rule 
13h-1. Id.
---------------------------------------------------------------------------

(4) Trade Blotters and Order Tickets
    As the Commission addressed in detail in the Notice, investment 
advisers and broker-dealers also maintain data in the form of order 
tickets and trade blotters that regulators can obtain on request. Order 
tickets are in-house records maintained by investment advisers and 
broker-dealers that provide order details, including timestamps of 
order initiation and placement, special order types, any special 
instructions for the order, and plans for the allocation of shares and 
prices across accounts and subaccounts. Order tickets also identify 
account owners. Commission Staff collects order tickets regularly for 
examinations, and occasionally also for market manipulation 
investigations.\1913\
---------------------------------------------------------------------------

    \1913\ Id.
---------------------------------------------------------------------------

    The Commission discussed the fact that broker-dealers maintain data 
in trade blotters that are similar to EBS. However, the trade blotters 
also contain more information, including the commissions paid in 
executing each order, timestamps of when an order is received and when 
it is executed (and the number of fills), and the pricing information 
for all executions in the order. SROs use trade blotters in 
examinations of their members. Commission Staff uses trade blotters 
frequently for examinations, including in almost every broker-dealer, 
investment adviser, and hedge fund examination, as well as for insider 
trading and market manipulation investigations. Regulators use trade 
blotter data to determine the order entry time and execution time for 
trades by a particular customer in examinations and enforcement 
investigations. Trade blotters are also the primary data source used in 
regulatory investigations for which subaccount allocation information 
is important for determining violative behavior, such as cherry-picking 
and front-running cases.\1914\
---------------------------------------------------------------------------

    \1914\ Id.
---------------------------------------------------------------------------

    As the Commission discussed in the Notice, broker-dealers and 
exchanges collect and maintain records of activity in their order 
handling systems and internal matching systems.\1915\ Some of the data 
that is collected and maintained in these systems exceeds the scope of 
information captured in EBS, SRO audit trail, trade blotter, or order 
ticket data and may include data on order receipt, modification or 
routing information not otherwise reported to SROs. Regulators use 
these trading and order handling system data in investigations and 
examinations to further analyze issues discovered during their analysis 
of data from other sources.\1916\
---------------------------------------------------------------------------

    \1915\ ``Internal matching systems of broker-dealers may include 
Alternative Trading Systems (``ATSs'') or automated trading systems 
that provide liquidity to received orders without interacting on a 
registered exchange. The Commission understands that some broker-
dealers rely on their clearing firms to collect and maintain records 
relating to routed orders on their behalf. Broker-dealers that 
operate their own internal matching systems are more likely to 
collect and maintain their own records.'' Id. at 30662.
    \1916\ Id.
---------------------------------------------------------------------------

(5) Public Data
    As discussed in detail in the Notice, exchanges and SROs make some 
data available to the public and regulators can access these data for 
their regulatory activities. One type of public data is 
``consolidated'' data feeds that are disseminated by registered 
Securities Information Processors (``SIPs'') pursuant to joint SRO 
plans. For a fee, the SIPs distribute consolidated market data on 
recent equity and option transactions and the prevailing best quotes at 
each exchange to market data subscribers. Additionally, all exchanges 
also make data available through direct data feeds. These feeds contain 
all data included in the SIP feed, but also include depth of book 
information and, depending on the exchange, may include additional 
data, such as the submission, cancellation and execution of all 
displayed orders and auction imbalance information on the exchange, 
among other things. Furthermore, at the request of Commission Staff, 
most equities exchanges also produce and make public two datasets with 
information on short sales: A file of short selling volume by stock, 
which contains the short selling and total volume on that exchange by 
symbol, and a file of short selling transactions, which contains trade 
information such as time, volume, and price for each transaction 
involving a short sale.\1917\
---------------------------------------------------------------------------

    \1917\ Id.
---------------------------------------------------------------------------

    The Commission and SROs use these publicly available trade and 
order data to conduct market analyses, market reconstructions, 
examinations, and investigations. Due to the accessibility and ease of 
use of the public data, regulators often use it as a starting point or 
a basis of comparison to other data sources. For example, real-time 
surveillance can rely on SIP data, and some insider trading 
surveillance relies on information from other publicly available 
sources such as news sources. Further, investigations into short sale 
market manipulation sometimes start with an analysis of the short 
selling data.\1918\
---------------------------------------------------------------------------

    \1918\ Id.
---------------------------------------------------------------------------

b. Current Limitations of Trade and Order Data
    As the Commission addressed in detail in the Notice, while 
regulators have access to trade and order data from the sources 
described above,\1919\ the available data are, for various reasons, 
limited in terms of the four qualities discussed above.\1920\ In terms 
of completeness, current sources do not represent all of the market 
activity of interest in sufficient detail in one consolidated audit 
trail. In terms of accuracy, current sources may reflect data errors, 
insufficiently granular clock

[[Page 84809]]

synchronization and timestamps, errors introduced in the process of 
combining data from different sources, a lack of consistent customer 
and broker-dealer identifiers, and data that is too aggregated at the 
record level to provide the information regulators need. In terms of 
accessibility, the SROs and Commission lack direct access to most of 
the data sources described above, and with respect to timeliness, 
obtaining trade and order data from current sources and converting the 
data into a form in which they can be analyzed can involve a 
significant delay from the time of a particular event of interest. Due 
to these limitations on current data sources, as the Commission 
addressed in detail in the Notice, regulators are limited in their 
ability to perform the activities outlined in Section V.D.1, above. 
Table 1 summarizes the key characteristics of the currently available 
data sources, the limitations of which are discussed in more detail 
below.
---------------------------------------------------------------------------

    \1919\ See Section V.D.2(a), supra.
    \1920\ See Notice, supra note 5, at 30662-74.

[[Page 84810]]

                                                                                                                 Table 1
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                         Routing/
                                  Customer      Broker-dealer      TimeStamp        Allocation     Order  display    Buy-to-cover       Special       modification/        Entire       Direct access    Off- exchange    Timeliness of
                                 identifier       identifier         \1921\        information      information       indicator         handling       cancellation      lifecycle      for regulators  activity \1922\  data  compiling
                                                                                                                                      instructions     information                                                            \1923\
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OATS........................  No.............  Yes............  Yes (majority    No.............  Yes (for limit   No.............  Yes              Yes............  Yes ( before     No (except       Yes............  Raw Data: T+1.
                                                                 in                                orders).                          (conditional).                    order reaches    FINRA). Access                   Corrected Data:
                                                                 milliseconds                                                                                          exchange).       can take                          T+6.
                                                                 but some in                                                                                          No (once order    several weeks.
                                                                 seconds).                                                                                             reaches
                                                                                                                                                                       exchange).
COATS.......................  No.............  Yes............  Yes............  No.............  No.............  No.............  No.............  Yes............  No.............  No (except SROs  No.............  Reported same-
                                                                                                                                                                                        w/r/t their                       day, but
                                                                                                                                                                                        own members).                     separate file
                                                                                                                                                                                                                          transmitted at
                                                                                                                                                                                                                          latest T+1.
SRO Audit Trails............  No.............  Yes............  Yes (majority    No.............  No.............  No.............  No.............  Yes............  No (only once    No (except SROs  No.............  As soon as a
                                                                 in                                                                                                    order reaches    w/r/t their                       trade is
                                                                 milliseconds                                                                                          exchange).       own trails).                      executed.
                                                                 but some in                                                                                                            Access can
                                                                 seconds).                                                                                                              take several
                                                                                                                                                                                        weeks.
Equity and Option Cleared     No.............  No.............  No.............  No.............  No.............  No.............  No.............  No.............  No.............  Yes............  Yes............  Equity: T+3.
 Reports.                                                                                                                                                                                                                Option: T+1.
Electronic Blue Sheets......  Yes (but not     Yes (but not     Yes............  No.............  No.............  No.............  No.............  No (except for   No.............  No. Access can   Yes............  10 business
                               always           always                                                                                                certain                           take several                      days after
                               consistent       consistent                                                                                            cancellation                      weeks or                          request is
                               across broker-   across broker-                                                                                        information).                     months.                           submitted.
                               dealers)         dealers).
                               \1924\.
Trade Blotters/Order Tickets  Yes (but not     Yes (but not     Yes (can be      No.............  No.............  No.............  No.............  No.............  No.............  No. Access can   Yes............  Same-day.
                               always           always           requested,                                                                                                             take several
                               consistent       consistent       although not                                                                                                           days.
                               across broker-   across broker-   always
                               dealers).        dealers).        reliable).
Trading and Order Handling    Depends on the   Yes............  Yes............  No.............  No.............  No.............  No.............  Yes............  Yes (except      No. Regulators   Yes............  Same-day.
 System Data.                  trader.                                                                                                                                 allocations).    must request
                                                                                                                                                                                        this data (SEC
                                                                                                                                                                                        asks for the
                                                                                                                                                                                        data within 10
                                                                                                                                                                                        days).
Public/Proprietary Data.....  No.............  No.............  Yes (varied      No.............  No.............  No.............  No.............  Yes (except non- No.............  Yes............  Yes............  Same-day.
                                                                 between                                                                              displayed
                                                                 seconds and                                                                          orders).
                                                                 microseconds).
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 84811]]

(1) Completeness
---------------------------------------------------------------------------

    \1921\ As proposed, the CAT NMS Plan also requires CAT Reporters 
to synchronize their time clocks to the time maintained by the NIST 
with an allowable drift of 50 milliseconds. See CAT NMS Plan, supra 
note 5, at Section 6.8. According to a survey conducted by the FIF, 
39% of responding broker-dealers currently synchronize their clocks 
with less precision than what is called for by the CAT NMS Plan. 
Thus, the CAT NMS Plan would also increase the accuracy of the 
timestamps used by certain broker-dealers. See FIF Clock Offset 
Survey, supra note 247.
    \1922\ Off-exchange activity includes currently reportable 
events that are not handled by a registered securities exchange.
    \1923\ In this instance, ``timeliness'' refers to when the data 
are compiled at the source in question (e.g., when OATS receives 
data from reporting broker-dealers), not when they become available 
to regulators because that timeline can vary depending on the 
regulator in question. As shown in the ``Direct Access for 
Regulators'' column, it may still take several days, weeks, or 
months for regulators to be able to access the data. For example, 
while OATS reporters provide the data at T+1, the SEC must request 
OATS data in order to access it, which may take several days or 
weeks. This narrower definition of timeliness is not used throughout 
this economic analysis.
    \1924\ Guidance from FINRA indicates that broker-dealers must 
``identify the party to the trade'' through EBS fields such as 
``Primary Party Identifier,'' but that party may be another broker-
dealer rather than the ultimate customer. See FINRA, Electronic Blue 
Sheet Submissions, FINRA and ISG Extend Effective Date for Certain 
Electronic Blue Sheet Data Elements, Regulatory Notice 12-47 (Oct. 
2012), available at https://www.finra.org/sites/default/files/NoticeDocument/p194655.pdf. Similarly, under the large trader rule, 
persons exercising ``investment discretion'' are reported through 
EBS, but in some cases such persons are investment advisers rather 
than their customers. See Notice, supra note 5, at note 372 and 
accompanying text (discussing the large trader rule).
---------------------------------------------------------------------------

    ``Completeness'' refers to whether the data represents all market 
activity of interest or just a subset, and whether the data is 
sufficiently detailed to provide the required information.\1925\ As 
addressed in detail in the Notice, while current data sources provide 
trade and order data specified by existing rules and regulations, those 
sources do not contain all market activity that might be required for 
certain market inquiries, in sufficient detail, within one consolidated 
audit trail. The Commission explained in the Notice that, to obtain 
information regarding a particular market event, regulators may have to 
piece together information from different data sources and that some 
data is not required to be reported at all under existing regulations. 
Therefore, as described below, current data sources either cover only a 
limited number of events and products, or lack some data fields that 
would be useful to regulators, each of which impedes effective market 
surveillance.\1926\
---------------------------------------------------------------------------

    \1925\ Id. at 30664.
    \1926\ Id.
---------------------------------------------------------------------------

    One commenter agreed with the Commission's analysis by stating that 
``[t]he fragmented nature of current data sources does pose significant 
challenges to regulators seeking complete data.'' \1927\
---------------------------------------------------------------------------

    \1927\ Data Boiler Letter at 30.
---------------------------------------------------------------------------

A. Events and Products
    As the Commission addressed in detail in the Notice, there is 
currently no single data source that covers all market activities. EBS 
data contains executed trades but does not contain information on 
orders or quotes (and thus does not provide information on routes, 
modifications, or cancellations). Similarly, trade blotters and order 
tickets contain only information recorded by the particular broker-
dealer or investment adviser that generated them and may contain 
limited information about full order lifecycles. SRO audit trail data 
are limited to identifying the activity of their members, can have 
incomplete information concerning their members, lack order lifecycle 
information occurring prior to receipt by an exchange, and may not 
contain information regarding principal trading. Furthermore, although 
public consolidated and direct data feeds provide data about the entire 
market, they lack information regarding non-displayed orders and do not 
provide sufficient information to identify the different lifecycle 
events of a single order.\1928\
---------------------------------------------------------------------------

    \1928\ See Notice, supra note 5, at 30664.
---------------------------------------------------------------------------

    The Commission also discussed individual SRO audit trails. While 
extensive, they contain only activity of their own members, and many 
SRO audit trails are incomplete in their coverage of the activities of 
those members. For example, FINRA's OATS data does not include 
proprietary orders originated by a trading desk in the ordinary course 
of a member's market making activities, or options data. And while OATS 
collects data from FINRA members with respect to orders and trades 
involving NMS and OTC stocks, OATS does not include trade or order 
activity that occurs on exchanges or at broker-dealers that are not 
FINRA members. In addition, while broker-dealers who are not members of 
FINRA must be members of an exchange SRO, an individual exchange SRO's 
audit trail data is generally limited to activity taking place on that 
exchange. The Commission noted that because broker-dealers who are not 
members of FINRA may engage in trading activity in off-exchange 
markets, a substantial portion of the trading activity that an exchange 
SRO supervises is not reported to the supervising SRO.\1929\ The 
Commission also discussed the fact that not all FINRA members are 
obligated to report to OATS. FINRA's rules exclude from reporting 
certain members that engage in a non-discretionary order routing 
process. Additionally, FINRA has the authority to exempt the manual 
orders of other members who meet specific criteria from the OATS 
recording and reporting requirements.\1930\
---------------------------------------------------------------------------

    \1929\ Id.
    \1930\ Id. (citing FINRA Rule 7470). At the time of the Notice, 
FINRA had granted approximately 50 such exemptions.
---------------------------------------------------------------------------

    The Commission also explained that some SRO audit trails do not 
include and are not required to include activity associated with 
principal trading, such as market-making activity. This may result in 
the exclusion of a significant amount of activity, particularly for 
firms with substantial market-making business activities.\1931\
---------------------------------------------------------------------------

    \1931\ Id. at 30665.
---------------------------------------------------------------------------

    Finally, the Commission discussed the fact that no single current 
data source integrates both equities and options, and that the lack of 
any combined equity and options audit trail data is a significant 
impediment to regulators performing cross-product surveillance.\1932\
---------------------------------------------------------------------------

    \1932\ Id.
---------------------------------------------------------------------------

B. Data Fields
    As addressed in detail in the Notice, each of the currently 
available data sources discussed above is missing certain data fields 
that are useful for conducting a variety of regulatory activities. 
Furthermore, certain valuable data fields are not contained in any of 
the data sources discussed above.\1933\
---------------------------------------------------------------------------

    \1933\ Id.
---------------------------------------------------------------------------

    Most notably, as the Commission explained in detail in the Notice, 
the identity of the customer is not available from any of the current 
data sources that are reported to regulators on a routine basis. As 
discussed in the Notice, a unique customer identifier could be useful 
for many types of investigations and examinations such as market 
manipulation investigations and examinations of investment advisers. 
The Commission also explained that although some data sources--
specifically large trader reports, EBS, trade blotters, and order 
tickets--identify customers, these data sources are not reported on a 
routine basis, provide only one part of the order lifecycle, and have 
other inherent limitations.\1934\
---------------------------------------------------------------------------

    \1934\ Id.
---------------------------------------------------------------------------

    The Commission explained that because there is currently no data 
source that includes customer identities

[[Page 84812]]

across multiple parts of an order lifecycle, regulators must seek and 
link multiple sources of data, which can be a burdensome and imperfect 
process. For example, trade blotter and order ticket data that identify 
customers from one broker-dealer may only include customer names and 
thus may not be readily matched to similar data from another broker-
dealer, or may require substantial time, effort, and uncertainty to 
reconcile across firms. Further, EBS data's limited coverage of trading 
activity and lack of some detailed trade information raises costs and 
reduces the timeliness of insider trading investigations.\1935\
---------------------------------------------------------------------------

    \1935\ Id. for a full discussion of the impact on insider 
trading investigations.
---------------------------------------------------------------------------

    As the Commission addressed in detail in the Notice, some valuable 
data fields, such as modifications that make an order non-displayed and 
other special handling instructions are consistently available on only 
a few data sources or require linking different data sources.\1936\ The 
Commission explained that the lack of direct, consistent access to 
order display information and special handling instructions creates 
inefficiencies in surveillances, examinations, and investigations that 
examine hidden liquidity and the treatment of customer orders.\1937\
---------------------------------------------------------------------------

    \1936\ In the Notice, the Commission provided further details on 
the reporting of order display information (i.e., whether the size 
of the order is displayed or non-displayed) and special handling 
instructions in OATS data. The Commission also noted that this data 
is not directly available to all regulators, and that the Commission 
must request this data from FINRA. Id. at 30666 n.412.
    \1937\ Id. at 30666.
---------------------------------------------------------------------------

    The Commission noted that data that are not directly accessible by 
regulators at all include buy-to-cover information and subaccount 
allocation information, including the allocation time. The Commission 
explained that regulators could use buy-to-cover information to better 
understand short selling and for investigations of short sale 
manipulation. However, no current data source allows regulators to 
directly identify when someone is buying to cover a short sale.\1938\
---------------------------------------------------------------------------

    \1938\ Id.
---------------------------------------------------------------------------

    As the Commission discussed in the Notice, subaccount allocation 
information needed for regulatory activities can be difficult for 
regulators to collect and compile because SRO audit trails currently do 
not require allocation reports and broker-dealers may not have records 
of the time of a subaccount allocation. The Commission explained that 
when regulators require an understanding of subaccount allocations for 
a regulatory task, they generally request and sift through trade 
blotter or EBS data in an attempt to identify allocations and the 
details of those allocations. However, current trade blotter data 
contains limited customer information on allocations and is not 
required to contain allocation time information at the subaccount 
level.\1939\
---------------------------------------------------------------------------

    \1939\ While the Commission is sometimes able to acquire 
allocation time on trade blotters, not all broker-dealers keep 
records in a manner that facilitates efficient regulatory requests 
for allocation time information. Id.
---------------------------------------------------------------------------

    The Commission explained that the difficulty in obtaining 
allocation information and the difficulty in reconstructing allocations 
with data from broker-dealers limits the efficiency of certain 
surveillances and examinations. In particular, allocation time at the 
subaccount level is critical for determining whether some customers are 
systematically given more favorable allocation treatment than others. 
For example, when a broker-dealer places an order or series of orders 
for multiple customer accounts that generates multiple executions at 
multiple prices, it is possible that different customers receive 
different prices in the allocation process. However, if some customers 
systematically receive less favorable prices than others when they 
should be receiving the same prices for their executions, this could 
indicate that the broker-dealer is handling allocations 
improperly.\1940\
---------------------------------------------------------------------------

    \1940\ Id.
---------------------------------------------------------------------------

    Three commenters noted that the open/close indicator is currently 
not captured for equities.\1941\ In their response, the Participants 
agreed with this assessment.\1942\ In addition, the Participants 
indicated that, pursuant to current industry practice, the open/close 
indicator is also not captured for some options transactions.\1943\
---------------------------------------------------------------------------

    \1941\ TR Letter at 9; SIFMA Letter at 35; FIF Letter at 83.
    \1942\ Response Letter I at 22.
    \1943\ Response Letter I at 22.
---------------------------------------------------------------------------

    The Commission has considered the comments it received regarding 
the current limitations of trade and order data in terms of 
completeness. The open/close indicator would provide information about 
whether a transaction is undertaken to open or increase a position in 
the security, or to close or reduce a position in the security, such as 
a buy-to-cover a short sale, which the Commission in the Notice stated 
was information not directly accessible to regulators today. Therefore, 
the commenters expressing that the open/close indicator is not 
currently captured for equities are consistent with the baseline 
discussed in the Notice; the open/close indicator is one type of a 
broader category of information that the Commission recognized is 
lacking from current audit trails.\1944\ In addition, although the 
Commission did not discuss this issue in the Notice, the Commission now 
recognizes that the open/close indicator is currently not captured for 
certain options transactions.
---------------------------------------------------------------------------

    \1944\ See Notice, supra note 5, at 30680.
---------------------------------------------------------------------------

(2) Accuracy
    In the Notice, the Commission carefully considered the accuracy of 
data currently used by regulators in order to consider whether and to 
what degree the CAT NMS Plan would provide more accurate data.\1945\ As 
discussed in more detail below, the Commission considered several forms 
of data inaccuracy, including data errors, inaccurate event sequencing, 
the inability to link data accurately, inconsistent identifiers, and 
obfuscating levels of irreversible data aggregation.
---------------------------------------------------------------------------

    \1945\ Id. at 30666-71.
---------------------------------------------------------------------------

A. Data Errors
    With respect to data errors,\1946\ the Commission stated its 
preliminary belief that data errors affect most current data used by 
regulators and can persist even after corrections. The Commission 
specifically noted instances where information was inaccurately 
reported by broker-dealers and discussed various errors in data 
translated from back-office systems, errors in data from trading 
systems, and errors in audit trail data.\1947\ Furthermore, the 
Commission noted that the CAT NMS Plan reports that 2.42% of order 
events submitted to OATS fail validation checks. Although FINRA sends 
these records back to its members to correct, significant error rates 
in event linking post-correction are common because OATS limits error 
correction requests to records with internal inconsistencies within a 
given member's submission and there is no cross-participant error 
resolution process. FINRA estimates that 0.5% of

[[Page 84813]]

OATS routing reports directed to another FINRA member broker-dealer 
cannot currently be linked.\1948\ Also, as stated in the Notice, the 
CAT NMS Plan reports that, following the rollouts of three major 
updates to OATS, 0.86% of Trade Reporting Facility reported trades 
could not be matched to OATS execution reports, 3.12% of OATS route 
reports could not be matched to exchange orders, and 2.44% of inter-
firm routes could not be matched to a record of the receiving firm's 
receipt of a routed order.\1949\
---------------------------------------------------------------------------

    \1946\ As used herein, the term ``data errors'' refers to 
instances where data reflect false information or are missing 
information such that they do not reflect order events that occurred 
in the market fully and accurately. Under this definition of ``data 
errors,'' a trading error or an order entry error would not be a 
``data error.'' For example, if a trader submitted an order to an 
exchange with an order size of 100,000, an accurate order record 
would contain an order size of 100,000. If the trader actually 
intended to enter the order size as 1,000, the accurate order record 
would still be 100,000 because that would reflect the actual state 
of the market at the time. In other words, the 100,000 order size is 
not a ``data error.'' If the trader later corrected the order size, 
accurate data would reflect the subsequent corrections while still 
preserving the accurate state of the market at the time.
    \1947\ Id. at 30666-67.
    \1948\ Id.
    \1949\ Id.
---------------------------------------------------------------------------

    The Commission received several comment letters that discussed the 
current state of errors in data used by regulators.\1950\ One commenter 
did not believe that OATS data currently achieves ``de minimis'' 
errors.\1951\ The commenter further stated that there are instances 
where errors cannot be corrected in OATS and gave true duplicates and 
non-reportable symbols as examples.\1952\ The commenter further 
detailed the classification scheme currently used to categorize OATS 
errors. According to the commenter, these errors are currently 
classified as: Rejects; unmatched executions; unmatched exchange 
routes; inter firm received unmatched; inter firm sent unmatched; out 
of sequence; and late reports.\1953\
---------------------------------------------------------------------------

    \1950\ Anonymous Letter I at 9-10; Anonymous Letter II at 1-2; 
FIF Letter at 55, 60.
    \1951\ FIF Letter at 60.
    \1952\ FIF Letter at 55.
    \1953\ FIF Letter at 54.
---------------------------------------------------------------------------

    Another commenter stated in two separate letters that there are 
OATS reporters that are repeatedly non-compliant, both in omitting to 
report required data and reporting inaccurate data to FINRA.\1954\ The 
commenter contended that the extent of this non-compliance is 
significant and is magnified by the lengthy period of time before the 
errors are discovered and corrected by FINRA. Also, there is no way to 
know the magnitude of noncompliance that is never detected and 
therefore never corrected. The non-compliance by reporters may cause 
the error rates reported by OATS to be higher than reported.
---------------------------------------------------------------------------

    \1954\ Anonymous Letter I at 9-10; Anonymous Letter II at 1-2.
---------------------------------------------------------------------------

    The Commission has considered the comments received. The Commission 
agrees with the commenter that stated there are instances where OATS 
data does not fail validation checks, but does contain errors. As 
mentioned in the Notice, OATS validation checks are limited to 
detecting errors that can be discovered by a concise set of logical 
rules and OATS limits error correction requests to records with 
internal inconsistencies within a given member's submission.\1955\ The 
Commission also recognizes the comment that some OATS reporters fail to 
send and/or send inaccurate reports to FINRA and is updating its 
analysis to take into account that current data errors in OATS may be 
larger than initially considered due to this non-compliance. Finally, 
the Commission now considers the error classifications provided by a 
commenter in its baseline.
---------------------------------------------------------------------------

    \1955\ See Notice, supra note 5, at 30667.
---------------------------------------------------------------------------

B. Event Sequencing
    With respect to event sequencing, as the Commission addressed in 
detail in the Notice, the ability to sequence market events is crucial 
to the efficacy of detecting and investigating some types of 
manipulation, and the sequencing of order events requires both 
sufficient clock synchronization across market participants and 
timestamps that are granular enough for accurate sequencing, but the 
current clock synchronization standards make this process difficult.
    In the Notice, the Commission discussed that current rules require 
most broker-dealers to synchronize their system clocks to within one 
second.\1956\ The Commission further noted that ``in practice'' some 
broker-dealers currently synchronize their clocks to smaller clock 
offset tolerances. The Commission cited the FIF Clock Offset Survey 
\1957\ where 29% of respondents report they currently synchronize their 
clock to permit a maximum clock offset of one second from NIST, 10% of 
respondents permit a maximum offset of 50 milliseconds to one second, 
21% of respondents permit a 50 millisecond maximum offset, and 18% of 
respondents permit a maximum offset less than 50 milliseconds. The 
remaining 22% of respondents report they utilize multiple clock offset 
tolerances across their systems ranging from five microseconds to one 
second. In addition, the Commission discussed that FINRA had filed a 
proposed rule change that would reduce the clock offset tolerance for 
members' computer clocks that are used to record events in NMS 
securities from within one second of the NIST atomic clock to within 50 
milliseconds of the NIST atomic clock.\1958\ Furthermore, the 
Commission discussed that if the rule change was approved, more 
entities would record timestamps with data at a 50 millisecond clock 
offset tolerance regardless of whether the CAT NMS Plan is 
approved.\1959\
---------------------------------------------------------------------------

    \1956\ Id. at 30669.
    \1957\ See FIF Clock Offset Survey, supra note 247.
    \1958\ See Notice, supra note 5, at 30668.
    \1959\ Id. at 30683.
---------------------------------------------------------------------------

    For clock synchronization on exchanges, the Commission discussed in 
the Notice that exchanges trading NASDAQ securities currently adhere to 
clock synchronization standards at or below 100 microseconds, and the 
Commission understands that the NYSE, the options exchanges, and the 
SIAC SIP have comparable clock synchronization standards. In addition, 
the Commission noted that Participants stated ``that absolute clock 
offset on exchanges averages 36 microseconds.'' \1960\
---------------------------------------------------------------------------

    \1960\ Id. at 30669.
---------------------------------------------------------------------------

    Also in the Notice, Commission Staff conducted an analysis of the 
frequency of order events using MIDAS data which identified whether for 
each order event, an event in the same security at another venue 
occurred within a given time range. 97.95% of order events for listed 
equities and 91% of order events for listed options occurred within one 
second of another unrelated order event in the same security. 14.44% of 
the unrelated order events for listed equities and 3.12% of the 
unrelated order events for listed options in the same security occurred 
within 5 microseconds of another order event in the same security. The 
Commission noted that the analysis underestimates the true frequency of 
unrelated events within the given time frames because it includes only 
order events that are included in the MIDAS data, and furthermore 
stated that the analysis illustrates how the current frequency of order 
events makes sequencing unrelated order events difficult. With respect 
to the granularity of timestamps, the Commission discussed in the 
Notice that regulators need sufficiently granular timestamps to 
sequence events across orders and within order lifecycles, and that the 
current lack of uniform and granular timestamps can limit the ability 
of regulators to sequence events accurately and link data with 
information from other data sources.\1961\ In addition, the Commission 
discussed that current data sources have different timestamp 
granularity standards, and that many public data sources report time in 
seconds or milliseconds, and some, including direct data feeds, report 
time in microseconds or nanoseconds. As examples, the Commission stated 
that OPRA allows for timestamps in nanoseconds and that the other SIPs 
require timestamps in microseconds for equity trades and quotes, 
whereas the

[[Page 84814]]

short sale transactional data released by exchanges contains timestamps 
in seconds.\1962\ In addition, the Commission stated that OATS requires 
timestamps in milliseconds for firms that capture time in milliseconds, 
but does not require members to capture time in milliseconds.\1963\
---------------------------------------------------------------------------

    \1961\ Id. at 30669-70.
    \1962\ Id.
    \1963\ Id.
---------------------------------------------------------------------------

    One commenter discussed the Commission's analysis of the frequency 
of order events in the context of the Commission's baseline assessment 
of clock synchronization and timestamp granularity.\1964\ The commenter 
pointed out that the Commission's analysis ``used primarily SIP data, 
reflecting exchange only recording of events, which is a tightly 
controlled, co-located and specialized environment'' and that the 
analysis ``does not reflect the broader broker-dealer communities' 
recording of events . . . in a distributed environment, a much less 
controlled and less precise environment.'' \1965\ That commenter also 
stated that ``[w]ithin every order lifecycle, the events leading up to 
the execution can be [sequenced] due to daisy chaining.'' \1966\
---------------------------------------------------------------------------

    \1964\ FIF Letter at 118.
    \1965\ FIF Letter at 118.
    \1966\ Id.
---------------------------------------------------------------------------

    As noted above, commenters recognized that lower tolerances were 
already mandated by some exchanges as well as ATSs that maintain an 
order book.\1967\ One commenter noted that some firms receive direct 
feeds from exchanges as precise as 1 microsecond.\1968\ The 
Participants and another commenter explained that the marketplace is 
segmented such that broker-dealers operate under a different business 
model and regulatory environment than ATSs and exchanges.\1969\ While 
microsecond tolerances for exchanges and ATSs are already standard 
practice, broker-dealers have no standard practice across the industry 
and are precluded from using matching engines, which are capable of the 
lowest level of granularity.\1970\
---------------------------------------------------------------------------

    \1967\ TR Letter at 7; FIF Letter at 97-99.
    \1968\ Better Markets Letter at 8.
    \1969\ Response Letter II at 4; FIF Letter 97-99, 116.
    \1970\ Id.
---------------------------------------------------------------------------

    One commenter noted the imprecise business process of handling 
manual orders.\1971\ Another commenter noted that manual intervention 
can take over a second because it involves several steps, which impact 
timestamp capture.\1972\
---------------------------------------------------------------------------

    \1971\ FIF Letter at 118.
    \1972\ SIFMA Letter at 35. Specifically, this commenter 
explained that manual order taking involves taking an order via 
phone, fax, or email and then manually entering the order into an 
electronic order management system.
---------------------------------------------------------------------------

    The Participants' response provided new information on the current 
clock synchronization standards of Participants.\1973\ Specifically, 
the response clarified that all Participants currently operate pursuant 
to a clock synchronization standard of 100 microseconds with regard to 
their electronic systems.\1974\
---------------------------------------------------------------------------

    \1973\ Response Letter II at 4-5.
    \1974\ Id.
---------------------------------------------------------------------------

    The Commission has considered these comments and, as discussed 
below, has updated its analysis of the baseline of clock 
synchronization as set out in the Notice.
    In the Notice, the Commission explained that its analysis of the 
frequency of order events used MIDAS data, recognized the limitations 
that its use of MIDAS data could impose, and explained how the 
limitations reflected the Commission's assessment of the 
baseline.\1975\ The Commission therefore agrees with the commenter that 
its analysis reflects a disproportionate number of exchange events 
relative to off-exchange events. But because the commenter did not 
explain how the limitations of the Commission's analysis could make the 
analysis less useful or what statistical biases could result from these 
limitations, the Commission believes that, despite its limitations, the 
analysis ``still provides useful insights'' and ``illustrates how the 
current frequency of order events makes sequencing unrelated order 
events difficult.'' \1976\
---------------------------------------------------------------------------

    \1975\ See Notice, supra note 5, at 30669.
    \1976\ Id.
---------------------------------------------------------------------------

    The Commission generally agrees that events can be sequenced due to 
daisy chaining, but notes that for most regulatory activities,\1977\ it 
is crucial for the regulators to be able to accurately sequence events 
from different orders. Furthermore, the Commission believes that such 
sequencing requires both sufficient clock synchronization across market 
participants and sufficiently granular timestamps.
---------------------------------------------------------------------------

    \1977\ Id. at 30667.
---------------------------------------------------------------------------

    With respect to comments regarding manual orders, the Commission 
believes the new insights provided by commenters are consistent with 
the baseline in the Notice.
    The Commission is updating its economic baseline to include the new 
information provided by the Participants and also to include the 
approval of a FINRA rule amendment. Specifically, the Commission now 
believes that all Participants currently operate pursuant to a clock 
synchronization standard of 100 microseconds. Also, the Commission 
approved the proposed rule change by FINRA that was discussed in the 
Notice that reduces the synchronization tolerance for computer clocks 
to 50 milliseconds for member firms that record events in NMS 
Securities.\1978\ Accordingly, FINRA members that record events in NMS 
Securities currently operate, or in the near future will operate, 
pursuant to a clock synchronization standard of 50 milliseconds for 
their computer clocks.
---------------------------------------------------------------------------

    \1978\ See Securities Exchange Act Release No. 77565 (April 8, 
2016), 81 FR 22136 (April 14, 2016).
---------------------------------------------------------------------------

C. Data Linking and Combining
    Regarding data linking, as the Commission addressed in detail in 
the Notice, regulators analyzing an event or running a surveillance 
pattern often need to link data.\1979\ As examples, the Commission 
stated that cross-market examinations require the cumbersome and time-
consuming task of linking many different data sources; that regulators 
that are determining whether rule violations have occurred will combine 
trading data from sources such as public feeds, SRO audit trails, EBS 
data, and trade blotters; and that the analysis and reconstruction of 
market events could require linking many different data sources, such 
as a dozen SRO audit trails.\1980\
---------------------------------------------------------------------------

    \1979\ Id. at 30670.
    \1980\ Id.
---------------------------------------------------------------------------

    The Commission discussed that merging different data sources often 
involves translating the data sources into the same format, which can 
be a complex process that is prone to error.\1981\ In addition, the 
Commission discussed that linking records within or across data sources 
requires the sources to share ``key fields'' that facilitate linkage, 
but that regulators may be unable to link some data source combinations 
accurately because the data sources do not have key fields in common or 
the key fields are not sufficiently granular; also, different data 
sources may have key fields in common but the relationship between the 
fields is not straightforward so the algorithm to link them may be 
necessarily complex and not entirely successful.\1982\ Furthermore, the 
Commission discussed that within a single order lifecycle, the order 
number may change when a broker-dealer routes the order to another 
broker-dealer or exchange or even to another desk at the same broker-
dealer. Finally, the Commission discussed that the inability to link 
all records affects

[[Page 84815]]

the accuracy of the resulting data and can force an inefficient manual 
linkage process that would delay the completion of the data collection 
and analysis portion of an examination, investigation, or 
reconstruction.\1983\
---------------------------------------------------------------------------

    \1981\ Id.
    \1982\ Id.
    \1983\ Id.
---------------------------------------------------------------------------

D. Customer and Broker-Dealer Identification
    With respect to market participant identifiers (``MPIDs''), the 
Commission explained that trade and order data currently available to 
the Commission lack consistent customer and broker-dealer identifiers, 
which limit regulators' ability to track the activity of one client or 
broker-dealer across the market.\1984\ In the case of broker-dealers, 
the Commission stated that identifiers are inconsistent and that no 
centralized database exists. In addition, although SROs generally 
identify their members using MPIDs, those MPIDS are not standardized 
across venues.\1985\ The Commission further stated that aggregating a 
broker-dealer's activity across venues requires verifying the MPIDs 
assigned to a broker-dealer on each venue, usually referencing the 
broker-dealer by its Central Registration Depository (``CRD'') number. 
Finally, the Commission stated that in the course of manual data 
analysis, Commission Staff have experienced challenges in identifying 
broker-dealers using CRD numbers, but that the Commission and the SROs 
have generally overcome these challenges in the context of automated 
regulatory data analysis.
---------------------------------------------------------------------------

    \1984\ Id. at 30670-71.
    \1985\ Id.
---------------------------------------------------------------------------

    In the case of broker-dealer customers, the Commission stated that 
identifying customer account owners across multiple broker-dealers is 
difficult and prone to error.\1986\ As an example, the Commission 
discussed that although the EBS system provides the names associated 
with each account traded, these names are drawn from separate records 
of each broker-dealer providing data to the EBS system, and the same 
party may be identified by a different name across multiple broker-
dealers.
---------------------------------------------------------------------------

    \1986\ Id.
---------------------------------------------------------------------------

    One commenter discussed the difficulty in tracking market 
participant activity using MPIDs, stating that ``[w]ith regard to trade 
identifiers used by market access providers, some clearing firms have 
used one or more MPIDs to conceal the identity of other participants/
clients using these services to manipulate markets.'' \1987\ The 
Commission agrees that tracking market participant activity using MPIDs 
can be difficult because of sponsored or direct market access 
arrangements whereby broker-dealers allow customers to trade 
electronically using the broker-dealer's MPID. In cases where the 
sponsored or direct market access customer is not a FINRA member, the 
EBS system allows regulators to observe the identity of trading parties 
that may be concealed by MPIDs, but, as discussed in the Notice, it is 
difficult to consistently identify trading parties across multiple 
broker-dealers because they may use different names across these 
broker-dealers. In addition, as discussed in the Notice, EBS data is 
cumbersome to use for broad analysis because of fragmentation of the 
data.\1988\ However, in cases where the sponsored or direct market 
access customer is a FINRA member, OATS reporting obligations require 
both the customer broker-dealer and the sponsoring broker-dealer to 
generate reports that, when linked correctly, allow regulators to 
observe the identity of the trading party.\1989\
---------------------------------------------------------------------------

    \1987\ Anonymous Letter I at 12.
    \1988\ See Notice, supra note 5, at 30661.
    \1989\ See OATS Compliance FAQ at C84 available at 
www.finra.org/industry/faq-oats-compliance-faq.
---------------------------------------------------------------------------

E. Aggregation
    Regarding data aggregation, as addressed in detail in the Notice, 
the practice used in some data records of bundling together data from 
different orders and trades can make it difficult to distinguish the 
different orders and trades in a given bundle. That aggregation reduces 
the usefulness of equity and options cleared reports, because the 
reports do not have detailed trade information and do not include 
activity that does not require clearing.\1990\ In the Notice, the 
Commission presented as an example the frequent use of average-price 
accounts by brokers to execute and aggregate multiple trades for one or 
more customers. The Commission discussed that for these cases, and with 
EBS data, the system does not reflect the details of each individual 
trade execution.\1991\ Furthermore, the Commission discussed that 
information on trade allocations aggregate the trade information to 
such an extent that it is difficult for regulators to identify when 
particular clients may be afforded preferential treatment because it is 
challenging to link subaccount allocations to orders and trades.\1992\
---------------------------------------------------------------------------

    \1990\ See Notice, supra note 5, at 30688-89.
    \1991\ Id. at 30671.
    \1992\ Id.
---------------------------------------------------------------------------

    In addition, as the Commission discussed in the Notice, issuer 
repurchase information is aggregated at the monthly and quarterly 
level, and this level of aggregation limits the use of such data in 
investigations of the timing of issuer repurchases and issuer stock 
price manipulation and in analysis of the use of the Rule 10b-18 issuer 
repurchase safe harbor.
(3) Accessibility
    As addressed in detail in the Notice, the SROs and the Commission 
also lack direct access--i.e., the ability to log into a system in a 
manner that would allow them to gather and analyze the data they need--
to many of the data sources described above. SROs generally have direct 
access only to their own audit trails and the public data feeds.\1993\ 
The Commission has direct access only to the public data feeds and the 
equity and option cleared data; it lacks direct access to information 
provided in EBS or contained in trade blotters, order tickets, order 
handling data, SRO audit trails, and OATS data.\1994\
---------------------------------------------------------------------------

    \1993\ FINRA does receive data from certain SROs on a daily 
basis and subsequently has direct access to that data. Id. at 30671 
n.453.
    \1994\ Id. at 30671-72.
---------------------------------------------------------------------------

    The Commission explained that if a regulator does not have direct 
access to data it needs, the regulator would request it, and that this 
can result in many burdensome requests to broker-dealers, SROs, and 
others. The Commission recognized that data requests could impose 
burdens on the entities responding to the requests, in addition to the 
burden on the regulators making the requests. In particular, broker-
dealers, investment advisers, and SROs responding to a data request 
must incur costs in order to produce, store, and transmit the data for 
the Commission or SRO.\1995\
---------------------------------------------------------------------------

    \1995\ Id. at 30672.
---------------------------------------------------------------------------

    The Commission explained that, to complete just one analysis, 
regulators may need to request data from many different data providers 
because of fragmentation in the data. The Commission discussed the fact 
that fragmentation in trade and order data can take many forms. First, 
an analysis may require the same type of data from many market 
participants. For example, while ATSs and dealers report order events 
in equities to OATS, each of the 12 equities exchanges has its own 
audit trail. As a result, a market reconstruction for a single security 
may involve data requests to multiple exchanges as well as to 
FINRA.\1996\
---------------------------------------------------------------------------

    \1996\ Id.
---------------------------------------------------------------------------

    Second, the required data fields for an analysis may be reflected 
in different types of data. For example, for investigations that 
require tracing a single trade or a set of trades back to an

[[Page 84816]]

investor or investors, regulators would first need to request data from 
the exchanges or market participants executing trades to find out which 
members, subscribers, or broker-dealers sent the orders that led to the 
executions. Then, regulators would need to ask the members, 
subscribers, and broker-dealers for information on the orders and 
repeat that process until they get to the broker-dealer who initiated 
the order to see the customer behind the order.\1997\
---------------------------------------------------------------------------

    \1997\ Id.
---------------------------------------------------------------------------

    Third, an analysis may require data on different products covered 
in separate data sources. For example, some regulatory activities 
require data on both equities and options. And because current data 
sources do not contain information regarding both equities and options, 
regulators needing data on both types of securities would need to make 
several data requests.\1998\
---------------------------------------------------------------------------

    \1998\ Id.
---------------------------------------------------------------------------

    As the Commission discussed in the Notice, data fragmentation also 
results in disparate requirements for industry members to record and 
report the same information in multiple formats. Because each SRO has 
its own data requirements, a market participant that is a member of 
multiple SROs may be required to report audit trail data in numerous 
formats and interact with multiple regulators in response to normal 
data queries.\1999\
---------------------------------------------------------------------------

    \1999\ Id.
---------------------------------------------------------------------------

(4) Timeliness
    As addressed in detail in the Notice, currently, obtaining trade 
and order data and converting the data into a form in which they can be 
analyzed can involve a significant delay from the time of a particular 
event of interest. In some cases the length of time from when an event 
occurs until regulators can use relevant data in an investigation or 
analysis can be weeks or months. This is especially true for trading 
data that includes customer information.\2000\
---------------------------------------------------------------------------

    \2000\ Id. at 30673. The Commission noted that some of the data 
sources described above can be accessed by SROs and the Commission 
without significant delay. For example, SROs and the Commission have 
some real-time direct access to public data and, through MIDAS, the 
Commission has next-day direct access to analytics that are based on 
public data, such as volumes over various time horizons. 
Furthermore, the Commission noted that FINRA receives audit trail 
data from exchanges pursuant to Regulatory Services Agreements at 
the end of each trading day. Id.
---------------------------------------------------------------------------

    The Commission explained in the Notice that corrected FINRA OATS 
data may be available less than two weeks after an event and 
uncorrected data on T+1. In particular, FINRA members submit OATS data 
on a daily basis, submitting end-of-day files by 8:00 a.m. ET the 
following day or they are marked late by FINRA. FINRA acknowledges 
receipt of the data an hour after the member submits it, before running 
its validation process. FINRA then takes approximately four hours after 
acknowledging receipt of OATS data to determine if the data contain any 
syntax errors. In addition to the four hours needed to identify errors 
within a report, it takes another 24 hours for context checking, which 
identifies duplicates or secondary events without an originating event. 
Once a context rejection is available, the member has up to five 
business days to repair the rejection. Reports for files that contain 
internally inconsistent information about processing, linking, and 
routing orders may be available within two business days. FINRA 
attempts to match the inconsistent information against any additional 
data received up to T+2 for linking errors and T+3 for routing errors. 
The timing for surveillance programs varies depending on the type of 
surveillance being performed; data is assumed to be completely 
processed and corrected at T+8.\2001\
---------------------------------------------------------------------------

    \2001\ Id.
---------------------------------------------------------------------------

    The Commission also explained that because market participants 
generally do not report or compile datasets immediately after an order 
event, there is a delay before regulators may access some data sources. 
For example, the compilation of equity and option cleared reports 
occurs on T+1 for options and T+3 for equities (i.e., the clearing day) 
and the electronic query access for equities is available from the 
Securities Information Automation Corporation (``SIAC'') on T+3. 
Additionally, when broker-dealers receive a request for EBS, the firm 
must first fill in the EBS report and then, if it does not self-clear, 
pass the reports on to its clearing firm to compile and send to SIAC. 
The EBS submission process can take up to ten business days. More 
immediate requests for cleared options data can be submitted to FINRA, 
but even this process takes up to two days. Because EBS data do not 
contain order entry time and order execution time, regulators must 
obtain this information from firms and brokers using either data 
requests or subpoenas, and this process generally can take from two to 
four weeks depending on the size of the request.\2002\
---------------------------------------------------------------------------

    \2002\ Id. The Commission also noted that it has been the 
Commission's experience that trade blotter data requests can take 
weeks or in excess of a month depending on the scope of the request 
and how accustomed the broker-dealer is with fulfilling such 
requests. Id.
---------------------------------------------------------------------------

    In addition, the Commission noted that the lack of direct access to 
most data sources may further delay the ability of regulators to use 
data in certain cases. When regulators have direct access to a data 
source, the time needed to receive data is only the time it takes for a 
query to run. On the other hand, when regulators lack direct access, 
their data requests can consume significant time, including both the 
time required to put the request together and response times from the 
SROs, broker-dealers, and others producing the data. For example, 
obtaining complete responses from each broker-dealer for an EBS request 
can take days or weeks depending on the scope of the request. Likewise, 
responses from the Intermarket Surveillance Group (``ISG'') for SRO 
audit trail data can take days or weeks.\2003\ As the Commission 
discussed in the Notice, once regulators receive the requested data, 
the data often have to be processed into a form in which they can be 
analyzed. The Commission explained that it can take considerable time 
for regulators to combine data from different sources and link records 
from within or across data sources. Furthermore, the lack of 
consistency in format adds complexity to projects involving data from 
multiple data sources, even when the project does not involve linking 
of these different data.\2004\
---------------------------------------------------------------------------

    \2003\ Id.
    \2004\ Id.
---------------------------------------------------------------------------

    The Commission further discussed that those who use regulatory data 
also typically take time to ensure the accuracy of the data. The 
Commission explained that when regulators question the accuracy of 
data, they often check several alternative sources until they are 
comfortable that their data are accurate. This checking of data 
accuracy and augmentation process adds time to an investigation or 
analysis.\2005\
---------------------------------------------------------------------------

    \2005\ Id. at 30674.
---------------------------------------------------------------------------

E. Benefits

    In the Notice, the Commission discussed its belief that the 
economic benefits of the CAT NMS Plan would come from any expanded or 
more efficient regulatory activities facilitated by improvements to the 
data regulators use.\2006\ This is because the Plan will create a new 
consolidated data source--CAT Data--that should replace the use of some 
current data sources for many regulatory activities. Therefore, the 
Benefits Section described how CAT Data compares to data regulators 
currently use for regulatory activities, how the CAT Data would improve

[[Page 84817]]

regulatory activities, and how these improvements would benefit 
investors, market participants, and markets in general.\2007\
---------------------------------------------------------------------------

    \2006\ Id.
    \2007\ Id. at 30674-30708.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed its preliminary belief that 
the CAT NMS Plan would produce data that would improve on current data 
sources because CAT Data would result in regulators having direct 
access to consolidated audit trail data, which would in turn improve 
many of the regulatory activities discussed in the Baseline 
Section.\2008\ As summarized in Table 2, the Commission preliminarily 
concluded that the Plan would generate improvements in the quality of 
data that regulators would have access to in the areas of completeness, 
accuracy, accessibility, and timeliness. The Commission discussed its 
preliminary belief that the improvements in the quality of regulatory 
data within these categories would significantly improve the ability of 
regulators to perform a wide range of regulatory activities, which 
would lead to benefits for investors and markets. In addition, the 
Commission preliminarily believed that certain provisions in the Plan--
those related to future upgrades of the Central Repository, the 
promotion of the accuracy of CAT Data, the promotion of the timeliness 
of CAT Data, and the inclusion of specific governance provisions 
identified by the Commission in the Adopting Release for Rule 613--
would increase the likelihood that the potential benefits of the CAT 
NMS Plan would be realized.
---------------------------------------------------------------------------

    \2008\ Id. at 30674-77.
---------------------------------------------------------------------------

    In the category of completeness, the Commission discussed its 
belief that the ability for regulators to access more material data 
elements from a consolidated source would enable regulators to more 
efficiently carry out investigations, examinations, and analyses 
because regulators could acquire data from a single source that they 
would otherwise need to compile from many data sources. In the category 
of accuracy, the Commission discussed its belief that the Plan would 
substantially improve data accuracy by requiring CAT Data to be 
collected, compiled, and stored in a uniform, linked format using 
consistent identifiers for customers and market participants. In the 
category of accessibility, the Commission discussed its belief that the 
Plan would substantially improve the access to data for regulators 
because the Plan requires regulators to have direct access to CAT Data 
and this direct access would dramatically reduce the hundreds of 
thousands of requests that regulators must make each year in order to 
obtain data, thus reducing the burden on the industry. Finally, in the 
category of timeliness, the Commission discussed its belief that the 
Plan, if approved as noticed, would significantly improve the 
timeliness of data acquisition and use, which could improve the 
timeliness of regulatory actions that use data.
    The Commission discussed its expectation that regulatory activities 
such as surveillance, investigations, examinations, analysis and 
reconstruction of market events, and analysis in support of rulemaking 
initiatives would benefit from improved data quality as part of 
CAT.\2009\ The Commission explained that data is essential to all of 
these regulatory activities, and therefore substantial improvements in 
the quality of the regulatory data should result in substantial 
improvements in the efficiency and effectiveness of these regulatory 
activities, which should translate into benefits to investors and 
markets. For example, improved data could lead to more effective and 
efficient surveillance that better protects investors and markets from 
violative behavior and facilitates more efficient and effective risk-
based investigations and examinations that more effectively protect 
investors. The Commission stated that together, these improved 
activities could better deter violative behavior of market 
participants, which could improve market efficiency. Furthermore, this 
increase in directly accessible data should improve regulators' 
understanding of the markets, leading to more informed public policy 
decisions that better address market deficiencies to the benefit of 
investors and markets. The Commission also discussed the fact that the 
Plan lacked information regarding the details of certain elements of 
the Plan likely to affect the benefits of the Plan, primarily because 
many of those details had not yet been determined, which creates some 
uncertainty about the expected economic effects.\2010\
---------------------------------------------------------------------------

    \2009\ Id. at 30675-76.
    \2010\ Id. at 30676.
---------------------------------------------------------------------------

    The Commission has considered the comments it received regarding 
the likely benefits of the CAT NMS Plan and continues to believe that 
the CAT NMS Plan would generate improvements in the quality of data 
that regulators would have access to in the areas of completeness, 
accuracy, accessibility, and timeliness. The Commission also continues 
to believe that improvements in the quality of regulatory data within 
these categories would significantly improve the ability of regulators 
to perform a wide range of regulatory activities, which would lead to 
benefits for investors and markets. In addition, the Commission 
continues to believe that certain provisions in the Plan--those related 
to future upgrades of the Central Repository, the promotion of the 
accuracy of CAT Data, the promotion of the timeliness of CAT Data, and 
the inclusion of specific governance provisions identified by the 
Commission in the Adopting Release for Rule 613--increase the 
likelihood that the potential benefits of the CAT NMS Plan described 
below will be realized. As set out in more detail below, the Commission 
has taken into account the modifications that have been made to the 
Plan where they are relevant to the Commission's analysis of the 
benefits of the Plan, and has updated its analysis accordingly.

[[Page 84818]]

                                                                                                                 Table 2
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                         Routing/
                                  Customer      Broker-dealer      Timestamp        Allocation     Order  display    Buy-to-cover       Special       modification/        Entire       Direct  access   Off- exchange    Timeliness of
                                 identifier       identifier         \2011\        information      information       indicator         handling       cancellation      lifecycle     for  regulators  activity \2012\  data  compiling
                                                                                                                                      instructions     information                                                            \2013\
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OATS........................  No.............  Yes............  Yes (majority    No.............  Yes (for limit   No.............  Yes              Yes............  Yes (before      No (except       Yes............  Raw Data: T+1
                                                                 in                                orders).                          (conditional).                    order reaches    FINRA). Access                    Corrected
                                                                 milliseconds                                                                                          exchange).       can take                          Data: T+6.
                                                                 but some in                                                                                          No (once order    several weeks.
                                                                 seconds).                                                                                             reaches
                                                                                                                                                                       exchange).
COATS.......................  No.............  Yes............  Yes............  No.............  No.............  No.............  No.............  Yes............  No.............  No (except SROs  No.............  Reported same-
                                                                                                                                                                                        w/r/t their                       day, but
                                                                                                                                                                                        own members).                     separate file
                                                                                                                                                                                                                          transmitted at
                                                                                                                                                                                                                          latest T+1.
SRO Audit Trails............  No.............  Yes............  Yes (majority    No.............  No.............  No.............  No.............  Yes............  No (only once    No (except SROs  No.............  As soon as a
                                                                 in                                                                                                    order reaches    w/r/t their                       trade is
                                                                 milliseconds                                                                                          exchange).       own trails).                      executed.
                                                                 but some in                                                                                                            Access can
                                                                 seconds).                                                                                                              take several
                                                                                                                                                                                        weeks.
Equity and Option Cleared     No.............  No.............  No.............  No.............  No.............  No.............  No.............  No.............  No.............  Yes............  Yes............  Equity: T+3
 Reports.                                                                                                                                                                                                                 Option: T+1.
Electronic Blue Sheets......  Yes (but not     Yes (but not     Yes............  No.............  No.............  No.............  No.............  No (except for   No.............  No. Access can   Yes............  10 business
                               always           always                                                                                                certain                           take several                      days after
                               consistent       consistent                                                                                            cancellation                      weeks or                          request is
                               across broker-   across broker-                                                                                        information).                     months.                           submitted.
                               dealers)         dealers).
                               \2014\.
Trade Blotters/Order Tickets  Yes (but not     Yes (but not     Yes (can be      No.............  No.............  No.............  No.............  No.............  No.............  No. Access can   Yes............  Same-day.
                               always           always           requested,                                                                                                             take several
                               consistent       consistent       although not                                                                                                           days.
                               across broker-   across broker-   always
                               dealers).        dealers).        reliable).
Trading and Order Handling    Depends on the   Yes............  Yes............  No.............  No.............  No.............  No.............  Yes............  Yes (except      No. Regulators   Yes............  Same-day.
 System Data.                  trader.                                                                                                                                 allocations).    must request
                                                                                                                                                                                        this data (SEC
                                                                                                                                                                                        asks for the
                                                                                                                                                                                        data within 10
                                                                                                                                                                                        days).
Public/Proprietary Data.....  No.............  No.............  Yes (varied      No.............  No.............  No.............  No.............  Yes (except non- No.............  Yes............  Yes............  Same-day.
                                                                 between                                                                              displayed
                                                                 seconds and                                                                          orders).
                                                                 microseconds).
Data from Proposed CAT......  Yes              Yes              Yes              Yes              Yes              Yes              Yes              Yes              Yes (613(j)(9))  Yes (SEC and     Yes (613(c)(2)   Raw Data: T+1
                               (613(c)(7)(i)(   (613(c)(7)(i)(   (milliseconds)   (613(c)(7)(vi)   (613(c)(7)(i)(   (613(c)(7)(i)(   (613(c)(7)(i)(   (613(c)(7)(ii).                   SROs)            and (3)).        Corrected
                               A)).             C)).             (613(d)).        ).               F)).             F)).             F)).                                               (613(e)(2)).                      Data: T+3.
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 84819]]

1. Improvements in Data Qualities
---------------------------------------------------------------------------

    \2011\ As proposed, the CAT NMS Plan also requires CAT Reporters 
to synchronize their time clocks to the time maintained by the NIST 
with an allowable drift of 50 milliseconds. See CAT NMS Plan, supra 
note 5, at Section 6.8. According to a survey conducted by the 
Financial Information Forum (FIF), 39% of responding broker-dealers 
currently synchronize their clocks with less precision than what is 
called for by the CAT NMS Plan. Thus, the CAT NMS Plan would also 
increase the accuracy of the timestamps used by certain broker-
dealers. See FIF Clock Offset Survey, supra note 247.
    \2012\ Off-exchange activity includes currently reportable 
events that are not handled by a registered securities exchange.
    \2013\ In this instance, ``timeliness'' refers to when the data 
are compiled at the source in question (e.g., when OATS receives 
data from reporting broker-dealers), not when they become available 
to regulators because that timeline can vary depending on the 
regulator in question. As shown in the ``Direct Access for 
Regulators'' column, it may still take several days, weeks, or 
months for regulators to be able to access the data. For example, 
while OATS reporters provide the data at T+1, the SEC must request 
OATS data in order to access it, which may take several days or 
weeks. This narrower definition of timeliness is not used throughout 
this economic analysis.
    \2014\ Guidance from FINRA indicates that broker-dealers must 
``identify the party to the trade'' through EBS fields such as 
``Primary Party Identifier,'' but that party may be another broker-
dealer rather than the ultimate customer. See FINRA, Electronic Blue 
Sheet Submissions, FINRA and ISG Extend Effective Date for Certain 
Electronic Blue Sheet Data Elements, Regulatory Notice 12-47 (Oct. 
2012), available at https://www.finra.org/sites/default/files/NoticeDocument/p194655.pdf. Similarly, under the large trader rule, 
persons exercising ``investment discretion'' are reported through 
EBS, but in some cases such persons are investment advisers rather 
than their customers. See supra note 1912 and accompanying text 
(discussing the large trader rule).
---------------------------------------------------------------------------

    Consistent with the Adopting Release, the Commission identified in 
the Notice four qualities of trade and order data that impact the 
effectiveness of core SRO and Commission regulatory efforts: Accuracy, 
completeness, accessibility, and timeliness.\2015\ In assessing the 
potential benefits of the CAT NMS Plan, the Commission's economic 
analysis compared the data that would be available under the Plan to 
the trading and order data currently available to regulators.\2016\ The 
Commission preliminarily believed that the Plan would improve data in 
terms of all four qualities, but that uncertainty remained as to the 
expected degree of improvement in some areas.\2017\ The Commission has 
considered the comments received, the Participants' response, and the 
modifications to the Plan, and continues to believe that the Plan will 
improve accuracy, completeness, accessibility, and timeliness of trade 
and order data relative to the Baseline, with some uncertainty as to 
the degree of improvement.
---------------------------------------------------------------------------

    \2015\ See Adopting Release, supra note 14, at 45727.
    \2016\ Changes in all four data qualities affect certain data-
driven regulatory activities. The benefits of the Plan derive from 
the changes to these regulatory activities.
    \2017\ See Notice, supra note 5, at 30678.
---------------------------------------------------------------------------

a. Completeness
    In the Notice, the Commission discussed how the CAT NMS Plan, if 
approved, would result in regulators having direct access to a single 
data source that would be more complete than any current data 
source.\2018\ The Commission discussed its belief that the CAT Data 
\2019\ would be more complete than other data sources because, compared 
to existing SRO audit trails and other data sources, the CAT Data would 
contain data from a greater number of broker-dealers on more event 
types, products, and data fields. While some current data sources 
contain many of the elements that would be included in CAT Data, the 
Commission explained that CAT Data would consolidate that data into one 
source that would be much more complete than any existing source, and 
that CAT Data would also include some elements that are not available 
from any current data source. In the Commission's view, having this 
data consolidated in a single source would provide numerous benefits.
---------------------------------------------------------------------------

    \2018\ Id. at 30678-81.
    \2019\ Id. at 30678.
---------------------------------------------------------------------------

(1) Events and Products
    In the Notice, the Commission discussed the fact that the CAT Data 
would include events and products from all current SRO audit trails, 
combined into a single data source. In addition, it would include some 
off-exchange activity not captured on current SRO audit trails,\2020\ 
as well as proprietary orders originated by a trading desk in the 
ordinary course of a member's market making activities (or ``principal 
activity''),\2021\ and information on equities, options and OTC Equity 
Securities.\2022\
---------------------------------------------------------------------------

    \2020\ The Commission noted that SRO audit trails currently do 
not include the activity of firms that are not members of that SRO. 
And, currently only FINRA requires its members to report their off-
exchange activity. While broker-dealers that trade off-exchange must 
be members of FINRA unless their activity fits the terms of the 
exemption in Rule 15b9-1, firms that qualify for the exemption in 
that rule and that are not FINRA members do not report their off-
exchange activity to OATS. This exemption covers a large percentage 
of off-exchange activity. Broker-dealers that are not FINRA Members 
accounted for 48% of orders sent directly to ATSs in 2014, 40% in 
2013, and 32% in 2012. Because all SROs are Participants in the 
Plan, under the Plan all broker-dealers with Reportable Events, 
including off-exchange, would be required to report the required CAT 
Data to the Central Repository. Id. at 30678-79.
    \2021\ Id. at Section IV.D.2.b(1)A.
    \2022\ ``OTC Equity Security'' is defined in the Plan as ``any 
equity security, other than an NMS Security, subject to prompt last 
sale reporting rules of a registered national securities association 
and reported to one of such association's equity trade reporting 
facilities.'' Id. at 30679.
---------------------------------------------------------------------------

    Four commenters believed that the CAT NMS Plan would result in a 
data source that is not complete enough and argued that CAT should be 
significantly expanded in scope to include additional event types, such 
as additional short selling information, clearing information, and ETF 
creation and redemption data; additional product types, such as stock 
index futures and options on index futures; or other types of 
regulatory submissions or metrics reports, such as CCAR/DFAST, TLAC, 
Volcker, Basel III, or BCBS-283.\2023\
---------------------------------------------------------------------------

    \2023\ Anonymous Letter at 6-9, 12-14, 17; Better Markets Letter 
at 7; Data Boiler Letter at 1,10-13, 17-18, 31; CBOE Letter at 1-2.
---------------------------------------------------------------------------

    The Commission recognizes that at least some of these expansions 
could potentially make CAT Data more complete and responds to each of 
the suggestions above in Section IV.D.4.f. At the same time, the 
Commission continues to believe that the CAT NMS Plan will result in 
regulators having direct access to a single data source that will be 
more complete than any current data source. Furthermore, the Commission 
continues to believe that the CAT Data will be more complete than other 
data sources because it will contain data from a greater number of 
broker-dealers on more event types and products when compared to 
existing SRO audit trails and other data sources.
(2) Data Fields
    In the Notice, the Commission also explained that the Plan would 
consolidate, in a single source, fields that currently may not be 
available from all data sources, including some fields that are 
difficult for regulators to compile.\2024\ It discussed its belief 
that, in particular, the inclusion of consistent, unique customer 
information in the CAT Data represents a significant improvement over 
current SRO audit trails in terms of completeness because very few 
current data sources contain customer information, and those that do 
are limited in terms of the completeness and accuracy of this 
information, which significantly limits regulatory efficiency.\2025\ As 
proposed in the

[[Page 84820]]

Notice, CAT Data would also include other data fields not available 
from current SRO audit trails, including allocation information such as 
allocation time, open/close information, Quote Sent Time,\2026\ and 
information on whether a Customer gave a modification or cancellation 
instruction. With respect to the rest of the data fields included in 
CAT Data, the Commission discussed the fact that certain of them are 
included in some or all current SRO audit trails but that no single 
current source contains all of them. For example, the inclusion of 
order display information (i.e., whether the size of the order is 
displayed or non-displayed) and special handling instructions in CAT 
Data improve completeness because they are not always mandatory in SRO 
audit trail data and therefore may not be consistently available 
without data requests to broker-dealers.
---------------------------------------------------------------------------

    \2024\ See Notice, supra note 5, at 30679-81.
    \2025\ Id. at Section IV.D.2.a(1) and Section IV.D.2.b.(1)b, 
supra. As discussed in the Notice, SRO audit trails typically do not 
provide customer information, but a recent FINRA rule change would 
require its members to report to OATS non-FINRA member customers who 
are broker-dealers.
    \2026\ ``Quote Sent Time'' refers to the time that an Options 
Market Maker routes its quote, or any modification or cancellation 
thereof, to an exchange. Id. at 30755.
---------------------------------------------------------------------------

    The Commission discussed its belief that, while the costs and 
benefits of including particular fields can change due to technological 
advances and/or changes in the nature of markets, the Plan contains 
provisions regarding periodic reviews and upgrades to CAT that could 
lead to proposing additional data fields that are deemed 
important.\2027\ In addition, the Commission noted that it had reviewed 
gap analyses that examine whether the CAT Data would contain all 
important data elements in current data sources, and that the 
Commission identified some potential data gaps.\2028\ However, the 
Commission discussed the fact that the Plan provides that prior to the 
retirement of existing systems, CAT Data must contain data elements 
sufficient to ensure the same regulatory coverage provided by existing 
systems that are anticipated to be retired.\2029\ The Commission 
discussed its expectation that, therefore, any missing elements that 
are material to regulators would be incorporated into the CAT Data 
prior to the retirement of the systems that currently provide those 
data elements to regulators.
---------------------------------------------------------------------------

    \2027\ See Notice, supra note 5, at Section IV.E.3.a for a 
discussion of adding new data fields and other requirements for 
upgrading the CAT Data after approval.
    \2028\ In the Notice, the Commission acknowledged that the 
Participants are continuing to study gaps between current regulatory 
data sources and the Plan as filed. See Notice, supra note 5, at 
30680-81; see also SEC Rule 613--Consolidated Audit Trail (CAT) 
OATS-CAT Gap Analysis and SEC Rule 613--Consolidated Audit Trail 
(CAT) Revised EBS-CAT GAP Analysis, available at http://www.catnmsplan.com/gapanalyses/index.html.
    \2029\ See Notice, supra note 5, at 30680-81.
---------------------------------------------------------------------------

    Three commenters questioned the benefits of timestamps in the 
Allocation Report.\2030\ One of the commenters stated that a 
requirement to report allocation time would be ``divorced from the 
goals of CAT.'' \2031\ Similarly, another commenter noted that 
allocation time would not provide the regulatory completeness benefit 
that the Commission is seeking because one likely definition would not 
capture what regulators would want.\2032\ This commenter further argued 
that if the main regulatory purpose of including allocation timestamps 
is to detect cherry-picking, there could be alternate approaches that 
achieve the same result using existing data fields.\2033\
---------------------------------------------------------------------------

    \2030\ FSR Letter at 9; SIFMA Letter at 35; FIF Letter at 3-4, 
11, 86-89.
    \2031\ SIFMA Letter at 35.
    \2032\ FIF Letter at 11.
    \2033\ FIF Letter at 89.
---------------------------------------------------------------------------

    Three commenters suggested that the open/close indicator for 
equities would be a new data field.\2034\ However, these comments did 
not address the benefits of the open/close indicator that the 
Commission discussed in the Notice.
---------------------------------------------------------------------------

    \2034\ FIF Letter at 84; TR Letter at 9; SIFMA Letter at 25.
---------------------------------------------------------------------------

    One commenter discussed possible data gaps between CAT and current 
data sources.\2035\ The commenter indicated that the OATS-CAT Gap 
Analysis, published in May 2015, is out of date because it does not 
reflect changes that have been incorporated into OATS since 2015 
including additional fields to accommodate the Tick Size Pilot and ATS 
Order Book Reporting. The commenter also argued that gaps between OATS 
and CAT may widen further if changes to OATS continue to be made 
without corresponding changes to the CAT Plan for the initial phase. 
Furthermore, the commenter noted that other regulatory systems may 
indirectly impact CAT reporting requirements; for example, recent NYSE 
changes to the Account Type Indicator will require EBS changes, which 
in turn impacts CAT.\2036\
---------------------------------------------------------------------------

    \2035\ FIF Letter at 28-29.
    \2036\ FIF Letter at 29.
---------------------------------------------------------------------------

    In their response, the Participants agreed with the Commission's 
analysis in the Notice and expressed their belief that there are 
benefits associated with including time-stamps in the Allocation 
Report, including the detection of allocation fraud.\2037\ With respect 
to the open/close indicator, the Participants noted that this data 
field is not captured pursuant to current industry practices for 
equities or some options transactions.\2038\ The Participants also 
responded to the comment regarding the OATS-CAT Gap Analysis, stating 
that the gap analysis has been updated by including newly-added data 
fields in these duplicative systems, such as the new OATS data fields 
related to the Tick Size Pilot and ATS Order Book Reporting 
changes.\2039\
---------------------------------------------------------------------------

    \2037\ Response Letter I at 37-38.
    \2038\ Response Letter I at 21-22.
    \2039\ Response Letter II at 21.
---------------------------------------------------------------------------

    The Commission has considered the comments it received and the 
Participants' response regarding the potential benefits of the CAT NMS 
Plan in terms of data completeness. The Commission disagrees with the 
comments that allocation timestamps are outside the goal of CAT and 
that they will not provide the Commission with the regulatory benefit 
that it is seeking. As discussed in the Notice and below, the 
Commission believes that allocation time is an important data field 
because it is critical in investigations of violations such as market 
manipulation and cherry-picking, and because allocation time is 
currently more difficult to acquire than the other information on the 
Allocation Report.\2040\ The inclusion of this data field will improve 
the efficiency and efficacy of enforcement investigations for 
regulators, and this benefit is one of the goals of the CAT NMS Plan. 
With respect to the commenter who argued that alternate approaches that 
do not rely upon allocation timestamps can be used to detect cherry 
picking, the Commission notes that the commenter's example requires an 
allocation time.
---------------------------------------------------------------------------

    \2040\ See Notice, supra note 5, at 30679; see also Section 
V.E.2.c(3), infra.
---------------------------------------------------------------------------

    Regarding the possibility of data gaps between CAT and current data 
sources, the Commission recognizes that there may be other gaps between 
current regulatory data sources and the Plan, in addition to those that 
the Commission mentioned in the Notice. The Commission also recognizes 
that the number and the scope of these gaps can change over time due to 
new regulatory developments. However, as discussed above, the 
Participants have stated that they have completed the gap 
analysis.\2041\ As set out in the Notice (and discussed above), the 
Plan specifically provides that, prior to the retirement of existing 
systems, CAT Data must contain data elements sufficient to ensure the 
same regulatory coverage as the coverage provided by these systems. 
Therefore, the Commission continues to believe that any missing 
elements that are important to regulators would be incorporated into

[[Page 84821]]

the CAT Data prior to the retirement of the systems that currently 
provide these data elements.
---------------------------------------------------------------------------

    \2041\ See Section IV.D.9, supra.
---------------------------------------------------------------------------

    The Commission is updating its analysis of these benefits to 
recognize two modifications to the Plan. First, modifications to the 
Plan to require the reporting of LEIs for Customers and Industry 
Members in certain circumstances \2042\ should result in regulators 
having access to more complete information identifying Customers and 
Industry Members. Second, the Plan has been modified to eliminate the 
requirement to report an open/close indicator for equities and Options 
Market Markers. The inclusion of this indicator for equities and 
Options Market Makers would have assisted regulators in determining 
when an investor was buying to cover a short sale in equities or 
identifying whether options market makers engage in aggressive risk-
taking trading. Such information would have been useful in detecting 
certain market manipulations, violations of rules such as Rule 105, 
short sale marking rules, and Rule 204. The Commission now notes that, 
due to the elimination of the requirement to report an open/close 
indicator for equities and Option Market Makers as part of CAT, these 
benefits will no longer be realized. However, the Commission is 
approving the Plan with this modification for the reasons discussed in 
Section IV.D.4.c, above.
---------------------------------------------------------------------------

    \2042\ See Section IV.D.4.a.(4) and Section IV.D.4.b.(2), supra, 
for a description of the LEI reporting requirements in the Plan.
---------------------------------------------------------------------------

b. Accuracy
    In the Notice, the Commission analyzed the expected effect of the 
CAT NMS Plan on the accuracy of data available to regulators.\2043\ The 
Commission preliminarily believed that the requirements in the CAT NMS 
Plan for collecting, consolidating, and storing the CAT Data in a 
uniform linked format, the use of consistent identifiers for Customers, 
and the focus on sequencing would promote data accuracy. However, in 
regard to certain Plan requirements, the Commission preliminary 
believed that improvements in data accuracy would be limited. For 
example, the Commission discussed its belief that the proposed clock 
synchronization requirements in the Plan would only lead to modest 
improvements in the percentage of sequenceable order events.\2044\ 
Also, the Commission noted that the full extent of improvement that 
will result from the Plan was uncertain, because the Plan defers many 
decisions relevant to accuracy until the Plan Processor publishes the 
Technical Specifications and interpretations.\2045\
---------------------------------------------------------------------------

    \2043\ See Notice, supra note 5, at 30681-89.
    \2044\ Id.
    \2045\ See CAT NMS Plan, supra note 5, at Section 6.9.
---------------------------------------------------------------------------

(1) Definitions
    As previously stated, the Plan defers many decisions relevant to 
accuracy until the Plan Processor publishes the Technical 
Specifications and interpretations. In particular, the CAT NMS Plan 
specifies that the ``Technical Specifications shall include a detailed 
description of . . . each data element, including permitted values, in 
any type of report submitted to the Central Repository'' \2046\ and 
``the Plan Processor shall have sole discretion to amend and publish 
interpretations regarding the Technical Specifications.'' \2047\ In the 
Notice, the Commission explained that this leaves open precise 
definitions and parameters for the data fields to be included in CAT 
Data.\2048\ Nonetheless, the Commission discussed its preliminary 
belief that the Plan provides some procedural protections to mitigate 
this uncertainty and help promote accuracy. For example, the Plan 
requires that, at a minimum, the Technical Specifications be 
``consistent with [considerations and minimum standards discussed in] 
Appendices C and D,'' and that the initial Technical Specifications and 
any Material Amendments thereto must be provided to the Operating 
Committee for approval by Supermajority Vote.\2049\ Further, all non-
Material Amendments and all published interpretations must be provided 
to the Operating Committee in writing at least ten days before 
publication, and shall be deemed approved unless two or more 
unaffiliated Participants call the matter for a vote of the full 
Operating Committee.\2050\
---------------------------------------------------------------------------

    \2046\ Id. at Section 6.9(b)(v).
    \2047\ The CAT NMS Plan provides details regarding how the 
responsibility for these decisions would be shared between the 
Operating Committee and the Plan Processor, with the Plan Processor 
having responsibility for data definitions and interpretations. Id. 
at Section 6.9(c)(i).
    \2048\ For example, the Completeness section in the Notice noted 
that the open/close indicator for equities does not exist in current 
data sources. See Notice, supra note 5, at 30681. The accuracy of 
the open/close indicator for equities would have been subject to 
Plan Processor discretion, because the Plan Processor would have had 
responsibility for defining the permitted values and interpreting 
when CAT Reporters would use such permitted values and the Plan 
Processor would not have had guidance from previous data sources on 
how to define or interpret such a field.
    \2049\ See CAT NMS Plan, supra note 5, at Section 6.9(a). The 
Commission notes that the standards in Appendices C and D do not 
cover all decisions that would affect the accuracy of the data.
    \2050\ Id. at Section 6.9(c)(i).
---------------------------------------------------------------------------

    The Commission received comments about the lack of definitions for 
data fields in the Plan such as the open/close indicator,\2051\ 
allocation time,\2052\ account type,\2053\ and customer type.\2054\ 
Commenters argued that it is currently uncertain whether the Plan 
Processor will select definitions that are the most beneficial to 
regulators. For example, one commenter suggested that allocation time 
may be challenging to define, stating that ``the industry does not have 
a standard business flow which consistently captures time at the same 
point in the allocation process.'' \2055\ This commenter further 
pointed out that if allocation time is defined as the time the 
allocation is booked, ``it will not provide the regulatory benefit 
expected by the SEC,'' and provided an example of a way to detect 
allocation fraud using the time ``when the allocation was submitted to 
move the shares into the intended subaccounts.'' \2056\ The 
Participants responded to the comments regarding the definitions of 
allocation time, account type, and customer type by saying that the 
definitions will be addressed in the Technical Specifications.\2057\
---------------------------------------------------------------------------

    \2051\ FIF Letter at 85.
    \2052\ TR Letter at 9; FIF Letter at 86.
    \2053\ TR Letter at 9.
    \2054\ TR Letter at 9.
    \2055\ FIF Letter at 86.
    \2056\ FIF Letter at 86, 89.
    \2057\ The Participants responded to the comments on open/close 
more generally by requesting that the Commission clarify that the 
open/close indicator should not apply to equities, and did not 
respond regarding the definition. As noted elsewhere, modifications 
to the Plan will remove the open/close indicator for equities. See 
Section IV.D.4.c, supra.
---------------------------------------------------------------------------

    The Commission has considered the comments and believes they are 
consistent with the Commission's assessment in the Notice that leaving 
open precise definitions, parameters, and interpretations for the data 
fields to be included in CAT Data creates uncertainty about the full 
extent of improvements in data accuracy. The Commission is cognizant of 
the complexity of certain data fields, such as allocation time. These 
complexities mean that the accuracy of the data fields depends on Plan 
Processor discretion, because the Plan Processor would have 
responsibility for defining the permitted values and interpreting when 
CAT Reporters would use such permitted values, and sometimes would not 
have guidance from previous data sources on how to define or interpret 
such a

[[Page 84822]]

field.\2058\ Although the Commission agrees that uncertainty exists in 
the selection of data definitions and that definitions ultimately 
selected may not promote accuracy as much as certain alternatives, as 
discussed in Section V.G.4.a.(2), the Commission continues to believe 
that the existing process trades off the need for certainty with the 
benefits of an efficient process going forward. Further, for reasons 
discussed above in Section IV.B. and below in Section V.E.3.d, the 
Commission continues to believe that the Plan provides some procedural 
protections to mitigate this uncertainty and help promote accuracy.
---------------------------------------------------------------------------

    \2058\ See Notice, supra note 5, at n.537. While the Commission 
would ultimately be able to correct such misinterpretations, 
regulators may not detect such a misinterpretation until the 
misinterpretation harms an investigation, exam, or other analysis.
---------------------------------------------------------------------------

(2) Data Errors
    In the Notice, the Commission discussed the fact that the CAT NMS 
Plan specifies a high-level process for handling errors that includes 
target Error Rates for data initially submitted by CAT Reporters and a 
correction process and timeline, but explained that it is difficult to 
conclude whether the Error Rates and processes in the CAT NMS Plan 
would constitute an accuracy improvement as compared to current data 
sources. Specifically, because the current OATS error rate is below 1% 
and the Plan states that 5% is an appropriate initial Error Rate, the 
Commission preliminarily believed that the initial percentage of errors 
in CAT would be higher than the current percentage of errors in OATS, 
though the OATS error rate may not be directly comparable to the Error 
Rate in the Plan.\2059\ As discussed in the Notice, Error Rates for CAT 
Data may not be comparable to error rates in OATS because of the 
increased scope and level of linkages specified in the Plan and the 
new, large, and untested system.\2060\
---------------------------------------------------------------------------

    \2059\ Id. at 30681-82.
    \2060\ Id.
---------------------------------------------------------------------------

    In the Notice, the Commission also discussed that the Plan contains 
some uncertainty about the level of the maximum Error Rate because the 
initial 5% rate is subject to a quality assurance testing period and 
subject to change again before each new batch of CAT Reporters are 
brought online. The Commission noted that in time, the rate could be 
lowered, but it also could be raised.\2061\ Finally, the Commission 
discussed that the Plan specifies an error correction process and 
indicates that practically all errors identifiable by the validations 
used would be corrected by 8:00 a.m. ET on T+5, but that the Plan does 
not provide the level of detail necessary to verify whether the CAT 
validation process would run the same validations as OATS, whether 
current validations would be relevant, and what validations, if any, 
would be added.\2062\
---------------------------------------------------------------------------

    \2061\ Id.
    \2062\ Id.
---------------------------------------------------------------------------

    Although the Commission received several letters regarding data 
error rates,\2063\ only a few letters discussed the effect of Error 
Rates on the accuracy of CAT Data.\2064\ While supporting the goal of a 
``de minimis'' post correction error rate, one commenter suggested that 
the errors in CAT Data would not be ``de minimis'' even after the error 
correction process because OATS currently does not achieve ``de 
minimis'' errors.\2065\ For example, this commenter stated that there 
are instances where errors cannot be corrected in OATS and gave true 
duplicates and non-reportable symbols as examples.\2066\ The commenter 
stated that it is unreasonable to expect CAT Data to be any different 
than OATS data, especially because the industry has no experience with 
reporting and error correcting the new data types required by the 
Plan.\2067\ Another commenter expanded on this concern by questioning 
why accuracy problems persist in OATS today and argued that the 
improvements to accuracy from the Plan depend on eliminating the 
inaccurate/problematic reporting that exists today.\2068\
---------------------------------------------------------------------------

    \2063\ See Section IV.D.11, supra for a complete summary of 
comments and the Commission's discussion of those comments. Further, 
the Commission responds to comments relevant to alternatives that 
would reduce error rates below in Section V.H.2, infra.
    \2064\ FIF Letter at 50-60; Anonymous Letter II at 2; SIFMA 
Letter at 6.
    \2065\ FIF Letter at 60.
    \2066\ FIF Letter at 55.
    \2067\ FIF Letter at 60.
    \2068\ Anonymous Letter II at 2.
---------------------------------------------------------------------------

    Other commenters expressed uncertainty regarding whether CAT 
Reporters would be able to achieve the initial Error Rate of 5%.\2069\ 
One commenter indicated that there is not enough information at this 
time to assess the Error Rate and that ``Error Rate'' is not 
specifically defined.\2070\ Another commenter echoed this sentiment 
saying that there is no history of reporting error rates for options, 
market making, customer information, or allocations and the Plan 
provides ``little or no information . . . regarding the types of errors 
that will be identified, and if and how those errors can be 
corrected.'' \2071\ The commenter also cited uncertainties related to 
the inexperience of some CAT Reporters, unknown interfaces, a lack of 
information on test tools and correction tool kits, and an unknown 
linkage logic.\2072\
---------------------------------------------------------------------------

    \2069\ FIF Letter at 50; SIFMA Letter at 6.
    \2070\ SIFMA Letter at 6.
    \2071\ FIF Letter at 50.
    \2072\ FIF Letter at 50.
---------------------------------------------------------------------------

    Finally, one commenter agreed with the Commission's analysis that 
OATS error rates may not be directly comparable to a CAT Error 
Rate.\2073\ In particular, this commenter stated that OATS would be a 
sufficient comparison base for equities data only, but not for options, 
allocations, Customer Information, or market making reporting.
---------------------------------------------------------------------------

    \2073\ FIF Letter at 55.
---------------------------------------------------------------------------

    In response to the comments on uncertainty in the definition of 
Error Rate, the Participants disagreed, pointing to the current 
definition in the Plan and in Rule 613(j)(6).\2074\ The Participants 
further stated that they intend to keep the definition of Error Rate 
the same as in Rule 613 and noted that it is the Compliance Thresholds 
\2075\ that relate to the CAT reporting performance of individual CAT 
Reporters. In response to commenters expressing uncertainty about the 
ability to achieve the Error Rates, the Participants explained that 
they performed a detailed analysis that not only considered current and 
historical OATS error rates, but also considered the magnitude of the 
new reporting requirements and the fact that many CAT Reporters had 
never previously been obligated to report data for audit trail 
purposes.\2076\ The Participants, however, acknowledged that actual 
experience with CAT itself will provide more accurate and applicable 
data for determining the appropriate Error Rate and pointed out that 
the Plan provides for various opportunities for the Error Rate to be 
reevaluated and reset.\2077\
---------------------------------------------------------------------------

    \2074\ Response Letter I at 45.
    \2075\ The Error Rate reports shall include each of the 
following--if the Operating Committee deems them necessary or 
advisable--``Error Rates by day and by delta over time, and 
Compliance Thresholds by CAT Reporter, by Reportable Event, by age 
before resolution, by symbol, by symbol type (e.g., ETF and Index) 
and by event time (by hour and cumulative on the hour)[.]'' See CAT 
NMS Plan, supra note 5, at Section 6.1(o)(v).
    \2076\ Response Letter I at 46.
    \2077\ Response Letter I at 46.
---------------------------------------------------------------------------

    The Commission has considered the comment letters received and the 
Participants' response and continues to believe that it is difficult to 
determine whether the Error Rates and processes in the Plan would 
constitute an accuracy improvement compared to current data. The 
Commission recognizes the uncertainty regarding the ability to achieve 
a ``de minimis'' post-correction Error Rate discussed by a

[[Page 84823]]

commenter and notes that post-correction errors are the ones more 
pertinent to the accuracy of data used in regulatory activities. While 
the Commission is concerned with the effect of the post-correction 
Error Rate on accuracy, it notes that, while uncertain, the Plan does 
require the Plan Processor to perform validations within three specific 
categories: File Validations (confirmation that the file is received in 
the correct format); Validation of CAT Data (checks of format, data 
type, consistency, range/logic, data validity, completeness, and 
timeliness); and Linkage Validation (checking the ``daisy 
chain'').\2078\ Specifically, in regard to Linkage Validation, the Plan 
seems to require validations that are more comprehensive than what 
FINRA runs on OATS data, where, as stated in the Notice, significant 
error rates in event linking are common because there is no cross-
participant error resolution process.\2079\ Further, the OATS error 
types described in the Baseline above \2080\ also suggest that the 
Plan's validations will be more comprehensive than the validations run 
on OATS data.
---------------------------------------------------------------------------

    \2078\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
7.2.
    \2079\ See Notice, supra note 5, at 30667.
    \2080\ See Section V.D.2.b(2)A, supra, which lists error types 
as rejects, unmatched exchange routes, inter firm received 
unmatched, inter-firm sent unmatched, out of sequence, and late 
reports.
---------------------------------------------------------------------------

    The Commission agrees with the commenters that expressed 
uncertainty about whether CAT would be able to achieve the 5% initial 
Error Rate, but also agrees with the Participants' response. In the 
Participants' analysis, the Participants considered the magnitude of 
the new reporting requirements and the fact that many CAT Reporters had 
never previously been obligated to report data for an audit trail when 
they set the initial Error Rate. Furthermore, as mentioned in the 
Notice, the Plan provides for various opportunities for the Error Rate 
to be reevaluated and reset after CAT Reporters have more experience 
with CAT.\2081\
---------------------------------------------------------------------------

    \2081\ Id. at 30682.
---------------------------------------------------------------------------

    Finally, the Commission agrees with the comment that OATS error 
rates may not be comparable to a CAT Error Rate because there is 
currently no reporting regime comparable to OATS for options, 
allocations, Customer Information, or market making reporting. In the 
Notice, the Commission discussed uncertainty in comparing OATS error 
rates to CAT Error Rates due, in part, to the increased scope of the 
CAT NMS Plan.\2082\
---------------------------------------------------------------------------

    \2082\ Id.
---------------------------------------------------------------------------

(3) Event Sequencing
A. Timestamp Granularity
    In the Notice, the Commission discussed its preliminary belief that 
the minimum timestamp granularity required by the Plan would result in 
some improvement in data accuracy, but that the level of improvement 
could be limited. The CAT NMS Plan requires timestamps to the 
millisecond.\2083\ This is consistent with Rule 613, which requires 
timestamps to reflect current industry standards and be at least to the 
millisecond.\2084\ Further, pursuant to Rule 613, if a CAT Reporter's 
system already utilizes timestamps in increments less than the minimum 
required by the Plan, the CAT Reporter must record timestamps in such 
finer increments.\2085\
---------------------------------------------------------------------------

    \2083\ See CAT NMS Plan, supra note 5, at Section 6.8(b).
    \2084\ 17 CFR 242.613(d)(3). This requirement does not apply to 
certain Manual Order Events, which are exempted from the requirement 
and are captured at one-second increments. Timestamp granularity on 
Manual Order Events is discussed separately in the Alternatives 
section.
    \2085\ Id.
---------------------------------------------------------------------------

    As the Commission discussed in the Notice, many of the systems from 
which regulators currently obtain data already capture timestamps in 
increments of milliseconds or less, meaning that there would be no 
improvement in timestamp granularity as compared to those 
systems.\2086\ However, to the extent that some current data sources 
report timestamps in increments coarser than a millisecond, which is 
the case for 12% of OATS records and all EBS records,\2087\ the 
Commission noted that it expected the CAT millisecond timestamp 
requirement to improve data granularity, and thereby allow regulators 
to more accurately determine the sequence of market events relative to 
surrounding events. However, the Commission also explained that the 
benefits from the more granular timestamps could be limited by the 
level of clock synchronization required by the Plan. In particular, the 
Commission explained that timestamp granularity would not be the 
limiting factor in sequencing accuracy, because recording events with 
timestamps with resolutions of less than one millisecond cannot help to 
sequence events occurring on different venues with clocks that may be 
100 milliseconds out of sync due to clock synchronization 
offsets.\2088\ Therefore, the benefits of timestamping order events at 
increments finer than a millisecond would be limited without also 
improving the clock synchronization standards of the Plan.
---------------------------------------------------------------------------

    \2086\ For example, OPRA allows for timestamps in nanoseconds, 
and the other SIPs require timestamps in microseconds for equity 
trades and quotes. See Notice, supra note 5, at Section 
IV.D.2.b.(2).
    \2087\ Current OATS rules require timestamps to be expressed to 
the nearest second, unless the member's system expresses time in 
finer increments. As of September 2014, approximately 12% of OATS 
records contain timestamps greater than one millisecond. EBS records 
either do not contain times or express timestamps in seconds. Id.
    \2088\ For example, under the requirements in the Plan, an order 
event at Broker-Dealer A could have a timestamp that is 1 
millisecond sooner than an order event at Broker-Dealer B even if 
the event at Broker-Dealer B actually occurred 99 milliseconds 
sooner. This could occur if Broker-Dealer A's systems are recording 
times 50 milliseconds ahead of NIST while Broker-Dealer B's systems 
are recording times 50 milliseconds behind NIST. Both broker-
dealers' systems would be within the Plan's allowable clock 
synchronization tolerance.
---------------------------------------------------------------------------

    The Commission discussed the benefits of the one second timestamp 
on manual orders and stated that it preliminarily believed that 
timestamp granularity of one second would be appropriate for manual 
orders, rather than a millisecond granularity, because recording Manual 
Order Events at the millisecond level would be ultimately arbitrary or 
imprecise due to human interaction.\2089\
---------------------------------------------------------------------------

    \2089\ See Notice, supra note 5, at 30684.
---------------------------------------------------------------------------

    Two commenters thought that a millisecond timestamp would be 
sufficient to achieve improvements in event sequencing.\2090\ One of 
these commenters suggested that requiring timestamps that are more 
granular than one millisecond for CAT Reporters who capture timestamps 
more granular than a millisecond would not yield regulatory benefits as 
it will result in a false sense of accuracy on event sequencing.\2091\ 
An additional commenter did not support this requirement, stating that 
it would be inequitable and would not serve a regulatory purpose.\2092\ 
On the other hand, two commenters supported the requirement that CAT 
Reporters report sub-millisecond timestamps if they capture them.\2093\ 
One commenter stated their belief that timestamp granularity ``should 
go hand-in-hand with how fast a market participant is allowed to 
conduct their HFT activities.'' \2094\ The other commenter stated that 
a ``significant portion of today's trades occur at microsecond 
intervals,'' and that the Plan's timestamp resolution ``will be 
insufficient to show the precise time of the reportable activities.'' 
\2095\ The commenter further stated that ``[f]or some practices, such 
as cancellations,

[[Page 84824]]

stuffing, and other ``noisy'' behaviors, the Plan should ``require a 
more precise granularity to more comprehensibly and accurately capture 
the frequency and scale of such practices.'' \2096\ One commenter 
stated their belief that stricter tolerances for the granularity of 
timestamps are already in effect at exchanges and ATSs that maintain an 
orderbook and did not believe it necessary to mandate timestamp 
tolerances for these entities since they already adhere to stricter 
tolerances for commercial reasons.\2097\
---------------------------------------------------------------------------

    \2090\ FIF Letter at 112; Data Boiler Letter at 21.
    \2091\ FIF Letter at 12.
    \2092\ SIFMA Letter at 35.
    \2093\ Data Boiler Letter at 21; Better Markets Letter at 8.
    \2094\ Data Boiler Letter at 21.
    \2095\ Better Markets Letter at 8.
    \2096\ Better Markets Letter at 8.
    \2097\ TR Letter at 7
---------------------------------------------------------------------------

    Two commenters indicated that timestamp granularity and clock-
offset tolerance for allocation timestamps should be at one 
second.\2098\ One commenter argued that the benefits of allocation time 
would not require millisecond precision while three commenters argued 
that allocations are not time-critical.\2099\
---------------------------------------------------------------------------

    \2098\ SIFMA Letter at 35; FIF Letter at 87, 89.
    \2099\ FSR Letter at 9; SIFMA Letter at 35; FIF Letter at 89.
---------------------------------------------------------------------------

    One commenter expressed that the irregularity in manual orders made 
it difficult to set a tolerance applicable to all manual orders and 
suggested that initially a timestamp tolerance of more than one second 
be allowed for manual orders.\2100\ However, several other commenters 
stated that one second is a reasonable standard for manual 
orders.\2101\
---------------------------------------------------------------------------

    \2100\ Data Boiler Letter at 21-22.
    \2101\ FIF Letter at 115; SIFMA Letter at 34; Better Markets 
Letter at 8; Response Letter I at 38. However, Better Markets 
expressed the concern that gaming of the system could occur by 
writing algorithms to make automated orders appear as manual orders.
---------------------------------------------------------------------------

    In their response, the Participants stated their belief that CAT 
Reporters should be required ``to report timestamps to the CAT at the 
granularity at which they are captured, even if that is more granular 
than that required by the Plan.'' They further stated their belief that 
capturing such granularity would increase the quality of data reported 
to the CAT.\2102\ With respect to the timestamps on Allocation Reports, 
the Participants recognized the practical issues raised by requiring 
timestamps for Allocation Reports and proposed to amend the Plan to 
permit CAT Reporters to report allocation timestamps with a granularity 
of one second.\2103\ With respect to manual order timestamps, the 
Participants stated that they continued to believe their proposed 
approach to Manual Order Events is appropriate.\2104\
---------------------------------------------------------------------------

    \2102\ Response Letter I at 28.
    \2103\ Response Letter I at 37.
    \2104\ Response Letter I at 38.
---------------------------------------------------------------------------

    The Commission has considered the comment letters received and the 
Participants' response, and as discussed in more detail above,\2105\ 
has amended the Plan so that Participants are required to adhere to a 
more stringent clock synchronization standard of 100 microseconds and 
allocation timestamps need only be reported in seconds instead of 
milliseconds. The Commission is updating its economic analysis to 
incorporate these modifications to the Plan. The Commission agrees with 
the commenter who pointed out that millisecond timestamps are 
insufficient to show the precise timestamp of certain activities and 
disagrees with commenters who stated that millisecond precision is 
sufficient to sequence events. As stated in the Notice, the Commission 
believes that a 1 millisecond timestamp granularity offers benefits 
over the Baseline, but that a more granular timestamp requirement, 
coupled with a more stringent clock synchronization requirement, would 
be needed to completely sequence the majority of unrelated market 
events. In response to the commenters who questioned the benefits of 
reporting the sub-millisecond timestamps if CAT Reporters capture them, 
the Commission agrees with the Participants that such a requirement 
will increase the quality of data reported to the CAT.
---------------------------------------------------------------------------

    \2105\ See Section IV.D.13, supra.
---------------------------------------------------------------------------

    Modifications to the Plan now require Participants to adhere to a 
more stringent clock synchronization standard of 100 microseconds (or 
less), and CAT Reporters to record timestamps in finer increments than 
1 millisecond if their systems utilize timestamps in such finer 
increments. Because, as discussed above,\2106\ Participants already 
operate pursuant to a clock synchronization standard of 100 
microseconds with regard to their electronic systems, and because many 
Participants already report timestamps in microseconds and nanoseconds 
in their direct feeds and are currently required to report timestamps 
in microseconds for equity trades and quotes, the Commission does not 
believe the clock synchronization amendment to the Plan will result in 
large accuracy improvements over current standards for timestamp 
granularity. However, the Commission is approving the Plan without 
further modifications for the reasons discussed in Section IV.D.13, 
above.
---------------------------------------------------------------------------

    \2106\ See Section IV.D.13.a(1), supra.
---------------------------------------------------------------------------

    In the Notice, the Commission did not explicitly consider timestamp 
granularity or clock synchronization standards for timestamps in 
Allocation Reports. However, in response to comments and modifications 
to the timestamp on Allocation Reports, the Commission now analyzes 
whether the modifications limit the improvements to accuracy. Based on 
the experience of its Staff, the Commission understands that 
allocations are conducted after a trade and that the allocation time 
can aid regulators in ways that do not require millisecond-level 
timestamps (or 50 millisecond clock offset tolerance). Further, the 
Commission agrees with the commenter's argument that allocations are 
not time-sensitive and the benefits from allocation timestamps do not 
require millisecond precision. Therefore, the Commission believes that 
requiring allocation times to be recorded in milliseconds (with 50 
millisecond offset tolerance) compared to seconds (with one second 
tolerance) would provide little, if any, additional regulatory benefit. 
Therefore, the Commission does not believe that this modification 
materially reduces the improvements to accuracy.
B. Clock Synchronization
    In the Notice, the Commission discussed its belief that the clock 
synchronization standards in the CAT NMS Plan are reasonably designed 
to improve the accuracy of market activity sequencing, but that the 
improvements to the percentage of sequenceable order events by Plan 
standards are modest and the requirements of the Plan may not be 
sufficient to completely sequence the majority of market events 
relative to all other events. In particular, the Commission conducted 
an analysis using MIDAS data that found that the current FINRA one-
second clock offset tolerance allows only an estimated 1.31% of 
unrelated order events \2107\ for listed equities and 6.97% of 
unrelated order events for listed options to be sequenced.\2108\ By 
comparison, the proposed 50 millisecond clock offset tolerance could 
accurately sequence an estimated 7.84% of unrelated order events for 
listed equities and 18.83% of unrelated order events for listed 
options.\2109\ Also, by comparison, the analysis found that a 100 
microsecond clock offset tolerance, if applied to all reporters, could 
accurately sequence an estimated 42.47% of unrelated order events for 
listed equities and 78.42% of unrelated order events for listed

[[Page 84825]]

options.\2110\ In the Notice, the Commission discussed its preliminary 
belief that the analysis suggests the standards required by the Plan do 
represent an improvement over the current standard but that the 
majority of unrelated market events would remain impossible to sequence 
based on the Plan's required clock synchronization standards.\2111\
---------------------------------------------------------------------------

    \2107\ See Notice, supra note 5, at 30669 for a definition of 
unrelated order events as it relates to this analysis and the 
analysis described there.
    \2108\ Id. at 30683. The Commission discussed that these 
estimates were upwardly biased.
    \2109\ Id. The Commission discussed that these estimates were 
upwardly biased.
    \2110\ A 100 microsecond clock offset tolerance will now be 
required of Participants due to an amendment to the Plan.
    \2111\ The Commission noted that the Plan itself states ``[f]or 
unrelated events, e.g., multiple unrelated orders from different 
broker-dealers, there would be no way to definitively sequence order 
events within the allowable clock drift as defined in Article 6.8,'' 
and that this limitation ``in turn limits the benefits of CAT in 
regulatory activities that require event sequencing, such as the 
analysis and reconstruction of market events, as well as market 
analysis and research in support of policy decisions, in addition to 
examinations, enforcement investigations, cross-market surveillance, 
and other enforcement functions.'' See Notice, supra note 5, at 
30683.
---------------------------------------------------------------------------

    The Commission also discussed in the Notice that, independent of 
the potential time clock synchronization benefits, order linking data 
captured in CAT should increase the proportion of order events that are 
accurately sequenced.\2112\ This is because some records pertaining to 
the same order can be sequenced by their placement in an order 
lifecycle (e.g., an order submission must have occurred before its 
execution) without relying on timestamps.
---------------------------------------------------------------------------

    \2112\ See Notice, supra note 5, at n. 555.
---------------------------------------------------------------------------

    Although the Commission received several comment letters related to 
clock synchronization, which are discussed in detail in Section 
IV.D.13.a above, only two letters commented on the effects of clock 
synchronization standards on event sequencing.\2113\ Both commenters 
agreed with the Commission's assessment that provisions in the CAT NMS 
Plan related to event sequencing would provide improvements in accuracy 
compared to what is currently achievable.\2114\ However, one of these 
commenters further stated their belief that unrelated events may not be 
sequenceable and stated that it is unclear what the regulatory 
relevance is of sequencing unrelated events across market 
centers.\2115\ The commenter went on to say that there was no evidence 
that lower clock synchronization tolerances would increase the accuracy 
of the audit trail; \2116\ however, the commenter also stated that 
``more precise timestamps provided by exchanges may be of benefit to 
the audit trail as corroborating evidence when sequencing events that 
terminate at an exchange.'' \2117\
---------------------------------------------------------------------------

    \2113\ FIF Letter at 97-111; Data Boiler Letter at 31.
    \2114\ FIF Letter at 101; Data Boiler Letter at 31.
    \2115\ FIF Letter at 101.
    \2116\ FIF Letter at 111.
    \2117\ FIF Letter at 98.
---------------------------------------------------------------------------

    The Commission has considered the comment letters received, the 
Participants' response, and amendments to the Plan. As explained below, 
the Commission continues to believe that requirements in the Plan 
related to event sequencing would provide improvements in accuracy 
compared to what is currently achievable, but that improvements are 
modest and the requirements to the Plan may not be sufficient to 
completely sequence the majority of market events relative to all other 
events. Orders sent from different broker-dealers to different CAT 
Reporters can only be sequenced in CAT Data according to their 
timestamp. If the clocks of CAT Reporters are not synchronized with 
sufficient precision, it is impossible to definitively sequence these 
events. The Plan acknowledges this limitation and states, ``[f]or 
unrelated events, e.g., multiple unrelated orders from different 
broker-dealers, there would be no way to definitively sequence order 
events within the allowable clock drift as defined in Article 6.8.'' 
\2118\ The Commission disagrees with the comment that sequencing 
unrelated market events has no regulatory relevance. As discussed in 
the Notice, the ability to sequence market events is crucial to the 
efficacy of detecting and investigating some types of manipulation, 
particularly those involving high frequency trading, those in liquid 
stocks in which many order events can occur within microseconds, and 
those involving orders spread across various markets. The Commission 
also disagrees with this commenter's assessment that more stringent 
clock synchronization standards would not increase the accuracy of the 
audit trail. As demonstrated by the Commission's analysis in the 
Notice, if clock synchronization standards were made more stringent, 
some of the many market events at separate market centers that occur 
within small time windows would become sequenceable, which would 
increase the accuracy of the audit trail.
---------------------------------------------------------------------------

    \2118\ See CAT NMS Plan, supra note 5, at Appendix C-25.
---------------------------------------------------------------------------

    As discussed in more detail above,\2119\ the Commission has amended 
the Plan so that Participants are required to adhere to a more 
stringent clock synchronization standard of 100 microseconds with 
regard to electronic systems, excluding certain manual systems. In the 
Participants' response, they noted that all Participants currently 
operate pursuant to a clock synchronization standard of 100 
microseconds with regard to their electronic systems, so that the 
amended requirement is already met by the Participants.\2120\ In 
addition, as discussed in more detail above,\2121\ the Commission has 
approved a proposed rule change by FINRA that reduces the 
synchronization tolerance for computer clocks of firms that record 
events in NMS Securities to 50 milliseconds.\2122\ Because broker-
dealers that are FINRA members are currently required to adhere to a 
clock synchronization standard of 50 milliseconds, and because 
Participants already adhere to a clock synchronization standard of 100 
microseconds, the Commission does not believe the 50 millisecond clock 
synchronization requirement of CAT Reporters and the more stringent 
clock synchronization requirement of 100 microseconds for Participants, 
as specified in the amended Plan, would substantially change the 
ability of regulators to accurately sequence unrelated market events 
over what is currently achievable using timestamps alone.\2123\ 
However, the Commission is approving the Plan without further 
modifications for the reasons discussed in Section IV.D.13, above. 
Further, to the extent CAT captures more events than are currently 
captured, such as CAT Reportable Events by broker-

[[Page 84826]]

dealers that are not FINRA members (see Section V.E.1.a.(1)), 
regulators will be able to accurately sequence a proportion of those 
events, which will increase the overall number of sequenced 
events.\2124\ In addition, the Commission continues to believe that, 
independent of the potential clock synchronization benefits, the order 
linking data that would be captured by the CAT should increase the 
proportion of events that could be sequenced accurately.\2125\
---------------------------------------------------------------------------

    \2119\ See Section IV.D.13, supra.
    \2120\ Response Letter II at 4-5.
    \2121\ See Section IV.D.13.a(1), supra.
    \2122\ See Securities Exchange Act Release No. 77565 (April 8, 
2016), 81 FR 22136 (April 14, 2016).
    \2123\ Although not currently required in the Plan, the 
Commission believes there would be additional benefit to event 
sequencing if off-exchange execution venues, including alternative 
trading systems and broker-dealer internalizers, were required to 
adhere to a more stringent clock synchronization standard. As 
discussed in Section IV.D.13.a, the Commission understands that 
certain Industry Members, such as ATSs and broker-dealers that 
internalize off-exchange order flow, today adhere to a finer clock 
synchronization standard. As the Participants conduct their annual 
reviews, the Commission expects them to consider proposing new clock 
synchronization standards whenever they determine the industry 
standard for CAT Reporters, or certain categories or systems 
thereof, has become more granular than required by the Plan at that 
time. In determining the appropriate industry standards for clock 
synchronization, the Commission has amended the Plan so that the 
SROs should apply industry standards based on the type of CAT 
Reporter or system, rather than the industry as a whole. Varied 
requirements would segment the broker-dealer community, and one 
commenter stated a desire to ``avoid unnecessary market 
segmentation'' with regard to clock synchronization. See FSR Letter 
at 8. See also Section IV.D.13.a(1), supra. The Commission notes, 
however, that these venues are already segmented with respect to 
their position within the broker-dealer and also with respect to 
other broker-dealers that do not provide these services.
    \2124\ Note that broker-dealers that are not FINRA members are 
not subject to FINRA's clock synchronization requirements and do not 
submit reports to OATS. Currently, their activity, to the extent it 
is captured, is captured and timestamped by exchanges and other 
FINRA members that receive their orders.
    \2125\ As discussed in the Notice, this reflects the fact that 
some records pertaining to the same order could be sequenced by 
their placement in an order without relying on timestamps. This 
information may also be used to partially sequence surrounding 
events. See Notice, supra note 5, at n.555.
---------------------------------------------------------------------------

(4) Linking and Combining Data
    In the Notice, the Commission discussed its preliminary belief that 
the requirements of Rule 613 and the Plan related to data linking would 
result in improvements to the accuracy of the data available to 
regulators, but the extent of the improvement would depend on the 
accuracy of the linking algorithm and the reformatting process that the 
Plan Processor would eventually develop. Specifically, the Commission 
discussed its belief that the requirement that data be stored in a 
uniform format would eliminate the need for regulators to reformat the 
data, and that storing data in a linked format removes the need for 
regulators to link information from multiple lifecycle events of an 
order or orders themselves, which could further reduce errors and 
increase the usability of the data. Furthermore, the Commission 
discussed its belief that the Plan would significantly improve the 
ability of regulators to link order events compared to OATS, and would 
link this activity to specific customers, unlike current audit trail 
data. However, the Commission also noted that the CAT NMS Plan does not 
provide sufficiently detailed information for the Commission to 
estimate the likely error rates associated with the linking process 
required by the CAT NMS Plan.\2126\ Accordingly, while the centralized 
linking should generally promote efficiencies and accuracies, the 
Commission stated that these uncertainties make it difficult to gauge 
the degree to which the process for linking orders across market 
participants and SROs would improve accuracy compared to existing data, 
including OATS.\2127\
---------------------------------------------------------------------------

    \2126\ While the 5% Error Rate covers data from CAT Reporters, 
the Plan Processor could create errors as well, for example, through 
the linking process. Further, the Plan does not include details on 
how the Plan Processor would perform the linking process, identify 
broken linkages, and seek corrected reports from CAT Reporters to 
correct broken linkages. Instead, the Plan defers key decisions 
regarding the validation process until the selection of a Plan 
Processor and the development of Technical Specifications. The CAT 
NMS Plan describes the Plan Processor's responsibility for creating 
the Technical Specifications. See CAT NMS Plan, supra note 5, at 
Section 6.9.
    \2127\ The Commission notes that the Plan Processor is required 
to create a quality assurance testing environment in which, during 
industry-wide testing, the Plan Processor provides linkage 
processing of data submitted, the results of which are reported back 
to Participants and to the Operating Committee for review. Id. at 
Appendix D, Section 1.2. This may help identify challenges in the 
linking process and allow for their early resolution.
---------------------------------------------------------------------------

    The Commission also explained that uncertainties prevented it from 
determining whether the process for converting data into a uniform 
format at the Central Repository would improve the accuracy of the data 
over existing audit trail accuracy rates.\2128\ The Plan includes two 
alternative approaches to data conversion. In the first, called 
Approach 1, CAT Reporters would submit data to the Central Repository 
in an existing industry standard protocol of their choice such as the 
Financial Information eXchange (``FIX'') protocol. In Approach 2, CAT 
Reporters would submit data to the Central Repository in single 
mandatory specified format, such as an augmented version of the OATS 
protocol. Under Approach 1, the data must be converted into a uniform 
format at the Central Repository in a second step. Under Approach 2, 
the data is already in a uniform format at the time of submission. The 
Plan defers the decision regarding which approach to take until the 
selection of a Plan Processor and the development of Technical 
Specifications. The Commission explained its preliminary belief that 
Approach 1 would likely result in a lower Error Rate than Approach 2 
because of increased efficiency and accuracy due to specialization by 
the Plan Processor.\2129\ However, because of uncertainties regarding 
expected Error Rates and error rates in current data, the Commission 
was unable to evaluate the degree to which the approach would improve 
data accuracy relative to currently available data.\2130\
---------------------------------------------------------------------------

    \2128\ See Notice, supra note 5, at 30686.
    \2129\ Id.
    \2130\ Id.
---------------------------------------------------------------------------

    The Commission also discussed its belief that the Plan's 
requirement for standardized Allocation Reports that consistently and 
uniquely identify Customers and CAT Reporters should improve the 
linkability of allocation information compared to current data, despite 
the limitation of direct linkage to order lifecycles, particularly in 
scenarios where potentially violative conduct is carried out by market 
participants operating through multiple broker-dealers.\2131\ The 
Commission stated that this moderate improvement in the linkability of 
allocation data should improve regulators' ability to identify market 
participants who commit violations related to improper subaccount 
allocations.
---------------------------------------------------------------------------

    \2131\ Id.
---------------------------------------------------------------------------

    The Commission received two comment letters that agreed with the 
Commission's assessment that Plan provisions related to data linking 
would increase the overall accuracy of data available to regulators. 
One of these commenters stated that, ``the provisions in the CAT NMS 
Plan (linkage requirements, daisy chains, Firm Designated ID) will 
result in a more complete and accurate linking of order events across 
market participants and SROs.'' \2132\ The other commenter agreed that 
data accuracy would improve.\2133\
---------------------------------------------------------------------------

    \2132\ FIF Letter at 96.
    \2133\ Data Boiler Letter at 31.
---------------------------------------------------------------------------

    Commenters also opined on whether data should be stored in a 
standardized format and on the relative economic effects of different 
approaches to data ingestion formats. One commenter stated that the 
Plan's requirement to store data in a standardized format would 
increase accuracy within that format, but on the other hand, 
transformation by CAT Reporters could introduce errors during the data 
submission process.\2134\ The commenter further stated that using 
original data reduces the chance of introducing noise.\2135\ Several 
commenters indicated that existing and widely used formats or protocols 
for data ingestion would promote better data accuracy.\2136\ Some also 
noted that without a uniform data ingestion format, data quality would 
suffer.\2137\
---------------------------------------------------------------------------

    \2134\ Data Boiler Letter at 31.
    \2135\ Data Boiler Letter at 18.
    \2136\ FIF Letter at 90-91; FIX Letter at 1; ICI Letter at 13; 
Better Markets Letter at 7-8.
    \2137\ Better Markets Letter at 7-8; UnaVista Letter at 2-3.
---------------------------------------------------------------------------

    The Commission received one comment related to the ability to link 
allocations under the Plan. Specifically, the commenter stated that an 
allocation report is ``undeniably useful for analytic[al] purpose[s],'' 
but noted challenges in linking account and subaccount information to 
which an execution is allocated.\2138\
---------------------------------------------------------------------------

    \2138\ Data Boiler Letter at 24-25.

---------------------------------------------------------------------------

[[Page 84827]]

    The Commission has considered the comment letters received, and 
continues to believe that the requirements of the Plan related to data 
linking would result in improvements to the accuracy of the data 
available to regulators. The Commission agrees with the commenter who 
stated that transforming data into a uniform format can introduce 
errors, but the Commission believes such errors will be less common and 
severe than those introduced currently by multiple regulators 
independently linking together many different data sources with 
different formats.\2139\ The Commission agrees with the commenters that 
stated requiring existing and widely used formats for data ingestion 
would promote the accuracy of data. Because the Plan does not mandate 
an ingestion format, uncertainty exists as to what ingestion format (or 
formats) will be required and whether the ingestion format(s) 
ultimately selected will promote accuracy as much as alternatives. The 
Commission acknowledges this uncertainty. In response to the commenters 
that stated that data quality would suffer without a uniform data 
ingestion format, as specified in Approach 2, the Commission continues 
to believe that the benefits to data accuracy are potentially greater 
using Approach 1, where data is ingested in an existing industry 
standard protocol of the submitter's choice and subsequently converted 
to a uniform format at the Central Repository. The Commission believes 
this approach is more likely to benefit data accuracy because, as 
stated by a commenter, allowing the use of original data eliminates the 
introduction of errors and specialization by the Plan Processor should 
keep to a minimum the number of errors introduced during the conversion 
process.
---------------------------------------------------------------------------

    \2139\ See Section V.D.2.b.(2).C, supra.
---------------------------------------------------------------------------

    With regards to the commenter who noted the challenges in linking 
allocation and sub-account information with executions using the Plan's 
approach, the Commission agrees that this approach may result in 
certain drawbacks, such as having access to less accurate allocation 
linkages compared to the approach under Rule 613, which required a link 
between allocations and executions.\2140\ However, the Commission 
continues to believe, as set out in the Notice, that the Plan's 
Allocation approach will provide regulators with the necessary 
information to detect abuses in the allocation process without placing 
undue burdens on broker-dealers.
---------------------------------------------------------------------------

    \2140\ In the Notice, the Commission discussed an alternative 
that would require the Rule 613 approach to allocation reporting 
linking. The Commission stated that linking allocations to order 
lifecycles would improve accuracy for many situations, particularly 
in one-to-one, one-to-many, and many-to-one allocations. Further, 
the Commission explained that broker-dealers likely already maintain 
records that allow them to ensure that the allocations receive fair 
prices based on market executions, and requested comment on whether 
those systems could provide a key to accurately link allocations to 
lifecycles in many-to-many allocations. See Notice, supra note 5, at 
30757-58. One commenter, however, stated that the ``many-to-many 
relationships [between executions and allocations] do not allow 
unique linkages for all situations.'' See FIF Letter at 90. This 
commenter did not refute the accuracy improvements that could come 
from linking allocations to order lifecycles. Another commenter 
opined that broker-dealers should and can track order allocation 
information, including in the many-to-many situation. See Data 
Boiler at 40. Therefore, the Commission continues to believe that 
such linking would be beneficial relative to the Plan. However, the 
Commission also believes that allocation linking would be costly to 
implement, a belief supported by the commenter who provided 
additional information on the source of such costs. See FIF Letter 
at 90.
---------------------------------------------------------------------------

(5) Customer and Reporter IDs
    In the Notice, the Commission discussed its preliminary belief that 
the inclusion of the unique Customer and CAT Reporter Identifiers 
described in the CAT NMS Plan would increase the accuracy of customer 
and broker-dealer information in data regulators use and provide 
benefits to a broad range of regulatory activities that involve audit 
trail data.\2141\ The Commission explained that it is currently 
difficult for regulators to identify the trading of a single customer 
across multiple market participants because many existing data sources 
use inconsistent definitions and mappings across market centers.\2142\ 
In addition, the Commission discussed how the Customer Information 
Approach specified in the CAT NMS Plan requires the Plan Processor to 
create a unique Customer-ID that would be consistent across that 
Customer's activity regardless of the originating broker-dealer.\2143\ 
The Commission discussed its preliminary belief that the Customer-ID 
approach constitutes a significant improvement relative to the Baseline 
because it would consistently identify the Customer responsible for 
market activity, obviating the need for regulators to collect and 
reconcile Customer Identifying Information from multiple broker-
dealers.
---------------------------------------------------------------------------

    \2141\ See Notice, supra note 5, at 30686-88.
    \2142\ Id.
    \2143\ Id.
---------------------------------------------------------------------------

    Also, in the Notice, the Commission discussed the challenges that 
regulators face in tracking broker-dealers' activities across markets 
due to inconsistent identifiers and a lack of a centralized 
database.\2144\ The CAT NMS Plan calls for the use of CAT-Reporter-IDs, 
which would be assigned to each CAT Reporter by the Plan Processor in 
the CAT Data.\2145\ In the Notice, the Commission stated that it 
preliminarily believed that the existing identifier approach specified 
in the CAT NMS Plan would improve the accuracy of tracking information 
regarding entities with reporting obligations, namely broker-dealers 
and SROs.
---------------------------------------------------------------------------

    \2144\ Id.
    \2145\ Id.
---------------------------------------------------------------------------

    One commenter stated that there are ``flaws to the approaches of 
CAT Customer and Reporter Identifiers, thus it has little benefit to 
improve the accuracy of information.'' \2146\ The commenter, however, 
did not list these flaws and did not provide specific reasons why the 
identifiers would not improve data accuracy. Another commenter stated 
that assigning a unique ID to ``every person that ever trades a 
security'' could render the data difficult to use, and that greater 
difficulties could arise from allowing broker-dealers to assign their 
own unique customer IDs.\2147\ However, the commenter did not specify 
in detail what difficulties would arise or why the data would be 
difficult to use. That commenter noted that unique IDs for every client 
might be unnecessary, and suggested applying them only to those with a 
certain threshold of trading activity.\2148\ Two commenters suggested 
that the use of the LEI would improve the accuracy of Customer 
Identifying Information. One commenter suggested that using LEIs would 
allow market participants to be ``easily identified,'' and also 
suggested that the LEI should be used to identify customers in 
conjunction with other recognized personal identifiers, to promote 
accurate identification.\2149\ Another stated that using the LEI would 
allow for ``unambiguous identification'' of entities submitting 
information to the CAT system and would allow the SEC ``to be clear 
about the identity of entities it is monitoring.'' \2150\
---------------------------------------------------------------------------

    \2146\ Data Boiler Letter at 31.
    \2147\ Anonymous Letter I at 3.
    \2148\ Anonymous Letter I at 3.
    \2149\ UnaVista Letter at 3.
    \2150\ SIFMA Letter at 37.
---------------------------------------------------------------------------

    In their response, the Participants stated that, based on 
discussions with the DAG, they agreed with the commenters that it would 
be reasonable to require an Industry Member to provide its own LEI and 
the LEIs of its customers to the CAT if the Industry Member has or 
acquires such LEIs.\2151\

[[Page 84828]]

As discussed above, the Commission agrees with the commenters and the 
Participants and has modified the Plan to require the reporting of LEIs 
for Customers and Industry Members in certain circumstances.\2152\
---------------------------------------------------------------------------

    \2151\ Response Letter II at 5.
    \2152\ See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra, for a 
description of the LEI reporting requirements in the Plan.
---------------------------------------------------------------------------

    The Commission has considered the comment letters received, the 
Participants' response, and modifications to the Plan. The Commission 
believes that limiting unique customer IDs to clients meeting a certain 
threshold of trading activity would significantly limit the benefits of 
the Plan in terms of accuracy.\2153\ As discussed in more detail below, 
the Commission expects consistent Customer IDs to improve the ability 
of regulators to identify insider trading, manipulation and other 
potentially violative activity.\2154\ The commenter that stated that 
assigning a unique ID to ``every person that ever trades a security'' 
could render the data difficult to use \2155\ did not explain in detail 
what difficulties might arise. Similarly, the commenter that suggested 
that the accuracy benefits of the Plan would be limited due to ``flaws 
to the approaches of CAT Customer and Reporter Identifiers'' \2156\ 
likewise did not provide any details as to these flaws or how they 
would affect the accuracy of the CAT Data. In light of the lack of 
specificity in these comment letters, the Commission continues to 
believe that the inclusion of unique Customer and Reporter Identifiers 
as described in the CAT NMS Plan would increase the accuracy of 
customer and broker-dealer information in data used by regulators.
---------------------------------------------------------------------------

    \2153\ Anonymous Letter I at 3.
    \2154\ See Section IV.E.2.c., infra.
    \2155\ Anonymous Letter I at 3.
    \2156\ Data Boiler Letter at 31.
---------------------------------------------------------------------------

    The Commission is, however, updating its economic analysis to 
recognize modifications to the Plan to require the reporting of LEI as 
part of the Customer Identifying Information if the Customer has an LEI 
and the Industry Member has collected it, and as a part of identifying 
information for Industry Members in addition to the CRD number, if the 
Industry Member has an LEI.\2157\ Currently, none of the sources of 
trade and order data discussed above in the Baseline include LEIs for 
Customers or Industry Members. Based on information provided by 
commenters who suggested the inclusion of LEI,\2158\ supplemented by 
Commission Staff experience, the Commission believes that the inclusion 
of an LEI in CAT Data will improve the accuracy of CAT Data by enabling 
the linking of the data to other data sources such as foreign 
jurisdictions and domestic data not included in CAT at this time (e.g., 
futures and security-based swaps), as LEIs become more widely used by 
regulators and the financial industry. In addition, the Commission 
expects the modification to improve the accuracy of the data by 
providing more information about the identities of Industry Members and 
Customers, including--as the LEI system starts to collect parent and 
subsidiary information--their relationships with other entities.\2159\ 
The Commission notes, however, that the benefits of the LEI information 
will be limited insofar as the reporting of an LEI is required for 
Industry Members only where the Members already have an LEI, and for 
Customers only where the Customer has an LEI and the Industry Member 
has or acquires the LEI.\2160\
---------------------------------------------------------------------------

    \2157\ See Sections IV.D.4.a and IV.D.4.b, supra.
    \2158\ SIFMA Letter at 36-37; DTCC Letter at 1-6; UnaVista 
Letter at 3; Better Markets Letter at 8; Data Boiler Letter at 22.
    \2159\ SIFMA Letter at 37.
    \2160\ See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra.
---------------------------------------------------------------------------

(6) Aggregation
    In the Notice, the Commission discussed its belief that most CAT 
Data would be disaggregated data and that therefore the CAT Data would 
not suffer from the limitations of the aggregated data sources that 
regulators must currently use.\2161\ Currently, subaccount allocation 
data and issuer repurchase data exist in forms that are aggregated and 
thus these data sources are limited for use in certain regulatory 
activities and interests.\2162\ In particular, neither data type may 
necessarily indicate the individual executions. The Commission 
discussed its preliminary belief that the CAT NMS Plan would improve 
the accuracy of allocation data compared to existing data available to 
regulators, because it would provide disaggregated information on the 
identity of the security, the number of shares and price allocated to 
each subaccount, when the allocation took place, and how each Customer 
subaccount is associated with the master account. This would more 
accurately reflect which Customer ultimately received the shares that 
were purchased in a particular trade. The Commission anticipated that 
regulators may use CAT Data for some purposes that they use cleared 
data for now because the CAT Data would be significantly less 
aggregated. Finally, the Commission discussed its belief that because 
the Plan would require that the Plan Processor link Customer 
information to the order lifecycle and the report would identify as 
Customers those issuers that are repurchasing their stock in the open 
market,\2163\ CAT Data would be more accurate and more granular and 
there would be more data than what is available currently for open 
market issuer repurchases, which consists of monthly aggregations of 
those issuer repurchases.
---------------------------------------------------------------------------

    \2161\ See Notice, supra note 5, at 30688-89.
    \2162\ Id. at Section IV.D.2.b.(2)E. Item 703 of Regulation S-K 
requires issuers to report aggregated issuer repurchase data to the 
Commission on an annual and quarterly basis in Forms 10-K and 10-Q. 
17 CFR 229.703.
    \2163\ See CAT NMS Plan, supra note 5, at Section 6.4(d)(iv).
---------------------------------------------------------------------------

    The Commission did not receive any comments regarding its analysis 
of data aggregation in the Notice, the Participants' response did not 
specifically address its analysis of data aggregation, and the 
Commission does not believe that modifications to the Plan warrant 
changes to this aspect of the economic analysis. The Commission 
continues to believe that CAT Data would constitute an improvement over 
current data sources because it would be disaggregated data that would 
not suffer from the limitations that characterize some of the 
aggregated data sources that regulators must currently use. 
Specifically, the Commission continues to believe that the Plan would 
promote more effective and efficient investigation by regulators of 
subaccount allocation issues and issuer repurchase activity.
c. Accessibility
    In the Notice, the Commission discussed its belief that the Plan, 
if approved, would substantially improve the accessibility \2164\ of 
regulatory data by providing regulators with direct access to the 
consolidated CAT Data, including some data elements that currently take 
weeks or months to obtain. However, the Commission also explained that 
there is some uncertainty regarding the process for regulatory access 
under the Plan, which creates uncertainty as to the degree of the 
expected improvement.\2165\
---------------------------------------------------------------------------

    \2164\ Accessibility refers to ``how the data is stored, how 
practical it is to assemble, aggregate, and process the data, and 
whether all appropriate regulators could acquire the data they 
need.'' See Notice, supra note 5, at 30689.
    \2165\ Id. at 30689-91.
---------------------------------------------------------------------------

(1) Direct Access to Data
    The Commission recognized in the Notice that improving 
accessibility of regulatory data relative to the Baseline requires 
ensuring that enough SRO and Commission Staff members are able to

[[Page 84829]]

use the direct access system supplied by the Central Repository when 
they need it. The Commission discussed its belief that the ability to 
use the direct access system depends, among other things, on how user-
friendly the system is, whether it has enough capacity for the expected 
use of the system, and whether it contains the functionality that the 
SRO and Commission Staff require. However, the Commission preliminarily 
believed that ``the minimum requirements for the direct access system 
ensure that the Plan will improve on the Baseline of access to current 
data, including the process of requesting data.\2166\
---------------------------------------------------------------------------

    \2166\ Id. at 30689.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed in detail the minimum 
functional and technical requirements, as set out in Appendix D of the 
Plan.\2167\ In terms of capacity, the Commission noted, among other 
things, that the Central Repository must be able to support a minimum 
of 3,000 regulatory users within the system, 600 of which might be 
accessing the system concurrently (which must be possible without an 
unacceptable decline in system performance). In terms of functionality, 
the Commission noted that two types of query interfacing must be 
supported--an online targeting query tool and a user-defined direct 
query tool that allows for bulk extraction.\2168\ The Commission 
further noted that all queries must be able to be run against raw 
(i.e., unlinked) or processed data, or both, and that a variety of 
minimum performance metrics apply to those queries.
---------------------------------------------------------------------------

    \2167\ Id. at 30689-90, citing CAT NMS Plan, supra note 5, at 
Appendix D, Section 8.
    \2168\ The Commission further explained that the online 
targeting query tool must include a date or time range, or both, and 
allow users to choose from a broad menu of 26 pre-defined selection 
criteria (e.g., data type, listing market, size, price, CAT-
Reporter-ID, Customer-ID, or CAT-Order-ID), with more to be defined 
at a later date. Results must be viewable in the tool or 
downloadable in a variety of formats and support at least a result 
size of 5,000 or 10,000 records, respectively, with a maximum result 
size to be determined by the Plan Processor. With the user-defined 
direct query or bulk extraction, CAT must be able to support at 
least 3,000 daily queries, including 1,800 concurrently, and up to 
300 simultaneous query requests, with no performance degradation. 
See Notice, supra note 5, at 30689-90.
---------------------------------------------------------------------------

    The Commission noted that the direct access facilitated by 
provisions of the CAT NMS Plan is reasonably designed to substantially 
reduce the number of ad hoc data requests and provide access to 
substantial data without the delays and costly time and knowledge 
investments associated with the need to create and respond to data 
requests.\2169\ The Commission believed that this would dramatically 
reduce the hundreds of thousands of requests that regulators must make 
each year in order to obtain data, thus reducing the burden on the 
industry. For example, the Commission noted that regulators do not have 
direct access to EBS or trade blotter data and therefore they must 
request such data when needed for regulatory tasks. As a result, in 
2014 the Commission made 3,722 EBS requests that generated 194,696 
letters to broker-dealers for EBS data. Likewise, the Commission 
understood that FINRA requests generate about half this number of 
letters. In addition, the Commission noted that for examinations of 
investment advisers and investment companies, it makes approximately 
1,200 data requests per year. The Commission also discussed its belief 
that, in addition to decreasing the amount of time currently required 
for regulators to access data sources, direct access to the CAT Data 
should decrease the costs that many regulators and market participants 
incur in either requesting data or fulfilling requests for data. 
Furthermore, the Commission discussed its belief that the Plan would 
also permit regulators to directly access customer information, which 
could improve the ability of SROs to conduct surveillance.\2170\
---------------------------------------------------------------------------

    \2169\ Id. at 30690.
    \2170\ Id.
---------------------------------------------------------------------------

    The Commission also discussed its belief that in some dimensions of 
accessibility, uncertainties exist that could affect the degree of the 
expected improvement to accessibility. In particular, while the Plan 
provides detail on the method of access and the types of queries that 
regulators could run, many of the decisions regarding access have been 
deferred until after the Plan Processor is selected and finalizes the 
Technical Specifications.\2171\ For instance, decisions regarding 
exactly how regulators would access the data beyond providing them with 
query tools; how user-friendly these tools will be; whether the Plan 
Processor would host a server workspace that regulators could use; and 
whether regulators can perform dynamic searches, data extraction, and 
offline analysis have not yet been decided. Nonetheless, the Commission 
stated that the requirements included in the Plan describe a system 
that, once implemented, would result in the ability to query 
consolidated data sources, which represents a significant improvement 
over the currently available systems. This substantial reduction in 
data delays and costly data investments would permit regulators to 
complete market reconstructions, analyses, and research projects, as 
well as investigations and examinations, more effectively and 
efficiently, and would lead to improved productivity in the array of 
regulatory matters that rely on data, which should lead to improved 
investor protection.\2172\
---------------------------------------------------------------------------

    \2171\ Id. at 30691.
    \2172\ Id.
---------------------------------------------------------------------------

    One commenter argued that ``the online targeted query tool and 
user-defined direct queries and bulk extracts methods will not enable 
regulatory staff to use the data.'' \2173\ This is because these 
methods do not embed real-time analytics that would allow the system to 
automatically red-flag suspicious trade activities.\2174\ The same 
commenter agreed that the direct access regulators will have to CAT 
Data ``would help reduce the number of ad-hoc data requests.'' \2175\ 
The commenter estimated that such a reduction in the number of data 
requests would result in cost savings of ``about 5%, but definitely not 
over 10%.'' \2176\ However, the commenter did not provide any 
additional information or details to support that estimate.
---------------------------------------------------------------------------

    \2173\ Data Boiler Letter at 26.
    \2174\ Data Boiler Letter at 10-13.
    \2175\ Data Boiler Letter at 31.
    \2176\ Data Boiler Letter at 38.
---------------------------------------------------------------------------

    A second commenter also agreed that the reduction in ad hoc data 
requests would result in cost savings, stating that the costs 
associated with responding to EBS requests ``will be reduced over time 
as regulators would no longer need to make EBS inquiries for data that 
already resides in CAT.'' \2177\ However, that commenter did not 
provide any specific estimates of these savings.
---------------------------------------------------------------------------

    \2177\ FIF Letter at 34-35.
---------------------------------------------------------------------------

    Two commenters agreed with the Commission that there is some 
uncertainty regarding the process for regulatory access to CAT 
Data.\2178\ In particular, one commenter stated that the Plan does not 
provide details of the technical or procedural mechanisms on how the 
regulators will access the online targeted query tool or submit user-
defined direct queries.\2179\ The commenter noted that the Plan does 
not provide any specifics on the types of technologies or systems that 
would be required for regulators to download the data or connect to the 
API to be made available by the Plan Processor.\2180\ Furthermore, the 
commenter pointed out that although the Plan Processor is required to 
support a minimum of 300 simultaneous query requests with no 
performance degradation, the Plan does

[[Page 84830]]

not define a baseline performance for dynamic search against which the 
performance degradation could be compared.\2181\ The commenter noted 
that the Plan requires the Plan Processor to provide such details at 
least six months before the Participants begin reporting data to the 
Central Repository.\2182\ The commenter stated that there is a risk 
that six months will be insufficient for regulators to implement any 
changes necessary in order to be able to use the tools offered by the 
Plan Processor, and that this could delay regulators' ability to access 
the CAT Data.\2183\ The other commenter noted generally that there are 
insufficient details regarding how regulators would access, use and 
analyze CAT Data, and how regulators' end-use requirements would be 
addressed.\2184\
---------------------------------------------------------------------------

    \2178\ SIFMA Letter at 32, 39-41; Data Boiler Letter at 26.
    \2179\ SIFMA Letter at 39.
    \2180\ SIFMA Letter at 41.
    \2181\ SIFMA Letter at 40.
    \2182\ SIFMA Letter at 39.
    \2183\ Id.
    \2184\ Data Boiler Letter at 26.
---------------------------------------------------------------------------

    In their response, the Participants argued that the Plan does 
provide sufficient detail regarding regulatory access to CAT 
Data.\2185\ In particular, the Participants noted that Section 8 of 
Appendix D of the Plan describes various tools that will be used for 
surveillance and analytics. In addition, the Participants noted that 
the Plan states that the Plan Processor will provide an open API that 
allows regulators to use analytic tools and will permit regulators to 
use ODBC/JDBC drivers to access the CAT Data.\2186\
---------------------------------------------------------------------------

    \2185\ Response Letter I at 42.
    \2186\ Response Letter I at 42, citing CAT NMS Plan, supra note 
5, at Appendix D, Section 8.2. A discussion of the types of data 
tools that Bidders proposed to support can be found in Appendix C, 
Section A.2(b) of the Plan. ODBC (Open Database Connectivity) is an 
open standard API (Application Programming Interface) for accessing 
a database. JDBC (Java Database Connectivity) is an API for the 
programming language Java, which defines how a client may access a 
database.
---------------------------------------------------------------------------

    The Commission has considered the comments it received regarding 
the potential benefits of the CAT NMS Plan in terms of the 
accessibility of regulatory data, as well as the Participants' 
response. Commenters did not provide any additional information or 
analysis that changes the Commission's conclusions as set out in the 
Notice, and there have been no modifications to the Plan that would 
warrant changes.
    With respect to the comment that an online targeted query tool and 
a user-defined direct query tool will not enable regulatory Staff to 
use CAT Data,\2187\ the Commission disagrees with the commenter's 
assertion that regulators cannot benefit from direct access to CAT Data 
unless CAT embeds real-time analytics. In the Notice, the Commission 
discussed two ways in which regulators could benefit from having direct 
access to CAT Data facilitated by the availability of an online 
targeted query tool and a user-defined direct query tool.\2188\ First, 
direct access to CAT Data could substantially reduce the number of ad 
hoc data requests and decrease the costs that many regulators currently 
incur in requesting data. Second, the Plan would permit regulators to 
directly access customer information, which could improve the ability 
of SROs to conduct surveillance, among other benefits discussed 
below.\2189\ Because these benefits of direct access do not depend on 
the ability of CAT to embed real-time analytics, the Commission 
continues to believe that the methods of direct access specified in the 
Plan will improve the accessibility of regulatory data relative to the 
Baseline.
---------------------------------------------------------------------------

    \2187\ Data Boiler Letter at 10-13, 26.
    \2188\ See Notice, supra note 5, at 30690.
    \2189\ See Section V.E.2, infra, for a discussion of various 
regulatory activities that direct access to data will improve.
---------------------------------------------------------------------------

    With respect to the comment that the reduction in the number of 
data requests would result in cost savings to SROs of ``about 5%,'' but 
``definitely not more than 10%,'' \2190\ the Commission notes that the 
commenter did not explain the basis for its estimate. The Commission 
acknowledged in the Notice that it lacks the necessary information to 
estimate the magnitude of these cost savings, and this continues to be 
the case, as the Commission has not received any additional information 
it can use to estimate the savings. However, the Commission continues 
to believe that direct access to CAT Data should decrease the costs 
that many regulators and market participants incur in either requesting 
data or fulfilling requests for data.
---------------------------------------------------------------------------

    \2190\ Data Boiler Letter at 38.
---------------------------------------------------------------------------

    With respect to the comments about uncertainties regarding the 
process for regulatory access to CAT Data,\2191\ the Commission agrees 
with the commenter that, as discussed in the Notice, there is some 
uncertainty regarding the process for regulatory access under the Plan. 
The Commission notes that while the Plan provides detail on the method 
of access and the type of queries that regulators could run, many of 
the decisions regarding access have been deferred until after the Plan 
Processor is selected and finalizes the Technical Specifications. In 
particular, as discussed in the Notice, the details of functionality 
and performance of the final CAT System are still to be 
determined.\2192\ The Commission continues to believe that these 
functionality and performance uncertainties create some uncertainty 
regarding the degree of improvement in regulatory access that will 
result from the Plan. The Commission agrees that is possible that, as 
one commenter noted,\2193\ the deferral of these decisions could result 
in a delay in regulators' ability to access the CAT Data. However, the 
Commission continues to believe that the Plan will substantially 
improve the accessibility \2194\ of regulatory data relative to the 
Baseline by providing regulators with direct access to the CAT Data.
---------------------------------------------------------------------------

    \2191\ SIFMA Letter at 32, 39-41.
    \2192\ See Notice, supra note 5, at 30691.
    \2193\ SIFMA Letter at 39.
    \2194\ Accessibility refers to ``how the data is stored, how 
practical it is to assemble, aggregate, and process the data, and 
whether all appropriate regulators could acquire the data they 
need.'' See Notice, supra note 5, at 30689.
---------------------------------------------------------------------------

(2) Consolidation of Data
    In the Notice, the Commission stated that it preliminarily believed 
that the Plan would improve accessibility by consolidating various data 
elements into one combined source, reducing data fragmentation.\2195\ 
Currently, audit trail data for securities that are traded on multiple 
venues (multiple exchanges or off-exchange venues) is fragmented across 
multiple data sources, with each regulator generally having direct 
access only to data generated on the trading venues it regulates.\2196\ 
The Commission explained that the Plan would bring audit trail data 
related to trading on all venues into the Central Repository where it 
could be accessed by all regulators. Additionally, the Commission noted 
that Rule 613 requires that the Plan include both equity and options 
data.\2197\ Because no existing regulatory audit trail data source 
includes both options and equities data, the Notice discussed the fact 
that collecting this data and providing access would allow regulators 
to monitor and run surveillance on the activity of market participants 
in related instruments, such as when a market participant has activity 
in both options and the options' underlying assets. The Commission 
noted that the Plan would also marginally increase the accessibility of 
historical exchange data. In particular, Section 6.5(b)(i) of the

[[Page 84831]]

Plan requires that the Central Repository make historical data 
available for not less than six years, in a manner that is directly 
accessible and searchable electronically without manual intervention by 
the Plan Processor.\2198\
---------------------------------------------------------------------------

    \2195\ Id. at 30690.
    \2196\ The Commission recognizes that FINRA collects data from 
exchanges for which it provides regulatory services. However, this 
data is sent to FINRA by the exchanges with a delay, and the data 
formats are not standardized prior to receipt at FINRA.
    \2197\ 17 CFR 242.613(c)(5), (c)(6).
    \2198\ See CAT NMS Plan, supra note 5, at Section 6.5(b)(i). 
Currently, broker-dealers retain data for six years, but exchanges 
are only required to retain data for five years. In practice, the 
Commission understands that most exchanges generally retain data for 
at least six years, but at least one exchange does not retain data 
for six or more years. Therefore, the CAT NMS Plan would improve the 
historical data available from at least one exchange.
---------------------------------------------------------------------------

    The Commission did not receive any comments on this aspect of 
accessibility, and there have not been any modifications to the Plan 
related to this aspect of the Commission's analysis. The Commission 
therefore continues to believe that the Plan will improve accessibility 
relative to the Baseline by consolidating various data elements into 
one combined source, reducing data fragmentation.
d. Timeliness
    In the Notice, the Commission discussed its belief that, if 
approved, the CAT NMS Plan would significantly improve the timeliness 
\2199\ of reporting, compiling, and accessing regulatory data, which 
would benefit a wide array of regulatory activities that use or could 
use audit trail data. The Commission discussed its belief that the 
timeline for compiling and reporting data pursuant to the Plan would 
constitute an improvement over the processes currently in place for 
many existing data sources and that, relative to some data sources, the 
improvement would be dramatic. Specifically, under the Plan, CAT Data 
would be compiled and made ready for access faster than is the case 
today for some data, both in raw and in corrected form; regulators 
would be able to query and manipulate the CAT Data without going 
through a lengthy data request process; and the data would be in a 
format to make it more immediately useful for regulatory 
purposes.\2200\
---------------------------------------------------------------------------

    \2199\ Timeliness refers to when the data is available to 
regulators and how long it would take to process before it could be 
used for regulatory analysis. See Notice, supra note 5, at 30691.
    \2200\ Id.
---------------------------------------------------------------------------

    In terms of initial access to the data, the Commission discussed 
its belief that the Plan would require CAT Reporters to report data to 
the Central Repository at times that are on par with current audit 
trails that require reporting, but the Central Repository would compile 
\2201\ the data for initial access sooner than some other such 
data.\2202\ For example, equity and option clearing data currently are 
not compiled and reported to the NSCC and the OCC until T+3, and data 
in EBS reports are not compiled and reported to a centralized database 
until a request is received.\2203\ OATS data is initially reported to 
FINRA by 8:00 a.m. ET on the calendar day following the reportable 
event, and it takes approximately 24 hours for FINRA to run validation 
checks on the file, though SROs do not currently access OATS 
information for regulatory purposes until after the error correction 
process is complete.\2204\
---------------------------------------------------------------------------

    \2201\ Compiling data refers ``to a process that aggregates 
individual data records into a data set. This could occur when 
regulators request data and when the regulators receive data from 
multiple providers. This is different from the act of reporting 
data.'' Id.
    \2202\ Id. at 30691-92.
    \2203\ Id.
    \2204\ Id.
---------------------------------------------------------------------------

    Furthermore, the Commission discussed the fact that, to the extent 
that access to the raw (i.e., uncorrected and unlinked) data would be 
useful for regulatory purposes, the CAT NMS Plan provides a way for 
SROs and the Commission to access the uncorrected and unlinked data on 
T+1 by 12:00 p.m. ET at the latest.\2205\ Under the Plan, this access 
would be at least several days sooner than OATS is available to non-
FINRA regulators. In the Notice, the Commission acknowledged that the 
Plan would not necessarily improve the timeliness of audit trail data 
in every case or for every regulator. For example, exchange SROs 
already have real-time access to their own audit trail data.\2206\ 
However, regulators at other SROs or the Commission do not have real-
time access to that audit trail data, and therefore the Commission 
stated that it preliminarily believed that CAT Data could be more 
timely for these other regulators to access and use than obtaining that 
exchange's audit trail data through other means.\2207\
---------------------------------------------------------------------------

    \2205\ Id. at 30691.
    \2206\ Under the Plan, SROs that are exchanges would still have 
the same real-time access to their own audit trail data as they 
currently do. The Commission does not expect that all SRO audit 
trails will be retired on implementation of the Plan because 
exchanges may use such audit trails to implement their CAT reporting 
responsibilities. CAT reporting requirements would require that 
exchanges collect and report audit trail information from their 
systems even if they elect to replace their current audit trails. 
However, CAT requirements may improve the completeness of real-time 
exchange audit trail data if the information that exchanges collect 
under the Plan is more complete than what they currently collect.
    \2207\ As noted, the SROs are generally currently able to access 
their own audit trail data on the same day of an event and the 
Commission is currently able to access some public data, like SIP 
and MIDAS, on the same day as an event. Further, OATS is available 
to FINRA at 8 a.m. on the day following an event. The Commission 
preliminarily does not expect the CAT NMS Plan would affect these 
regulators' access to most of these respective data sources.
---------------------------------------------------------------------------

    In terms of timeliness of access to error-corrected data, the 
Commission stated in the Notice that it preliminarily believed that the 
error correction process required by the CAT NMS Plan is reasonably 
designed to provide additional improvements in timeliness for corrected 
data. The Plan specifies that the initial data validation and 
communication of errors to CAT Reporters must occur by noon on T+1 and 
that corrections of these errors must be submitted by the CAT Reporters 
to the Central Repository by 8:00 a.m. ET on T+3, with the corrected 
data made available to the regulators by 8:00 a.m. ET on T+5.\2208\ 
During this interim time period between initial processing and 
corrected data availability, ``all iterations'' of processed data must 
be available for regulatory use.\2209\ The Central Repository must be 
able to receive error corrections at any time, even if late; \2210\ if 
corrections are received after T+5, the Plan Processor must notify the 
SEC and SROs of this fact and describe how re-processing of the data 
(to be determined in conjunction with the Operating Committee) would be 
completed.\2211\ Customer information (i.e., information containing 
PII) is processed along a slightly different timeline, but the 
outcome--corrected data available by 8:00 a.m. ET on T+5--is the 
same.\2212\ One exception to this timeline is if the Plan Processor has 
not received a significant portion of the data, as determined according 
to the Plan Processor's monitoring, in which case the Plan Processor 
could determine to halt processing pending submission of that 
data.\2213\ The Commission noted that the error resolution process for 
OATS is limited to five business days from the date a rejection becomes 
available.\2214\ The CAT NMS Plan requires a three-day repair window 
for the Central Repository.\2215\ Accordingly, the Commission stated 
that if the Plan were approved, regulators would generally be able to 
access partially and fully corrected data earlier than they would for 
OATS.\2216\
---------------------------------------------------------------------------

    \2208\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.2(a), Appendix D, Section 6.1.
    \2209\ Id. at Appendix D, Section 6.2.
    \2210\ Id. at Appendix C, Section A.3.(b), Appendix D, Section 
7.4.
    \2211\ Id. at Appendix D, Section 6.2.
    \2212\ Id.
    \2213\ Id. at Appendix D, Section 6.1.
    \2214\ See Notice, supra note 5, at Section IV.D.2.b.(4) and 
n.465.
    \2215\ Id. at Appendix C, Section A.2(a).
    \2216\ CAT Data being available on T+5 may be later than for 
other current SRO audit trails.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed its belief that 
improvements

[[Page 84832]]

to timeliness would also result from the ability of regulators to 
directly access CAT Data.\2217\ The Commission discussed the fact that 
most current data sources do not provide direct access to most 
regulators and explained that data requests can take as long as weeks 
or even months to process. Other data sources provide direct access 
with queries that can sometimes generate results in minutes--for 
example, running a search on all MIDAS message traffic in one day can 
take up to 30 minutes \2218\--but only for a limited subset of the data 
to be available in CAT and generally only for a limited number of 
regulators. Accordingly, the Commission stated that it preliminarily 
believed that the ability of regulators to directly access and analyze 
the scope of audit trail data that would be stored in the Central 
Repository should reduce the delays that are currently associated with 
requesting and receiving data. Furthermore, the Commission discussed 
its belief that direct access to CAT Data should reduce the costs of 
making ad hoc data requests, including costs arising from extensive 
interactions with data liaisons and IT staff at broker-dealers, SROs, 
and vendors, developing specialized knowledge of varied formats, data 
structures, and systems, and reconciling data.
---------------------------------------------------------------------------

    \2217\ See Notice, supra note 5, at 30692 (citing CAT NMS Plan, 
supra note 5, Section 6.5(c)).
    \2218\ See Notice, supra note 5, at Section IV.D.2.b.(4) and 
n.468.
---------------------------------------------------------------------------

    The Commission also stated that it preliminarily expected that the 
CAT NMS Plan would reduce the time required to process data before 
analysis.\2219\ The Commission explained that currently, regulators can 
spend days and up to months processing data they receive into a useful 
format.\2220\ Part of this delay is due to the need to combine data 
across sources that could have non-uniform formats and to link data 
about the same event both within and across data sources. These kinds 
of linking processes can require sophisticated data techniques and 
substantial assumptions and can result in imperfectly linked data. The 
Commission noted that the Plan addresses this issue by stating that the 
Plan Processor must store the data in a linked uniform format.\2221\ 
Specifically, the Commission discussed how the Central Repository will 
use a ``daisy chain'' approach to link and reconstruct the complete 
lifecycle of each Reportable Event, including all related order events 
from all CAT Reporters involved in that lifecycle. Therefore, 
regulators accessing the data in a linked uniform format would no 
longer need to take additional time to process the data into a uniform 
format or to link the data.\2222\ Accordingly, the Commission stated 
that it preliminarily believed that the Plan would reduce or eliminate 
the delays associated with merging and linking order events within the 
same lifecycle and that the Plan would improve the timeliness of 
FINRA's access to the data it uses for much of its surveillance by 
several days because the corrected and linked CAT Data would be 
accessible on T+5 compared to FINRA's T+8 access to its corrected and 
linked data combining OATS with exchange audit trails.\2223\
---------------------------------------------------------------------------

    \2219\ See Notice, supra note 5, at 30693.
    \2220\ See Table 1, Section V.D.2.b, supra.
    \2221\ See CAT NMS Plan, supra note 5, at Section 6.5(b)(i). The 
CAT NMS Plan does not link allocations to order events. See also 17 
CFR 242.613(e)(1).
    \2222\ The daisy chain approach is used to link and reconstruct 
the complete lifecycle of each Reportable Event in CAT. According to 
this approach, CAT Reporters assign their own identifiers to each 
order event that the Plan Processor later replaces with a single 
identifier (the CAT Order-ID) for all order events pertaining to the 
same order. See Notice, supra note 5, at 30691.
    \2223\ Id. at 30693.
---------------------------------------------------------------------------

    The Commission also discussed its belief that the expected 
improvements to data accuracy could result in an increase in the 
timeliness of data that is ready for analysis, although uncertainty 
exists regarding the extent of this benefit. The Commission explained 
that regulators currently take significant time to ensure data is 
accurate beyond the time that it takes data sources to validate data 
and that, in some cases, data users may engage in a lengthy iterative 
process involving a back and forth with the staff of a data provider in 
order to obtain accurate data necessary for a regulatory inquiry. 
Accordingly, the Commission stated that, to the extent that the Central 
Repository's validation process is sufficiently reliable and complete, 
the duration of the error resolution process regulators would perform 
with CAT Data may be shorter than for current data. Further, to the 
extent that the Central Repository's linking and reformatting processes 
are sufficiently successful, the SROs and Commission may not need a 
lengthy process to ensure the receipt of accurate data. However, the 
Commission noted that it lacked sufficient information on the 
validations, linking, and reformatting processes needed to draw a 
strong conclusion as to whether users would take less time to validate 
CAT Data than they take on current data. Nonetheless, the Commission 
preliminarily believed that the linking and reformatting processes at 
the Central Repository would be more accurate than the current 
decentralized processes such that it would reduce the time that 
regulators spend linking and reformatting data prior to use.
    The Commission received comments on the improvements in timeliness 
from the Plan. Two commenters suggested that CAT Data would not be 
timely enough because it is reported too late.\2224\ One commenter 
called the reporting deadline (8:00 a.m. ET on T+1) an 
``extraordinarily lax reporting time frame.'' \2225\ Another commenter 
argued that the T+5 schedule for regulatory access to corrected CAT 
Data is ``useless in terms of effective market surveillance in 
prevention of threats to the U.S. financial stability'' because a 
``huge loss can be accumulated within [a] split-second'' and ``market 
collapse does not take more than one day.'' \2226\ Furthermore, 
although the commenter agreed that ``CAT offers the regulators on-
demand query of delayed data that saves them multiple trips to request 
data from the financial institutions,'' he opined that this ``does not 
necessarily mean timeliness improvement.'' \2227\
---------------------------------------------------------------------------

    \2224\ Data Boiler Letter at 18; Better Markets Letter at 6.
    \2225\ Better Markets Letter at 6.
    \2226\ Data Boiler Letter at 26.
    \2227\ Data Boiler Letter at 32.
---------------------------------------------------------------------------

    The Participants' response provided additional information on error 
correction timelines for customer information and PII. Specifically, 
the Participants' response identified an errant discussion of these 
error correction timelines in the Plan, and clarified that the Plan 
Processor must validate customer data and generate error reports no 
later than 5:00 p.m. ET on T+1, and stated that they believe the two 
day period for error correction is sufficient for CAT Reporters to 
correct errors in customer data.\2228\
---------------------------------------------------------------------------

    \2228\ Response Letter I at 30.
---------------------------------------------------------------------------

    The Commission has considered the comments it received regarding 
the potential of the Plan to improve timeliness. As discussed below, 
the commenters did not provide any additional information or analysis 
that the Commission believes would warrant changes to its analysis or 
conclusions as set out in the Notice.
    The Commission disagrees with the commenter that characterized the 
next day reporting of CAT Data as an ``extraordinarily lax reporting 
time frame,'' and with the commenter that argued that the T+5 schedule 
for regulatory access to corrected CAT Data is insufficient.\2229\ As 
discussed further above,\2230\ the Commission considered whether CAT 
Reporters should be

[[Page 84833]]

required to report data in real-time when it adopted Rule 613 under 
Regulation NMS.\2231\ While the Commission acknowledged that there 
might be advantages to receiving data intraday, the Commission stated 
that the greater majority of benefits that may be realized from 
development of the CAT do not require real-time reporting.\2232\ 
Furthermore, many SROs have real-time access to data generated on 
exchanges they operate, and can and do use this data for real-time 
surveillance of activity occurring on those exchanges As discussed in 
the Notice, the T+5 schedule improves the timeliness of regulatory 
access to corrected data relative to the Baseline in two ways.\2233\ 
First, corrected OATS data is currently available to FINRA at 
T+8.\2234\ Under the Plan, regulators will be able to access corrected 
CAT Data three days earlier than that (i.e., T+5). Second, the ability 
of regulators to directly access CAT Data will improve 
timeliness.\2235\ Most current data sources do not provide direct 
access to most regulators, and data requests can take as long as weeks 
or even months to process. Therefore, for many purposes, the T+5 
schedule for regulatory access to corrected CAT Data will be up to many 
weeks more timely relative to the Baseline.
---------------------------------------------------------------------------

    \2229\ Data Boiler Letter at 26.
    \2230\ See Section IV.D.3, supra.
    \2231\ See Adopting Release, supra note 13, at 45765. Indeed, 
Rule 613 stated that the CAT NMS Plan may not impose a reporting 
deadline earlier than 8:00 a.m. ET. 17 CFR 242.613(c)(3).
    \2232\ Id.
    \2233\ See Notice, supra note 5, at Section IV.E.1.d(2) and 
Section IV.E.1.d(3).
    \2234\ Id. at 30673.
    \2235\ Id. at 30692.
---------------------------------------------------------------------------

    The Commission also disagrees with the comment that the ability of 
regulators to directly access CAT Data will not result in improvement 
in timeliness.\2236\ The comment does not dispute that data requests 
can take time to process and it does not provide any specificity in 
arguing that direct access would not improve timeliness that undermines 
the Commission's belief that direct access will make CAT Data up to 
many weeks more timely. This represents an important improvement in 
timeliness over the Baseline.
---------------------------------------------------------------------------

    \2236\ Data Boiler Letter at 32.
---------------------------------------------------------------------------

    Regarding the Participants' response, the Commission does not 
believe the clarification regarding the timeline for communication of 
errors for customer and account information would warrant changes to 
its analysis or conclusions regarding timeliness. The Commission notes 
that the Plan states that 5:00 p.m. ET on T+1 is the deadline for 
communication of errors for customer and account information, including 
PII.\2237\ In separate exposition, the Plan mistakenly discussed 12:00 
p.m. ET on T+3 as the deadline for validation of data and generation of 
error reports for CAT PII data.\2238\ These two statements are in 
conflict because they describe different reporting deadlines for the 
same types of errors. However, the Commission is amending the Plan to 
correct that error.\2239\ In the Notice, the Commission states that 
customer information has a separate error correction timeline with the 
same outcome in terms of the availability of corrected data to 
regulators; this analysis was not dependent on the time at which error 
messages were sent to CAT Reporters.\2240\ Consequently, the 
clarification of this timeline does not affect the Commission's 
analysis. Furthermore, the Commission notes that commenters did not 
raise questions on the mistake and seem to have understood that the 
deadline for error reports on PII was 5:00 p.m. ET on T+1.
---------------------------------------------------------------------------

    \2237\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
6.2.
    \2238\ Id.
    \2239\ See note 1555, supra.
    \2240\ See Notice, supra note 5, at 30692.
---------------------------------------------------------------------------

2. Improvements to Regulatory Activities
    In the Notice, the Commission discussed its preliminary belief that 
improvements in the quality of available data have the potential to 
result in improvements in the analysis and reconstruction of market 
events; market analysis and research in support of regulatory 
decisions; and market surveillance, examinations, investigations, and 
other enforcement functions.\2241\ The Commission discussed its belief 
that the ability of regulators to perform analyses and reconstruction 
of market events would likely improve if the CAT NMS Plan were 
approved, because it would allow regulators to provide investors and 
other market participants with more timely and accurate explanations of 
market events, and to develop more effective responses to such events. 
Furthermore, availability of CAT Data would benefit market analysis and 
research in support of regulatory decisions, by facilitating an 
improved understanding of markets that will inform potential policy 
decisions. The Commission also discussed how regulatory initiatives 
that are based on an accurate understanding of underlying events and 
are narrowly tailored to address any market deficiency should improve 
market quality and benefit investors.
---------------------------------------------------------------------------

    \2241\ Id. at 30693-99.
---------------------------------------------------------------------------

    The Commission also explained that, in its preliminary view, the 
Plan would substantially improve both the efficiency and effectiveness 
of SRO broad market surveillance, which could benefit investors and 
market participants by allowing SROs to more quickly and precisely 
identify and address a higher proportion of market violations that 
occur, as well as prevent violative behavior through deterrence.
    The Commission discussed in the Notice its expectation that CAT 
Data would enhance the SROs' and the Commission's abilities to 
effectively target risk-based examinations of market participants who 
are at elevated risk of violating market rules, as well as their 
abilities to conduct those examinations efficiently and effectively, 
which could also contribute to the identification and resolution of a 
higher proportion of violative behavior in the markets. Accordingly, 
the reduction of violative behavior in the market should benefit 
investors by providing them with a safer environment for allocating 
their capital and making financial decisions, and it could also benefit 
market participants whose business activities are harmed by the 
violative behavior of other market participants. The Commission further 
discussed how more targeted examinations could benefit market 
participants by resulting in proportionately fewer burdensome 
examinations of compliant market participants.
    The Commission also explained that a significant percentage of 
Commission enforcement actions involve trade and order data,\2242\ and 
that it preliminarily believed CAT Data would significantly improve the 
efficiency and efficacy of enforcement investigations by the Commission 
and SROs, including

[[Page 84834]]

insider trading and manipulation investigations.
---------------------------------------------------------------------------

    \2242\ In 2015, the Commission filed 807 enforcement actions, 
including 39 related to insider trading, 43 related to market 
manipulation, 124 related to broker-dealers, 126 related to 
investment advisers/investment companies, and one related to 
exchange or SRO duties, many of which involved trade and order data. 
In 2014, the Commission filed 755 enforcement actions, including 52 
related to insider trading, 63 related to market manipulation, 166 
related to broker-dealers, and 130 related to investment advisers/
investment companies, many of which also involved trade and order 
data. See Year-by-Year SEC Enforcement Statistics, available at 
https://www.sec.gov/news/newsroom/images/enfstats.pdf. The total 
number of actions filed is not necessarily the same as the number of 
investigations. An investigation may result in no filings, one 
filing, or multiple filings. Additionally, trade and order data may 
be utilized in enforcement investigations that do not lead to any 
filings. Based on these numbers, the Commission estimates that 30-
50% of its enforcement actions incorporate trading or order data. A 
portion of FINRA's 1,397 disciplinary actions in 2014 and 1,512 in 
2015 also involved trading or order data. See http://www.finra.org/newsroom/statistics.
---------------------------------------------------------------------------

    The Commission also stated that it as well as the SROs anticipated 
additional benefits associated with enhanced abilities to handle tips, 
complaints and referrals, and improvements in the speed with which they 
could be addressed, particularly in connection with the significant 
number of tips, complaints, and referrals that relate to manipulation, 
insider trading, or other trading and pricing issues.\2243\ The 
Commission explained that the benefits to investor protection of an 
improved tips, complaints, and referrals system would largely mirror 
the benefits to investor protection that would accrue through improved 
surveillance and examinations efficiency.
---------------------------------------------------------------------------

    \2243\ In fiscal years 2014 and 2015, the Commission received 
around 15,000 entries in its TCR system, approximately one third of 
which related to manipulation, insider trading, market events, or 
other trading and pricing issues.
---------------------------------------------------------------------------

    As discussed more fully below, the Commission has considered the 
comments it received regarding the likely benefits to regulatory 
activities, the Participants' response, and modifications to the Plan, 
and continues to believe that the CAT NMS Plan would generate 
improvements to regulatory activities, particularly in the analysis and 
reconstruction of market events; market analysis and research in 
support of regulatory decisions; and market surveillance, examinations, 
investigations, and other enforcement activities.
a. Analysis and Reconstruction of Market Events
    In the Notice, the Commission discussed the reasons for its 
preliminary belief that the Plan would improve regulators' ability to 
perform analysis and reconstruction of market events.\2244\ As noted in 
the Adopting Release, the sooner regulators can complete a market 
reconstruction, the sooner regulators can begin reviewing an event to 
determine what happened, who was affected and how, if any regulatory 
responses might be required to address the event, and what shape such 
responses should take.\2245\ Furthermore, the improved ability for 
regulators to generate prompt and complete market reconstructions could 
provide improved market knowledge, which could assist regulators in 
conducting retrospective analysis of their rules and pilots.
---------------------------------------------------------------------------

    \2244\ See Notice, supra note 5, at 30694-95.
    \2245\ See Adopting Release, supra note 14, at 45732.
---------------------------------------------------------------------------

    The Commission discussed how the fragmented nature of current audit 
trail data and the lack of direct access to such data renders market 
reconstructions cumbersome and time-consuming.\2246\ Currently, the 
information needed to perform these analyses is spread across multiple 
audit trails, with some residing in broker-dealer order systems and 
trade blotters. Requesting the data necessary for a reconstruction of a 
market event often takes weeks or months and, once received, regulators 
then need weeks to reconcile disparate data formats used in different 
data sources. Some of the most detailed data sources, including sources 
like EBS and trade blotters that identify customers, are impractical 
for broad-based reconstructions of market events. In particular, 
including EBS data for a reconstruction of trading in the market for 
even one security on one day could involve many, perhaps hundreds, of 
requests, and would require linking that to SRO audit trail data or 
public data.\2247\ Further, because EBS data lacks timestamps for 
certain trades,\2248\ the Commission discussed how the use of EBS data 
in market reconstructions requires supplementation with data from other 
sources, such as trade blotters.
---------------------------------------------------------------------------

    \2246\ During the financial crisis in 2008, the lack of direct 
access to audit trail data resulted in the Commission being unable 
to quickly and efficiently reconstruct market events. The state of 
OATS data in 2008 also limited FINRA's ability to analyze and 
reconstruct the market during the financial crisis because FINRA 
could not yet augment its OATS data with exchange data and OATS did 
not include market maker quotations. As a result, regulators had 
little information about the role of short sellers in market events 
and the identity of short sellers during the financial crisis, for 
example. See Notice, supra note 5, at 30694-95.
    \2247\ Id. at Section IV.E.2.a (noting that in 2014, the SEC 
made 3,722 EBS requests which generated 194,696 letters to broker-
dealers requesting EBS data). The Commission understands that FINRA 
makes about half this number of requests.
    \2248\ Large traders who file Form 13H with the Commission are 
assigned a ``large trader identification number'' by the Commission 
and must provide that number to their brokers for inclusion in the 
EBS records that are maintained by the clearing brokers. Rule 13h-1, 
subject to relief granted by the Commission, requires that execution 
time be captured (to the second) for certain categories of large 
traders. Id. at Section IV.D.2.a(3) and Section IV.D.2.b (discussing 
the EBS system and large trader reports and the limitations of these 
data sources in performing market reconstructions).
---------------------------------------------------------------------------

    The Commission stated that it expected that improvements in data 
completeness and accuracy from the Plan would enhance regulators' 
ability to perform analyses and to reach conclusions faster in the wake 
of a market event by reducing the time needed to collect, consolidate 
and link the data.\2249\ Specifically, the inclusion of Customer-IDs 
and consistent CAT-Reporter-IDs in the CAT Data would allow regulators 
to more effectively and efficiently identify market participants that 
submit orders through several broker-dealers and execute on multiple 
exchanges and whose activity may warrant further analysis. The 
Commission discussed its belief that this would be useful if regulators 
were interested in determining if a particular trader or category of 
traders had some role in causing the market event, or how they might 
have adjusted their behavior in response to the event, which could 
amplify the effects of the root cause or causes. Furthermore, the 
Commission discussed how the clock synchronization requirements of the 
Plan would improve the ability of regulators to sequence some events 
that happened in different market centers to better identify the causes 
of market events. Overall, the Commission stated that it preliminarily 
believed that the CAT NMS Plan would dramatically improve the ability 
of regulators to identify the market participants involved in market 
events.
---------------------------------------------------------------------------

    \2249\ The Commission stated that the lack of readily available 
trade and order data resulted in delays and gaps in the Commission's 
analysis of the events of the Flash Crash. It was also unable to 
quickly and efficiently conduct analysis and reconstruction of 
markets events, particularly around the financial crisis. 
Furthermore, the Commission and SROs have faced similar challenges 
when reconstructing events around the May 2012 Facebook IPO, the 
August 2012 Knight Securities ``glitch,'' and the August 2013 NASDAQ 
SIP outage. Id. at 30694-95.
---------------------------------------------------------------------------

    The Commission also preliminarily believed that better data 
accessibility from the Plan would significantly improve the ability of 
regulators to analyze and reconstruct market events. Because CAT Data 
would link Reportable Events, the Plan could allow regulators to 
respond to market events more rapidly because they would not need to 
process corrected and linked data before starting their analyses.
    The Commission received one comment on the fragmented nature of 
current audit trail data and the potential benefits of CAT Data to 
improve the ability of regulators to perform analysis and 
reconstructions of market events. That commenter agreed with the 
Commission that the fragmented nature of current data sources poses 
challenges to regulators seeking complete data,\2250\ however, the 
commenter also stated that the potential benefits that CAT Data would 
provide regulators in terms of conducting analysis and market 
reconstructions are minimal.\2251\ The Participants did not provide 
responses to these concerns.
---------------------------------------------------------------------------

    \2250\ Data Boiler Letter at 30.
    \2251\ Data Boiler Letter at 33.
---------------------------------------------------------------------------

    In the Commission's view, this comment did not provide any 
additional information or analysis that warrants

[[Page 84835]]

changes to the analysis or conclusions in the Notice. The commenter 
stated that ``the plan is majoring in the minors (i.e., overemphasis on 
storage, and not enough coverage of pattern recognition).'' \2252\ The 
Commission disagrees. While the Commission has emphasized aspects of 
storage as in the Notice,\2253\ the Commission has also emphasized that 
improvements in data completeness and accuracy would greatly assist 
regulators in performing analyses and reconstructing market events. The 
inclusion of Customer-IDs and CAT-Reporter-IDs would assist regulators 
in determining if particular traders had some role in causing a market 
event, and further, inclusion of these IDs could help regulators study 
patterns in customer-specific trading behavior. Further, enhanced clock 
synchronization requirements would assist regulators in sequencing 
events that happened in different market centers and help them to 
better identify the causes of market events. As such, the Commission 
continues to believe that the CAT NMS Plan would provide benefits in 
terms of performing analysis and reconstructing market events.
---------------------------------------------------------------------------

    \2252\ Id.
    \2253\ See Notice, supra note 5, at Sections III.B.3, III.B.12.
---------------------------------------------------------------------------

    Changes to the Plan do affect data completeness and accuracy, as 
well as regulators' ability to analyze and reconstruct market events. 
First, the Commission has modified the Plan to require the reporting of 
LEIs for Customers and Industry Members in certain circumstances.\2254\ 
These requirements will result in a greater ability of regulators to 
accurately identify traders that cause market events.\2255\ Second, 
removing the open/close indicator for equities and Options Market 
Makers may reduce the completeness of CAT Data and may reduce the 
benefits that this potentially provides in terms of analysis and market 
reconstructions. Third, requiring exchanges to synchronize their clocks 
within 100 microseconds of NIST should enhance regulators' abilities to 
sequence events and reconstruct market events to a greater degree than 
initially stated in the Notice, though as discussed above in Section 
V.E.1.b.(3), the Commission does not expect a large improvement 
relative to what was described in the Notice.
---------------------------------------------------------------------------

    \2254\ See Section IV.D.4.a.(4) and Section IV.D.4.b.(2), supra, 
for a description of the LEI reporting requirements in the Plan.
    \2255\ See Section V.E.1.b(5), supra for a discussion of how 
LEIs can increase the accuracy of identifications; see also SIFMA 
Letter at 37.
---------------------------------------------------------------------------

b. Market Analysis and Research
    In the Notice, the Commission discussed the reasons for its 
preliminary belief that the CAT NMS Plan would benefit the quality of 
market analysis and research that is produced to increase regulatory 
knowledge and support policy decisions and would lead to a more 
thorough understanding of current markets and emerging issues.\2256\ 
The Commission discussed how improvements in regulatory market analysis 
and research aimed at informing regulatory decisions would benefit 
investors and market participants by improving regulators' 
understanding of the intricacies of dynamic modern markets and how 
different market participants behave in response to policies and 
information. These more nuanced and more thorough insights would help 
regulators to identify the need for regulation that specifically 
tailors policy to the diverse landscape of market participants and 
conditions that characterize current financial markets, as well as 
assist them in conducting retrospective analysis of their rules and 
pilots.
---------------------------------------------------------------------------

    \2256\ For example, this includes understanding the role and 
impact of high-frequency trading strategies; understanding how 
broker-dealers route their customer orders and studying ``whether 
access fees and rebates drive routing decisions as much as execution 
quality considerations;'' understanding the nature of short selling; 
and more generally, understanding how entities trade and the market 
impact of their trading. See Notice, supra note 5, at 30695-97.
---------------------------------------------------------------------------

    As described in the Notice, the lack of direct access to necessary 
data, along with inaccuracies in the data that are available, currently 
limits the types of analyses that regulators can conduct. These data 
limitations constrain the information available to regulators when they 
are considering the potential effects of regulatory decisions. The CAT 
NMS Plan would provide direct access to data that currently requires an 
often lengthy and labor-intensive effort to request, compile, and 
process, including data that regulators could use to more directly 
study issues such as high frequency trading, maker-taker pricing 
structures, short selling, issuer repurchases, and ETF trading. 
Furthermore, the Commission discussed how CAT Data would better inform 
SROs and the Commission in rulemakings and assist them in conducting 
retrospective analysis of their rules and pilots, and how it would 
allow SROs to examine whether a rule change on another exchange was in 
the interest of investors and whether to propose a similar rule on 
their own exchange.
    The Commission received two comments regarding the potential 
benefits of the CAT NMS Plan to help the Commission perform market 
analyses and conduct research. One commenter misinterpreted what 
accessibility to CAT Data means for the Commission, stating that access 
to the CAT system and data is limited to its regulatory functions and 
could exclude analytical or academic needs.\2257\ Another commenter 
disagreed with the Commission's findings and stated that the CAT Plan 
would provide little benefit to facilitating market analysis and 
research absent real-time access to intra-day feeds.\2258\
---------------------------------------------------------------------------

    \2257\ Better Markets Letter at 4.
    \2258\ Data Boiler Letter at 33.
---------------------------------------------------------------------------

    Commenters did not provide any additional information or analysis, 
however, and the Participants did not provide responses providing 
information relevant to this issue. The Commission is not changing its 
analysis and conclusions in light of the aforementioned comments for 
several reasons. First, one of the commenters assumes a narrow 
definition of ``regulatory functions'' but that CAT Data would serve 
the Commission and SROs in their analytical needs to conduct market 
analysis and academic research.\2259\ Second, the Commission believes 
that even without real-time access to intra-day feeds, access to CAT 
Data would nonetheless benefit regulators since the quality of market 
analysis and research that is produced to increase regulatory knowledge 
would improve relative to the Baseline. Furthermore, the Commission 
continues to believe its statement in the Adopting Release that the 
majority regulatory benefits gained from the creation of a consolidated 
audit trail, as described in the Proposing Release,\2260\ do not 
require real-time reporting.\2261\ Specifically, the Commission notes 
that market analysis and research does not require contemporaneous 
access to CAT Data, and therefore, it is not necessarily the case that 
real-time access to CAT Data, as opposed to the Plan requirement of 
access to corrected data at T+5, would provide more benefit to market 
analysis and research by regulators. As such, the Commission continues 
to believe that CAT Data would provide significant

[[Page 84836]]

improvements to market analysis and research conducted by regulators.
---------------------------------------------------------------------------

    \2259\ See Notice, supra note 5, at 30695-97 for a list of 
examples of market analysis and research that could be conducted by 
SROs and the Commission with access to CAT Data.
    \2260\ See Proposing Release, supra note 14, at 45768.
    \2261\ Id.
---------------------------------------------------------------------------

    The Commission notes, however, that changes to the CAT NMS Plan do 
alter the analysis regarding the benefits for regulators in terms of 
conducting market analysis and research. In our view, the modifications 
to the Plan to require the reporting of LEIs for Customers and Industry 
Members in certain circumstances \2262\ should result in a greater 
ability of regulators to conduct analysis and research involving 
individual market participants.\2263\ Specifically, the reporting of 
LEI would also make it possible to merge CAT Data with other data 
sources that are currently not part of CAT (e.g., futures and security-
based swaps), and this could potentially help with market 
reconstructions involving these products. Furthermore, more granular 
clock synchronization requirements for exchanges would mean that 
regulators could sequence events with greater granularity, which could 
potentially benefit analysis that requires sequencing events and 
research surrounding high frequency traders. However, because the Plan 
no longer contains an open/close indicator for equities, regulators 
will not be able to distinguish buying activity that covers short 
positions from buying activity that establishes or increases long 
positions and, therefore, regulators would not be able to examine, for 
example, how long particular types of traders hold a short position, as 
indicated in the Notice.\2264\
---------------------------------------------------------------------------

    \2262\ See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra, for a 
description of the LEI reporting requirements in the Plan.
    \2263\ See Section V.E.1.b(5), supra for a discussion of how 
LEIs can increase the accuracy of identifications; see also SIFMA 
Letter at 37.
    \2264\ See Notice, supra note 5, at 30696.
---------------------------------------------------------------------------

c. Surveillance and Investigations
    In the Notice, the Commission explained the reasons for its 
preliminary belief that the enhanced surveillance and investigations 
made possible by the implementation of the CAT NMS Plan could allow 
regulators to more efficiently identify and investigate violative 
behavior in the markets and could also lead to market participants that 
currently engage in violative behavior reducing or ceasing such 
behavior, to the extent that such behavior is not already deterred by 
current systems.\2265\ The Commission discussed how potential 
violators' expected probability of being caught influences their 
likelihood of committing a violation.\2266\ If market participants 
believe that the existence of CAT, and the improved regulatory 
activities that result from improvements in data and data processes, 
increase the likelihood of regulators detecting violative behavior, 
they could reduce or eliminate the violative activity in which they 
engage to avoid incurring the costs associated with detection, such as 
fines, legal expenses, and loss of reputation. Such a reduction in 
violative behavior would benefit investor protection and the market as 
investors would no longer bear the costs of the violative behavior that 
would otherwise exist in the current system. Many of the improvements 
that would result from CAT could also allow regulators to identify 
violative activity, such as market manipulation, more quickly and 
reliably, which could improve market efficiency by deterring market 
manipulation and identifying and addressing it more quickly and more 
often when it occurs.\2267\
---------------------------------------------------------------------------

    \2265\ Id. at 30697-99.
    \2266\ It is well established in the economics and political 
science literature that common knowledge among market actors can 
lead to the deterrence of behaviors. See, e.g., Schelling, Thomas, 
``The Strategy of Conflict: Prospectus for a Reorientation of Game 
Theory,'' Journal of Conflict Resolution, Vol. 2 No.3 (1958) and 
Ellsberg, Daniel, ``The Crude Analysis of Strategic Choices,'' 
American Economic Review, Vol. 51, No. 2 (1961). Therefore, market 
participants with knowledge of improvements in the efficiency of 
market surveillance, investigations, and enforcement, and 
consequently the increased probability of incurring a costly 
penalty, could be deterred from participating in violative behavior.
    \2267\ The Plan would allow regulators to more efficiently 
conduct cross-market and cross-product surveillance relative to 
surveillance using current data sources, and the requirement that 
data be consolidated in a single database would assist regulators in 
detecting violative (but not obvious) activity. To the extent that 
market participants are aware of the current challenges to 
regulators in performing cross-market surveillance and aggregating 
data across venues, and to the extent that they believe that their 
violative behavior is more likely to be detected if regulators' 
ability to perform those activities improves, they may reduce or 
eliminate violative behavior if the CAT Plan is approved. See 
Notice, supra note 5, at Section IV.E.2.c(1).
---------------------------------------------------------------------------

    The Commission received several comments on the potential benefits 
of the CAT NMS Plan to improve SRO surveillance, risk-based 
examinations, enforcement activity, and the process for evaluating tips 
and complaints; and the Participants also responded to some of the 
comments raised in the comment letters. As discussed below, the 
Commission is not changing its analysis and conclusions in light of 
these comments and the Participants' responses; however, changes to the 
Plan affect the analysis that the Commission laid out in the Notice.
(1) SRO Surveillance
    Rule 613(f) requires SROs to implement surveillances reasonably 
designed to make use of the CAT Data.\2268\ Further, data improvements 
resulting from the Plan would improve regulators' ability to perform 
comprehensive and efficient surveillance. As the Commission explained 
in detail in the Notice, these benefits would encompass a number of 
improvements including: detection of insider trading; surveillance of 
principal orders; and cross-market and cross-product surveillance; and 
other market surveillance activities, which are each described in more 
detail below.
---------------------------------------------------------------------------

    \2268\ 17 CFR 242.613(f).
---------------------------------------------------------------------------

    First, the Commission noted that CAT Data would include additional 
fields not currently available in data used for surveillance. Since 
currently available data does not include customer identifiers, SROs 
performing insider trading and manipulation surveillance are unable to 
identify some suspicious trading \2269\ and must undertake multiple 
steps to request additional information after identifying suspect 
trades. The inclusion of Customer-IDs in the CAT would significantly 
improve these surveillance capabilities. The ability to link uniquely 
identified customers with suspicious trading behavior would provide 
regulators with a better opportunity to identify the distribution of 
suspicious trading instances by a customer as well as improve 
regulators' ability to utilize customer-based risk assessment.
---------------------------------------------------------------------------

    \2269\ The Commission understands that SRO surveillances on 
topics such as insider trading and market manipulation do not 
incorporate data that identifies customers. Based on alerts from 
their surveillances, SROs may open a review that runs through 
several stages of data requests before identifying a customer. The 
Commission notes that SRO audit trails typically do not provide 
customer information but a recent FINRA rule change would require 
its members to report to OATS non-FINRA member customers who are 
broker-dealers. See Notice, supra note 5, at 30697.
---------------------------------------------------------------------------

    Second, the Commission noted that some current data sources used 
for SRO surveillance exclude unexecuted principal orders, limiting the 
surveillance for issues such as wash sales. As a result, many 
surveillance patterns are unable to detect certain rule violations 
involving principal orders. The inclusion of principal orders of 
Industry Members in the CAT would therefore enable regulators to better 
identify rule violations by broker-dealers that have not previously had 
to provide audit trail data on unexecuted principal orders.
    Third, the Commission noted that the Plan would improve regulators' 
efficiency in conducting cross-market and cross-product surveillance, 
and enable any regulator to surveil the trading activity of market 
participants in both equity and options markets and

[[Page 84837]]

across multiple trading venues without data requests. Regulators would 
also have access to substantially more information about market 
participants' activity,\2270\ and the requirement that the data be 
consolidated in a single database would assist regulators in detecting 
activity that may appear permissible without evaluating data from 
multiple venues.\2271\ The Commission explained that because market 
data are fragmented across many data sources and because audit trail 
data lacks consistent customer identifiers, regulators currently cannot 
run cross-market surveillance tracking particular customers.\2272\ 
Furthermore, routine cross-product surveillance is generally not 
possible with current data. The Commission concluded that the potential 
enhancements in market surveillance enabled by the CAT NMS Plan are 
likely to result in more capable and efficient surveillance which could 
reduce violative behavior and protect investors from harm.
---------------------------------------------------------------------------

    \2270\ For example CAT Data would include Customer information, 
subaccount allocation information, exchange quotes, trade and order 
activity that occurs on exchanges, trade and order activity that 
occurs at broker-dealers that are not FINRA members, and trade and 
order activity that occurs at FINRA members who are not currently 
required to report to OATS. In addition CAT Data would require 
reporters to report data in milliseconds and would be directly 
available to non-FINRA regulators much faster than OATS is currently 
available to them. Id. at 30698.
    \2271\ See Section V.E.2.c(3), infra. The Commission notes that 
while this is a benefit allowed by consolidation of data in the 
Central Repository, linked data would not be available in the 
Central Repository until T+5, which may delay the completion of 
surveillance activities.
    \2272\ As noted above, SROs currently do not conduct routine 
surveillance that tracks particular customers because data currently 
used for surveillance does not include customer information.
---------------------------------------------------------------------------

    Two commenters stated that the Commission is overly optimistic as 
to the benefits that the Plan would provide to SRO surveillance 
activities,\2273\ with one of the commenters also mentioning that the 
Commission is overly optimistic with respects to the benefits to 
surveillance.\2274\ One of the commenters argued that benefits are 
exaggerated because the Plan lacks an analytical framework embedded in 
its design.\2275\ The same commenter mentioned that the lack of an 
analytical framework embedded in the design of CAT reduces the ability 
to identify false positives (i.e., detection of behaviors that are not 
violative), and false negatives (i.e., not detecting behaviors that are 
violative).\2276\ The commenter also specifically raised concerns that 
the current accessibility and functionality requirements of CAT Data 
would be rendered unusable for regulators because the methods for 
querying data and performing bulk extracts are ``generic'' and not fit 
for financial market surveillance.\2277\
---------------------------------------------------------------------------

    \2273\ Anonymous Letter I at 3; Data Boiler Letter at 33.
    \2274\ Data Boiler Letter at 33.
    \2275\ Data Boiler Letter at 33.
    \2276\ Data Boiler Letter at 33.
    \2277\ Data Boiler Letter at 13, 27.
---------------------------------------------------------------------------

    Two commenters stated that CAT should encompass real-time reporting 
functionality, because without it, it is hard to conduct meaningful 
surveillance.\2278\ Additionally, one commenter mentioned that the Plan 
does not provide details on how regulators would use CAT Data.\2279\
---------------------------------------------------------------------------

    \2278\ Data Boiler Letter at 30; Better Markets Letter at 6-7.
    \2279\ SIFMA Letter at 32.
---------------------------------------------------------------------------

    The Participants responded to these comments and noted that they 
already have real-time surveillance and monitoring tools in place for 
the respective markets that will not be affected by CAT.\2280\ 
Furthermore, the Participants noted that the Plan Processor will 
provide sufficient data access tools as well as analytical tools in the 
CAT for the Participants to satisfy their obligations as set forth in 
Rule 613(f).\2281\ But the Participants did note that surveillance 
methods and techniques could vary over time and across 
Participants,\2282\ potentially yielding some degree of uncertainty in 
how benefits to surveillance activities would accrue to SROs, investors 
and market participants. The Participants also noted that CAT is not 
intended to be the sole source of surveillance for each Participant, 
and therefore, would not cover all surveillance methods currently 
employed by the Participants.\2283\
---------------------------------------------------------------------------

    \2280\ Response Letter I at 31, 43.
    \2281\ Response Letter I at 42.
    \2282\ Response Letter I at 42.
    \2283\ Response Letter II at 27.
---------------------------------------------------------------------------

    The Commission considered these comments and the Participants' 
responses and believes that they would not warrant changes to the 
Commission's preliminary conclusions of the benefits that the Plan 
would provide to SRO surveillance. But the Commission does acknowledge 
that there is some uncertainty particularly regarding how exactly the 
SROs will incorporate CAT into their surveillance activities. First, 
while the Commission agrees that surveillance methods differ across 
Participants and this could generate uncertainty in the benefits, the 
Commission disagrees with the commenters that stated that the 
Commission is overly optimistic as to the benefits. Access to CAT Data 
would result in substantial benefits to SRO surveillance for the 
reasons mentioned earlier in this Section, none of which are undermined 
by the comments. Second, the Commission disagrees with the commenter 
that stated that the benefits that would accrue to surveillance are 
exaggerated due to the Plan's lack of an analytical framework embedded 
in its design. The commenter assumes that if the Plan had an analytical 
framework, the benefits of CAT would be more realistic. The Commission 
notes that the Plan does have an analytical framework embedded in its 
design. The Plan states specifically that the Plan Processor will 
provide the following analytical framework--namely an API that allows 
regulators to use analytical tools (e.g., R, SAS, Python, Tableau) and 
permit regulators to use ODBC/JDBC drivers to access CAT Data.\2284\ 
This analytical framework would benefit SROs in conducting 
surveillance, which would benefit investors and market participants by 
allowing regulators to more quickly and precisely identify and address 
a higher proportion of market violations that occur, as well as prevent 
violative behavior through deterrence. Third, this analytical framework 
could allow regulators to code computer programs using CAT Data to 
detect trading patterns indicative of violative behavior. While there 
might be potential errors in detecting violative behavior using these 
programs, that is, false positives (detecting non-violative behavior) 
and false negatives (not detecting violative behavior), having access 
to more detailed CAT Data in a consolidated source including 
timestamps, principal orders, non-member activity, and subaccount 
allocations could minimize those errors. Fourth, the Commission 
disagrees with the commenter that the methods for querying data and 
performing bulk extracts are ``generic'' and not fit for financial 
market surveillance. The Commission expects these query methods, 
generic or not, will facilitate the direct access necessary for SROs to 
build improved surveillances. For instance, the Plan states that CAT 
will support two types of query interfacing,\2285\ and specifies that 
all queries must be able to be run against raw (i.e., unlinked) or 
processed data, or both.\2286\ Furthermore, by using the query 
interfacing supported by CAT, regulators would be able to directly 
query Customer-IDs, which could

[[Page 84838]]

improve the ability for SROs to conduct surveillance, contrary to what 
the commenter stated.
---------------------------------------------------------------------------

    \2284\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
8.2.
    \2285\ Id. at Appendix D, Section 8.1.1.
    \2286\ See Section V.E.1.d(3), supra for additional information.
---------------------------------------------------------------------------

    The Commission considered the comments on real-time surveillance, 
and understands that from the Participants' response, some SROs already 
have real-time surveillance. Further, the Commission expects the Plan 
to improve on SROs' real-time surveillances because the Plan will 
result in exchanges receiving, even at a later date, additional fields 
in the Material Terms of the Order, such as special order handling 
instructions, and additional order events, such as principal orders, 
that some SROs currently do not have available for any surveillance, 
real-time or otherwise.\2287\
---------------------------------------------------------------------------

    \2287\ As noted in Section V.D.1.c, this economic analysis 
considers surveillance to be SROs running processing on routinely 
collected or in-house data to identify potential violations of rules 
or regulations.
---------------------------------------------------------------------------

    Finally, in response to the commenter that claimed the Plan did not 
provide enough details on how regulators would use CAT Data, the 
Commission acknowledges that there is uncertainty as to how the SROs 
will incorporate CAT Data into their surveillance activities. The 
Commission believes that even if there is uncertainty in this regard, 
the SROs nonetheless would still be able to conduct ``meaningful'' 
surveillance with the opportunity to improve on their current 
surveillances. In this regard, the Commission notes that Rule 613(f) 
states that national securities exchanges should create surveillances 
that are ``reasonably designed to make use of consolidated information 
in the consolidated audit trail.'' \2288\ In addition, the Plan will 
improve the ability of regulators to perform cross-market and cross-
product surveillance because regulators will have direct access to 
consistent data that includes comprehensive trade and order data in 
markets for multiple products.
---------------------------------------------------------------------------

    \2288\ 17 CFR 242.613(f).
---------------------------------------------------------------------------

    The Commission also notes that the changes to the Plan to require 
the reporting of LEIs for Customers and Industry Members in certain 
circumstances \2289\ should facilitate improved SRO surveillance by 
enabling SROs to identify traders and their clients with more 
accuracy.\2290\ The reporting of LEIs would also make it possible to 
merge CAT Data with markets not included in CAT at this time (e.g., 
futures and security-based swaps), which could potentially assist with 
surveillance activities involving these products. Therefore, the 
inclusion of LEI for Customers and Industry Members could result in 
greater benefits to SRO surveillance than those described in the 
Notice.
---------------------------------------------------------------------------

    \2289\ See Section IV.D.4.a.(4) and Section IV.D.4.b.(2), supra, 
for a description of the LEI reporting requirements in the Plan.
    \2290\ See Section V.E.1.b(5), supra, for a discussion of how 
LEIs can increase the accuracy of identifications; see also SIFMA 
Letter at 37.
---------------------------------------------------------------------------

(2) Examinations
    In the Notice, the Commission discussed its preliminary belief that 
the availability of CAT Data would also improve examinations by the 
Commission and SROs and that these improvements would benefit investor 
protection, and the market in general, by resulting in more effective 
supervision of market participants.\2291\ The Commission conducted 493 
broker-dealer examinations in 2014 and 484 in 2015, 70 exams of the 
national securities exchanges and FINRA in 2014 and 21 in 2015. In 
addition, the Commission conducted 1,237 investment adviser and 
investment company examinations in 2014 and 1,358 in 2015. Virtually 
all investment adviser examinations and a significant proportion of the 
Commission's other examinations involved analysis of trading and order 
data. Currently some data that would be useful to conduct risk-based 
selection for examinations, such as trade blotters, are not available 
in data sources available for pre-exam analysis.\2292\ Further, the 
Commission explained that data available during exams often require 
regulatory Staff to link multiple data sources to analyze customer 
trading. For example, some customer identities are present in EBS data, 
but timestamps are not. To evaluate the execution price a customer 
received, it is necessary to know the time of the trade to compare the 
price of the customer's execution with the prevailing market prices at 
that time, which requires linking the EBS data with another data source 
that contains trades with timestamps (such as the trade blotter). These 
linking processes can be labor-intensive and require the use of 
algorithms that may not link with 100% accuracy.
---------------------------------------------------------------------------

    \2291\ See Notice, supra note 5, at 30698-99.
    \2292\ Regulators can obtain detailed equity transaction data by 
requesting a trade blotter from a particular firm; however, the data 
would only show the activity of that firm.
---------------------------------------------------------------------------

    The Commission explained in the Notice that the expected 
improvements in the data qualities discussed above would enhance the 
ability of regulators to select market participants for focused 
examinations on the basis of risk. Having direct access to consolidated 
data in the Central Repository would improve regulators' ability to 
efficiently conduct analyses in an attempt to select broker-dealers and 
investment advisers for more intensive examinations based on identified 
risk. Additionally, the Commission discussed its belief that regulators 
would be able to conduct certain types of exams more efficiently 
because of the inclusion of Customer-IDs in CAT. Moreover, the clock 
synchronization provisions of the Plan could aid regulators in 
sequencing some events more accurately, thereby facilitating more 
informed exams. The Commission believed that the Plan would allow the 
data collection portion of examinations to be completed more quickly 
with fewer formal data requests, and that more efficient examinations 
would help regulators better protect investors from the violative 
behavior of some market participants and could reduce examination costs 
for market participants who would have otherwise faced examinations 
that are less focused and more lengthy.
    One commenter suggested that without ``red-flagging'' suspicious 
activities using the commenter's recommended approach (using real-time 
analytics),\2293\ it would not be possible to facilitate the ability of 
regulators to conduct risk-based examinations.\2294\ The same commenter 
stated that the Commission has an overly optimistic assessment of the 
economic effects to examinations, mainly due to the Plan lacking an 
analytical framework embedded in its design.\2295\ The Participants did 
not provide a response to this comment.
---------------------------------------------------------------------------

    \2293\ Part of the commenter's recommended approach to 
conducting surveillance involves using sensors to perform real-time 
analytics over streamed data. See Data Boiler Letter at 10-13.
    \2294\ Data Boiler Letter at 32.
    \2295\ Data Boiler Letter at 33.
---------------------------------------------------------------------------

    The Commission considered these comments, but believes that they do 
not warrant changes to the Commission's preliminary conclusions of the 
benefits that the Plan would provide to performing risk-based 
examinations. First, the Commission disagrees with the commenter that 
stated ``red-flagging'' suspicious activity using their recommended 
approach (using real-time analytics) is the only way to facilitate 
risk-based examinations. As discussed above, having access to Customer-
IDs would assist the Commission in flagging suspicious activity for 
their risk-based examinations, and assist the Commission in effectively 
targeting risk-based examinations of market participants who are at 
elevated risk of violating market rules. Furthermore, the Commission 
could also conduct more informed risk-based exams under the Plan 
because enhanced clock synchronization provisions could aid the 
Commission in sequencing some

[[Page 84839]]

events more accurately. Second, regarding the commenter who stated that 
the Commission's assessment of the effects to examinations are 
optimistic because the Plan lacks an analytical framework, the 
Commission disagrees with this commenter for similar reasons to those 
stated above.\2296\
---------------------------------------------------------------------------

    \2296\ See Section V.E.2.c(1), supra; supra n.2284.
---------------------------------------------------------------------------

    While the commenters did not provide any additional information 
that would warrant changes to the Commission's analysis or conclusions 
as set out in the Notice, changes in the Plan do alter the Commission's 
preliminary analysis. Requiring CAT Reporters to report their LEI for 
Customers and Industry Members in certain circumstances \2297\ should 
result in a greater ability for regulators to identify traders for the 
purposes of risk-based examinations.\2298\ Additionally, more stringent 
clock synchronization requirements for exchanges should enhance 
regulators' abilities to sequence events, thereby facilitating more 
informed risk-based exams. As such, the Commission believes that 
changes to the Plan could generate additional benefits over and above 
those stated in the Notice.
---------------------------------------------------------------------------

    \2297\ See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra, for a 
description of the LEI reporting requirements in the Plan.
    \2298\ See Section V.E.1.b(5), supra, for a discussion of how 
LEIs can increase the accuracy of identifications; see also SIFMA 
Letter at 37.
---------------------------------------------------------------------------

(3) Enforcement Investigations
    In the Notice, the Commission explained that the improvements in 
data qualities that would result from the CAT NMS Plan would 
significantly improve the efficiency and efficacy of enforcement 
investigations, including insider trading and manipulation 
investigations.\2299\ The Commission discussed how more efficient and 
effective enforcement activity is beneficial to both investors and 
market participants because it deters violative behavior that degrades 
market quality and that imposes costs on investors and market 
participants.
---------------------------------------------------------------------------

    \2299\ See Notice, supra note 5, at 30699.
---------------------------------------------------------------------------

    The Commission discussed its expectation that dramatic benefits 
would come from improvements to the accessibility, timeliness, 
accuracy, and completeness of the data. First, compiling the data to 
support an investigation often requires a tremendous amount of time and 
resources, multiple requests to multiple data sources and significant 
data processing efforts, for both SROs and the Commission. While SROs 
have direct access to the data from their own markets, their 
investigations and investigations by the Commission often require 
access to the data of other SROs because firms trade across multiple 
venues. Some enforcement investigations, including those on insider 
trading and manipulation, require narrow market reconstructions that 
allow investigators to view actions and reactions across the market. 
Data fragmentation and the time it takes to receive requested data 
currently make these market reconstructions cumbersome and time-
consuming. The Commission discussed its view that having access to CAT 
Data would help regulators analyze and reconstruct market events, and 
could in turn help them detect violative behavior during enforcement 
investigations.
    Second, the Commission explained that it currently takes weeks or 
longer to process, link and make data available for analysis in an 
enforcement investigation. Under the CAT NMS Plan, data for an 
enforcement investigation initiated five days or more after an event 
would be processed, linked, and available for analysis within 24 hours 
of a query. The Commission discussed how the enhanced timeliness of 
data can improve the Commission's chances of preventing asset transfers 
from manipulation schemes, because regulators could use even 
uncorrected data (between T+1 and T+5) to detect the manipulation and 
identify the suspected manipulators.
    Third, the Commission explained in the Notice that currently, 
identifying the activity of a single market participant across the 
market is cumbersome and prone to error. The inclusion and expected 
improvement in the accuracy of Customer Identifying Information in the 
CAT NMS Plan could allow regulators to review the activity of specific 
market participants more effectively. The Commission also explained 
that this information would be helpful in identifying insider trading, 
manipulation and other potentially violative activity that depends on 
the identity of market participants. Additionally, the Commission 
explained that improved accuracy with respect to timestamp granularity 
could increase the proportion of market events that could be sequenced 
under the CAT NMS Plan. This could yield some benefits in enforcement 
investigations, including investigations of insider trading, 
manipulation, and compliance with Rule 201 of Regulation SHO and Rule 
611 of Regulation NMS.\2300\
---------------------------------------------------------------------------

    \2300\ Benefits associated with the ability to sequence events 
may be limited in some cases because many order events would not be 
able to be sequenced completely with the standards established in 
the CAT NMS Plan. See Section V.D.2.b(2)B.i, supra.
---------------------------------------------------------------------------

    Finally, the Commission explained that the expected improvements in 
completeness could also benefit investigations by allowing regulators 
to observe in a consolidated data source relevant data that are not 
available in some or all current data sources, including timestamps, 
principal orders, non-member activity, customer information, 
allocations, and an open/close indicator, which would identify whether 
a trade increases or decreases an existing position. This data could be 
important, for example, when investigating allegations of market 
manipulation or cherry-picking in subaccounts.
    One commenter agreed that the CAT Plan would slightly improve the 
efficiency of regulators' enforcement activities because CAT will save 
them multiple trips to request data from financial institutions; \2301\ 
however, this commenter argued that such benefits would be minimal 
because they do not help to identify misconduct and/or recognize 
patterns of market manipulation in real-time.\2302\ The commenter 
mentioned that the CAT Plan would not effectively and efficiently deter 
violative behavior, thereby only resulting in marginal improvements to 
enforcement.\2303\ The Commission also received a comment stating that 
the Plan is overly-focused on best execution, which requires parsing 
bid and offer information on a minute scale, and that this may 
overwhelm the system and thereby prevent the capture of relevant 
information and frustrate the generally stated goals of CAT.\2304\ One 
commenter also stated that the Commission is overly optimistic with 
respect to the benefits of CAT to enforcement activity, mainly due to 
the Plan lacking an analytical framework embedded in its design.\2305\ 
The Participants did not specifically provide a response to the 
commenters' concerns.
---------------------------------------------------------------------------

    \2301\ Data Boiler Letter at 32.
    \2302\ Id.
    \2303\ Id. at 33.
    \2304\ Anonymous Letter I at 3.
    \2305\ Data Boiler Letter at 33.
---------------------------------------------------------------------------

    The Commission considered these comments and believes that they do 
not warrant changes to the Commission's preliminary conclusions of the 
benefits that the Plan would provide to enforcement investigations. 
First, while the Commission acknowledges that CAT Data will not assist 
the Commission in recognizing patterns of market manipulation in real-
time, the Commission nonetheless believes that

[[Page 84840]]

the benefits of CAT Data to performing enforcement activities relative 
to the Baseline are significant. For instance, Customer Identifying 
Information in CAT Data would be particularly helpful in identifying a 
single market participant across the market, which would be useful in 
identifying insider trading, manipulation and other potentially 
violative activity that depends on the identity of market participants. 
Second, in light of the comment on best execution, the Commission 
believes that while the Plan will facilitate enforcement of best 
execution, including on Rule 611, this will not prevent the Plan from 
improving regulators' ability to investigate other types of violations, 
including market manipulation and insider trading. Furthermore, by 
parsing information on a granular scale, the Commission believes that 
the CAT Plan would increase the proportion of events that can be 
sequenced, yielding benefits in enforcement investigations. Third, 
regarding the commenter who stated that the Commission's assessment of 
the effects to enforcement investigations are optimistic because the 
Plan lacks an analysis framework, the Commission disagrees with this 
commenter for similar reasons to those stated above.\2306\
---------------------------------------------------------------------------

    \2306\ See Section V.E.2.c(1), supra; supra n.2284.
---------------------------------------------------------------------------

    While the Commission is not altering its analysis of the benefits 
in response to the comments it received, the Commission is updating its 
analysis to recognize modifications to the Plan. Requiring CAT 
Reporters to report LEIs for Customers and Industry Members in certain 
circumstances \2307\ should result in a greater ability for regulators 
to identify traders for the purposes of enforcement activity.\2308\ 
This potentially improved data completeness could result in greater 
benefits to enforcement than stated in the Notice. Benefits to data 
completeness could also be potentially diminished by Plan modifications 
that remove the open-close indicator for equities and Options Market 
Makers. Such information would have been useful in detecting certain 
market manipulations and violations of rules such as Rule 105, short 
sale marking rules, and Rule 204 in equities and in identifying whether 
options market makers engage in aggressive risk-taking trading. The 
Commission now notes that due to the elimination of the requirement to 
report an open/close indicator for equities and Options Market Makers 
as part of CAT, these benefits will no longer be realized. However, the 
Commission is approving the Plan with this modification for the reasons 
discussed in Section IV.D.4.c, above. With regards to modifications to 
the timestamps on Allocation Reports, the Commission now understands 
that allocations are conducted after a trade and that the allocation 
time can aid regulators in ways that do not require millisecond-level 
timestamps. Therefore, modifications to the Plan that now require 
second-level timestamps would not result in a significant loss of 
benefits to the Commission. In spite of these modifications to the 
Plan, the Commission nonetheless believes that the efficiency and 
efficacy of enforcement investigations will be improved to a greater 
degree than anticipated in the Notice.
---------------------------------------------------------------------------

    \2307\ See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra, for a 
description of the LEI reporting requirements in the Plan.
    \2308\ See Section V.E.1.b(5), supra, for a discussion of how 
LEIs can increase the accuracy of identifications; see also SIFMA 
Letter at 37.
---------------------------------------------------------------------------

(4) Tips and Complaints
    In the Notice, the Commission explained why it believed that the 
CAT NMS Plan, would improve the process for evaluating tips and 
complaints by allowing regulators to more effectively triage tips and 
complaints, which could focus resources on behavior that is most likely 
to be violative.\2309\ Specifically, the availability of CAT Data would 
drastically increase the detail of data available to regulators for the 
purposes of tip assessment. This would assist the SROs and Commission 
in identifying which tips and complaints are credible, would help 
ensure that regulators open investigations or examinations on credible 
tips and complaints, and would limit regulatory resources spent on 
unreliable tips and complaints.
---------------------------------------------------------------------------

    \2309\ See Notice, supra note 5, at 30699; see also SEC Office 
of the Whistleblower, What Happens to Tips, available at https://www.sec.gov/about/offices/owb/owb-what-happens-to-tips.shtml.
---------------------------------------------------------------------------

    The Commission did not receive any comments regarding the benefits 
that would accrue to investors with regards to how regulators respond 
to tips and complaints. However, changes to the Plan affect the 
Commission's analysis from the Notice; namely, requiring LEI reporting; 
enhanced clock synchronization requirements for exchanges; less 
granular timestamps for allocation reports; and removing the open/close 
indicator for equities and for Options Market Makers. As discussed 
above in Sections V.E.2.c.(2) and (3), these changes could affect risk 
based examinations and enforcement investigations, and could thereby 
affect the ability of regulators to effectively triage tips and 
complaints. In light of these modifications to the CAT NMS Plan, the 
Commission continues to believe that benefits would accrue to 
regulators allowing them to more effectively triage tips and complaints 
by focusing resources on behavior that is most likely to be violative, 
thereby resulting in benefits that would also accrue to investors and 
market participants.

3. Other Provisions of the CAT NMS Plan

    In the Notice, the Commission noted that there are a number of 
provisions of the CAT NMS Plan that provide for features that are 
uniquely applicable to a consolidated audit trail or otherwise lack a 
direct analog in existing data systems.\2310\ Therefore, rather than 
analyze the benefits of these provisions as compared to existing NMS 
Plans or data systems, the Commission analyzed these provisions in 
comparison to a CAT NMS Plan without these features. The Commission 
preliminarily believed that these provisions of the CAT NMS Plan would 
increase the likelihood that the potential benefits of the CAT NMS Plan 
described above would be realized.
---------------------------------------------------------------------------

    \2310\ Id. at 30699-30708.
---------------------------------------------------------------------------

    As discussed below, the Commission has revised its analysis in 
response to comments, the Participants' response, and the Commission's 
modifications to the Plan.
a. Future Upgrades
    In the Notice, the Commission discussed several Plan provisions 
that seek to ensure that the CAT Data would continually be updated to 
keep pace with technological and regulatory developments.\2311\ For 
example, the Plan would require that the CCO review the completeness of 
CAT Data periodically,\2312\ that the Central Repository be scalable to 
efficiently adjust for new requirements and changes in 
regulations,\2313\ and that Participants provide the Commission with a 
document outlining how the Participants could incorporate information 
on select additional products and related Reportable

[[Page 84841]]

Events.\2314\ The Commission preliminarily believed these provisions 
would allow the CAT to be updated if and when the applicable 
technologies and regulations change.
---------------------------------------------------------------------------

    \2311\ Id. at 30700. Examples of these provisions include, 
requiring ``the Chief Compliance Officer to review completeness of 
CAT Data periodically;'' requiring that ``the Central Repository be 
scalable to efficiently adjust for new requirements and changes in 
regulations;'' and requiring Participants ``to provide the 
Commission with a document outlining how Participants could 
incorporate information on selecting additional products and related 
Reportable Events.'' Id.
    \2312\ See CAT NMS Plan, supra note 5, at Sections 4.12(b)(ii), 
6.2(a)(v)(E). The CCO would be required to perform reviews on 
matters including the completeness of information submitted to the 
Plan Processor or Central Repository and report findings 
periodically to the Operating Committee.
    \2313\ Id. at Appendix D, Section 1.1.
    \2314\ Id. at Section 6.11. This document is due within six 
months of the Effective Date of the CAT NMS Plan.
---------------------------------------------------------------------------

    The Commission noted that these provisions are designed to ensure 
that the Participants consider enhancing and expanding CAT Data shortly 
after initial implementation of the CAT NMS Plan and that the 
Participants consider improvements regularly continuing forward. The 
Commission preliminarily expected that, in addition to these 
provisions, the CCO review would further facilitate proactive expansion 
of CAT to account for regulatory changes or changes in how the market 
operates, or in response to a regulatory need for access to new order 
events or new information about particular order events. To the extent 
that the Participants determine that an expansion is necessary and it 
is approved by the Commission, the Plan's scalability provision 
promotes the efficient implementation of that expansion such that it 
could be completed at lower cost and/or in a timely manner.
    Taken together, the Commission believed that these provisions could 
also provide a means for the Commission to ensure that improvements to 
CAT functionality are considered so as to preserve its existing 
benefits, or that the expansion of CAT functionality is undertaken in 
order to create new benefits. The Commission recognized some 
uncertainty with respect to how effectively these provisions would 
operate to ensure that improvements to CAT functionality are considered 
in a way that would maximize the benefits of the Plan, but noted that 
the Commission does retain the ability to modify the Plan, if such a 
step becomes necessary to ensure that future upgrades are undertaken as 
necessary.\2315\ Moreover, the focus on scalability, adaptability, and 
timely maintenance and upgrades promotes a system that could be readily 
adapted over time. The Commission preliminarily believed that the 
provisions outlined above would allow the CAT Data to be continually 
updated to keep pace with technological and regulatory developments.
---------------------------------------------------------------------------

    \2315\ 17 CFR 242.608.
---------------------------------------------------------------------------

    The Commission received one comment disagreeing that future 
upgrades would increase the likelihood that potential future benefits 
would be realized. The commenter stated that the provisions about 
future upgrades are infrastructure related, rather than quality 
improvements in the sense of timely insights to regulators.\2316\ 
Another commenter stated that the proposal for the CCO to be an officer 
of the CAT LLC as well as an employee of the Plan Processor creates a 
conflict of interest that would undermine the ability of this officer 
to carry out his or her responsibilities effectively under the Plan 
because he or she would owe a fiduciary duty to the Plan Processor 
rather than the CAT LLC.\2317\ The Commission notes that the Plan 
accords the CCO certain responsibilities related to future upgrades; 
for example, as noted above, the CCO is responsible for reviewing the 
completeness of CAT Data periodically and providing the SEC with a 
document outlining how the Participants could incorporate information 
on select additional products and related Reportable Events.\2318\
---------------------------------------------------------------------------

    \2316\ Data Boiler Letter at 34.
    \2317\ FSI Letter at 3.
    \2318\ The Plan delegates these tasks to the CCO. See CAT NMS 
Plan, supra note 5, at Sections 4.12(b)(ii), 6.11, 6.2(a)(v)(E).
---------------------------------------------------------------------------

    In response to that comment, the Participants recommended a change 
to the Plan that would require that the CCO have fiduciary duties to 
the CAT LLC in the same manner and extent as an officer of a Delaware 
corporation, and that, to the extent those duties conflict with duties 
the CCO has to the Plan Processor, the duties to the CAT LLC should 
control.\2319\ As discussed in more detail in the Discussion Section, 
the Commission agrees with this suggestion and has modified the Plan to 
incorporate this change.
---------------------------------------------------------------------------

    \2319\ Response Letter I at 17-18.
---------------------------------------------------------------------------

    The Commission has considered the comments received, the 
Participants' response, and the modifications the Commission has made 
to the Plan. The Commission disagrees with the commenter that stated 
that the future upgrades would not help to provide ``timely insights to 
regulators'' because the provisions are ``infrastructure related.'' 
\2320\ As discussed above, the upgrades should improve the completeness 
of the CAT Data by potentially allowing for its expansion to include 
information on select additional products and related Reportable 
Events, and access to more complete data should improve regulatory 
activities.\2321\ Additionally, the required scalability of the Central 
Repository infrastructure and the mechanism to accept suggested changes 
from the Advisory Committee and regulators will permit the CAT to meet 
the needs of the regulators--such as enhancements benefiting their 
oversight of the markets--and be modifiable and adaptable to future 
technology changes.\2322\
---------------------------------------------------------------------------

    \2320\ Data Boiler Letter at 34.
    \2321\ See Sections V.E.1.a and V.E.2, supra, for a discussion 
of how more complete data is expected to improve the analysis and 
reconstruction of market events, market analysis and research in 
support of regulatory decisions, and market surveillance, 
examinations, investigations, and other enforcement functions.
    \2322\ See Section IV.D.15, supra.
---------------------------------------------------------------------------

    In response to the comment noting that the proposal for the CCO to 
be an officer of the CAT LLC as well as an employee of the Plan 
Processor creates a conflict of interest,\2323\ the Commission notes 
that the potential for a conflict of interest would create additional 
uncertainty as to whether the provisions of the Plan requiring the CCO 
to review the completeness of CAT Data periodically and to provide the 
Commission with a document outlining how the Participants could 
incorporate information on select additional products and related 
Reportable Events will be carried out in a way that will maximize the 
benefits of the Plan. However, the modification to the Plan requiring 
the CCO to have fiduciary duties to the CAT LLC in the same manner and 
extent as an officer of a Delaware corporation should reduce that 
uncertainty. Therefore, the Commission continues to believe that those 
provisions will allow the CAT to be updated efficiently if and when the 
applicable technologies and regulations change.
---------------------------------------------------------------------------

    \2323\ FSI Letter at 3.
---------------------------------------------------------------------------

    Furthermore, the Plan has been modified to require an annual 
evaluation of potential technological upgrades based upon a review of 
technological advancements over the preceding year, drawing on 
Participants' technology expertise, whether internal or external.\2324\ 
The Plan has also been modified to require an annual assessment of 
whether any data elements should be added, deleted or changed to the 
CAT Data. Because these amendments result in more frequent evaluations 
(compared to biannually), and require the evaluations to review 
technological advancements as well as the usefulness of the data 
elements in CAT, these amendments should further allow the Participants 
to consider the appropriate time to make technological upgrades and 
decisions regarding the inclusion, deletion or modification of data 
elements.
---------------------------------------------------------------------------

    \2324\ See Section IV.D.14, supra.
---------------------------------------------------------------------------

    In summary, the Commission continues to believe that the Plan 
provides a means for the Commission to ensure that improvements to CAT

[[Page 84842]]

functionality are considered so as to preserve its existing benefits, 
or that the expansion of CAT functionality is undertaken in order to 
create new benefits.
b. Promotion of Accuracy
    In the Notice, the Commission discussed specific Plan provisions 
designed to generally promote the accuracy of information contained in 
the Central Repository.\2325\ The CCO is required, among other 
responsibilities, to perform reviews related to the accuracy of 
information submitted to the Central Repository and report to the 
Operating Committee with regard thereto,\2326\ and there is a special 
Compliance Subcommittee of the Operating Committee, which is 
established to aid the CCO with regard to, among other things, issues 
involving the accuracy of information.\2327\ The Plan also contains 
certain other provisions intended to monitor and address Error 
Rates.\2328\
---------------------------------------------------------------------------

    \2325\ See Notice, supra note 5, at 30700-01.
    \2326\ See CAT NMS Plan, supra note 5, at Section 6.2(a)(v)(E).
    \2327\ Id. at Section.4.12(b).
    \2328\ Id. at Appendix C, Section A.3(b).
---------------------------------------------------------------------------

    The Commission discussed its preliminary belief that the provisions 
were reasonably designed to improve the overall accuracy of CAT Data 
relative to the exclusion of such provisions. It noted, however, that 
certain procedures outlined in the Plan might not incentivize all firms 
to further improve the quality of the data they report. Specifically, 
because the Plan only discusses penalties or fines for CAT Reporters 
with excessive Error Rates, the Commission explained that it is not 
clear what incentive, if any, would be provided to firms with median 
Error Rates to improve their regulatory data reporting processes, and 
that this lack of incentive could collectively limit industry's 
incentives to reduce Error Rates.\2329\
---------------------------------------------------------------------------

    \2329\ See Notice, supra note 5, at 30701.
---------------------------------------------------------------------------

    In addition, the Commission noted that the Plan includes provisions 
requiring the establishment of a symbology database that will also 
foster accuracy. The Commission noted that Participants and their 
Industry Members will each be required to maintain a five-year running 
log documenting the time of each clock synchronization performed and 
the result of such synchronization, and that these requirements should 
provide a clearer foundation for evaluating the standards set in the 
Plan upon which future improvements could be considered.
    The Commission received several comments regarding the promotion of 
accuracy in the Plan. One comment letter stated that there are 
insufficient incentives provided by the Plan for CAT Reporters to 
reduce Error Rates.\2330\ The commenter did not provide any additional 
information as to why the existing incentives are insufficient or any 
specific suggestions to improve the incentives. Another commenter 
recommended a ``positive reinforcement'' approach to incentivize the 
reduction of Error Rates, where firms would be exempted from 
duplicative reporting systems if their Error Rate for ``comparable'' 
data in CAT reaches a certain threshold.\2331\ In addition, the 
commenter suggested that customer information fields should be 
categorized based on the degree of their importance for market 
surveillance and market reconstruction purposes, so that CAT Reporters 
can focus on ensuring accuracy of the fields most important for market 
surveillance.\2332\ That commenter seemed to agree that an annual 
review of error rates would promote accuracy, stating that an annual 
review is ``reasonable.'' \2333\ The same commenter also noted that 
detailed error reporting statistics for CAT Reporters will assist in 
minimizing the error rate over time.\2334\ Another commenter stated 
their belief that CAT Reporters should have an opportunity to reduce 
their error rate prior to onboarding on CAT, and furthermore, should 
receive a grace period before error correction rates are disseminated 
to regulators.\2335\ The commenter stated that such provisions, ``would 
provide them [CAT Reporters] with a window to better understand the 
data being returned by the CAT, and how it is evaluating data 
submissions.'' \2336\ An additional commenter stated that error rate 
monitoring is an effective way of ensuring firms put in place pre-
validation checks, and that such checks can be an effective method of 
protecting the integrity and accuracy of the data being reported.\2337\ 
The Commission received three comment letters that appeared to support 
the idea that the annual review of clock synchronization and timestamp 
standards would promote accuracy.\2338\ One commenter noted that the 
annual review would permit a consideration of ``the current state and 
cost of clock synch technology, and what the current industry practices 
are regarding adoption of these technologies,'' \2339\ and a second 
generally agreed with that observation.\2340\ A third supported regular 
review to assess whether the standard might be introducing ``noise and/
or overly distorted signals.'' \2341\ In their response, the 
Participants stated that with respect to data accuracy, the 
Participants have included provisions in the Plan to take into account 
minor and major inconsistencies in customer information. In particular, 
the Participants noted that Appendix D explains that ``[t]he Plan 
Processor must design and implement procedures and mechanisms to handle 
both minor and material inconsistencies in customer information.'' 
\2342\ They also noted that material inconsistencies must be 
communicated to the submitting CAT Reporter(s) and resolved within the 
established error correction timeframe.\2343\ The Participants stated 
that the Central Repository also must have an audit trail showing the 
resolution of all errors.\2344\ Finally, the Participants noted that 
they intend to monitor errors in the customer information fields and 
will consider, as appropriate, whether to prioritize the correction of 
certain data fields over others.
---------------------------------------------------------------------------

    \2330\ Data Boiler Letter at 34. The commenter generally 
suggests an alternative approach to data reporting involving a 
``dynamic analytical framework'' where ``sensors directly conduct 
real-time analytics over streamed data where it was originated.'' 
Id.
    \2331\ FIF Letter at 58.
    \2332\ FIF Letter at 11, 93.
    \2333\ FIF Letter at 57.
    \2334\ FIF Letter at 52.
    \2335\ SIFMA Letter at 7.
    \2336\ SIFMA Letter at 7.
    \2337\ UnaVista Letter at 4.
    \2338\ FIF Letter at 106; SIFMA Letter at 34; Data Boiler Letter 
at 21.
    \2339\ FIF Letter at 106. This commenter recommended that any 
clock synchronization should stay in place for three years because 
it is costly to the industry and distributive to the industry to 
change the standard, and such changes could take two years to 
implement. Id.
    \2340\ SIFMA Letter at 34.
    \2341\ Data Boiler Letter at 21.
    \2342\ Response Letter I at 22, citing the CAT NMS Plan at 
Appendix D, Section 9.4.
    \2343\ Id.
    \2344\ Id.
---------------------------------------------------------------------------

    Another commenter suggested that a CAT Reporter's performance of 
pre-validation checks prior to submitting data to the CAT can be an 
effective way to preserve data integrity and accuracy.\2345\ In their 
response, the Participants noted that, in recognition of their 
potential value in ensuring accurate data submissions, they have 
discussed with the Bidders various tools that will be made available to 
CAT Reporters to assist with their data submission, including pre-
validation checks.\2346\
---------------------------------------------------------------------------

    \2345\ UnaVista Letter at 4.
    \2346\ Response Letter I at 49.

---------------------------------------------------------------------------

[[Page 84843]]

    Finally, as discussed in more detail above,\2347\ another commenter 
stated that the proposal for the CCO to be an officer of the CAT LLC as 
well as an employee of the Plan Processor creates a conflict of 
interest.\2348\ The Commission notes that the Plan accords the CCO 
certain responsibilities related to the promotion of accuracy; for 
example, as noted above, the CCO is responsible for reviews related to 
the accuracy of information submitted to the Central Repository and 
reporting to the Operating Committee with regard thereto. In response 
to that comment, the Participants proposed a change to the Plan which 
would require that the CCO have fiduciary duties to the CAT LLC in the 
same manner and extent as an officer of a Delaware corporation.\2349\ 
As discussed in more detail in the Discussion Section, the Commission 
agrees with this suggestion and has modified the Plan to incorporate 
this change.
---------------------------------------------------------------------------

    \2347\ See Section V.E.3.a, supra.
    \2348\ FSI Letter at 3.
    \2349\ Response Letter I at 17-18.
---------------------------------------------------------------------------

    The Commission has considered the comments and the Participants' 
response and is revising its economic analysis as indicated below. In 
response to the commenter that suggested the prioritization of customer 
information fields, the Commission notes that it is amending the Plan 
to require the SROs to submit an assessment of errors in the customer 
information fields and whether to prioritize the correction of certain 
data fields over others, within 36 months of Plan Approval.\2350\ The 
Commission agrees with the Participants, however, that the provisions 
of the Plan requiring the Plan Processor to design and implement 
procedures and mechanisms to handle both minor and material 
inconsistencies \2351\ in customer information, requiring material 
inconsistencies to be resolved within the established error correction 
timeframe, and requiring the Central Repository to have an audit trail 
showing the resolution of all errors should help to promote accuracy, 
as well. Nonetheless, the Commission believes that, the assessment will 
help to identify any unanticipated issues with the accuracy of the 
customer information fields and, in addition to the provisions 
discussed in the Notice and summarized above, should promote the 
overall accuracy of CAT Data.
---------------------------------------------------------------------------

    \2350\ See Section IV.D.4.a.(1), supra.
    \2351\ The Plan states that minor inconsistencies, such as 
variations in road name abbreviations in searches, would be resolved 
within the Plan Processor. Material inconsistencies, such as two 
different people with the same SSN, must be communicated to the 
submitting CAT Reporters and resolved within the error correction 
timeframe described in Section 2.2.4 of the Plan. See CAT NMS Plan, 
supra note 5, at D-35.
---------------------------------------------------------------------------

    In response to the commenter that suggested CAT Reporters should 
have an opportunity to reduce their error rate prior to onboarding on 
CAT, the Commission agrees and believes that such an opportunity exists 
during the testing periods, particularly as specified in the amended 
Plan.\2352\ The Commission is also amending the Plan to require that 
the CAT testing environment will be made available to Industry Members 
on a voluntary basis no later than six months prior to when Industry 
Members are required to report and that more coordinated, structured 
testing of the CAT System will begin no later than three months prior 
to when Industry Members are required to report data to CAT.\2353\ The 
ability to use a testing environment prior to reporting will promote 
accuracy of data going forward.
---------------------------------------------------------------------------

    \2352\ Id. at Appendix C.
    \2353\ See Section IV.D.8.a, supra.
---------------------------------------------------------------------------

    In response to the comment noting that the proposal for the CCO be 
an officer of the CAT LLC as well as an employee of the Plan Processor 
creates a conflict of interest,\2354\ the Commission notes that the 
potential for a conflict of interest would create additional 
uncertainty as to whether the reviews related to the accuracy of 
information submitted to the Central Repository and reports to the 
Operating Committee with regard thereto, both of which are delegated to 
the CCO under the Plan, will be carried out in a way that will maximize 
the benefits of the Plan. However, the modification to the Plan 
requiring the CCO to have fiduciary duties to the CAT LLC in the same 
manner and extent as an officer of a Delaware corporation should reduce 
that uncertainty.
---------------------------------------------------------------------------

    \2354\ FSI Letter at 3.
---------------------------------------------------------------------------

    The Commission also believes that, if they are made available to 
CAT Reporters, pre-validation checks could promote the accuracy of data 
in the Central Repository prior to T+5 by reducing errors. However, the 
Commission notes that the availability of these tools is uncertain.
    While the Commission continues to believe that the lack of 
incentives for firms with median Error Rates to improve their 
regulatory data reporting processes could collectively limit industry's 
incentives to reduce Error Rates, the Commission agrees with the 
commenter that suggested that positive reinforcement with respect to 
error rates may help promote accuracy.\2355\ The Commission notes that, 
as discussed above,\2356\ the overall elimination of existing data 
reporting systems will be conditioned on the availability of quality 
data in CAT, which may incentivize accurate CAT reporting. While the 
Commission agrees that allowing CAT Reporters to stop reporting to 
existing data systems on an individual basis according to their error 
rates would incentivize CAT Reporters to reduce their error rates, the 
Commission notes that this approach may not promote the accuracy of CAT 
Data as a whole, because it could entail a division of market data 
across multiple data sources that would obligate regulators to merge 
multiple data sources to conduct their regulatory activities. However, 
as discussed above, the Commission has amended the Plan to require 
Participants to consider, in their rule filings to retire duplicative 
systems, whether individual Industry Members can be exempted from 
reporting to duplicative systems once their CAT reporting meets 
specified accuracy standards. This should provide further analysis 
regarding whether individual reporting exemptions based on meeting data 
quality standards can incentivize fewer errors while, ensuring that 
regulators can effectively carry out their obligations using CAT 
Data.\2357\
---------------------------------------------------------------------------

    \2355\ FIF Letter at 58.
    \2356\ See Section IV.D.9, supra.
    \2357\ Id. (explaining that the Commission is amending Section 
C.9 of Appendix C of the Plan to require that the Participants 
consider, in their rule filings to retire duplicative systems, 
whether individual Industry Members can be exempted from reporting 
to duplicative systems once their CAT reporting meets specified 
accuracy 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).
---------------------------------------------------------------------------

    The Commission believes that three additional reports and reviews 
will further promote lower data error rates by focusing attention on 
the sources of data errors. First, the Plan has also been modified to 
require an annual evaluation of how the Plan Processor and SROs are 
monitoring Error Rates and exploring the imposition of Error Rates 
based on product, data element or other criteria.\2358\ By increasing 
the frequency of the evaluation and specifically including this Error 
Rate information, this analysis will enable the SROs to better 
understand the factors that generate Error Rates. Second, the Plan has 
been amended to require an assessment in connection with any Material 
Systems Changes to the CAT of its potential impact on the

[[Page 84844]]

maximum Error Rate.\2359\ This will facilitate understanding of how a 
particular Material Systems Change would impact Error Rates and whether 
to temporarily adjust the Error Rates around that Material Systems 
Change. Third, the Plan has been modified to require the SROs to 
provide an assessment of the feasibility, benefits and risks and 
advisability of permitting Industry Members to have bulk access to 
their reported data. Such an assessment would provide further 
information on the tradeoffs of bulk extracts, which could allow 
Industry Members to more efficiently identify and correct data errors.
---------------------------------------------------------------------------

    \2358\ See Section IV.D.11.c, supra.
    \2359\ See Section IV.D.11.b, supra.
---------------------------------------------------------------------------

    The Plan has also been modified to require a report detailing the 
SROs' consideration of engaging in coordinated surveillance (e.g., 
entering into Rule 17d-2 agreements, RSAs or some other approach to 
coordinate compliance and enforcement oversight of the CAT), within 12 
months of Plan Approval.\2360\ This analysis will promote accuracy by 
focusing the SROs on ensuring that their members comply with 
requirements in the Plan.
---------------------------------------------------------------------------

    \2360\ See Section IV.B.4, supra.
---------------------------------------------------------------------------

    Other amendments could promote accuracy by promoting finer 
timestamps and shorter clock offset tolerances. The Plan has been 
modified so that the SROs should apply industry standards related to 
clock synchronization based on the type of CAT Reporter, type of 
Industry Member, or type of system, rather than the industry as a 
whole. In addition, the Plan has been amended to require that the Plan 
Processor review clock synchronization standards by type of entity and 
system type six months after effectiveness of the Plan and on an annual 
basis thereafter. These amendments to the Plan should focus attention 
on areas where improvements to the clock synchronization and timestamp 
standards could improve the accuracy of the data at lower cost.
c. Promotion of Timeliness
    In addition to the specific timeliness benefits discussed in the 
foregoing Sections, in the Notice the Commission discussed some Plan 
provisions that promote performance of the Central Repository, and that 
therefore could indirectly improve the timeliness of regulator access 
to or use of the CAT Data. These are found in capacity requirements for 
the Plan Processor, disaster recovery requirements to ensure the 
availability of the system, and in supervision and reporting of 
timeliness issues.
    First, the Plan Processor must measure and monitor Latency within 
the Central Repository's systems, must establish acceptable levels of 
Latency with the approval of the Operating Committee, and must 
establish policies and procedures to ensure that data feed delays are 
communicated to CAT Reporters, the Commission, and Participants' 
regulatory Staff.\2361\ Second, the Plan Processor must develop 
disaster recovery and business continuity plans to support the 
continuation of CAT business operations.\2362\ Third, the Chief 
Compliance Officer of the Plan Processor must conduct regular 
monitoring of the CAT System for compliance with the Plan, including 
with respect to the reporting and linkage requirements in Appendix 
D.\2363\ Moreover, the Plan Processor must provide the Operating 
Committee with regular reports on the CAT System's operations and 
maintenance, including its capacity and performance, as set out in 
Appendix D.\2364\
---------------------------------------------------------------------------

    \2361\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
8.3
    \2362\ Id. at Section 6.2(a)(v)(J).
    \2363\ Id. at Appendix D, Section 6.2(a)(v)(J).
    \2364\ Id. at Appendix D, Section 6.1(o)(i).
---------------------------------------------------------------------------

    Furthermore, the Commission discussed that one caveat on the 
foregoing discussion is that system performance would in part be 
dependent on a series of SLAs to be negotiated between the Plan 
Participants and the eventual Plan Processor, including with respect to 
linkage and order event processing performance, query performance and 
response times, and system availability.\2365\ As these have not yet 
actually been negotiated, some of the key timeliness benefits 
anticipated to accrue from implementation of the Plan could be subject 
to negotiation.
---------------------------------------------------------------------------

    \2365\ Id. at Appendix D, Section 8.5.
---------------------------------------------------------------------------

    The Commission received several comments on the development of 
disaster recovery and continuity plans. One commenter stated that it is 
not clear that the current disaster recovery plan would provide 
uninterrupted access to CAT data in the case of an event that calls for 
the plan to be activated.\2366\ Another commenter requested 
clarification that the bi-annual disaster recovery test of CAT 
operations at its secondary facility would be conducted twice a year, 
rather than once every two years.\2367\ In their response, the 
Participants clarified that disaster recovery tests would be conducted 
twice a year.\2368\
---------------------------------------------------------------------------

    \2366\ SIFMA Comment Letter at 45.
    \2367\ FSI Letter at 5.
    \2368\ Response Letter I at 51.
---------------------------------------------------------------------------

    As discussed in more detail above,\2369\ another commenter stated 
that the proposal for the CCO to be an officer of the CAT LLC as well 
as an employee of the Plan Processor creates a conflict of 
interest.\2370\ The Commission notes that the Plan accords the CCO 
certain responsibilities related to the promotion of timeliness; for 
example, as noted above, the CCO is responsible for conducting regular 
monitoring of the CAT System for compliance, including with respect to 
compliance with the timelines for reporting and linkage of the data set 
out in Appendix D of the Plan, which could help ensure that the CAT 
Data is made available to regulators in accordance with the timelines 
discussed in Section V.E.1.d.\2371\ In response to that comment, the 
Participants proposed a change to the Plan which would require that the 
CCO have fiduciary duties to the CAT LLC in the same manner and extent 
as an officer of a Delaware corporation. As discussed in more detail in 
the Discussion Section, the Commission agrees with this suggestion and 
has modified the Plan to incorporate this change. The Commission has 
considered the comments, the Participants' response and the 
modification to the Plan, and continues to believe that the provisions 
discussed in the Notice and summarized above promote performance of the 
Central Repository, and therefore could indirectly improve the 
timeliness of regulator access to or use of the CAT Data.
---------------------------------------------------------------------------

    \2369\ See Section IV.B.3, supra.
    \2370\ FSI Letter at 3.
    \2371\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
6.2(a)(v)(J).
---------------------------------------------------------------------------

    In response to the comment noting that the proposal for the CCO to 
be an officer of the CAT LLC as well as an employee of the Plan 
Processor creates a conflict of interest,\2372\ the Commission notes 
that the potential for a conflict of interest would create additional 
uncertainty as to whether regular monitoring of the CAT System for 
compliance, which is the responsibility of the CCO under the Plan, will 
be carried out in a way that will maximize the benefits of the Plan. 
However, the modification to the Plan requiring the CCO to have 
fiduciary duties to the CAT LLC in the same manner and extent as an 
officer of a Delaware corporation should reduce that uncertainty.
---------------------------------------------------------------------------

    \2372\ FSI Letter at 3.
---------------------------------------------------------------------------

    In response to the comment regarding the frequency of 
testing,\2373\ the Commission notes that the Participants

[[Page 84845]]

have clarified that testing will take place twice a year, which will 
promote the effectiveness of the disaster recovery plan relative to 
less frequent testing. In response to the comment regarding 
uninterrupted access to CAT Data in the case of an event that calls for 
the disaster recovery plan to be activated,\2374\ the Commission 
recognizes that regulators may not have uninterrupted access to CAT 
Data in the event the disaster recovery plan is activated, which may 
limit the extent to which the disaster recovery plan promotes 
timeliness relative to a plan that provided for uninterrupted access. 
However, the Commission notes that the CAT NMS Plan states that the 
disaster recovery capability will ensure no loss of data and that a 
secondary processing site must be capable of recovery and restoration 
of services within 48 hours, but with the goal of next-day 
recovery.\2375\ As noted in the Discussion Section, the Commission also 
expects that, given the importance of the Central Repository, the Plan 
Processor will strive to reduce the time it will take to restore and 
recover CAT Data at a backup site. Further, the Commission's amendment 
to the Plan to require an annual review of efforts to reduce the time 
to restore and recover CAT Data at a back-up site should promote 
timeliness. Specifically, any enhancements with respect to restoration 
and backup of data resulting from these reviews will help to further 
ensure that access to CAT Data after an outage would be timely.
---------------------------------------------------------------------------

    \2373\ FSI Letter at 5.
    \2374\ SIFMA Letter at 45.
    \2375\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
5.4.
---------------------------------------------------------------------------

d. Operation and Administration of the CAT NMS Plan
    In the Notice, the Commission stated its preliminary belief that 
certain elements of the CAT NMS Plan's governance are uniquely 
applicable to a consolidated audit trail and that, as compared to a CAT 
NMS Plan without these features, these provisions of the CAT NMS Plan 
increase the likelihood that the potential benefits of the CAT NMS Plan 
would be realized.\2376\
---------------------------------------------------------------------------

    \2376\ See Notice, supra note 5, at 30702.
---------------------------------------------------------------------------

(1) Introduction
    In the Notice, the Commission stated that, in adopting Rule 613, 
the Commission established certain requirements for the governance of 
the CAT NMS Plan, stating that those ``requirements are important to 
the efficient operation and practical evolution of the [CAT] and are 
responsive to many commenters' concerns about governance structure, 
cost allocations, and the inclusion of SRO members as part of the 
planning process.'' \2377\ Moreover, the Commission did not establish 
detailed parameters for the governance of the CAT NMS Plan, but rather 
allowed the SROs to develop specific governance arrangements, subject 
to a small number of requirements.\2378\ For those requirements, the 
Commission stated that the governance provisions identified in the 
Adopting Release--relating to Operating Committee voting and the 
Advisory Committee--continue to be important to the efficient operation 
and practical evolution of the Plan, particularly given that there are 
a range of possible outcomes with respect to both the costs and 
benefits of the Plan that depend on future decisions.\2379\ Further, 
the way in which the identified governance provisions have been 
incorporated into the Plan could help facilitate better decision-making 
by the relevant parties. This, in turn, means that the Commission could 
have greater confidence that the benefits resulting from implementation 
of the Plan would be achieved in an efficient manner and that costs 
resulting from inefficiencies would be avoided.\2380\
---------------------------------------------------------------------------

    \2377\ Id. (quoting the Adopting Release, supra note 14, at 
45787).
    \2378\ Id.
    \2379\ Id.
    \2380\ Id.
---------------------------------------------------------------------------

(2) Key Factors Relating to Governance
    Two factors identified by the Commission in the Rule 613 Adopting 
Release as ``important to the efficient operation and practical 
evolution of the [CAT]'' are voting within the Operating Committee and 
the role and composition of the Advisory Committee.\2381\ Specifically, 
voting thresholds that result in Operating Committee decision-making 
that balances the ability of minority members to have alternative views 
considered with the need to move forward when appropriate to implement 
needed policies can promote achievement of the Plan's benefits in an 
efficient manner. Similarly, an Advisory Committee that is balanced in 
terms of membership size and composition, as well as in its ability to 
present views to the Operating Committee, can result in better 
performance of its informational role, and thus more efficient 
achievement of the benefits of the Plan.\2382\
---------------------------------------------------------------------------

    \2381\ Id. at 30703.
    \2382\ Id.
---------------------------------------------------------------------------

A. Voting

    In adopting Rule 613, the Commission stated that ``an alternate 
approach'' to voting involving ``the possibility of a governance 
requirement other than unanimity, or even super-majority approval, for 
all but the most important decisions'' should be considered, as it 
``may be appropriate to avoid a situation where a significant majority 
of plan sponsors--or even all but one plan sponsor--supports an 
initiative but, due to a unanimous voting requirement, action cannot be 
undertaken.'' \2383\ The Notice states that the Plan generally eschews 
a unanimous voting threshold, except for three clearly-defined 
circumstances--and that by contrast ``[m]ajority approval of the 
Operating Committee is sufficient to approve routine matters, arising 
in the ordinary course of business, while non-routine matters, outside 
the ordinary course of business, would require a supermajority (two-
thirds) vote of the Operating Committee to be approved.'' \2384\ As the 
Notice discusses, majority voting avoids the hold-out problem of 
unanimity, but can result in decisions that bear less concern for the 
interests of the minority members--which in turn may depend on the ease 
with which a majority coalition can be formed, whether those coalitions 
are fluid or static, and whether in practice decision-making is 
collegial or contentious.\2385\ The Notice also recognizes that 
``Participant SROs that are affiliated with one another could vote as a 
block by designating a single individual to represent them on the 
Committee,'' thereby permitting those individuals to exercise more 
influence, but still short of control over voting outcomes.\2386\ And 
the Notice states that the Plan's supermajority voting requirement for 
more important matters represents an intermediate ground between 
majority and unanimous voting.\2387\
---------------------------------------------------------------------------

    \2383\ Id. at 30703.
    \2384\ Id.
    \2385\ Id. at 30703-04.
    \2386\ Id.
    \2387\ Id. at 30704.
---------------------------------------------------------------------------

    One commenter stated that it supports the EMSAC recommendations 
regarding changes to NMS Plan governance, which include limiting NMS 
Plan provisions requiring a unanimous vote and instead requiring two-
thirds supermajority voting for substantive changes, plan amendments, 
and fees, with a simple majority vote for administrative or technical 
matters and argued that the recommendations should be included in the 
CAT NMS

[[Page 84846]]

Plan.\2388\ The same commenter also supported the recommendation that 
would involve ``revisit[ing] allocation of voting rights among SROs'' 
to replace the ``one vote per exchange registration'' model with a 
model of one vote per exchange family (except if the exchange family 
has a consolidated market share of 10% or more, then two votes) and 
recommended that it be applied to the CAT NMS Plan.\2389\
---------------------------------------------------------------------------

    \2388\ Fidelity Letter at 7-8; see also EMSAC Recommendation, 
supra note 693, at 3. The recommendation recognizes changes in the 
environment with respect to exchange competition. See Transcript, 
Equity Market Structure Advisory Committee Meeting (April 26, 2016) 
at 106 (``EMSAC April 26 Transcript''), available at https://www.sec.gov/spotlight/emsac/emsac-042616-transcript.txt.
    \2389\ Fidelity Letter at 7-8; see also EMSAC Recommendation, 
supra note 693 at 3. The recommendation recognizes that the number 
of exchange licenses that an exchange may have is related to the 
flexibility to provide for different pricing arrangements, rather 
than relating to what is appropriate for NMS Plan voting. See EMSAC 
April 26 Transcript, supra note 2388, at 106-07.
---------------------------------------------------------------------------

    With respect to unanimous voting, the Participants' response noted 
that the Plan already significantly limits the use of unanimous voting 
to three well-defined circumstances, and that the Plan differs from 
other NMS Plans in this regard.\2390\ With respect to allocation of 
voting to exchanges or exchange families, the Participants stated that 
because each Participant has obligations under Rule 613, each 
Participant should receive a vote.\2391\ The Participants also noted 
that this approach is consistent with other NMS Plans.
---------------------------------------------------------------------------

    \2390\ Response Letter I at 7-8.
    \2391\ Response Letter I at 7.
---------------------------------------------------------------------------

    The Commission has analyzed the comments received and discusses 
them in turn below, focusing on the CAT NMS Plan, and specifically on 
the question of whether the governance structure as amended in this 
Notice would decrease Plan uncertainty for purposes of the Commission's 
approval of the CAT NMS Plan.\2392\
---------------------------------------------------------------------------

    \2392\ The analysis therefore does not relate to whether changes 
at a later point to NMS Plan governance more broadly, which could 
include changes to CAT NMS Plan governance, would be appropriate at 
such time; see also infra note 2442 and associated text; Section 
IV.B, supra.
---------------------------------------------------------------------------

    With respect to voting thresholds, the Commission believes that the 
CAT NMS Plan already anticipated the need for a voting structure that 
differs from other NMS Plans in following the Commission's 
recommendation to seek an ``alternative approach.'' The CAT NMS Plan 
requires unanimous voting only in three specific instances and 
otherwise relies on supermajority or majority votes,\2393\ which the 
Commission notes is generally consistent with the suggestions made by 
the commenters. With respect to allocation of votes, the Commission 
believes that the exchange family approach could potentially give 
smaller or unaffiliated exchanges a more significant voice in Operating 
Committee decision-making, but it is already the case under the Plan 
that no single exchange family or even pair of exchange families can 
themselves control voting outcomes, even at a majority voting 
threshold.\2394\ Thus, the determinants of whether majority voting 
would result in adequate attention to the rights of minority members 
continues to turn on the factors set out in the economic analysis 
accompanying the Notice.
---------------------------------------------------------------------------

    \2393\ Unanimous voting is required for: (i) Obligating 
Participants to make a loan or capital contribution to the Company; 
(ii) dissolving the Company; and (iii) acting by written consent in 
lieu of a meeting. See Section IV.B.1, supra.
    \2394\ See infra note 2811.
---------------------------------------------------------------------------

B. Advisory Committee

    The Commission in the Notice further stated that in implementing 
the requirements of Rule 613--which requires that the Plan designate an 
Advisory Committee to advise plan sponsors on the implementation, 
operation, and administration of the Central Repository, and which must 
include representatives of member firms of the Plan sponsors (broker-
dealers)--the Plan requires the Advisory Committee to have diverse 
membership: A minimum of six broker-dealers of diverse types and six 
representatives of entities that are not broker-dealers.\2395\ The 
Notice elaborates that, given the primary purpose of the Advisory 
Committee as a forum to communicate important information to the 
Operating Committee, which the Operating Committee could then use to 
ensure its decisions are fully-informed, the Plan's choices in 
implementing Rule 613 do reflect some tradeoffs.\2396\ Specifically, 
one factor in the ability of the Advisory Committee to collect relevant 
information for the Operating Committee is the quality and depth of the 
expertise, and the diversity of viewpoints, of the Advisory Committee's 
membership.\2397\ The Notice states that the Plan balances these 
considerations by providing the Advisory Committee with sufficient 
membership to be able to generate useful information and advice for the 
Operating Committee, while being at a sufficiently low size and 
diversity level to permit the members to be able to work 
together.\2398\ Moreover, another factor in the ability of the Advisory 
Committee to advise the Operating Committee is whether the Advisory 
Committee, having assembled a diverse set of views, could effectively 
communicate those views to the Operating Committee.\2399\ The Notice 
states that two Plan provisions, relating to the staggering of member 
terms and the limits on participation of the Advisory Committee under 
Rule 613, bear on this communication.\2400\ Finally, one other 
determinant bears on the effectiveness of the Advisory Committee in 
ensuring that the Operating Committee makes decisions in light of 
diverse information--whether the Operating Committee actually takes 
into account the facts and views of the Advisory Committee before 
making a decision.\2401\ Here, the Notice states that the Plan does not 
contain a mechanism to ensure that the Operating Committee considers 
the views of the Advisory Committee.\2402\
---------------------------------------------------------------------------

    \2395\ See Notice, supra note 5, at 30704. The Notice also makes 
clear that the ``[t]erms of Advisory Committee members would not 
exceed three years, and memberships would be staggered so that a 
third of the Committee would be replaced each year.'' Id.
    \2396\ Id.
    \2397\ Id.
    \2398\ Id.
    \2399\ Id.
    \2400\ Id. at 30705. The Notice clarifies that staggering of 
terms could ``enhance the cohesion of the Advisory Committee, and 
thereby its effectiveness in communicating member viewpoints to the 
Operating Committee.'' But, ``the Operating Committee members may 
exclude Advisory Committee members from Executive Sessions.'' Id.
    \2401\ Id.
    \2402\ Id. Such a mechanism could include, per the Notice, 
``requiring the Operating Committee to respond to the Advisory 
Committee's views, formally or informally, in advance of or 
following a decision by the Operating Committee.'' Id.
---------------------------------------------------------------------------

    A number of commenters raised concerns about the extent of input 
from entities other than plan sponsors into the governance of the Plan. 
Several of these commenters cited what they perceived to be governance 
shortcomings with other NMS Plans that have a governance structure 
similar to that of the CAT NMS Plan--i.e., those that also have an 
Operating Committee limited to SRO members, and an Advisory Committee 
for generating input from a broader set of interested parties.\2403\ In 
addition to generalized

[[Page 84847]]

concerns about Advisory Committees having a lack of ``visibility,'' 
``voice,'' or ``authority,'' \2404\ commenters raised a number of ways 
in which they believe Advisory Committees' ability to provide effective 
input into Operating Committees' decision-making has been limited: 
Executive sessions of Operating Committees are overused to exclude 
Advisory Committee participation; \2405\ robust information-sharing was 
not practiced; \2406\ and other similar obstacles.\2407\ These and 
other commenters expressed the view that voting representation for 
certain types of entities \2408\ on the Plan's Operating Committee was 
necessary to promote fully-informed and high-quality decision-
making,\2409\ to enhance transparency and mitigate plan sponsor 
conflicts of interest,\2410\ or to ensure adequate incentives exist to 
drive future improvements to the CAT.\2411\
---------------------------------------------------------------------------

    \2403\ SIFMA Letter at 25 (``The existing governance structure 
for other NMS Plans, which is being imported into the Plan, is 
ineffective and will provide broker-dealers with no meaningful 
participation in the development or operation of the CAT.''); 
Fidelity Letter at 7 (noting that the Plan's governance structure is 
similar to that of other NMS Plans, which structure has largely been 
unchanged since the 1970s, despite significant market changes; 
stating that ``we do not believe that the governance structure in 
the Proposed Plan permits CAT Advisory Committee members an 
opportunity to participate meaningfully in the implementation, 
operation, and administration of the CAT . . . .''); KCG Letter at 7 
(``Feedback related to the administration and operation of other NMS 
Plans . . . indicates that Advisory Committee members have limited 
visibility into the actions of the Operating Committee and almost no 
voice in the operation [of the] NMS Plan''); ICI Letter at 10 
(``[T]he governance structure . . ., similar to other NMS plans, 
deprives a broad range of market participants, including registered 
funds and their advisers, of any meaningful voice in plan operations 
. . . .''). Cf. DAG Letter at 3 (noting that Industry's experience 
as a part of the CAT's DAG was that ``SROs limited the Industry's 
participation in important aspects of the development process''); 
STA Letter at 1 (seconding the DAG Letter's conclusions).
    \2404\ SIFMA Letter at 26; KCG Letter at 7; ICI Letter at 10; 
Fidelity Letter at 7.
    \2405\ SIFMA Letter at 26 (``[T]he SROs have a long history of 
conducting all meaningful NMS Plan business in executive session, 
from which Advisory Committee members are excluded.''); Fidelity 
Letter at 7; KCG Letter at 7.
    \2406\ SIFMA Letter at 26 (``[T]he Operating Committees have 
refused to share even routine documents.''); cf. Fidelity Letter at 
7.
    \2407\ SIFMA Letter at 26 (citing also the exclusion of Advisory 
Committee members from meetings of ``subcommittees'' of the 
Operating Committee, the circulation of agendas with limited 
opportunity to prepare views and the requirement that an SRO 
``sponsor'' an agenda item raised by the Advisory Committee, and the 
absence of a mechanism for an individual member of an Advisory 
Committee to solicit and represent the views of broader 
constituencies).
    \2408\ SIFMA Letter at 25 (broker-dealers); DAG Letter at 3 
(``Industry members''); ICI Letter at 11 (representatives of 
registered funds and other non-SRO participants); STA Letter at 1 
(seconding the DAG Letter); KGC Letter at 6 (broker-dealers); MFA 
Letter at 3 (``an institutional investor, a broker-dealer with a 
substantial retail base, a broker-dealer with a substantial 
institutional base, a data management expert, and . . . a 
representative from a federal agency experienced with cybersecurity 
concerns as they relate to national security'').
    \2409\ SIFMA Letter at 25 (noting that (1) the CAT is complex 
and broker-dealer insight will bring perspectives of those who will 
be doing the bulk of the reporting; (2) broker-dealer participation 
will ensure the burden of systems changes is shared between broker-
dealers and SROs; and (3) broker-dealers will, under the CAT funding 
model, be expected to bear the vast majority of costs); DAG Letter 
at 3 (``[F]iltering [Industry] input through SROs, who face a 
different set of reporting challenges than Industry members, has 
proven to be an imperfect mechanism for communicating and addressing 
concerns[;] . . . the Industry remains too far removed from 
decision-making processes.''); STA Letter at 1 (seconding the DAG 
Letter); ICI Letter at 11 (stating that ``[t]he perspective of other 
market participants--particularly given that the central repository 
will house their sensitive information--would help in the 
development and maintenance of the CAT'' and noting further that 
registered funds' and their advisers' views would make the Operating 
Committee ``far better informed'' particularly with respect to the 
impact of CAT on trading and order management practices of funds, 
and on CAT data security); MFA Letter at 3 (suggesting 
representation for market participants who will be most 
significantly impacted by the Operating Committee's decisions).
    \2410\ ICI Letter at 12 (stating that the SROs have an incentive 
to make regulatory use of and to potentially commercialize the 
information that they report to the CAT, whereas registered funds 
would be solely interested in the ``security, confidentiality, and 
appropriate use of all data reported to the CAT''); KCG Letter at 7; 
MFA Letter at 3-4.
    \2411\ MFA Letter at 4.
---------------------------------------------------------------------------

    Some commenters argued for improving the effectiveness of the 
Advisory Committee--on its own merits, in addition to changes to the 
Operating Committee, or as a second-best alternative to Operating 
Committee changes.\2412\ Along these lines, several commenters asserted 
that the membership of the Advisory Committee should be expanded to 
include more or additional types of entities.\2413\ Commenters also 
suggested that the Advisory Committee should be involved in every 
aspect of CAT decision-making, with procedural protections put in place 
to ensure a robust role for the Advisory Committee in the operation and 
administration of the CAT.\2414\ Finally, some commenters called for 
additional enhanced governance features, such as independent directors, 
an audit committee, or publicly-released financial and other 
disclosures.\2415\
---------------------------------------------------------------------------

    \2412\ See infra n.161-162 & associated text; see also SIFMA 
Letter at 26 (while stating that the Advisory Committee is not a 
substitute for direct voting rights, offering comments ``in the 
alternative'' on the Plan's proposed Advisory Committee structure); 
FIF Letter at 135 (recommending ``defining the Advisory Committee to 
reflect a more participatory, active role in the formulation of 
decisions and directions being reviewed by the SROs''). But cf. KCG 
Letter at 7 (stating that the Advisory Committee is ``not an 
adequate substitute for providing non-SROs with full voting power on 
the CAT NMS Plan Operating Committee'').
    \2413\ Hanley Letter at 6 (add two financial economists); SIFMA 
Letter at 27 (``the makeup of the Advisory Committee should include 
participants with an appropriate representation of firm sizes and 
business models, such as: Inter-dealer brokers, agency brokers, 
retail brokers, institutional brokers, proprietary trading firms, 
smaller broker-dealers, firms with a floor presence, and trade 
associations''--to be selected by broker-dealer representatives, 
rather than SROs); DAG Letter at 3 (the ``Advisory Committee should 
have a strong Industry continent and [] this contingent should be 
formed prior to the approval of the plan''); STA Letter at 1 
(seconding the DAG Letter); FIF Letter at 135-136 (``the composition 
of the Advisory Committee should be widened to 20 participants with 
a minimum of 12 broker-dealer firms represented''; ``[c]ategories of 
participants that should be added are trade processing and order 
management service bureaus, as well as the industry associations, 
such as FIF and SIFMA''); ICI Letter at 12 (``more investor 
representation, including representation from registered funds'' and 
clarify that existing slot for ``institutional'' investor would 
include ``advisers to registered funds''); Reuters at 6 (add service 
bureau representation; service bureaus can offer the view of 
multiple of their audit trail reporting clients); see also Fidelity 
Letter at 7 (recommending adoption of the EMSAC recommendations, 
which includes nomination of new candidates for Advisory Committee 
membership by the Advisory Committee, to be confirmed by a majority 
vote of the Operating Committee).
    \2414\ SIFMA Letter at 27-28 (stating that the role of the 
Advisory Committee must include every aspect of the CAT, including 
every discussion and meeting of the Operating Committee, and every 
key issue; procedural safeguards would include (1) establishing 
written criteria for, and written justifications for invoking, 
executive sessions, (2) written responses to or documentation for 
any rejection by the Operating Committee of a written recommendation 
of the Advisory Committee, (3) circulation of agendas and 
documentation with sufficient time to prepare for meetings, and (4) 
broad access by Advisory Committee members to information regarding 
the performance of the central repository); ICI Letter at 13 
(stating that the CAT NMS Plan should include (1) a requirement that 
the Operating Committee respond in writing to Advisory Committee 
recommendations, (2) a right for the Advisory Committee to have 
broad access to documents, and (3) a right to be present in all 
discussions about data security, including receiving all reports 
from the CCO and CISO that the Operating Committee receives); 
Reuters at 7 (stating that the Advisory Committee should have input 
on Plan amendments that impact CAT Reporters, as well as on 
decisions on ``funding and other aspects of CAT operations''); 
Fidelity Letter at 7 (supporting changes to Advisory Committee 
structure proposed by the EMSAC). Cf. DAG Letter at 3 (the Advisory 
Committee's Industry contingent should be formed prior to the 
approval of the Plan to permit the Advisory Committee to provide 
input to the selection of the Processor and developing Operating 
Procedures); FIF Letter at 136-37 (an active and collaborative 
Advisory Committee is necessary to ensure a high-quality CAT; the 
scope of the Advisory Committee should include the CAT System in 
addition to the Central Repository; and the Advisory Committee 
should have input into all amendments--material and non-material 
(with material amendments redefined to include ``External Material 
Amendments'' and ``Internal Material Amendments''); NYSE Letter at 
4-6.
    \2415\ SIFMA Letter at 29 (requesting that the CAT be operated 
at-cost, with fully transparent, publicly-disclosed annual reports, 
audited financial statements, and executive compensation disclosure; 
an audit committee should ensure that revenue is used for regulatory 
purposes--these would be appropriate to the ``regulatory 
undertaking'' and ``industry utility'' that the CAT should be, with 
SROs' regulatory decisions ``made outside the governance and 
operation of the CAT itself''); DAG Letter at 3 (calling for the CAT 
governance structure to include independent directors (with both 
non-Industry and Industry participants) and a majority-independent 
audit committee); STA Letter at 1 (seconding the DAG Letter).
---------------------------------------------------------------------------

    One commenter objected wholesale to the governance structure of the 
Plan, asserting that the ``governance of the CAT must not be riddled 
with conflicts of interest'' and that therefore the CAT

[[Page 84848]]

should either be controlled entirely by the Commission, or that the CAT 
governance structure should be radically altered, in order for it to be 
more consistent with the public interest and the SEC's mission.\2416\
---------------------------------------------------------------------------

    \2416\ Better Markets Letter at 4-6 (with respect to the latter 
option, the CAT would need to be a not-for-profit, led by a Board 
with a supermajority of independent directors (including an 
independent Chair), and with SEC representation, with ultimate SEC 
control over the access to and usage of the CAT).
---------------------------------------------------------------------------

    On the other hand, one commenter expressed a view that the CAT NMS 
Plan's governance structure, including the provision limiting Operating 
Committee voting membership to Plan sponsors, was appropriate, given 
that Rule 613 places the responsibility for creating and maintaining 
the CAT NMS Plan on the Plan sponsors,\2417\ and that the Plan 
sponsors, as SROs, are subject to obligations under Rules 608 and 613, 
as well as Section 6(b)(1) and 15A(b)(2) of the Exchange Act--
obligations to which Advisory Committee members are not subject.\2418\
---------------------------------------------------------------------------

    \2417\ NYSE Letter at 4-5 (citing the Commission's statement in 
the Adopting Release that the structure of the Operating Committee 
and the Advisory Committee, including the ability of the Operating 
Committee to meet in executive session, ``appropriately balances the 
need to provide a mechanism for industry input . . . against the 
regulatory imperative that the operations and decisions regarding 
the [CAT] be made by SROs who have a statutory obligation to 
regulate the securities markets, rather than by members of the SROs, 
who have no corresponding statutory obligation . . . .''). But cf. 
KCG Letter at 6 (stating that the SRO-only Operating Committee is 
``contrary to the public interest and fails to recognize the CAT 
system as a core market utility meant to benefit all market 
participants'').
    \2418\ Id. at 6 (the latter are the obligations to comply, and 
enforce its members' compliance with, the Exchange Act).
---------------------------------------------------------------------------

    In their responses, Participants responded to many of the concerns 
raised by the commenters. First, the Participants stated that the 
composition of the Operating Committee is consistent with Rule 613, and 
including non-SROs on the Committee could give rise to conflicts of 
interest as entities that are the subject of market surveillance would 
be given a role in determining how such market surveillance would 
operate.\2419\ Moreover, the Advisory Committee would provide non-SROs 
with an ``appropriate and meaningful forum'' in which to make their 
views known.\2420\
---------------------------------------------------------------------------

    \2419\ Response Letter I at 6.
    \2420\ Id. at 7.
---------------------------------------------------------------------------

    With respect to the Advisory Committee, the Participants agreed 
with certain commenters who had called for additional entities to be 
added to the membership of the Advisory Committee, and therefore 
proposed a Plan amendment to add a service bureau representative, along 
with an additional institutional investor representative (while 
requiring one of the three institutional investor representatives to 
represent registered funds).\2421\ However, the Participants disagreed 
with adding financial economists, as there is already an academic who 
could be a financial economist; trade groups, as there are already 
individual members thereof represented; or additional broker-dealers, 
as there are already several representatives from different segments of 
the industry--and adding so many additional people would ``likely 
hamper, rather than facilitate, discussion.'' \2422\ With respect to 
the appointment of Advisory Committee members, the Participants 
rejected the suggestion that the broker-dealer members of the Advisory 
Committee be permitted to make appointments, but determined to amend 
the Plan to provide the Advisory Committee an opportunity to advise the 
Operating Committee on candidates before the Operating Committee makes 
an appointment.\2423\
---------------------------------------------------------------------------

    \2421\ Id. at 9-10.
    \2422\ Id. at 10-11.
    \2423\ Id. at 13-14.
---------------------------------------------------------------------------

    With respect to the activities of the Advisory Committee, the 
Participants stated that the existing structure provided under Rule 613 
already provides the Advisory Committee with an appropriate, active 
role in governance, and that no changes are needed.\2424\ Similarly, 
the Participants did not believe that a change to provisions governing 
consideration of Material Amendments was necessary to provide the 
Advisory Committee with a more robust role.\2425\
---------------------------------------------------------------------------

    \2424\ Response Letter I at 13. The Participants also declined 
to form the Advisory Committee prior to the approval of the Plan in 
response to the commenter who wanted the Industry contingent to the 
Advisory Committee to be formed early to have input on selection of 
the Plan Processor and the formation of operating procedures, 
stating that they have, and will continue, to engage with the DAG in 
order to receive the views of industry members prior to the approval 
of the Plan. Id. at 16-17.
    \2425\ Id. at 19-20.
---------------------------------------------------------------------------

    With respect to the additional procedural protections for the 
effectiveness of the Advisory Committee, the Participants asserted 
that, first, with respect to Executive Sessions, Rule 613 and the Plan 
strike the right balance, as the Plan Participants need the opportunity 
to discuss certain matters, including certain regulatory and security 
issues, without the participation of the industry, and that maintaining 
flexibility in determining when to meet in Executive Session is 
important. But Participants nonetheless clarified that they intend to 
limit Executive Sessions to ``limited purposes requiring 
confidentiality.'' Second, Participants asserted that similarly the 
right balance has been struck with respect to the treatment of Advisory 
Committee requests and recommendations, as the commenters' proposed 
procedural protections are formulaic, and could hamper 
interactions.\2426\ The Participants also affirmed their belief that 
``as a matter of good corporate governance, the Operating Committee 
should take into consideration the Advisory Committee's input regarding 
the CAT.'' \2427\
---------------------------------------------------------------------------

    \2426\ Id. at 14-16. The purposes requiring confidentiality for 
which an Executive Session could be appropriate were further 
elaborated as including ``(1) matters that present an actual or 
potential conflict of interest for Advisory Committee members (e.g., 
relating to Industry Members' regulatory compliance); (2) discussion 
of actual or potential litigation; (3) CAT security issues; and (4) 
personnel issues.'' Id. at 15.
    \2427\ Id. at 15-16. Response Letter I did not directly address 
the comments regarding agenda timing, or broad informational access.
---------------------------------------------------------------------------

    Finally, with respect to the other governance features requested by 
commenters, the Participants declined to make any changes. With respect 
to independent directors, according to Participants, the composition of 
the Operating Committee as set forth in the Plan is consistent with 
Rule 613, and adding independent directors is unnecessary, given 
existing independent representation on SRO boards.\2428\ Moreover, they 
asserted that an audit committee is unnecessary, because the CAT will 
operate on a break-even (versus for-profit) basis, the Operating 
Committee members can act objectively, and the Compliance Subcommittee 
can aid the CCO in much the same way as an independent audit committee 
would.\2429\ Finally, the Participants noted that financial 
transparency is accomplished through Advisory Committee members' right 
to access information about the operation of the CAT and their receipt 
of minutes from meetings; also, financial information related to the 
CAT will be disclosed in fee filings with the Commission.\2430\
---------------------------------------------------------------------------

    \2428\ Id. at 7.
    \2429\ Id. at 8-9. However, Participants also stated that the 
Operating Committee could decide to add an audit committee at a 
later date. Id. at 9.
    \2430\ Id. at 17.
---------------------------------------------------------------------------

    The Commission has considered the comments it received regarding 
governance issues but believes that the economic benefits and tradeoffs 
of the CAT NMS Plan governance structure examined in the Notice 
continue to apply. The Commission in the Notice stated that the 
governance provisions of the CAT could ``help promote better

[[Page 84849]]

decision-making by the relevant parties'' and thereby ``could mitigate 
concerns about potential uncertainty in the economic effects of the 
Plan by giving the Commission greater confidence that its expected 
benefits would be achieved in an efficient manner and that costs 
resulting from inefficiencies would be avoided.'' \2431\ While 
commenters have not raised issues that would cause the Commission to 
fundamentally reconsider that assessment, commenters have called 
attention to ways in which they believe NMS Plan governance could be 
improved to increase the likelihood that the benefits of the plan would 
be achieved in an efficient manner and that costs resulting from 
inefficiencies would be avoided. These are discussed in turn below, 
along with the changes the Participants recommended making to the Plan, 
and which the Commission has made, in response to certain comments. As 
above, the discussion is specific to the CAT NMS Plan, and 
specifically, the question of whether the governance structure as 
amended would decrease Plan uncertainty for purposes of the 
Commission's approval of the CAT NMS Plan.
---------------------------------------------------------------------------

    \2431\ See Notice, supra note 5, at 30705.
---------------------------------------------------------------------------

    The Notice did not expressly address the possibility of adding non-
SRO members to the Operating Committee, given that the Commission in 
the Adopting Release for Rule 613 cited the ``regulatory imperative'' 
that the operations and decisions regarding the CAT be made by SROs, 
who have the statutory obligation to oversee the securities 
markets.\2432\ The Commission believes that adding non-SROs to the 
Operating Committee, as advocated by some commenters, could give rise 
to the types of tradeoffs that are similar to those the Commission 
identified in the Notice with respect to expanding or diversifying the 
Advisory Committee: A larger and more diverse Operating Committee could 
result in better-informed Operating Committee decision-making, but it 
could also decrease the ability of Operating Committee members to 
coordinate effectively in decision making.\2433\ In particular, non-
SROs may have significantly different interests than SRO members, given 
that non-SROs lack the statutory obligation to oversee the securities 
markets, and their inclusion could give rise to potential conflicts of 
interest or recusal issues if the Operating Committee were to discuss 
regulatory surveillance issues. Thus, the Commission believes that 
adding non-SRO members to the Operating Committee at this time would 
increase rather than decrease the uncertainty around achieving the 
benefits of the Plan.
---------------------------------------------------------------------------

    \2432\ Id. at 30704.
    \2433\ Similarly, adding an independent board or audit committee 
to the Plan's governance structure could provide additional 
oversight of Plan decision-making and mitigate potential concerns 
about Plan Participants' conflicts of interest, but it could also 
decrease coordination in decision-making required for efficiently 
achieving the regulatory benefits of the Plan. Aside from the 
potential costs, the incremental benefits of these and other 
enhanced governance features (e.g., additional disclosure 
requirements) may be narrow in light of the other provisions 
discussed in the Notice, including the Commission's ability to 
monitor whether the benefits of the CAT are being achieved and the 
provisions limiting the incentive and ability of Operating Committee 
members to serve the private interests of their employers, including 
rules regarding recusal of Operating Committee members from voting 
on matters that raise a conflict of interest. Id. at 30741.
---------------------------------------------------------------------------

    Commenters did not challenge the nature of the tradeoffs that apply 
to the membership of the Advisory Committee, but rather where the 
particular balance was struck. A larger, more diverse committee as 
advocated by some commenters could provide additional views that could 
lead to better-informed decision-making; however, such a committee 
could also lack cohesion and have difficulty making decisions in a 
timely manner, which would impede the efficiency of the decision-making 
process under the CAT NMS Plan.\2434\ Adding a small number of diverse 
voices as Participants propose to do in response to comments could 
enhance the quality of Advisory Committee decision-making by increasing 
the diversity of views that are represented, but risks decreasing the 
quality of decision-making by making the Advisory Committee larger and 
less cohesive. It is difficult to determine where the exact tipping 
point lies, but the changes the Participants propose making to the Plan 
we believe would on net increase the quality of Plan decision-making: 
The value of the additional diverse viewpoints appears likely to 
justify any additional unwieldiness the two additional members might 
cause. Along these same lines, the Commission further believes that 
adding the unique perspectives of a financial economist would also 
increase the quality of the Advisory Committee discussions without 
unduly burdening its operations, and the Commission has therefore 
amended the Plan to add to the Advisory Committee an academic who is a 
financial economist. However, adding a large number of additional 
members, or members whose views could be expected to largely coincide 
with those of existing members, as certain commenters sought, makes it 
more likely that the marginal benefits of expansion would be outweighed 
by the increase in coordination difficulties.\2435\
---------------------------------------------------------------------------

    \2434\ Id. at 30705.
    \2435\ For example, while there are many diverse types of 
broker-dealers, it is not clear that increasing the number of 
broker-dealers representatives from 7 to 12 would add significantly 
to the diversity of views represented on the Advisory Committee, and 
by constituting a majority of Advisory Committee members, may give 
rise to a risk that broker-dealer voices would dominate Advisory 
Committee discussions, which could limit the diversity of views 
transmitted to the Operating Committee and thereby worsen Plan 
decision-making.
---------------------------------------------------------------------------

    With respect to the Advisory Committee membership, one commenter 
suggested that the appointments be made by the broker-dealer members of 
the Advisory Committee, rather than by the Operating Committee; 
Participants asserted that the Operating Committee should have 
selection responsibility. The question of who to vest with appointment 
power embodies certain tradeoffs: Increasing the independence of the 
Advisory Committee by vesting appointment power in Advisory Committee 
members may promote more diverse or robust presentation of views to the 
Operating Committee. On the other hand, it increases the possibility 
that the Advisory Committee would operate in a manner adversarial to 
the Operating Committee, and could diminish the likelihood that the 
Operating Committee would be open to persuasion following consideration 
of the Advisory Committee's views. Moreover, vesting appointment powers 
solely in the broker-dealer members of the Advisory Committee, as 
opposed to all members of the Advisory Committee, could result in 
Advisory Committee membership that overweighs the views of broker-
dealers. As a compromise position, the Participants propose to 
formalize a role for the Advisory Committee in advising the Operating 
Committee on membership selections. This is not the only compromise 
position that could balance the interests of SROs and non-SROs and 
ensure the representation of a diverse set of views to promote well-
informed decision-making--for example, one commenter's alternative 
would provide slightly more power to the Advisory Committee by vesting 
nominating authority in the Advisory Committee, while providing a veto 
right to the Operating Committee through the majority vote it would 
take to confirm a new member. But the Plan, as amended, would promote 
better-informed decision-making by ensuring the views of existing 
Advisory Committee members are considered as part of the selection of 
new members.

[[Page 84850]]

This should promote membership in the Advisory Committee that is more 
independent, rather than intellectually-aligned with either the 
Operating Committee or Advisory Committee (or some subset thereof), and 
thereby better-able to bring diverse views to the Operating Committee's 
attention in Plan decision-making.
    While, as amended, the Plan would provide a role with respect to 
Advisory Committee membership selection to the Advisory Committee, the 
Participants did not propose an additional expansion of the activities 
of the Advisory Committee, as some commenters had sought. It is not 
clear that procedural changes such as having the Advisory Committee 
formally vote on matters that the Operating Committee is voting on, as 
opposed to a less formal way of providing the Operating Committee with 
the Advisory Committee's views with respect to those votes, would 
materially improve Plan decision-making and thereby reduce uncertainty 
that benefits would be achieved.\2436\ Similarly, the Plan's current 
definition of Material Amendment seems appropriately calibrated to 
bring the most robust decision-making processes to bear on the matters 
of the greatest importance. Altering the balance to add more process 
under Section 6.9(c) (i.e., to require affirmative approval by 
Supermajority Vote (Material Amendments) versus a right of objection 
vested solely in Participants plus a Majority Vote (non-Material 
Amendments)) could improve the quality of those decisions by making 
them better-informed--i.e., by requiring debate and subjecting them to 
a Supermajority Vote, versus only triggering debate at the option of 
Participants \2437\--but the additional delay imposed on decision-
making with respect to less significant matters would likely not 
justify any marginal gains in decisional quality.
---------------------------------------------------------------------------

    \2436\ Similarly, constituting the industry portion of the 
Advisory Committee early, so that industry may have a greater voice 
with respect to selection of the Plan Processor and the operating 
procedures of the CAT, would not improve Plan decision-making where 
those views could be solicited from industry via the DAG.
    \2437\ It is not clear the extent to which the Advisory 
Committee would have the opportunity to have input into a non-
Material Amendment during the 10 day window before the non-Material 
Amendment is deemed approved, but, as noted above in Section IV.B.2, 
the Commission amendment to the Plan would provide the Advisory 
Committee with the same information regarding non-Material 
Amendments as the Operating Committee would have.
---------------------------------------------------------------------------

    Similarly, the Notice discussed several of the issues raised by 
commenters, including that the Advisory Committee members are permitted 
to attend Operating Committee meetings but are excluded from Executive 
Sessions; that the Advisory Committee's access to information is 
subject to scope and content determinations made by the Operating 
Committee; and that there is no mechanism under the Plan to ensure that 
the Operating Committee does in fact consider the views of the Advisory 
Committee when engaged in Plan decision-making.\2438\ Changing any of 
these features as commenters suggested would pose certain economic 
tradeoffs. Commenters did not assert that the Advisory Committee system 
as currently constructed is unable to function appropriately, but 
rather in their experience that it does not--and therefore that 
additional protections are needed. Cooperation in good faith under the 
existing structure of the Plan could ensure that Advisory Committee 
members have access to the information they need to contribute 
meaningfully to discussions and that Advisory Committee members' 
recommendations are taken seriously; absent good faith cooperation, 
processes would be needed to promote these outcomes. While additional 
processes could provide protections, they would also increase 
inflexibility. Thus, adding formal mechanisms where informal mechanisms 
would have sufficed would add costs, delay, and lack of adaptability 
with little or no corresponding benefit.
---------------------------------------------------------------------------

    \2438\ See Notice, supra note 5, at 30705.
---------------------------------------------------------------------------

    In their response, Participants stated that they ``recognize the 
benefit and purpose of the Advisory Committee and intend to use the 
Executive Session for limited purposes requiring confidentiality'' and 
further that ``as a matter of good corporate governance, the Operating 
Committee should take into consideration the Advisory Committee's input 
regarding the CAT.'' \2439\ The Commission agrees, and in light of the 
Participants' assurances, believes that the protections sought by some 
commenters are generally not necessary to achieve the Plan's benefits 
and could be counterproductive at this time.
---------------------------------------------------------------------------

    \2439\ Response Letter I at 15-16.
---------------------------------------------------------------------------

    However, the Commission is amending the Plan in two ways that 
respond, at least in part, to certain of commenters' concerns. First, 
the Commission is amending the Plan to require that SEC Staff be able 
to attend Executive Sessions. In addition to the direct oversight 
benefits that would accrue from SEC Staff attendance at Executive 
Sessions, SEC Staff would be able to monitor whether Participants are 
complying with their stated intent of limiting Executive Sessions to 
purposes requiring confidentiality. The direct and indirect costs of 
permitting SEC Staff attendance should be low, but potential indirect 
costs do exist. For example, it may chill the free exchange of ideas in 
an executive session if the presence of the Participants' regulator 
causes the Participants to engage in a less robust conversation, which 
could diminish the effectiveness of the Plan's governance. Similarly, 
the additional imposition on Executive Sessions may prompt the 
Participants to seek alternative, informal methods of communication and 
debate outside the formal governance mechanisms established by the 
Plan, which could ultimately disadvantage Advisory Committee members if 
decisions are made informally, without the benefit of their input.
    Second, the Commission is amending the Plan to require that the 
Advisory Committee members receive the same materials and information 
as the Operating Committee receives (absent confidentiality concerns 
with respect to such information). This new procedural protection will 
put Advisory Committee members on an equal informational footing with 
the Operating Committee, and should thereby allow the Advisory 
Committee to produce recommendations that are better-informed. The 
procedural protection should have low direct costs: It does not require 
the preparation of new materials but simply the dissemination of 
information that is already prepared for the Operating Committee. 
However, there could be indirect costs and tradeoffs. Principally, 
Operating Committee members who are no longer able to exclude certain 
materials from dissemination to the Advisory Committee members (e.g., 
materials that are sensitive in some way but do not fall within the 
confidentiality exception in the Plan) could choose to withhold such 
materials entirely, thereby making the Operating Committee's 
deliberations less well-informed, or they could seek to hold sensitive 
discussions in a less formal or less well-documented venue, which could 
pose the same problems as discussed above with respect to SEC presence 
in Executive Sessions.
    With respect to the remaining requested protections for which no 
Plan amendment is being made, the Commission will be alert to future 
suggestions that cooperation between the Advisory Committee and the 
Operating Committee is lacking, and will assess, as appropriate, 
whether additional procedural protections are needed.

[[Page 84851]]

    With respect to the additional governance features for which some 
commenters advocated--an independent board, audit committee, and 
financial transparency--the economic analysis in the Notice did not 
specifically discuss these items. The Commission believes that, on 
balance, commenters advocating for these issues have not raised 
concerns that would cause the Commission to alter its economic 
analysis. Having an independent board or audit committee would add an 
additional layer of complication to Plan decision-making--triangulating 
among the Operating Committee, Advisory Committee, and the independent 
board, thereby increasing the likelihood of untimely decision-making. 
There do not appear to be significant offsetting benefits at this time, 
as alternative mechanisms already exist to advance the purposes that 
these governance enhancements would seek to serve. If the purpose is 
that there be an external check on potential conflicts of interest, the 
Advisory Committee can serve in that role, given its ability to receive 
documents.\2440\ Similarly, to the extent that independent board 
members or an audit committee could serve a monitoring function, such a 
monitoring function could already be accomplished through the 
Compliance Subcommittee that the Plan establishes to aid the CCO.\2441\ 
Because the functions that the additional governance features would 
fulfill are already performed, at least in some extent, by existing 
features of Plan governance, adding them does not appear necessary at 
this time to ensure that the Plan's governance is such that 
uncertainties under the Plan would be diminished.
---------------------------------------------------------------------------

    \2440\ In addition, as the Notice makes clear, the Commission 
can modify the Plan as it may deem necessary or appropriate, and has 
the right to attend meetings of the Operating Committee, as well as 
receive specified documents. See Notice, supra note 5 at 30702. The 
Commission can thus serve as an additional external check on 
potential conflicts.
    \2441\ Similarly, the Commission's amendment to the Plan to 
require that CAT LLC financial statements be prepared in compliance 
with GAAP and audited by an independent public accounting firm may 
substitute to a certain extent for the added financial transparency 
sought by commenters. See CAT NMS Plan, supra note 5, at Section 
9.2; see also Section IV.B.4; Participants' Letter II.
---------------------------------------------------------------------------

    With respect to the commenter who advocated a radically different 
method for Plan governance, where the CAT would be controlled by the 
Commission to avoid conflicts of interest, the Commission notes that 
SROs are entrusted with regulatory and oversight responsibilities by 
the Exchange Act; to the extent their commercial interests create an 
actual or potential conflict of interest, the Advisory Committee is 
able to monitor and advise the Operating Committee on Plan decision-
making, acting as a counter-weight; and to the extent there are any 
residual unmitigated conflicts, the Commission has authority to 
intervene. The Commission believes that the CAT NMS Plan approach to 
balancing and offsetting the conflicts of interest can achieve the 
regulatory benefits of the CAT.
    At this time, given the analysis above, the Commission believes 
that the governance structure in the Plan as modified increases the 
likelihood that the benefits of the Plan will be achieved. The 
Commission notes that more significant changes to NMS Plan governance 
structures could potentially produce better overall Plan outcomes, but 
could also lead to additional coordination problems or have unintended 
consequences. Thus, while the Commission believes that the reduction in 
uncertainty relating to the achievement of Plan benefits can at this 
time best be achieved through the Plan's approach to governance, the 
Commission will continue to assess the governance of NMS Plans 
generally and the tradeoffs between the quality and efficiency of the 
decision-making processes of NMS Plans.\2442\
---------------------------------------------------------------------------

    \2442\ See, e.g., Fidelity Letter at 7-8 (``We also agree that 
the SEC should engage in formal administrative rulemaking to revise 
Rule 608 of Regulation NMS to specify that NMS Plans must contain 
governance provisions consistent with the objectives specified in 
the EMSAC recommendations . . . .''). Cf. ICI Letter at 12 (noting 
that ``every NMS Plan . . . at least should include an advisory 
committee comprising a broad range of industry participants that 
lack operating committee representation'' (emphasis added)); see 
also supra Section IV.B.
---------------------------------------------------------------------------

    Finally, one commenter asserted that the CAT should be administered 
by a single centralized body from a legal, administrative, supervisory, 
and enforcement perspective, rather than by nineteen separate 
SROs.\2443\ According to that commenter, while the Plan ``contains 
permissive language'' that would allow the SROs to enter into 
agreements with one another, nothing requires the SROs to enter into 
17d-2 agreements, Regulatory Services Agreements, or some combination 
thereof. Thus, SROs could interpret the CAT's requirements differently, 
or apply them to duplicative enforcement, which would be ``inefficient 
and unworkable for firms that are members of several of the SROs.'' 
Coordination, by contrast, ``will create efficiencies and avoid 
regulatory duplication, potential inconsistent interpretations and 
interpretive guidance, and unnecessary compliance costs.'' \2444\ The 
Participants stated that they recognize the potential efficiencies to 
be achieved through coordination, and plan to consider a Rule 17d-2 
agreement.\2445\ The Commission agrees that coordination of efforts can 
produce efficiencies, but notes that alternative mechanisms for 
coordination of efforts, including the Operating Committee, also exist. 
Requiring delegation of authority to one SRO also would not necessarily 
lead to a better outcome, if such a one-size-fits-all approach were to 
inhibit the ability to tailor programs to a particular SRO or its 
members. However, in light of the potential efficiencies, the 
Commission believes it important that the Participants consider 
mechanisms for regulatory cooperation, and has therefore amended the 
Plan to require a report detailing the Participants' considerations. 
Thus, the permissive approach taken in the Plan--where SROs can execute 
agreements but are not required to do so, particularly where coupled 
with the Participants' assertion that they are exploring whether it 
would in fact be efficient to enter into those agreements and the 
Plan's requirement that they report on whether they have done so--still 
promotes the achievement of the Plan's regulatory benefits.
---------------------------------------------------------------------------

    \2443\ SIFMA Letter at 29 (suggesting that a single SRO take the 
lead, and others execute agreements to transfer responsibility for 
enforcement to that SRO).
    \2444\ Id.
    \2445\ Response Letter I at 17.
---------------------------------------------------------------------------

(3) Conclusion
    In the Notice, the Commission concluded by stating its preliminary 
belief that the governance provisions discussed therein could help 
promote better decision-making by the relevant parties and, in turn, 
could mitigate concerns about potential uncertainty in the economic 
effects of the Plan by giving the Commission greater confidence that 
its expected benefits would be achieved in an efficient manner and that 
costs resulting from inefficiencies would be avoided.\2446\ For the 
reasons discussed above, the Commission continues to believe that this 
is the case after considering the comments on its analysis, the 
Participants' response, and modifications to the Plan.
---------------------------------------------------------------------------

    \2446\ Id.
---------------------------------------------------------------------------

F. Costs
    In the Notice, the Commission preliminarily estimated current costs 
related to regulatory data reporting, anticipated costs associated with 
building and maintaining the Central Repository, and the anticipated 
costs to report CAT Data to the Central

[[Page 84852]]

Repository.\2447\ These preliminary estimates were calculated from 
information provided in the CAT NMS Plan as amended on February 27, 
2015 as well as supplemental information. The Commission discussed the 
Plan's estimate that the 20 Participants spend $154.1 million annually 
on reporting regulatory data and performing surveillance.\2448\ The 
Notice also reported that the approximately 1,800 broker-dealers 
anticipated to have CAT reporting responsibilities currently spend $1.6 
billion annually on regulatory data reporting. The Commission estimated 
that the cost of the Plan would be approximately $2.4 billion in 
initial aggregate implementation costs and $1.7 billion in ongoing 
annual costs. Furthermore, the Notice discussed that market 
participants would have duplicative audit trail data reporting 
responsibilities for a period of up to a maximum of 2.5 years preceding 
the retirement of potentially duplicative regulatory data reporting 
schemes. The Commission estimated that duplicative audit trail data 
reporting could cost broker-dealers $1.6 billion per year or more and 
could cost the Participants up to $6.9 million per year. The Notice 
also treated all costs of developing the Plan (estimated at $8.8 
million at the time the Plan was filed) as sunk costs, excluding them 
from costs to industry if the Plan were adopted.
---------------------------------------------------------------------------

    \2447\ See Notice, supra note 5, at 30708-30.
    \2448\ The number of Participants has changed since the Plan was 
filed. Adjustments to cost numbers to account for new Participants 
is discussed in Section V.F.1.b, infra.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed its belief, however, that 
there is significant uncertainty surrounding the actual implementation 
costs of CAT and the actual ongoing broker-dealer data reporting costs 
if the Plan were approved. The Commission explained that the 
methodology and data limitations used to develop these cost estimates 
could result in imprecise estimates that may significantly differ from 
actual costs.
    In the Notice, the Commission considered which elements of the CAT 
NMS Plan are likely to be among the most significant contributors to 
CAT costs.\2449\ The Commission discussed its preliminary belief that 
significant sources of costs would include the requirement to report 
customer information, the requirement to report certain information as 
part of the Material Terms of the Order, the requirement to use listing 
exchange symbology, and possibly, the inclusion of Allocation Reports.
---------------------------------------------------------------------------

    \2449\ Id. at 30730-32.
---------------------------------------------------------------------------

    The Commission also recognized that a number of second-order 
effects could result from the approval of the Plan.\2450\ These 
included market-participant actions designed to avoid direct costs of a 
security breach; changes to CAT Reporter behavior due to increased 
surveillance; changes in CAT Reporter behavior to switch from one 
funding tier to another to qualify for lower fees; and changes in 
broker-dealer routing practices related to fee differentials across 
Execution Venues. The Commission also recognized that investors and 
market participants could face significant costs if CAT Data security 
were breached.\2451\
---------------------------------------------------------------------------

    \2450\ Id. at 30733-34.
    \2451\ See Section V.C.8, supra and Section VI.F.2.b, infra.
---------------------------------------------------------------------------

    The Commission has considered the comments received, the 
Participants' response, and the modifications to the Plan, and has 
updated and revised its analysis of costs accordingly. The Commission's 
updated cost estimates presented below consider a change in the number 
of Participants, updated cost information for the Central Repository 
provided by the Participants, and modifications to the Plan that 
include: A requirement that exchanges synchronize their clocks to 
within 100 microseconds of NIST; \2452\ changes to the Funding Model 
regarding the manner in which ATSs are assessed Central Repository 
costs; and updated milestones regarding the retirement of duplicative 
systems. The updated estimates also recognize that the Participants 
plan to recover some portion of their Plan development costs from 
industry.
---------------------------------------------------------------------------

    \2452\ See Section V.F.3.a(5), infra.
---------------------------------------------------------------------------

    The Commission's revised cost estimates cover 21 Participants, 
rather than 19 as were covered by the Participants Study. Consequently, 
the Commission has increased its estimate of the Participants' 
aggregate implementation costs from $41.1 million to $47.7 million, and 
increased its estimate of the Participants' ongoing annual costs from 
$102.4 million to $118.9 million.\2453\ Although these changes also 
increase the Commission's estimate of the implementation and ongoing 
costs of the Plan to industry, the increases do not change the rounded 
totals presented in the Notice. The Commission now estimates that the 
cost of the Plan is approximately $2.4 billion in initial aggregate 
implementation costs, $55 million in system retirement costs, and $1.7 
billion in ongoing annual costs.
---------------------------------------------------------------------------

    \2453\ See Section VI.1.b, infra.
---------------------------------------------------------------------------

    The Commission expands on the analysis of the estimated costs above 
by exploring individual components of the CAT NMS Plan. In general, the 
CAT NMS Plan does not break down its cost estimates as a function of 
particular CAT NMS Plan requirements. Therefore, the Commission 
discusses the costs of particular requirements separately from the 
aggregate costs and costs by Participant, and qualitatively discusses 
costs the Commission is unable to estimate. The Commission has revised 
its analysis of particular requirements from that in the Notice in 
three ways. First, the Commission now discusses the uncertainty in its 
analysis of these costs in more detail. Second, in response to 
information provided by commenters, the Commission now recognizes that 
some costs, namely costs associated with reporting Allocation Time and 
Quote Sent Time, were not included in the estimated costs in the 
Notice. The Commission now includes these costs in the total costs for 
broker-dealers where estimates are available or otherwise recognizes 
them as additional to the existing estimates.\2454\ Third, the 
Commission no longer judges whether quantified costs attributable to 
specific elements of the Plan represent a significant contribution to 
total costs. The Commission is cognizant that some of the costs for 
particular elements may be significant in isolation even if they are 
not a large proportion of the aggregate costs of the Plan.
---------------------------------------------------------------------------

    \2454\ The Commission recognizes that Allocation Time may also 
increase the costs of the Central Repository and that Quote Sent 
Time may increase the costs of the Central Repository and to 
Participants. However, the Commission lacks sufficient information 
to add these costs to the existing estimates in these categories. 
Consequently, the Commission discusses the modifications 
qualitatively.
---------------------------------------------------------------------------

    The Commission continues to believe that direct costs in the event 
of a CAT security breach could be significant, but that certain 
provisions of Rule 613 and the CAT NMS Plan appear reasonably designed 
to mitigate the risk of a security breach. Furthermore, the Commission 
notes that the Plan amendments and the Participants' response provide 
more details about the required security provisions and more clarity on 
the applicability of Regulation SCI standards. The Commission believes 
that these clarifications address some commenters' concerns by 
providing more assurances that the security procedures are reasonably 
designed to prevent security breaches and that customers will be 
notified in the event of a breach; nevertheless, the

[[Page 84853]]

Commission acknowledges that the costs of a breach could be quite 
large.
    As discussed further below, the Commission's analysis of the 
second-order effects that could result from the approval of the Plan is 
largely unchanged from what was published in the Notice. However, the 
Commission has revised its analysis to reflect that the Plan will 
change so that ATS volume is not charged first to broker-dealers 
operating the ATS and then again to FINRA, which would pass through the 
fee costs to their members (which include ATSs). Further, the 
Commission recognizes certain second-order effects that it did not 
address in the Notice.
1. Analysis of Expected Costs
    The Plan divided the analysis of CAT cost estimates into costs 
associated with: Building and operating the Central Repository; data 
reporting and surveillance performed by Participants; data reporting by 
broker-dealers; and CAT implementation costs borne by service 
providers. The Notice's analysis of the cost estimates of the Plan 
followed this approach, and the Commission's updated analysis presented 
here also divides the analysis of costs in this way, incorporating 
comments, the Participants' responses, and Plan amendments into each 
analysis.
    There were a number of comments on the Commission's cost estimates, 
which are discussed below in their appropriate subsections. However, 
one commenter had general comments on uncertainties in cost estimates 
and the scope of what was covered by cost estimates presented in the 
Plan, stating, ``. . . the overarching theme throughout the analysis is 
that these estimates may not be an accurate reflection of actual 
costs.'' \2455\ The commenter further stated, ``the Proposal does not 
adequately explain what is included in the calculation of ``costs'' of 
the system.'' The Commission continues to believe that the cost 
estimates it provided in the Notice were reliable,\2456\ though it 
acknowledges that uncertainties related to the scope and magnitude of 
the estimated costs remain.\2457\ The Commission further acknowledges 
that many cost estimates from the Notice reflect market participants' 
estimates of total costs of implementing and maintaining CAT reporting; 
the Commission agrees with the commenter that the Plan lacks a certain 
amount of detail on the cost of individual elements that contribute to 
the total costs of the Plan that will be borne by market participants.
---------------------------------------------------------------------------

    \2455\ FSR Letter at 9.
    \2456\ By characterizing estimates as ``reliable,'' the 
Commission is stating its belief that the methodology used to create 
the estimates is likely to result in estimates that are 
representative of the costs industry will actually incur, and that 
the magnitude of the estimates appears to be reasonable. However, 
the Commission is not suggesting such estimates are free of 
uncertainty. Indeed, the Commission recognizes a degree of 
uncertainty--in some cases a large degree--surrounding estimates it 
is characterizing as ``reliable.''
    \2457\ See Notice, supra note 5, at 30708.
---------------------------------------------------------------------------

    The Commission attempts to address the individual components of the 
costs separately below in the Further Analysis of Costs Section.\2458\ 
The Commission has also updated and revised certain cost estimates in 
response to comments and modifications in the Plan, and explains each 
of those changes below. The Commission acknowledges that, in light of 
the predictive nature of the analysis and limitations in the available 
data, uncertainties remain. The Commission believes, however, that the 
estimates are reliable in that the methodology used to create the 
estimates is representative of the costs industry will actually incur, 
and that the magnitude of the estimates appears to be reasonable. The 
Commission also notes that, while a commenter criticized the 
uncertainty in the estimates provided in the Notice, the commenter did 
not offer additional data and did not fault the Commission's analysis 
of the information it did have.
---------------------------------------------------------------------------

    \2458\ See Section V.F.3, infra for a discussion of some of the 
individual components of the costs.
---------------------------------------------------------------------------

a. Costs of Building and Operating the Central Repository
    In the Notice, the Commission's estimates of costs to build and 
operate the Central Repository relied on information presented in the 
Plan as amended on February 27, 2015. At the time of the Notice, the 
Plan's estimates of the costs to build the Central Repository were 
based on Bids that varied in a range as high as $92 million.\2459\ The 
Plan's estimates of annual operating costs at that same time were based 
on Bids that varied in a range up to $135 million. To estimate the one-
time total cost to build the Central Repository, the Plan used the Bids 
of the final six Shortlisted Bidders.\2460\ The eventual magnitude of 
Central Repository costs is dependent on the Participants' selection of 
the Plan Processor, and may ultimately differ from estimates discussed 
in the Plan if Bids are revised as the bidding process progresses. The 
Plan as filed also provided information based on the Bids on the total 
five-year operating costs for the Central Repository because the annual 
costs to operate and maintain the Central Repository are not 
independent of the build cost. Across the six Shortlisted Bidders, the 
total five-year costs to build and maintain CAT, according to the Plan 
at the time of the Notice, ranged from $159.8 million to $538.7 
million.\2461\ In the Notice, the Commission stated its preliminary 
belief that estimating Central Repository costs using estimates from 
the Bids was reliable because they are the result of a competitive 
bidding process, although the Commission recognized that the Bids are 
not legally binding on Bidders.\2462\
---------------------------------------------------------------------------

    \2459\ See Notice, supra note 5, at 30709-11.
    \2460\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(i)(B). The Plan does not reflect any more specific cost 
ranges that result from narrowing the range of Bidders from six to 
three.
    \2461\ Id. at Appendix C, Section B.7(b)(i)(B).
    \2462\ See Notice, supra note 5, at 30709. The Notice further 
explains this position.
---------------------------------------------------------------------------

    As discussed in the Notice,\2463\ the Commission believed that a 
range of factors will drive the ultimate costs associated with building 
and operating the Central Repository and who will bear those costs. 
Furthermore, the Commission was mindful that the cost estimates 
associated with building and operating the Central Repository were 
subject to a number of additional uncertainties. First, the 
Participants had not yet selected a Plan Processor, and the Shortlisted 
Bidders had submitted a wide range of cost estimates for building and 
operating the Central Repository. Second, the individual Bids submitted 
by the Shortlisted Bidders were not yet final, as Participants could 
allow Bidders to revise their Bids before the final selection of the 
Plan Processor. Third, neither the Bidders nor the Commission could 
anticipate the evolution of technology and market activity with 
complete prescience.
---------------------------------------------------------------------------

    \2463\ Id. at 30709-30710.
---------------------------------------------------------------------------

    One commenter provided an alternate estimate for Central Repository 
ongoing costs.\2464\ The commenter stated, ``[w]e estimate the on-going 
costs for the CAT infrastructure (inclusive of [Business Continuity 
Plan/Disaster Recovery] costs), to be about $28 million to $36 million 
annually assuming a low-latency platform running at about 50 
millisecond speed.'' The commenter did not provide additional 
information or analysis to support this estimate, but the Commission 
believes it is possible it was derived based on comparisons to costs 
expected from the Volcker Rule because the commenter cited a study of 
those costs in support of estimates for costs to broker-dealers.\2465\ 
As discussed

[[Page 84854]]

below,\2466\ the requirements of the Plan are significantly different 
than the requirements of the Volcker Rule, which is primarily focused 
on restricting certain trading activities and investments of banking 
entities, rather than the centralization and standardization of 
regulatory data reporting. The Commission also notes that the estimates 
provided in the Notice and updated in the Participants' response are 
the result of a competitive bidding process specific to CAT and the 
Commission deems them reliable.
---------------------------------------------------------------------------

    \2464\ Data Boiler Letter at 15.
    \2465\ Data Boiler Letter at 15.
    \2466\ See Section V.F.2.a, infra.
---------------------------------------------------------------------------

    The Commission is updating and revising its economic analysis to 
incorporate updated estimates in the Participants' Response Letter III, 
a modification to the Plan to establish the Company as a 501(c)(6) non-
profit entity, and a requirement that the Company's financials be in 
compliance with GAAP and audited by an independent public accounting 
firm.\2467\ The Participants' Response Letter III contains estimates of 
the costs of building and operating the Central Repository from those 
discussed in the Notice to reflect the fact the that Participants have 
narrowed the number of Bidders to the final three and the range of 
potential cost estimates is therefore narrower as well. Based on this 
updated information, the Commission now believes that the costs to 
build the Central Repository range from $37.5 million to $65 million 
and annual operating costs range from $36.5 million to $55 
million.\2468\ The Participants also clarified that costs from Bids do 
not include additional expenses that might be incurred such as 
insurance, operating reserves or third-party costs such as accounting 
and legal expenses.\2469\ The Commission further acknowledges that 
these cost estimates for the Central Repository do not include Quote 
Sent Time reporting by Option Market Makers and the capture of 
Allocation Time in Allocation Reports.\2470\ The Commission does not 
have cost estimates of, and lacks sufficient information to estimate, 
the costs to the Central Repository of these fields and the Plan does 
not include this information and commenters did not offer estimates. 
The Commission does not believe these costs will significantly impact 
the costs of building or operating the Central Repository because the 
addition of these fields does not significantly impact the size or 
scope of the Central Repository. Further, the Commission notes that 
costs from the Company that will be passed on to Industry Members will 
be slightly reduced by organizing the Company as a non-profit entity 
because reserve funds will not be taxable as they would have been under 
the Plan as filed. The Commission notes, however, that CAT fees--the 
sole revenue source for the Company--are not expected to exceed the 
Company's expenses, so the Commission believes these savings will be 
minor.
---------------------------------------------------------------------------

    \2467\ See Participants' Letter II.
    \2468\ The Commission uses the upper end of cost ranges for its 
estimates of aggregate costs to industry, as discussed in Section 
V.F.2.a, infra.
    \2469\ Response Letter III at 15.
    \2470\ These fields were included in the Plan, but because the 
bidding process began before the Exemptive Requests were submitted 
and approved, it is possible that Bids did not include expenses 
related to collecting and storing these fields. See Section 
V.F.3(6), infra and Section V.F.3(4), infra.
---------------------------------------------------------------------------

    Overall, the Commission continues to believe that estimating 
Central Repository costs using estimates from the Bids is reliable and 
is therefore updating its cost estimates to reflect updates provided in 
the Participants' Response Letter III.\2471\
---------------------------------------------------------------------------

    \2471\ Response Letter III at 15.
---------------------------------------------------------------------------

b. Costs to Participants
    In the Notice, the Commission stated its preliminary belief that 
the Plan's estimates of costs for Participants to report CAT Data and 
of surveillance costs were reasonable and explained the reasoning 
behind this determination.\2472\ At the time, the Plan estimated costs 
for the Participants as an aggregate across all Participants (the five 
\2473\ single-license Participants and the five Affiliated Participant 
Groups).\2474\ The implementation cost estimate for Participants was 
$17.9 million.\2475\ Annual ongoing costs were estimated to be $14.7 
million.\2476\
---------------------------------------------------------------------------

    \2472\ See Notice, supra note 5, at 30711.
    \2473\ In its discussion of Participants' costs, the Notice 
errantly discussed six single license Participants and five 
Affiliated Participant Groups. See Notice, supra note 5, at 30711. 
At the time of the notice, there were five single license 
Participants and six Affiliated Participant Groups. Because 
Participant costs were aggregated across all Participants in the 
Plan, this correction does not affect the Commission's estimate of 
the Participants' costs of the Plan. At this time, there are six 
single-license Participants and four Affiliated Participant Groups. 
See infra note V.G.1.a(1)B.
    \2474\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(B)(2).
    \2475\ Id.
    \2476\ Id.
---------------------------------------------------------------------------

    In the Notice, the Commission estimated that the Participants that 
filed the Plan currently spend $6.9 million annually on data reporting, 
based on estimates the Participants provided in the Plan. The Notice 
also states that Participants currently spend approximately $154 
million per year on data reporting and surveillance activities. The 
Participants estimate that they would incur $41 million in CAT 
implementation costs, and $14.7 million in annual ongoing costs to 
report CAT Data. In addition to data reporting costs, Participants face 
costs associated with developing and implementing a surveillance system 
reasonably designed to make use of the information contained in CAT 
Data as required by Rule 613(f).\2477\ The Notice discussed the Plan's 
estimates of the costs to Participants to implement surveillance 
programs using data stored in the Central Repository. The Plan provided 
an estimate of $23.2 million to implement surveillance systems for CAT, 
and ongoing annual costs of $87.7 million.\2478\ At the time, the Plan 
did not provide information on why Participants' data reporting costs 
would substantially increase nor did it provide information on why 
surveillance costs would decrease.
---------------------------------------------------------------------------

    \2477\ 17 CFR 242.613(f).
    \2478\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(B)(2). Rule 613 requires the SROs to file updated 
surveillance plans within 14 months of CAT implementation. See 17 
CFR 242.613(f). The Commission assumes that the CAT NMS Plan's 
estimate is limited to adapting current surveillance programs to the 
Central Repository.
---------------------------------------------------------------------------

    Finally, in the Notice, the Commission assumed that cost estimates 
presented in the Plan were limited to costs the Participants would 
incur if the Plan is approved, and that the cost estimates did not 
include other costs related to development of the Plan that the 
Participants have incurred previously, or will incur regardless of 
approval.\2479\ The Plan separately reports that Participants have 
spent $8.8 million in development costs to date.\2480\ Because these 
development costs do not depend on approval of the Plan, the Commission 
treated them as sunk costs in the Notice and did not include them in 
the costs to the Participants.\2481\
---------------------------------------------------------------------------

    \2479\ The Participants may have incurred obligations that would 
generate expenses if the Plan were not approved, such as expenses to 
terminate contracts entered or employees hired in expectation of 
approval of the Plan. The Commission is not aware of the existence 
of or details of such obligations.
    \2480\ See Notice, supra note 5, at 30711, n.848.
    \2481\ Id.
---------------------------------------------------------------------------

    The Commission received several comments regarding the estimates of 
Participants' data reporting costs in the Notice. One commenter stated 
that estimates of current data reporting costs to Participants are 
``grossly underestimated,'' but did not provide further detail or 
alternate estimates.\2482\ The same commenter stated the implementation 
cost estimate of $17.9 million for Participants was ``not too far 
off,'' but felt the Participants' estimated

[[Page 84855]]

costs for legal and consulting services and additional employees were 
not reliable. The Commenter stated that these costs could be far lower 
with different technological approaches to capturing audit trail data.
---------------------------------------------------------------------------

    \2482\ Data Boiler Letter at 35.
---------------------------------------------------------------------------

    The Commission also received comments on the estimates of 
surveillance costs the Participants would incur to incorporate the CAT 
Data into their surveillance. One commenter implied that savings on 
surveillance were unlikely, and stated that the lack of an analytical 
framework did not facilitate the identification of suspicious 
activities.\2483\ The commenter seemed to express doubt that CAT would 
reduce ad hoc data requests, calling this idea ``hype.'' The commenter 
further seemed to imply that the comparable magnitude of annual CAT 
reporting costs and current regulatory data reporting costs raised 
questions about the reliability of the Commission's analysis of costs. 
A second commenter, however, stated that ``[t]he consolidated nature of 
the CAT also should allow the SROs to conduct their market surveillance 
activities more efficiently, allowing for additional cost savings . . . 
.'' \2484\ The commenter did not provide additional detail on what the 
source of additional efficiencies or cost savings would be. Another 
commenter noted that uncertainties in the manner in which regulators 
will access data in the Central Repository create significant cost 
uncertainties, especially if SROs must use bulk extraction to create 
copies of CAT Data for analysis within their own infrastructure.\2485\
---------------------------------------------------------------------------

    \2483\ Data Boiler Letter at 35.
    \2484\ SIFMA Letter at 18.
    \2485\ SIFMA Letter at 33.
---------------------------------------------------------------------------

    A few commenters questioned the apparent inclusion or exclusion of 
certain costs related to the fee model and development costs. One 
commenter noted that the Participant cost estimates do not include the 
``per-message toll charge in the CAT funding model.'' \2486\ The 
Commission received several comments on the $8.8 million Participants 
incurred in developing the Plan. One Commenter stated that treating all 
costs related to the development of the Plan as sunk costs ``. . . may 
sound conservative'', and is a preferred approach if a broad 
alternative to the Plan is adopted instead of the Plan as 
noticed.\2487\
---------------------------------------------------------------------------

    \2486\ Data Boiler Letter at 35.
    \2487\ See Notice, supra note 5, at 30737; see also Data Boiler 
Letter at 37.
---------------------------------------------------------------------------

    The Participants restated their intention to recoup implementation 
costs in Participants' Response Letter II.\2488\ Furthermore, they 
cited an expectation of $10.6 million in savings from retiring existing 
systems. The Participants further stated that these savings would 
offset costs of implementing CAT.
---------------------------------------------------------------------------

    \2488\ Response Letter II at 13.
---------------------------------------------------------------------------

    The Commission considered the comments, the Participants' 
responses, and modifications to the Plan and, as explained below, is 
updating its analysis of Participants' CAT costs. These changes 
acknowledge a change in the number of Participants, the addition of 
Quote Sent Times for option market maker quotes, requirements to 
produce additional reports and add more specificity in current reports, 
as well as producing current reports more frequently, the requirement 
to conduct an independent audit of expenses for the development of the 
Plan, annual audit expense for the Company, and a modification to the 
clock synchronization requirement for exchanges. The Commission is also 
acknowledging system retirement costs that the Participants will incur 
when duplicative reporting systems are retired. Further, in response to 
a comment and the Participants' response, the Commission is also 
revising its cost estimates to change how it treats the costs already 
incurred by Participants to develop the Plan.
    The Commission has considered the comments it received regarding 
cost estimates for Participants in the Plan and continues to believe 
that Participant cost estimates presented in the Plan are reliable. As 
discussed in the Notice, all 19 SROs \2489\ responded to the 
Participants Study, and most SROs have experience collecting audit 
trail data, familiarity with the requirements of CAT, and expertise in 
their business practices. The commenter that challenged the current 
data reporting costs provided no reasoning or estimates to indicate 
that the Participants are unable to reasonably estimate their own 
costs. Regarding the comment that its estimates did not fully 
incorporate the ``per-message'' fees that Participants will face, the 
Commission notes that the Plan's funding model does not charge 
Participants for message-traffic. Further, the Commission's analysis 
acknowledged that Central Repository costs will be passed on to both 
Participants and Industry Members by an unidentified formula, thus it 
accounted for funding model costs separately in its analysis of total 
costs of the Plan.
---------------------------------------------------------------------------

    \2489\ There were 19 participants at the time the Participants 
conducted the study.
---------------------------------------------------------------------------

    Regarding the comment concerning the inclusion of an analytical 
framework in surveillance cost estimates in the Plan, the Plan does 
incorporate an analytical framework.\2490\ Therefore, the Commission 
believes that Participant cost estimates already account for an 
analytical framework. Regarding the uncertainties in Participant costs 
related to bulk extraction causing SROs to host their own copies of CAT 
Data, while the Plan requires a bulk extraction tool, it also requires 
analytical tools for manipulating and analyzing data within the Central 
Repository.\2491\ The Commission believes that the requirement for a 
method of bulk downloading data does not necessarily imply that 
multiple copies of CAT Data will be hosted on SRO systems. The 
Commission acknowledges that if SROs use the bulk download feature to 
replicate some or all CAT Data on their own systems, their costs are 
likely to increase because hosting large databases is costly. However, 
the Commission believes that SROs are likely to consider the cost 
implications when contemplating replicating large portions of the 
Central Repository within their IT infrastructure and presumably will 
only do so when it is efficient for them to do so.
---------------------------------------------------------------------------

    \2490\ See Section V.E.2.c.(1), supra.
    \2491\ See Notice, supra note 5, at Appendix D, Section 8.2.
---------------------------------------------------------------------------

    The Commission recognizes, however, that the Plan calls for 
recovery of some or all of the CAT development costs from Industry 
Members. And, based on the Participants' response, the Commission now 
believes that the expectation the Participants will recoup these costs 
will effectively reduce the SROs' future costs while increasing future 
costs of Industry Members. The Commission therefore is adding the 
development costs for CAT to the implementation costs of broker-
dealers, as indicated in the following Section, and subtracting them 
from Participants' implementation costs as in Table 3 below. Overall, 
as detailed in the Aggregate Costs Section below, the Commission also 
believes the recovery of these costs from Industry Members would 
constitute a transfer from Industry Members to Participants, but would 
not affect the total cost of CAT to market participants in aggregate.
    The Commission is revising its Participant cost estimates to 
account for additional requirements that result from modifications made 
to the Plan by the Commission. These requirements include a number of 
reports, some produced one time, some produced on an ongoing basis. 
Each of these

[[Page 84856]]

requirements is discussed briefly below. In aggregate, the Commission 
estimates they have a one-time cost of $1.1 million and annual, ongoing 
costs of $1.1 million.
    First, the Plan as amended requires a written assessment of the 
operation of the CAT on an annual, rather than biannual basis, and 
requires the assessment to provide more specificity.\2492\ The 
Commission estimates the production of this report will cost $870,000 
annually.\2493\
---------------------------------------------------------------------------

    \2492\ The assessment is now required to include the following: 
(1) An evaluation of the information security program of the CAT to 
ensure that the program is consistent with the highest industry 
standards for protection of data; (2) an evaluation of potential 
technological upgrades based upon a review of technological 
developments over the preceding year, drawing on necessary 
technological expertise, whether internal or external; (3) an 
assessment of efforts to reduce the time to restore and recover CAT 
Data at a back-up site; (4) an assessment of how the Plan Processor 
and SROs are monitoring Error Rates and address the application of 
Error Rates based on product, data element or other criteria; and 
(5) a copy of the evaluation required by Section 6.8(c) as to 
whether industry standards have evolved such that: (i) the clock 
synchronization standard in Section 6.8(a) should be shortened; or 
(ii) the required timestamp in Section 6.8(b) should be in finer 
increments; and (6) an assessment of whether any data elements 
should be added, deleted or changed. See Section IV.H., supra. 
Although the bi-annual assessment was required under the Plan and 
its costs would thus have been included in the Participants' cost 
estimates presented in the Plan, the requirements have changed such 
that the report is both produced more frequently and is presented in 
greater detail. Consequently, the Commission assumes that the 
majority of the cost of this report would not be covered by cost 
estimates presented in the Plan as filed, and is adding the cost of 
this reporting to its final cost estimates. To the extent that a 
less detailed bi-annual report was already included in the 
Participants' cost estimates, the revised cost estimate 
overestimates this reporting cost.
    \2493\ Detailed cost estimates are discussed in Section 
VI.D.1.f.B, infra.
---------------------------------------------------------------------------

    Second, the Plan now requires an independent audit of expenses 
incurred prior to the Effective Date. The Commission believes that this 
one-time audit will cost approximately $5,000.\2494\
---------------------------------------------------------------------------

    \2494\ To arrive at this estimate, the Commission relied on an 
industry source for the costs of an audit per dollar of revenue, and 
assumed that the audit cost per unit of revenue would be comparable 
to the audit cost per unit of development costs, which were 
approximately $8.8 million. See infra note 2503. $8.8 x $479 = 
$4,215 ~ $5,000.
---------------------------------------------------------------------------

    Third, the Plan now requires a review of clock synchronization 
standards, including consideration of industry standards based on the 
type of CAT Reporter, Industry Member and type of system within six 
months of the Effective Date. The Commission estimates that the 
production of this study will have a one-time cost of approximately 
$133,000.\2495\
---------------------------------------------------------------------------

    \2495\ See Section VI.G.1.b, infra.
---------------------------------------------------------------------------

    Fourth, the Plan now requires the Participants to submit a report 
detailing the Participants' consideration of coordinated surveillance 
(e.g., entering into Rule 17d-2 agreements or regulatory services 
agreements), within 12 months of effectiveness of the Plan. The 
Commission estimates this report will entail a one-time cost of 
$445,000.\2496\
---------------------------------------------------------------------------

    \2496\ See Section VI.G.1.c, infra. The Commission assumes an 
hourly labor rate of $235.75 that is based on the FTE annual cost 
provided by the Participants in the Plan and an assumption of 1,800 
hours annually. See Notice, supra note 5 at 30762 n.1243. $424,350/
1800 hours = $235.75.
---------------------------------------------------------------------------

    The Plan now also requires the Participants to provide a report 
discussing the feasibility, benefits, and risks of allowing an Industry 
Member to bulk download the Raw Data it submitted to the Central 
Repository, within 24 months of effectiveness of the Plan. The 
Commission estimates this requirement will entail a total one-time cost 
of approximately $147,000.\2497\
---------------------------------------------------------------------------

    \2497\ See Section VI.G.1.d, infra.
---------------------------------------------------------------------------

    The Plan now also requires the Participants to submit an assessment 
of errors in the customer information submitted to the Central 
Repository that considers whether to prioritize the correction of 
certain data fields over others, within 36 months of effectiveness of 
the Plan. The Commission estimates this requirement will entail an 
approximate one-time cost of $186,000.\2498\
---------------------------------------------------------------------------

    \2498\ See Section VI.G.1.e, infra.
---------------------------------------------------------------------------

    The Plan now requires the Participants to submit a report to study 
the impact of tiered-fees on market liquidity, including an analysis of 
the impact of the tiered-fee structure on Industry Members' provision 
of liquidity, within 36 months of effectiveness of the Plan. The 
Commission estimates this requirement will have a one-time external 
cost of $110,000.\2499\
---------------------------------------------------------------------------

    \2499\ See Section VI.G.1.f, infra. The Commission assumes an 
hourly labor rate of $235.75 that is based on the FTE annual cost 
provided by the Participants in the Plan and an assumption of 1,800 
hours annually. See Notice, supra note 5 at 30762 n.1243. $424,350/
1800 hours = $235.75.
---------------------------------------------------------------------------

    The Plan now requires an assessment of the impact on the maximum 
Error Rate in connection with any Material Systems Change to the CAT; 
the Commission assumes that the CAT may have four Material Systems 
Changes per year. The Commission estimates this requirement will entail 
an ongoing annual cost of $138,000.\2500\
---------------------------------------------------------------------------

    \2500\ See Section VI.G.1.g, infra.
---------------------------------------------------------------------------

    The Plan now requires that the Advisory Committee members receive 
the same materials as the Operating Committee absent confidentiality 
concerns with respect to such information. The Commission estimates 
this will require an aggregate annual cost of $2,400.\2501\
---------------------------------------------------------------------------

    \2501\ See Section VI.G.1.h, infra.
---------------------------------------------------------------------------

    The Plan now requires that the CAT LLC financials (i) be in 
compliance with GAAP, (ii) be audited by an independent public 
accounting firm, and (iii) be made publicly available.\2502\ The 
Commission estimates these requirements to entail costs of $65,000 
annually.\2503\
---------------------------------------------------------------------------

    \2502\ See Section IV.B.4, supra; see also Participants' Letter 
II.
    \2503\ To estimate this number, the Commission drew from a 
recent Commission adopting release and an industry report. 
Specifically, the Commission's Crowdfunding Adopting Release 
estimated that the audit costs for affected issuers would be $2,500 
to $30,000. See Securities Act Release No. 9974 (October 30, 2015), 
80 FR 71499 (November 16, 2015). The Commission believes this 
estimate could be reasonable if the Company's financials are of the 
same level of complexity as the larger issuers affected by the 
Crowdfunding rule, which is realistic because the Company is not 
publicly traded, is organized as a ``business league'', and has a 
limited and predictable revenue stream. As an alternative estimate, 
the Commission estimated an audit cost of approximately $65,000 
using an industry estimate of $479 in audit costs per $1 million in 
revenue, using the assumption that Company revenue will just offset 
expected costs of $139 million. See Audit Analytics report ``Audit 
Fees and Non-Audit Fees: A Twelve Year Trend,'' October 9, 2014, 
available at http://www.auditanalytics.com/blog/audit-fees-and-non-audit-fees-a-twelve-year-trend/. $479 x $139 = $64,665 ~ $65,000. 
The Commission incorporates the higher estimate from the two 
methodologies ($65,000) into its cost estimates.
---------------------------------------------------------------------------

    Finally, the Plan now requires that each Participant conduct 
background checks of its employees and contractors that will use the 
CAT System. The Commission estimates that this requirement would entail 
an initial cost of $60,000, with ongoing annual costs of $14,000.\2504\
---------------------------------------------------------------------------

    \2504\ See Section VI.G.1.i, infra.
---------------------------------------------------------------------------

    The Commission is also revising its Participant cost estimates to 
account for the addition of two additional Participants that were not 
covered by the Participants Study.\2505\ The Commission assumes the new 
Participants will have similar costs to the 19 Participants that 
provided cost estimates summarized in the Plan. Consequently, the 
Commission has increased its estimates of Participants costs by 
10.53%.\2506\ The Commission now estimates that the 21 Participants 
spend $8 million annually for data reporting, and $162.7 million for

[[Page 84857]]

surveillance. The Commission estimates that implementation of CAT Data 
reporting will cost the Participants $19.8 million, and implementation 
of surveillance using data in the Central Repository will cost the 
Participants $25.6 million. The Commission estimates that Participants 
will spend $16.2 million annually to maintain CAT Data reporting, and 
$96.9 million annually on surveillance. The Commission is also 
recognizing that the Participants will recoup $8.8 million in Plan 
development costs, as discussed above. The Commission estimates that 
Participants will spend approximately $1.1 million to produce one-time 
reports required by amendments to the Plan, and $1.1 million annually 
to produce additional periodic reports required by amendments to the 
Plan. Furthermore, the Commission is recognizing $343,000 in system 
retirement costs, as discussed below.\2507\ The Commission is unable to 
update cost estimates to account for the modifications to the clock 
synchronization standards for exchanges, but, as discussed below, the 
Commission does not believe that the modifications will result in 
substantial cost increases for exchanges.\2508\ The Commission 
acknowledges that the addition of quote sent times to option market 
maker quotes may increase costs to options exchanges. Based on comments 
received, the Commission believes that Participant cost estimates from 
the Participants Study are unlikely to include the additional expense 
Participants will incur capturing and processing the Quote Sent Time 
field. The Commission lacks information to estimate these costs for 
Participants because the Plan does not include this information and 
commenters did not offer estimates. Table 3 reflects the Commission's 
estimates after taking these adjustments into consideration.
---------------------------------------------------------------------------

    \2505\ The Participants Study covered the 19 Participants that 
were operating as Participants at the time the study was conducted. 
The Notice acknowledged that ISE Mercury would likely become a 
Participant before the Plan was implemented, but cost estimates 
presented in the Notice did not account for costs that ISE Mercury 
would incur due to the Plan. Since filing the Plan, ISE Mercury and 
IEX have become Participants in the Plan.
    \2506\ 100 x (2/19) = 10.53%.
    \2507\ See Section V.F.2.b, infra.
    \2508\ See Section V.F.3.a(5), infra.

                                    Table 3--Estimates of Participants' Costs
----------------------------------------------------------------------------------------------------------------
                                                                        CAT           System
                                                      Current     implementation    retirement     CAT on-going
----------------------------------------------------------------------------------------------------------------
Data Reporting..................................      $7,626,570     $19,784,870  ..............     $16,247,910
Surveillance....................................     162,700,160      25,642,960  ..............      96,934,810
Development Recoup..............................  ..............     (8,800,000)  ..............  ..............
Additional Reporting Requirements...............  ..............       1,085,927  ..............       1,089,137
                                                 ---------------------------------------------------------------
    Total.......................................     170,326,730      37,713,757        $342,632     114,271,857
----------------------------------------------------------------------------------------------------------------

c. Costs to Broker-Dealers
(1) Summary of Notice and Comments and Commission's Response
    In the Notice, the Commission provided an analysis of the 
compliance cost estimates for broker-dealers that included analyzing 
whether estimates provided in the Plan and based on a Reporters Study 
survey were reliable.\2509\ The Commission preliminarily believed that 
the cost estimates for small broker-dealers were not reliable. The 
Commission described the details of the analysis supporting that 
conclusion. The Commission then developed and calibrated a model 
(``Outsourcing Cost Model'') to estimate average current data reporting 
costs and average Plan compliance costs for broker-dealers that the 
Commission expects will rely on service bureaus to perform their CAT 
Data reporting responsibilities (``Outsourcers''). For other broker-
dealers, the ``Insourcers,'' the Commission continued to rely on the 
large broker-dealer estimates from the Plan. Using this framework, the 
Commission estimated approximate one-time implementation costs for 
broker-dealers of $2.1 billion, and annual ongoing costs of CAT 
reporting of $1.5 billion.
---------------------------------------------------------------------------

    \2509\ See Notice, supra note 5, at 30712-26.
---------------------------------------------------------------------------

    The Commission received comments on the reliability of its 
Outsourcing Cost Model and its re-estimation of costs. One commenter 
stated that the Commission's estimates of service bureau charges for a 
small firm ``sound reasonable.'' \2510\ Another commenter noted that 
even when Outsourcers rely on their service providers (service bureaus 
or clearing firms) to accomplish current data reporting, the 
Outsourcers must expend internal resources as well.\2511\ A third 
commenter stated that broker-dealers that clear for other broker-
dealers may face higher implementation costs because they may support 
more broker-dealers than they did before implementation of the 
Plan.\2512\ This commenter also stated that the Commission has not 
analyzed the cost implications of the phased implementation of small 
and large Industry Members.\2513\ The Commission did not receive 
comments on its analysis or conclusion that the Reporters Study did not 
provide reliable cost estimates for small broker-dealers.
---------------------------------------------------------------------------

    \2510\ Data Boiler Letter at 36.
    \2511\ Specifically, this commenter references EBS reporting, 
but indicates that broker-dealers sometimes must also be involved in 
preparing EBS request responses. See FIF Letter at 34.
    \2512\ TR Letter at 3-4.
    \2513\ TR Letter at 3.
---------------------------------------------------------------------------

    The Commission also received several comments on uncertainties in 
broker-dealer cost estimates. Three of these comments related to the 
selection of the Plan Processor. One commenter stated, ``not knowing 
who the CAT Processor is introduces a significant amount of 
uncertainty. . . . We believe the Commission discounts the importance 
of the choice of Plan Processor as it relates to implementation costs. 
While the bids to build the Processor may be within a sufficiently 
narrow range so as to negate those costs, the choice of Processor may 
have a significant impact on broker-dealer implementation costs.'' 
\2514\ A commenter stated that the differences in Bids prevented 
broker-dealers from ``. . . provid[ing] more definitive cost estimates 
and other projections related to CAT implementation.'' \2515\ Other 
commenters noted that the Plan's lack of specific details creates 
uncertainty around what costs broker-dealers will incur to implement 
these provisions.\2516\ Other comment letters discussed the general 
uncertainties that result from not having the technical 
specifications.\2517\
---------------------------------------------------------------------------

    \2514\ TR Letter at 4; FSI Letter at 6.
    \2515\ FSI Letter at 6.
    \2516\ SIFMA Letter at 42; FSI Letter at 6.
    \2517\ See, e.g., FSR Letter at 10; SIFMA Letter at 23; UnaVista 
Letter at 2; Fidelity Letter at 6.
---------------------------------------------------------------------------

    The Commission has considered these comments, the Participants' 
response, and modifications to the Plan and is updating and revising 
its cost estimates. As discussed below, the Commission

[[Page 84858]]

now acknowledges that its estimates exclude some additional costs that 
would be faced by Outsourcers or new reporters that clear for other 
broker-dealers, or that provide support for introducing broker-dealers. 
The Commission further acknowledges that broker-dealer costs presented 
in its analysis are subject to significant uncertainties and recognizes 
additional sources of uncertainty. The Commission is also updating its 
analysis of the costs to recognize the effects of modifications to the 
requirement to report an open/close indicator and allocation time, and 
is revising its analysis to indirectly account for the Participants' 
development costs. However, the Commission is not revising the 
structure of its Outsourcing Cost Model, its conclusions regarding the 
reliability of the Reporters Study, or estimates of the broker-dealers' 
current, implementation or ongoing costs.
    With respect to the comment that the Outsourcing Cost Model does 
not account for internal expenses that support outsourced activities, 
the Commission notes that its cost estimates explicitly assume that 
Outsourcers have employee expenses that cover these activities.\2518\ 
With respect to the commenters concerned that the Commission's 
estimates do not account for an increase in costs for broker-dealers 
that clear for other broker-dealers or provide support to introducing 
broker-dealers, the Commission continues to believe the analysis of 
broker-dealer implementation costs presented in the Notice is generally 
reliable, and notes that Reporters Study estimates for large broker-
dealers are likely to include these expenses because survey respondents 
are likely to include broker-dealers that provide these services. The 
Commission acknowledges, however, that there are some broker-dealers--
such as one of the commenters--that would be classified as Outsourcers 
or new reporters for which the Commission's cost estimates rely on the 
Outsourcing Cost Model, and the additional implementation costs that 
these firms face due to clearing for other broker-dealers or supporting 
introducing broker-dealers are not captured by the Outsourcing Cost 
Model. Costs that Outsourcers and new reporters that continue to clear 
for other broker-dealers will face include, but are likely not limited 
to, additional costs associated with reporting customer information to 
the Central Repository and costs associated with receiving customer 
information from their broker-dealer clients. Outsourcers and new 
reporters that currently clear for other broker-dealers or support 
introducing broker-dealers that elect to outsource their clearing or 
regulatory data reporting will face costs that include, but are not 
limited to, costs associated with establishing service provider 
relationships with other broker-dealers; and lost revenues from 
providing services for other firms if those firms cease providing 
clearing services or supporting introducing broker-dealers, although 
the Commission believes that they might be able to establish 
``piggyback'' arrangements that allow them to retain their 
relationships with current customers.\2519\ The Commission, however, 
cannot estimate the number of broker-dealers that would bear these 
costs because the Commission lacks data on the number of broker-dealers 
that clear for other broker-dealers that would be classified as new 
reporters or Outsourcers. Furthermore, the Commission lacks data to 
estimate the magnitude of these costs because the Plan does not provide 
this data and the Commission is unaware of any data available to it 
that it could use to estimate these costs.
---------------------------------------------------------------------------

    \2518\ See Notice, supra note 5, at 30723.
    \2519\ Costs related to outsourcing services such as clearing 
are discussed in Section V.F.1.c, supra, and Section V.G.1.d, infra. 
``Piggyback'' relationships are discussed in the Notice, supra note 
5, at 30716 n.894.
---------------------------------------------------------------------------

    In response to comment letters that identified sources of 
uncertainties related to the costs Industry Members will incur, the 
Commission acknowledges that such costs depend on the Technical 
Specifications, which will be published no later than one year before 
Industry Member reporting begins. The Commission now believes that the 
sources of uncertainty include both how Technical Specifications would 
vary across Bids, and what costs of CAT are included in cost estimates 
obtained from market participants and presented in the Plan and 
included in the Commission's analysis.\2520\ However, the Commission 
notes that final Bids will not be submitted until after the Plan is 
approved, so the Commission is unable to quantify the degree of 
variation in broker-dealer implementation costs across Bids.
---------------------------------------------------------------------------

    \2520\ For example, the analyses in the Plan and the 
Commission's analysis assume that respondents to cost surveys are 
representative of their respective groups. If broker-dealers that 
clear for other broker-dealers or serve as introducing broker-
dealers did not respond to cost surveys, the costs such broker-
dealers are likely to face might not be represented by Plan 
estimates, and the Commission's estimates where they rely on the 
Plan's estimates.
---------------------------------------------------------------------------

    The Commission has also revised its analysis of its cost estimates 
to account for the following things: The clarification that 
Participants intend to recoup their development costs; modifications to 
the Plan regarding reporting the open/close indicator for equities and 
Options Market Makers; costs for Options Market Makers to provide Quote 
Sent Time; and costs related to providing allocation times on 
Allocation Reports. The Participants' response clarified that the 
Participants intend to recoup some of the more than $8.8 million they 
have already spent to develop the CAT NMS Plan by collecting fees from 
broker-dealers.\2521\ In the Notice, the Commission treated such costs 
as sunk costs incurred by the Participants and did not include them in 
its analysis of the Plan, but is now recognizing that these costs will 
be transferred to broker-dealers.\2522\ Therefore, the Commission adds 
the development costs to the costs to broker-dealers.\2523\ The 
Commission recognizes that the modification that removes the open/close 
indicator for equities and Options Market Makers will reduce the 
implementation and potentially ongoing costs for Industry Members. 
However, as discussed in the further analysis of costs Section 
below,\2524\ the Commission is not certain whether Industry Members 
included these costs in their cost survey results, and the Commission 
does not have sufficient information on these costs to remove them from 
its estimates.\2525\ With regard to Quote Sent Time, the Commission is 
incorporating estimates discussed in the Notice but not included 
separately in cost estimates published in the Notice.\2526\

[[Page 84859]]

The Commission recognizes that the modifications related to including 
allocation times will reduce costs to Industry Members, but also 
recognizes that the Commission did not previously account for these 
costs in estimates of their costs.\2527\ Therefore, the Commission is 
adding the estimated costs of including allocation time as required 
under the Plan as amended to its cost estimates. The Commission notes 
that this increase in broker-dealer costs is small relative to the 
other estimated costs of broker-dealers and therefore does not change 
the rounded estimates.
---------------------------------------------------------------------------

    \2521\ See Section V.F.1.b, supra, for further discussion.
    \2522\ See Notice, supra note 5, at n 848. This clarification to 
the Plan, and comments received on this clarification, which are 
discussed in Section IV, imply disagreement with the Commission's 
treatment of these costs as sunk costs in the Notice. The Commission 
notes that these costs have already been incurred, so are not 
attributable to the Approval of the Plan, but rather are costs 
associated with and anticipated by Rule 613. Furthermore, the 
recovery of these costs by the Participants does not change the cost 
to industry of the Plan; rather the costs comprise a transfer from 
one market participant type (Industry Members) to another 
(Participants). Consequently, the cost of the Plan to industry is 
unaffected. The Commission acknowledges that this transfer will 
increase broker-dealer costs and decrease Participant costs.
    \2523\ This cost is also subtracted from costs to Participants. 
See Section V.F.1.b, supra.
    \2524\ See Section V.F.3.a(2), infra, for a more detailed 
discussion of the effect of this modification.
    \2525\ The Commission believes the estimates are conservative in 
this dimension as they overestimate broker-dealer implementation 
costs due to the removal of the open/close indicator from the 
material terms of the order insofar as broker-dealers included that 
indicator in their implementation cost estimates in the Reporters 
Study survey.
    \2526\ The Notice discusses estimates of five year 
implementation and ongoing costs of up to $76.8 million. The 
Commission notes that for other broker-dealer costs, implementation 
costs are 146.46% of ongoing costs and assumes that ratio of 
implementation to ongoing costs for Quote Sent Time. (1.4646 ongoing 
costs + 5 x ongoing costs = $76.8 million.) See Section V.F.3.a(6), 
infra for discussion of these estimates and their treatment in the 
Notice and this Order.
    \2527\ See Section V.F.3.a(4), infra, for a more detailed 
discussion of the costs of including allocation times on Allocation 
Reports.
---------------------------------------------------------------------------

    Therefore, in its final analysis, the Commission estimates 
approximate one-time implementation costs for broker-dealers of $2.2 
billion, and annual ongoing costs of CAT reporting of $1.5 billion.
(2) Commission's Final Analysis
    The discussion that follows provides a synopsis of the Commission's 
final analysis of the compliance costs of broker-dealers. Because the 
Commission is not revising the structure of its Outsourcing Cost Model 
or its conclusions regarding the reliability of the Costs to CAT 
Reporters Study (``Reporters Study''),\2528\ the final analysis 
regarding these below provides a summary of the more detailed 
discussions in the Notice.
---------------------------------------------------------------------------

    \2528\ See Notice, supra note 5, at 30712-14.
---------------------------------------------------------------------------

A. Estimates in the Plan
    The Plan, as amended on February 27, 2015, estimates total costs 
for those broker-dealers expected to report to CAT. In particular, the 
Plan relies on the Reporters Study. Based on the Reporters Study survey 
data, the Plan estimates implementation costs of less than $740 million 
for small firms \2529\ and approximately $2.6 billion for large firms, 
for a total of $3.34 billion in implementation costs for broker-
dealers.\2530\ For annual ongoing costs, the Plan estimates costs of 
$739 million for small firms and $2.3 billion for large firms, for a 
total of $3.04 billion in annual ongoing costs for broker-
dealers.\2531\
---------------------------------------------------------------------------

    \2529\ Survey respondents were instructed to classify themselves 
as ``small'' if their Total Capital (defined as net worth plus 
subordinated liabilities) was less than $500,000. See CAT NMS Plan, 
supra note 5, at Appendix C, Section B.7(b)(ii)(C) n.188. This is 
consistent with the definition of ``small business'' or ``small 
organization'' used with reference to a broker or dealer for 
purposes of Commission rulemaking in accordance with provisions of 
Chapter Six of the Administrative Procedure Act (5 U.S.C. 601 et 
seq.). See 17 CFR 240.0-10(c).
    \2530\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iv)(A)(3).
    \2531\ Id.
---------------------------------------------------------------------------

    The Commission believes, however, that the cost estimates for small 
broker-dealers provided in the Plan, which are based upon responses set 
forth in the Reporters Study, do not provide reliable estimates of 
smaller CAT Reporter costs for a number of reasons discussed in detail 
in the Notice and summarized herein.\2532\ First, some respondents 
classified as small in the Reporters Study appear to have responded 
numerically with incorrect units, with such responses resulting in 
annual estimated cost figures that would be 1,000 times too large. 
Second, maximum responses in certain categories of costs suggest that 
some large broker-dealers may have misclassified themselves as small 
broker-dealers.\2533\ Third, methods used to remove outliers are likely 
to have introduced significant biases. Finally, the response rate to 
the Reporters Study survey was low and is likely to have oversampled 
small broker-dealers who currently have no OATS reporting 
obligations.\2534\
---------------------------------------------------------------------------

    \2532\ See Notice, supra note 5, at 30712-14.
    \2533\ The Plan presents summary statistics such as average, 
median and maximum for each survey response. See CAT NMS Plan, supra 
note 5, at Appendix C, Section B(7)(b)(ii)(C), Table 5. In the left 
most column, $14 million is the maximum response for ``Hardware/
Software Current Cost.''
    \2534\ In reaching these conclusions, the Commission reviewed 
the detailed discussions of the Reporters Study survey methodology 
in the Plan and the survey form and instructions provided to 
respondents. See 6/23/14 entry on CAT NMS Plan website, available at 
http://www.catnmsplan.com/pastevents/index.html. The Commission 
Staff also discussed with the Participants potential methodology 
adjustments in aggregating the CAT Reporters Study data. After 
Commission Staff discussions with the Participants, the Commission 
concluded that no methodology could address these fundamental issues 
with the survey data.
---------------------------------------------------------------------------

    Although the Commission concludes that the small broker-dealer cost 
estimates presented in the Plan are unreliable, the Commission also 
believes, for reasons discussed in detail in the Notice and summarized 
herein, that the cost estimates in the Plan for large broker-dealers 
are reliable.\2535\ The Plan estimates that an OATS-reporting large 
broker-dealer has current data reporting costs of $8.7 million per 
year.\2536\ A non-OATS reporting large broker-dealer is currently 
estimated to spend approximately $1.4 million annually.\2537\ The Plan 
estimates that OATS-reporting large broker-dealers would spend 
approximately $7.2 million to implement CAT Data reporting, and $4.8 
million annually for ongoing costs.\2538\ For non-OATS reporting large 
broker-dealers, the Plan estimates $3.9 million in implementation costs 
and $3.2 million in annual ongoing costs.\2539\
---------------------------------------------------------------------------

    \2535\ See Notice, supra note 5, at 30714.
    \2536\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.(7)(b)(ii)(C), Table 3. The $8.7 million figure was calculated by 
summing the average hardware/software cost, third party/outsourcing 
cost, and full-time employee costs using the Commission's estimated 
cost per employee of $424,350.
    \2537\ Id. at Appendix C, Section B.(7)(b)(ii)(C), Table 4. The 
$1.4 million figure was calculated by summing the average hardware/
software cost, third party/outsourcing cost, and full-time employee 
costs using the Commission's estimated cost per employee of 
$424,350.
    \2538\ Id. at Appendix C, Section B.(7)(b)(iii)(C)(2)a., Table 
9; Appendix C, Section B.(7)(b)(iii)(C)(2)b., Table 15.
    \2539\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.(7)(b)(iii)(C)(2)a., Table 10; and at Appendix C, Section 
B.(7)(b)(iii)(C)(2)b., Table 16.
---------------------------------------------------------------------------

B. Commission Cost Estimates
    As discussed in detail in the Notice, the Commission believes that 
the small firm cost estimates presented in the Reporters Study are 
unreliable. Therefore, the Commission has re-estimated the costs that 
broker-dealers likely would incur for CAT implementation and ongoing 
reporting.\2540\ The Commission's broker-dealer cost estimates 
incorporate some broker-dealer data from the Plan, but to address 
issues in the Plan's Reporters Study data, the Commission's cost 
estimates also include other data sources described in the 
Notice.\2541\ As with the Plan's cost estimates, the Commission's re-
estimation relies on classifying broker-dealers based on whether they 
currently report OATS data. However, the re-estimation further 
classifies broker-dealers based on whether the firm is likely to use a 
service bureau to report its regulatory data, or, alternatively, 
whether the firm may choose to self-report its regulatory data. In this 
re-estimation, the Commission estimates that the 1,800 broker-dealers 
expected to incur CAT reporting obligations spend approximately $1.6 
billion annually to report regulatory data.\2542\ The

[[Page 84860]]

Commission believes that these broker-dealers will incur approximately 
$2.2 billion in implementation costs and $1.5 billion in ongoing data 
reporting costs.\2543\ As explained in more detail in the Notice, the 
Commission believes classifying broker-dealers based on their manner of 
reporting provides a more accurate estimate of the costs firms will 
incur because costs differ based on whether the firm insources or 
outsources reporting responsibilities and insourcing/outsourcing does 
not necessarily correlate with firm size.\2544\ The Commission 
maintains the Plan's approach of separating broker-dealer costs of OATS 
reporting firms from those that have no OATS reporting obligations, 
recognizing that the group of non-OATS reporting firms are diverse in 
size and scope of activities. As discussed in detail in the Notice, the 
Commission believes this is appropriate because firms that do not 
currently report to OATS will face a different range of costs to 
implement and maintain CAT reporting because firms that do not report 
to OATS are likely to have little to no regulatory data infrastructure 
in place.
---------------------------------------------------------------------------

    \2540\ See Notice, supra note 5, at 30717-24.
    \2541\ Discussions below present information included in the 
Notice on data obtained from FINRA and gleaned from discussions with 
broker-dealers and service bureaus arranged by FIF and staff. Id. at 
30715.
    \2542\ To the extent that the CAT NMS Plan underestimates the 
number of broker-dealers that would incur CAT reporting obligations, 
the Commission's estimates presented in the Notice understate the 
actual costs Reporters will face.
    \2543\ These figures cover only broker-dealer costs. Industry-
wide costs are summarized below.
    \2544\ See Notice, supra note 5, at 30715-17.
---------------------------------------------------------------------------

    The Commission's framework for estimation of broker-dealers costs, 
as presented in the Notice and adopted here without alteration, is 
based on analysis of data provided by FINRA and discussions with 
broker-dealers and service providers that were detailed in the 
Notice.\2545\ Analysis of data reported by FINRA confirms that there 
are two primary methods by which broker-dealers accomplish data 
reporting: insourcing, where the firm reports data to regulators 
directly; and outsourcing, where a third-party service provider 
performs the data reporting, usually as part of a service agreement 
that includes other services. Based on data from FINRA and 
conversations with market participants discussed in the Notice, the 
Commission believes that the vast majority of broker-dealers outsource 
most of their regulatory data reporting functions to third-party firms. 
A broker-dealer's decision to insource/outsource these functions and 
services can be complex, and different broker-dealers reach different 
solutions based on their business characteristics. To illustrate, some 
broker-dealers self-clear trades but outsource regulatory data 
reporting functions; some broker-dealers have proprietary order 
handling systems, self-clear trades, and outsource regulatory data 
reporting functions. Other broker-dealers outsource order-handling, 
outsource clearing trades, and self-report regulatory data. The most 
common insource/outsource service configuration, however, for all but 
the most active-in-the-market broker-dealers is to use one or more 
service bureaus to handle all of these functions.
---------------------------------------------------------------------------

    \2545\ Id. at 30714 n.880.
---------------------------------------------------------------------------

    The framework for the Commission's re-estimation, which is 
described in more detail in the Notice, is as follows.\2546\ First, the 
Commission identifies those OATS-reporting firms that insource 
(``Insourcers'') and those that outsource based on an analysis of the 
number of OATS Reportable Order Events (``ROEs'') combined with 
specific data provided by FINRA on how firms report OATS data. 
Furthermore, the Commission separately identifies firms that do not 
report to OATS but are likely to insource based on their expected 
activity level by identifying Options Market Makers and Electronic 
Liquidity Providers (``ELPs''). Based on that analysis, the Commission 
estimates that there are 126 OATS-reporting Insourcers and 45 non-OATS 
reporting Insourcers.\2547\ The Commission's re-estimation classifies 
the remaining 1,629 broker-dealers that the Plan anticipates will have 
CAT Data reporting obligations as ``Outsourcers,'' based on outsourcing 
practices observed in data obtained from FINRA.\2548\ Next, to 
determine costs for Insourcers, the Commission relies upon cost 
estimates for firms classified as ``large'' in the Reporters Study.
---------------------------------------------------------------------------

    \2546\ Id. at 30715.
    \2547\ Id.
    \2548\ Id. at 30715-16.
---------------------------------------------------------------------------

    For Outsourcers, the Commission uses a model of ongoing outsourcing 
costs (``Outsourcing Cost Model'') to estimate both current regulatory 
data reporting costs and CAT-related data reporting costs Outsourcers 
will incur if the CAT NMS Plan is approved. The Commission analyzed 
data provided by FINRA to establish a count of CAT Reporters likely to 
outsource their regulatory data reporting functions. The Commission's 
analysis of FINRA reporting data, which is discussed in the Notice, 
allowed the Commission to examine how broker-dealers' current 
outsourcing activities varied with the number of ROEs reported to OATS. 
Based on this analysis, the Commission believes that the 126 broker-
dealers that reported more than 350,000 OATS ROEs between June 15 and 
July 10, 2015 made the insourcing-outsourcing decision strategically 
based on the broker-dealer's characteristics and preferences, while the 
remaining OATS reporters were likely to utilize a service bureau to 
accomplish their regulatory data reporting.\2549\
---------------------------------------------------------------------------

    \2549\ The Commission believes this decision is strategic and 
discretionary because FINRA data reveals that while many broker-
dealers at these activity levels self-report most or all of their 
regulatory data, other broker-dealers outsource most or all of their 
regulatory reporting at these activity levels. At lower activity 
levels, most, but not all, broker-dealers outsource most if not all 
of their regulatory data reporting. The Commission is cognizant that 
some broker-dealers reporting fewer than 350,000 OATS ROEs per month 
can and do opt to self-report their regulatory data. However, based 
on conversations with broker-dealers, the Commission believes that 
most broker-dealers at these activity levels do not have the 
infrastructure and specialized staff that would be required to 
report directly to the Central Repository, and electing to self-
report would be cost-prohibitive in most but not all cases.
---------------------------------------------------------------------------

    The Commission estimates ongoing costs for outsourcing firms using 
a model which, as discussed in more detail in the Notice, was based on 
data gleaned from discussions with service bureaus and broker-dealers 
and implementation costs using information learned in conversations 
with industry.\2550\ Based on discussions with market participants, the 
Commission assumes that the cost function for outsourcing is concave 
\2551\ and applies the same assumption to its final analysis. This type 
of function is appropriate when costs increase as activity level 
increases, but the cost per unit of activity (e.g., cost per report) 
declines as activity increases. For reasons indicated in the Notice, 
the Commission relies on a schedule of average charges to access 
liquidity and rebates to provide liquidity from four non-inverted 
exchanges to estimate the concavity of the exchange pricing function, 
which the Commission uses to approximate the concavity of the 
outsourcing cost model.\2552\ The model's output, which the Commission 
relies on in its final analysis, is an estimate of a broker-dealer's 
cost to outsource data reporting services as part of a bundle of 
services from a service bureau; for smaller broker-dealers, it is 
assumed to include provision of an order management system and market 
connectivity.\2553\
---------------------------------------------------------------------------

    \2550\ See Notice, supra note 5, at 30718-24, for more 
information on these discussions.
    \2551\ Id. at 30719, for more information on these discussions.
    \2552\ The Commission's estimate of concavity relies on data 
from exchanges that do not feature inverted pricing. On ``inverted'' 
exchanges, the party with the resting order pays a fee while her 
counterparty that receives immediate execution earns a rebate.
    \2553\ In conversations with Commission Staff, service bureaus 
related that some very large clients provide their own order-
handling system and market connectivity.

---------------------------------------------------------------------------

[[Page 84861]]

    To estimate costs of CAT Data reporting by the service bureaus, the 
Commission assumes that the pricing function used to estimate current 
costs will apply for CAT Data reporting, but the costs in relation to 
the number of ROEs will increase because some events that are excluded 
from OATS (like proprietary orders originated by a trading desk in the 
ordinary course of a member's market making activities), will be 
included in CAT.\2554\
---------------------------------------------------------------------------

    \2554\ Although the pricing function is assumed constant, as 
explained in the Notice, broker-dealer costs would increase because 
the number of ROEs they report through their service bureaus would 
increase under the Plan. See Notice, supra note 5, at 30721.
---------------------------------------------------------------------------

    As discussed in detail in the Notice, application of the model to 
data provided by FINRA allows the Commission to estimate pre-CAT 
outsourcing costs for broker-dealers, as well as projected costs under 
the CAT NMS Plan. The Commission estimates that the 806 broker-dealers 
that each report fewer than 350,000 OATS ROEs monthly spend an 
aggregate $100.1 million on annual outsourcing costs. Under the CAT NMS 
Plan, the Commission estimates that these 806 broker-dealers will spend 
$100.2 million on annual outsourcing costs. As in the Notice, the 
Commission recognizes that the magnitude of this increase is quite 
small, but this is driven by the fact that the vast majority of firms 
that are assumed to outsource had very low regulatory data reporting 
levels at the time the estimates were made.\2555\
---------------------------------------------------------------------------

    \2555\ The average broker-dealer in this category reported 
15,185 OATS ROEs from June 15-July 10, 2015; the median broker-
dealer reported 1,251 OATS ROEs. Of these broker-dealers, 39 
reported more than 100,000 OATS ROEs during the sample period. Id. 
at 30722.
---------------------------------------------------------------------------

    As discussed in the Notice, firms that outsource their regulatory 
data reporting face additional internal staffing costs associated with 
this activity. Based on conversations with market participants 
described in the Notice, the Commission estimates that these firms 
currently have 0.5 full-time employees devoted to regulatory data 
reporting activities. The Commission further estimates that these firms 
will need one full-time employee for one year to implement CAT 
reporting requirements, and 0.75 full-time employees on an ongoing 
basis to maintain CAT reporting.\2556\
---------------------------------------------------------------------------

    \2556\ Based on discussions with broker-dealers described in the 
Notice, the Commission believes that very small broker-dealers are 
unlikely to have employees entirely dedicated to regulatory data 
reporting. Instead, other employees generally have duties that 
include dealing with service bureau matters and answering regulatory 
inquiries. The Commission assumes a full-time employee costs 
$424,350 per year. Id. at 30714, n. 880.
---------------------------------------------------------------------------

    As discussed in the Notice, in addition to broker-dealers that 
currently report to OATS, the Commission estimates that there are 799 
broker-dealers that are excluded from OATS reporting rules due to firm 
size, or exempt because all of their order flow was routed to a single 
OATS reporter, such as a clearing broker, that will have CAT reporting 
responsibilities.\2557\ The Commission assumes that these broker-
dealers will have low levels of CAT reporting, similar to those of the 
typical Outsourcers that currently report to OATS.\2558\ For these 
firms, the Commission assumes that under CAT they will incur the 
average estimated outsourcing cost of firms that report fewer than 
350,000 OATS ROEs per month, which is $124,373 annually. Furthermore, 
because these firms have more limited data reporting requirements than 
other firms, the Commission assumes these firms have only 0.1 full-time 
employees dedicated to regulatory data reporting activities. The 
Commission assumes that these firms will require 2 full-time employees 
for one year to implement the CAT NMS Plan and 0.75 full-time employees 
annually to maintain CAT Data reporting.\2559\
---------------------------------------------------------------------------

    \2557\ In discussions with Commission Staff, FINRA has stated 
that there are currently 54 OATS-exempt broker-dealers and 691 OATS-
excluded firms.
    \2558\ Exemption or exclusion from OATS may be based on firm 
size or type of activity. Broker-dealers with exemptions or 
exclusions that relate to firm size are presumably relatively 
inactive. However, some firms may be exempted or excluded because 
they route only to a single OATS-reporting broker-dealer; this could 
encompass large firms that would be more similar to Insourcers.
    \2559\ See supra note 2556.
---------------------------------------------------------------------------

    The Commission, however, believes for reasons described in more 
detail in the Notice that there are three other categories of broker-
dealers not reflected in the above detailed cost estimates that do not 
currently report OATS data but could be CAT Reporters. First, there are 
at least 14 ELPs that did not carry customer accounts; these firms are 
not FINRA members and thus have no regular OATS reporting 
obligations.\2560\ The Commission believes that it is likely that these 
broker-dealers already have self-reporting capabilities in place 
because each is a member of an SRO that requires the ability to report 
to OATS on request. The second group of broker-dealers that are not 
encompassed by the cost estimates of FINRA member broker-dealers 
discussed above are those that make markets in options and not 
equities. Although not required by the CAT NMS Plan to report their 
option quoting activity to the Central Repository,\2561\ these broker-
dealers may have customer orders and other activity that will cause 
them to incur a CAT Data reporting obligation. As explained in the 
Notice, based on CBOE membership data, the Commission believes that 
there are 31 options market-making firms that are members of multiple 
SROs but not FINRA.\2562\ The third group comprises 24 broker-dealers 
that have SRO memberships only with CBOE; the Commission believes that 
this group is comprised primarily of CBOE floor brokers and, further, 
believes these firms will incur CAT implementation and ongoing 
reporting costs similar in magnitude to small equity broker-dealers 
that currently have no OATS reporting responsibilities because they 
will face similar tasks to implement and maintain CAT reporting. As 
explained in the Notice, the Commission assumes the 31 options market-
making firms and 14 ELPs are typical of the Reporters Study's large, 
non-OATS reporting firms because this group encompasses large broker-
dealers that are not FINRA members, a category that excludes any 
broker-dealer that carries customer accounts and trades in equities. As 
in the Notice, for these 45 firms, the Commission relies on cost 
estimates from the Reporters Study.\2563\
---------------------------------------------------------------------------

    \2560\ The category of Insourcers that do not currently report 
OATS data includes firms that have multiple SRO memberships that 
exclude FINRA. This category includes Options Market Makers and at 
least 14 ELPs; these are firms that carry no customer accounts and 
directly route proprietary orders to Alternative Trading Systems.
    \2561\ See Exemption Order, supra note 21, at 11857-58.
    \2562\ The Commission identified 39 CBOE-member broker-dealers 
that were not FINRA members, but were members of multiple SROs; 8 of 
these broker-dealers were previously identified as ELPs, leaving 31 
firms with multiple SRO memberships that were unlikely to be CBOE 
floor brokers.
    \2563\ The Commission recognizes that additional broker-dealers 
may be members of neither FINRA nor CBOE, yet may incur CAT 
reporting obligations if the Plan is approved. The Commission has 
determined that categorizing additional broker-dealers that are 
currently classified as exempt or excluded FINRA members as non-
FINRA members would not change the cost estimates because these 
groups have identical estimated per-firm costs.
---------------------------------------------------------------------------

    As discussed in detail in the Notice, pre-CAT Data reporting cost 
estimates range from $167,000 annually for floor brokers and firms that 
are exempt from OATS reporting requirements to $8.7 million annually 
for firms that report more than 350,000 OATS ROEs per month 
(``Insourcers''). Estimates of one-time implementation costs range from 
$424,000 for OATS reporters that are assumed to outsource (``OATS 
Outsourcers'') to $7.2 million for Insourcers, and ongoing annual costs 
range from $443,000 annually for firms that are assumed to outsource 
(OATS Outsourcers, New Outsourcers and Floor Brokers) to $4.8 million 
for Insourcers.

[[Page 84862]]

    Table 4 summarizes the Commission's updated estimates of costs to 
broker-dealers expected from the approval of the CAT NMS Plan. The 
Commission estimates that broker-dealers spend, in aggregate, 
approximately $1.6 billion annually on current regulatory data 
reporting activities. The Commission estimates approximate one-time 
implementation costs of $2.2 billion, and annual ongoing costs of CAT 
reporting of $1.5 billion.\2564\ The Commission notes that its estimate 
of ongoing CAT reporting costs of $1.5 billion is slightly lower than 
current data reporting costs of $1.6 billion. As explained in the 
Notice, this differential is driven by expectations of reductions in 
data reporting costs reported by large OATS-reporting broker-dealers in 
the Reporters Study survey.\2565\ The Commission estimates that all 
other categories of broker-dealers will face significant increases in 
annual data reporting costs. Also, the Commission acknowledges that 
there are some broker-dealers that would be classified as Outsourcers 
or new reporters for which the Commission's cost estimates rely on the 
Outsourcing Cost Model, and the additional implementation costs that 
these firms face due to clearing for other broker-dealers or supporting 
introducing broker-dealers are not captured by these estimates.
---------------------------------------------------------------------------

    \2564\ As noted in Section V.F.1.b, supra, the Plan as amended 
in February 2016 states that the Participants will recover their 
costs of developing the Plan (currently $8.8 million) from broker-
dealers. This constitutes a transfer from broker-dealers to 
Participants, but does not change the aggregate cost of the Plan to 
market participants.
    \2565\ In the Reporters Study, Large OATS Reporters cite average 
current data reporting costs of $8.32 million and Approach 1 
maintenance costs of $4.5 million annually. See CAT NMS Plan, supra 
note 5, at Appendix C, Section B.7.(b)(ii)(C).
    \2566\ Additional Costs are discussed in Section V.F.1.c(1), 
supra. See additional discussion in Section V.F.3.a(4), infra and 
Section V.F.a(6), infra.

                         Table 4--Estimated Broker-Dealer Costs for CAT NMS Plan \2566\
----------------------------------------------------------------------------------------------------------------
                                                                                   System
                                 Number     Current costs    Implementation      retirement          Ongoing
----------------------------------------------------------------------------------------------------------------
Broker-Dealers:
    Insourcers...............        126    $1,097,130,000      $911,144,052       $12,600,000      $599,285,000
    Outsourcers..............        806       271,113,000       342,026,100         8,060,000       356,764,000
    New Small Firms..........        799       133,137,000       678,111,300         7,990,000       353,666,000
    ELPs.....................         14        20,068,000        54,257,245         1,400,000        45,160,000
    Options Market Makers....         31        44,437,000       120,141,043         3,100,000        99,998,000
    Options Floor Brokers....         24         3,999,000        20,368,800           240,000        10,623,000
Additional Costs:
    NEW: Allocation time.....  .........  ................        44,050,000  ................         5,035,833
    NEW: Quote sent time.....  .........  ................        17,400,000  ................        11,880,000
    NEW: Development Cost      .........  ................         8,800,000  ................  ................
     Recoup..................
                              ----------------------------------------------------------------------------------
        Total BD.............       1800     1,569,884,000     2,196,298,540        33,390,000     1,482,411,833
----------------------------------------------------------------------------------------------------------------

    The Commission recognizes both that there is uncertainty in these 
cost estimates and that these cost estimates do not include additional 
costs that Outsourcers and new reporters that clear for other broker-
dealers or support introducing broker-dealers will incur. As explained 
above, because the Commission's Outsourcing Cost Model does not and 
cannot incorporate these costs, the cost estimates here could 
underestimate the costs for these firms and, as a result, the total 
broker-dealer costs. Because Bids are not yet final, the Commission 
believes that its cost estimates, while reliable in light of available 
data and information, could differ from actual costs the broker-dealers 
will incur and that broker-dealers will not know the true magnitude of 
their costs until they can analyze the Technical Specifications.
d. Costs to Service Bureaus
    In the Notice, the Commission considered whether to include the 
implementation and ongoing costs to service bureaus in the aggregate 
costs of the Plan.\2567\ The Commission preliminarily believed that 
costs that service bureaus would face to implement CAT should be 
included as part of the aggregate costs of CAT. While the CAT NMS Plan 
does not require the use of service bureaus to report CAT Data, the 
Commission recognized that the most cost effective manner to implement 
the Plan likely will be for most market participants to continue their 
current practice of outsourcing their regulatory data reporting to one 
or more service bureaus. By doing so, the roughly 1,600 broker-dealers 
predicted to outsource would avoid incurring a significant fraction of 
CAT implementation costs; instead, service bureaus would incur 
implementation costs on their behalf. Based on conversations with 
market participants, the Commission believed that these implementation 
costs are likely to pass-through to broker-dealers that outsource data 
reporting, because service contracts between broker-dealers and service 
bureaus are renegotiated periodically, and approval of the CAT NMS Plan 
could trigger renegotiation as the bundle of services provided would 
materially change.
---------------------------------------------------------------------------

    \2567\ See Notice, supra note 5, at 30726.
---------------------------------------------------------------------------

    The Commission, however, preliminarily believed that the ongoing 
costs of CAT Data reporting by service bureaus would be duplicative of 
costs incurred by broker-dealers. The aggregate fees paid by 
Outsourcers to service bureaus cover the service bureaus' costs of 
ongoing data reporting. To include ongoing service bureau costs as a 
cost of CAT would double-count the costs that broker-dealers incur for 
CAT Data reporting.
    The CAT NMS Plan estimates aggregate implementation costs of $51.6 
million to $118.2 million for service bureaus, depending on the 
particular data ingestion format.\2568\ Aggregate ongoing annual cost 
estimates ranged from $38.6 million to $48.7 million. To provide a 
conservative estimate of aggregate cost estimates for CAT, the 
Commission included only the maximum implementation cost that vendors 
would likely face of $118.2 million.
---------------------------------------------------------------------------

    \2568\ The Vendor Survey asked about the costs under two 
different data ingestion formats, Approach 1 and Approach 2. 
Approach 1 would allow broker-dealers to submit data to the Central 
Repository using their choice of existing industry messaging 
protocols, while Approach 2 would specify a pre-defined format. Id. 
at Section 30726.
---------------------------------------------------------------------------

    One commenter provided additional information regarding service 
bureau

[[Page 84863]]

implementation costs.\2569\ The commenter stated that these firms will 
face $1.3 million in implementation costs related to providing 
allocation timestamps, and that these costs were not covered by the 
Vendors Study conducted by the Participants. The Commission believes 
this estimate is reliable because the commenter is an industry trade 
group with members that can provide cost estimates to the commenter. 
Furthermore, the Commission believes it is possible that at the time 
the Vendor's Study was conducted, industry members may not have been 
aware that allocation timestamps would be required in CAT. 
Consequently, the Commission is updating its analysis to account for 
these costs.
---------------------------------------------------------------------------

    \2569\ FIF Letter at 87-88.
---------------------------------------------------------------------------

    The Commission continues to believe that the only relevant cost for 
service bureaus to include in the aggregate costs of complying with the 
Plan is the estimated implementation cost which as adjusted is $119.5 
million.
2. Aggregate Costs to Industry
a. Estimated Costs of Compliance
    In the Notice, the Commission preliminarily estimated that industry 
would spend $2.4 billion to implement CAT, and $1.7 billion per year in 
ongoing annual costs.\2570\ The Commission calculated these numbers as 
the sum of its estimates for the Central Repository, Participants, 
broker-dealers, and service bureaus. These compare to Plan estimates of 
initial aggregate costs to industry of $3.2 billion to $3.6 billion and 
annual ongoing costs of $2.8 billion to $3.4 billion.\2571\
---------------------------------------------------------------------------

    \2570\ See Notice, supra note 5, at 30726-30.
    \2571\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iv)(A)(5).
---------------------------------------------------------------------------

    In terms of magnitudes of aggregate costs, the Notice discussed 
that costs to the 126 largest broker-dealers that currently report OATS 
data would be the largest driver of implementation costs, accounting 
for 38.3% of CAT implementation costs. Although these broker-dealers 
would face significant costs in implementing CAT, the Reporters Study 
survey results suggest that they anticipate lower ongoing reporting 
costs than they currently incur ($599 million annually in expected 
aggregate costs versus $1.1 billion annually in current aggregate 
regulatory data reporting costs). For all other categories of broker-
dealers, the Commission estimated ongoing annual costs to be higher 
than current reporting costs. While broker-dealers are anticipated to 
bear the greatest share of costs associated with CAT, the Commission 
discussed the possibility that these costs would be passed on to 
investors.
    The Commission received comments on its preliminary estimates of 
aggregate costs to the industry. One commenter provided alternative 
cost estimates, citing costs for financial institutions of $2 to 40 
million during initial years of CAT, and ongoing costs for CAT 
infrastructure of $28 to 36 million annually based on an analysis 
released by the Office of Comptroller of the Currency related to the 
Volcker Rule.\2572\ Another commenter noted that while aggregate costs 
are not certain, they will be measured in billions of dollars.\2573\ 
The same commenter also noted that the costs of CAT would be passed on 
to investors.\2574\
---------------------------------------------------------------------------

    \2572\ Data Boiler Letter at 14-15.
    \2573\ FSR Letter at 9-10.
    \2574\ FSR Letter at 9-10.
---------------------------------------------------------------------------

    The Commission does not believe, however, that these comments 
require revision of its analysis of the aggregate costs of the Plan.
    With respect to the comment that suggested that the Commission use 
Volcker Rule cost estimates to estimate the costs of the Plan, the 
Commission believes that these estimates are not relevant to the 
Plan.\2575\ The requirements of the Plan are significantly different 
than the requirements of the Volcker Rule, which is primarily focused 
on restricting certain trading activities and investments of banking 
entities, rather than the centralization and standardization of 
regulatory data reporting. Further, while the Commission acknowledges 
that some market participants will be subject to both the Volcker Rule 
and CAT, the Commission notes that market participants affected by the 
Plan are not necessarily comparable to banking entities affected by the 
Volcker Rule, and thus cost estimates for changes to their business 
processes would not be applicable to typical CAT reporters, which tend 
to be smaller institutions. The commenter's suggested estimate of $2 
million per year for affected market participants that are not large 
financial institutions does not seem reasonable because the majority of 
data that must be collected under CAT is already hosted by many of 
these firms' service providers, and much of this data is already 
reported to a regulatory data reporting system (OATS) for a far lower 
cost than the $2 million estimate.\2576\
---------------------------------------------------------------------------

    \2575\ Data Boiler Letter at 14-15.
    \2576\ See Notice, supra note 5, at 30722.
---------------------------------------------------------------------------

    The Commission agrees with the comment regarding the uncertainty of 
the cost estimates,\2577\ and notes that it recognized in the Notice 
the significant uncertainty surrounding the actual implementation costs 
of CAT and the actual ongoing broker-dealer data reporting costs if the 
Plan were approved and is cognizant of the magnitude of the aggregate 
costs.\2578\ The Commission continues to recognize that the methodology 
and data limitations used to develop these cost estimates could result 
in imprecise estimates that may significantly differ from actual costs. 
The Commission continues to believe, however, that it is using its best 
judgment to assess available information and data to provide analysis 
and estimates of the costs of the CAT NMS Plan. With regard to the 
comment that CAT costs will be passed on to investors,\2579\ the 
Commission acknowledged in the Notice and continues to believe that it 
is possible that some or most of the costs of CAT will be passed on to 
investors.
---------------------------------------------------------------------------

    \2577\ FSR Letter at 9-10.
    \2578\ See Notice, supra note 5, at 30708.
    \2579\ FSR Letter at 9-10.
---------------------------------------------------------------------------

    The Commission has, however, updated its aggregate cost estimates 
to account for the updates to Central Repository, Broker-Dealer, 
Participant and Service Bureau cost estimates which incorporate updates 
due to modifications of the Plan. In aggregate, the Commission believes 
that that industry will spend $2.4 billion to implement CAT, and $1.7 
billion per year in ongoing annual costs. Table 5 below shows these new 
cost estimates and aggregate costs to industry. Some individual 
estimates have changed from estimates presented in the Notice for a 
number of reasons. First, the Commission is now recognizing system 
retirement costs of $55 million. Also, estimates for Participant costs 
have increased to account for two additional Participants that were not 
covered by the Participants Study, and to account for the cost of 
additional reporting required by amendments to the Plan. Finally, 
estimates for Central Repository implementation and ongoing costs have 
been updated to reflect the Participants' current estimates. As Table 5 
shows, however, the changes to the cost estimates do not affect the 
rounded estimates of implementation and ongoing costs presented in the 
Notice. The Commission recognizes that these cost estimates do not 
specifically itemize the costs of certain modifications to the Plan or 
respond to information provided by certain

[[Page 84864]]

Commenters related to the costs of individual elements of the Plan. The 
Commission discusses these in detail in Section VI.F.3 below.

                                         Table 5--Commission's Estimate
----------------------------------------------------------------------------------------------------------------
                                                                                     CAT
                                                           -----------------------------------------------------
                                 Number     Current costs                          System
                                                             Implementation      retirement          Ongoing
----------------------------------------------------------------------------------------------------------------
Central Repository...........  .........                $0       $65,000,000  ................       $55,000,000
Participants (all, 21).......  .........       170,326,730        37,713,757          $342,632       114,271,857
Service Bureaus (all, 13)....  .........           Unknown       119,500,000        21,300,000          Excluded
Broker Dealers:
Insourcers...................        126     1,097,130,000       911,144,052        12,600,000       599,285,000
Outsourcers..................        806       271,113,000       342,026,100         8,060,000       356,764,000
New Small Firms..............        799       133,137,000       678,111,300         7,990,000       353,666,000
ELPs.........................         14        20,068,000        54,257,245         1,400,000        45,160,000
Options Market Makers........         31        44,437,000       120,141,043         3,100,000        99,998,000
Options Floor Brokers........         24         3,999,000        20,368,800           240,000        10,623,000
Additional Costs:
    NEW: Allocation time.....  .........  ................        44,050,000  ................         5,035,833
    NEW: Quote sent time.....  .........  ................        17,400,000  ................        11,880,000
    NEW: Development Cost      .........  ................         8,800,000  ................  ................
     Recoup..................
                              ----------------------------------------------------------------------------------
        Total BD.............      1,800     1,569,884,000     2,196,298,540        33,390,000     1,482,411,833
                              ----------------------------------------------------------------------------------
        Total Industry.......  .........     1,740,210,730     2,418,512,297        55,032,632     1,651,683,690
----------------------------------------------------------------------------------------------------------------

b. System Retirement and Duplicative Reporting Costs
    In the Notice, the Commission considered whether to include in its 
estimates of aggregate compliance costs the costs of system retirement 
and the costs of duplicative reporting if Participants and broker-
dealers need to maintain and report to current systems after commencing 
reporting to the Central Repository.
    The Commission considered the costs for system retirement provided 
in the Plan, which discussed significant costs ($2.6 billion) for 
retirement of current regulatory reporting systems.\2580\ The 
Commission did not include those costs in its estimate of the aggregate 
costs of the Plan, for several reasons. First, the Commission 
preliminarily believed that the cost estimates provided in the Plan 
were unlikely to accurately represent the actual costs industry would 
face in retiring duplicative reporting systems.\2581\ In particular, 
for the majority of broker-dealers that outsource, system retirement 
would affect few in-house systems; these broker-dealers would likely 
adapt the systems that interface with service bureaus for current 
regulatory data reporting to interface for CAT Data reporting. Further, 
for broker-dealers that self-report regulatory data, the Commission 
could not determine the source of the costs of system retirement that 
were estimated in the Plan and the magnitude of estimated costs led the 
Commission to doubt that estimates included only costs of retiring 
systems.\2582\ Second, the retirement of current regulatory reporting 
systems was not a requirement of the Plan and the timeline and process 
for their retirement was uncertain.
---------------------------------------------------------------------------

    \2580\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iv)(A)(5).
    \2581\ At its simplest level, ceasing reporting activities would 
include scrapping IT hardware dedicated to the endeavor and 
terminating the employees responsible for such regulatory data 
reporting. The Commission recognized that there are costs associated 
with those activities, but did not preliminarily believe their 
magnitude (estimated in the Plan as $2.6 billion) should approach or 
exceed the magnitude of costs of CAT implementation (estimated in 
this analysis as $2.4 billion). See Notice, supra note 5, at 30726-
28.
    \2582\ Id.
---------------------------------------------------------------------------

    While the Commission's cost estimates did not recognize explicit 
system retirement expenses, they also did not explicitly recognize 
savings from elimination of these systems, though they were recognized 
qualitatively. In the Notice, the Commission discussed its preliminary 
belief that this approach was conservative in the sense that system 
retirement costs would likely be mitigated by incorporation of current 
reporting infrastructure into CAT reporting infrastructure, while cost 
savings associated with industry's need to maintain fewer regulatory 
data reporting systems were not explicitly recognized. While the 
Commission did not include explicit system retirement costs, the 
Commission did recognize that industry would experience a costly period 
of duplicative reporting if the CAT NMS Plan were approved, and the 
Commission stated that it believed it was possible that these costs 
could be conflated with actual retirement costs estimated in the Plan.
    In the Notice, the Commission stated its preliminary belief that 
the period of duplicative reporting would likely constitute a major 
cost to industry for several reasons.\2583\ These reasons included the 
length of the duplicative reporting period; constraints on the capacity 
of industry to implement changes to regulatory reporting infrastructure 
that might cause market participants to implement changes using less 
cost-effective resources; \2584\ and the inability of some market 
participants to implement duplicative reporting in house, necessitating 
that they seek service bureau relationships to accomplish their CAT 
reporting requirements.
---------------------------------------------------------------------------

    \2583\ Id. at 30728.
    \2584\ Id.
---------------------------------------------------------------------------

    Based on data provided in the Plan, the Commission preliminarily 
believed that the period of duplicative reporting anticipated by the 
Participants would likely last for 2 to 2.5 years.\2585\ This time 
period involved four steps. Step 1, which could take 12 to 18 months, 
involves the SROs identifying duplicative SRO Rules and systems and 
Commission rulemaking. Step 2, which would last six months, involves 
preparations by the SROs to file rule changes, followed by Step 3, 
lasting three months, for the Commission to approve such rule changes. 
The last

[[Page 84865]]

step, Step 4, involves implementation, and the Commission estimated it 
could last from 90 days to six months, during which time the Plan 
stated that the Participants could consider when the quality of CAT 
Data would be sufficient to meet surveillance needs.
---------------------------------------------------------------------------

    \2585\ Id. at 30726-30.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed its preliminary belief that 
the current data reporting costs of $1.7 billion per year constituted 
an estimate of the cost per year to industry of duplicative reporting 
requirements, as it represents the cost of duplicative reporting to 
industry if there are no efficiencies that arise when a market 
participant has to report a subset of already centralized regulatory 
data to other regulatory data reporting systems.\2586\ The Commission 
did not believe that duplicative reporting costs should be added to the 
estimated aggregate costs of the CAT NMS Plan. The Commission discussed 
its belief that that the aggregate costs above represent the total 
costs of the Plan, and do not account for the differential between 
these costs and the costs the industry currently incurs for regulatory 
data reporting and maintenance. During the period of duplicative 
reporting, industry would incur the aggregate costs of accomplishing 
CAT reporting described above, plus the costs of current data 
reporting, which the Commission used as an estimate of duplicative 
reporting costs. The Commission noted that market participants would 
incur costs equal to current data reporting costs before system 
retirement and CAT implementation (because current regulatory data 
reporting would continue), or as duplicative reporting costs from Plan 
implementation until system retirement. Consequently, the Commission 
preliminarily believed these costs should not be considered as costs 
attributable to approval of the Plan, because market participants would 
bear these costs whether the Plan is approved or not.
---------------------------------------------------------------------------

    \2586\ Assuming that OATS, for example, is a subset of CAT, 
producing OATS data from the same database that produces CAT data 
might be less expensive than creating a separate infrastructure to 
report OATS data during the period of duplicative reporting.
---------------------------------------------------------------------------

    The Commission received comments on the costs of duplicative 
reporting. Several commenters agreed with the Notice that duplicative 
reporting would constitute a major cost to industry,\2587\ with a few 
of these commenters providing examples of the types of costs.\2588\ 
Examples of burdens provided by these commenters include dual reporting 
complexities such as conflicting reporting requirements,\2589\ varied 
corrections to the same errors across different systems,\2590\ legal 
and compliance confusion,\2591\ costs of maintenance of duplicative 
reporting systems such as infrastructure, storage, technical, and 
staffing resources,\2592\ and costs associated with making changes to 
redundant systems.\2593\ No commenters agreed with the Commission's 
preliminary belief \2594\ that reporters might experience efficiencies 
during duplicative reporting, with one commenter claiming that its 
costs would double.\2595\
---------------------------------------------------------------------------

    \2587\ FIF Letter at 5; SIFMA Letter at 5; FSR Letter at 10; 
Fidelity Letter at 4-5; TR Letter at 2; KCG Letter at 3; MFA Letter 
at 9; DAG Letter at 2.
    \2588\ FIF Letter at 30; SIFMA Letter at 5; Fidelity Letter at 
4-5; TR Letter at 2.
    \2589\ FIF Letter at 30.
    \2590\ FIF Letter at 30.
    \2591\ TR Letter at 2.
    \2592\ FIF Letter at 30; SIFMA Letter at 5.
    \2593\ Fidelity Letter at 5; KCG Letter at 3.
    \2594\ See Notice, supra note 5, at 30729.
    \2595\ TR Letter at 2.
---------------------------------------------------------------------------

    The Commission received comments on the measurement of the 
duplicative reporting period as well as the necessity and impact of the 
length of the duplicative reporting period. Some commenters indicated 
that the lengthy expected duplicative reporting period was unnecessary, 
redundant and/or avoidable \2596\ and two commenters indicated that the 
length of the duplicative reporting period was a major factor in the 
duplicative reporting costs.\2597\ A commenter suggested that it was 
feasible for the Commission and SROs to complete Step 1 before the 
milestone for the publication of Technical Specifications (one year 
before Industry Members other than Small Industry Members are required 
to begin reporting), which would speed up systems retirement by 18 to 
24 months relative to the Commission's estimate.\2598\ The same 
commenter also suggested that Step 4 was longer than necessary to 
achieve acceptable data quality.\2599\ One commenter indicated that the 
length of the duplicative reporting period was actually 3 to 3.5 years 
instead of the Commission's estimate of 2 to 2.5 years for firms that 
do not meet the definition of Small Industry Member.\2600\
---------------------------------------------------------------------------

    \2596\ SIFMA Letter at 5; Data Boiler Letter at 36; Fidelity 
Letter at 4; DAG Letter at 2.
    \2597\ FIF Letter at 5; DAG Letter at 2.
    \2598\ FIF Letter at 6.
    \2599\ FIF Letter at 6.
    \2600\ TR Letter at 2.
---------------------------------------------------------------------------

    The Commission also received comments discussing the system 
retirement costs presented in the Plan and discussed by the Commission 
in the Notice. One Commenter disagreed with the Plan's estimate that it 
should cost $2.6 billion to retire redundant systems.\2601\ Instead, 
the commenter suggested that a more accurate cost estimate would range 
from $10,000 to $100,000 per firm. This commenter did not provide an 
explanation of the how the commenter derived this estimated range and 
sought more information on the Plan's estimate.
---------------------------------------------------------------------------

    \2601\ SIFMA Letter at 7.
---------------------------------------------------------------------------

    The Participants' Response Letter II discussed comments related to 
system retirement.\2602\ The Participants noted that Small Industry 
Members can begin reporting earlier on a voluntary basis, and stated 
that the Participants will consider a rule change that would accelerate 
reporting for small Industry Members that are OATS reporters. The 
Participants also discussed their commitment to eliminating duplicative 
reporting systems as quickly as possible.\2603\ They stated that they 
are incented to eliminate duplicative systems because maintaining the 
systems is costly.
---------------------------------------------------------------------------

    \2602\ Response Letter II at 19-20.
    \2603\ Response Letter II at 20-21.
---------------------------------------------------------------------------

    The Participants also outlined a revised timetable for system 
retirement that differs from the Plan as filed.\2604\ Under the 
Participants' proposal, Step 1 would be completed within 9-12 months 
after the Plan's approval. Step 2, in which Participants file rule 
changes with the Commission, would end six months after the conclusion 
of Step 1. The Participants also discussed an exemption for individual 
CAT reporters from duplicative reporting.\2605\
---------------------------------------------------------------------------

    \2604\ Response Letter II at 21-25.
    \2605\ Response Letter II at 26; see also Section IV.D.9, supra.
---------------------------------------------------------------------------

    The Commission has considered the comments received, the 
Participants' response, and the modifications to the Plan, and is 
revising its analysis of the costs of duplicative reporting and system 
retirement as described below. The Commission acknowledges additional 
uncertainty regarding duplicative reporting due to its revised belief 
that efficiencies in duplicative reporting are less likely than it 
believed at the time of the Notice, but continues to believe that 
duplicative reporting could cost up to $1.7 billion per year. However, 
as discussed below, the Commission now believes that the period of 
duplicative reporting is likely to be shorter than was anticipated in 
the Notice, and that the cost will therefore be reduced. Based on 
comments received, the Commission has revised its estimate of system 
retirement costs and now believes the aggregate cost to

[[Page 84866]]

industry will be approximately $55 million.
    Consistent with its position in the Notice, the Commission agrees 
with commenters that duplicative reporting will constitute a major cost 
to industry, and recognizes that conflicting reporting requirements, 
varied corrections to the same error across different systems, legal 
and compliance confusion will all contribute to these costs. Further, 
the Commission agrees that maintenance of duplicative reporting systems 
will entail commitment of additional resources such as infrastructure, 
storage, technical, and staffing resources, as well as costs associated 
with making changes to redundant systems. However, the Commission notes 
that modifications to the Plan that minimize changes to potentially 
duplicative systems during the period of duplicative reporting may 
mitigate some of these costs.\2606\ Regarding the comment that some 
market participants will see their data reporting costs double during 
the period of duplicative reporting, the Commission agrees and believes 
that calculation is reflected in the estimates in the Notice, as its 
estimate of duplicative reporting costs of $1.7 billion per year is in 
line with the projected industry costs of ongoing CAT reporting of $1.7 
billion per year.\2607\
---------------------------------------------------------------------------

    \2606\ See Section IV.D.9.a(2), supra (explaining that the 
Commission is amending Section C.9 of Appendix C of the Plan to 
state that between the Effective Date and the retirement of the 
Participants' duplicative systems, each Participant, to the extent 
practicable, will attempt to minimize changes to those duplicative 
systems.
    \2607\ See Notice, supra note 5, at 30729. As discussed above, 
the Commission estimates that market participants currently spend 
$1.7 billion for regulatory data reporting, and estimates that 
market participants will spend $1.7 billion to report regulatory 
data under CAT. During years of duplicative reporting, the 
Commission estimates market participants would spend $3.3 billion in 
regulatory data reporting, which is approximately double the $1.7 
billion they currently spend. See Section V.F.2, supra.
---------------------------------------------------------------------------

    In response to the comment that duplicative reporting does not 
create efficiencies, the Commission, in the Notice, explained that it 
expected some cost efficiencies, but expressed uncertainty about those 
efficiencies. Because of that uncertainty and in light of the comment, 
the Commission acknowledges that duplicative reporting may not result 
in efficiencies.
    Based on the changes to the Plan, the Commission now believes that 
the duplicative reporting period may be shorter than estimated in the 
Notice. As discussed previously, the Commission has revised the 
milestones for system retirement, which may decrease the duplicative 
reporting period compared to the period anticipated at the time of the 
Notice.\2608\ Specifically, the gap analyses for major duplicative 
systems (Step 1) have been substantially completed 3-3.5 years sooner 
\2609\ than was envisioned in the Notice.\2610\ Furthermore, the Plan 
as amended now calls for the Participants to file with the Commission 
within 6 months after Plan approval (Step 2) rule change 
proposals.\2611\ Consequently, Step 3 (Commission review of rule 
modification filings) is expected to commence six months after Plan 
approval, and, as discussed in the Notice, is expected to take three 
months to one year. As a result, Step 4 (Participant implementation of 
rule changes) is the only system retirement step that the Commission 
expects to extend past when Large Industry Members begin reporting to 
the Central Repository.
---------------------------------------------------------------------------

    \2608\ See Section IV.D.9.a(1), supra.
    \2609\ The Plan states that Step 1 would end 1-1.5 years after 
large Industry Members begin reporting to the Central Repository. 
Large Industry Members will begin reporting 2 years after the Plan 
is approved.
    \2610\ See Section IV.D.9, supra.
    \2611\ These proposals must consider at least three factors: (1) 
Specific standards of data accuracy and reliability, including, but 
not limited to, whether the attainment of a certain Error Rate is 
reached, (2) whether the availability of Small Industry Member data 
two years after Plan approval would facilitate more expeditious 
systems retirement, and (3) whether individual Industry Members can 
be exempted from reporting to duplicative systems once their CAT 
reporting meets specified accuracy and reliability standards. See 
Section IV.D.9.a, supra. The Commission analyzes these amendments 
below.
---------------------------------------------------------------------------

    The Commission recognizes that there remains significant 
uncertainty as to when system retirement will occur, because the actual 
retirement of such rules and systems will depend upon several factors. 
In particular, the Commission notes that the retirement of systems will 
not occur until the CAT Data is of sufficient quality and when the CAT 
system has been fully implemented for all reporters.\2612\
---------------------------------------------------------------------------

    \2612\ See Section IV.D.9, supra.
---------------------------------------------------------------------------

    With respect to the quality of the CAT Data, as discussed above, in 
the Notice the Commission estimated that the period of duplicative 
reporting was likely to last for 2 to 2.5 years. At the time of the 
Notice, the Commission's estimate suggested that the length of the rule 
modification steps within the four step process discussed above would 
primarily determine the length of the overall duplicative reporting 
period, although it recognized that data quality could delay the 
retirement of duplicative systems.\2613\ The Commission recognized in 
the Notice that Step 4 (implementation of system retirement plans) 
required not only the completion of Steps 1 through 3 but also that 
data quality within the Central Repository had to be adequate for the 
SRO's regulatory needs.
---------------------------------------------------------------------------

    \2613\ See Notice, supra note 5, at 30729.
---------------------------------------------------------------------------

    The Commission now believes that, while the revision of the system 
retirement milestones may decrease the length of the duplicative 
reporting period, this change will also increase the probability that 
Industry Member data quality might delay system retirement because 
Industry Members will have less experience reporting CAT Data when the 
four step process reaches the point where data quality could delay 
system retirement.
    Additionally, the Commission believes it is possible that, as one 
commenter suggested,\2614\ the phased implementation of CAT reporting 
for Small Industry Members could result in up to one year of 
duplicative reporting expense for Large Industry Members. Specifically, 
Large Industry Member data quality may reach a level that is sufficient 
for SRO regulatory needs prior to the commencement of reporting by 
Small Industry Members to the Central Repository, but retirement of 
systems might not occur until after those Small Industry Members begin 
reporting.\2615\ Further, it is possible that, as a result of having 
commenced reporting at a later date, Small Industry Members' data may 
not reach an acceptable quality threshold for some period after Large 
Industry Members' data has reached an acceptable quality threshold. The 
phased implementation schedule may therefore limit the extent to which 
the Plan amendments accelerating the timeframe for initial rule change 
proposals shorten the duplicative reporting period and thereby reduce 
the costs of duplicative reporting. Despite this caveat, for reasons 
explained below, the Commission believes that the amendments could 
significantly shorten this period and reduce costs.
---------------------------------------------------------------------------

    \2614\ TR Letter at 2.
    \2615\ The Commission's analysis of costs is not based on small 
versus large Industry Members, but rather is based on Insourcers 
versus Outsourcers. It is reasonable to assume that Insourcers, ELPs 
and Option Market Makers are large Industry Members because these 
market participants can be characterized as having high activity 
levels that would require capital levels that exceed the upper 
threshold for small Industry Members. For these three groups of CAT 
reporters, one year of duplicative reporting is estimated to cost 
$1.2 billion. See estimates of current data reporting costs in 
Section V.F.1.c(2)B, supra.
---------------------------------------------------------------------------

    In particular, at least four amendments or other factors might 
mitigate the impact of phased implementation on duplicative reporting 
and costs. First, the Commission has amended the Plan to

[[Page 84867]]

require the Participants' to include, in their filings to retire 
systems, specific standards of data accuracy and reliability, 
including, but not limited to, whether the attainment of a certain 
Error Rate is reached,\2616\ which should incentivize accurate data 
reporting by both Large and Small Industry Members and reduce the 
duplicative reporting period. Second, an amendment to the Plan requires 
Participants' rule change proposals to consider whether individual 
Industry Members can be exempted from reporting to duplicative systems 
once their CAT reporting meets specified accuracy and reliability 
standards.\2617\ If the Participants determine to grant such individual 
exemptions to some Industry Members prior to all Industry Members' data 
reaching an acceptable quality threshold, the economic impact of the 
phased implementation schedule could be less. Third, the Participants 
have indicated that OATS-reporting Small Industry Members can begin 
voluntarily reporting at the same time as Large Industry Members, and 
the Commission encourages the Participants and the Plan Processor to 
work with these Small Industry Members to enable them to begin 
reporting to CAT, on a voluntary basis, at the same time that Large 
Industry Members are required to begin reporting or as soon as 
practicable. The Commission recognizes, however, that incentives for 
Small Industry Members to begin reporting voluntarily at an earlier 
time are limited because accelerating CAT reporting imposes costs on 
CAT reporters, while the benefits of earlier system retirement accrue 
primarily to Large Industry Members that face a longer period of 
duplicative reporting. As a result, the extent to which accelerating 
commencement of voluntary reporting mitigates the economic impact of 
the phased implementation schedule may be limited. Therefore, the 
Commission believes that the amendment to require that the Participants 
consider whether the availability of Small Industry Member data two 
years after Plan approval would facilitate more expeditious systems 
retirement \2618\ could help to avoid an extension of the duplicative 
reporting period attributable to the phased implementation schedule.
---------------------------------------------------------------------------

    \2616\ See Section IV.D.9.a.(2), supra. Note that such proposals 
are subject to Commission approval. In reviewing such a proposal, 
the Commission would consider the appropriateness, and the 
consistency with the Act, of the proposal.
    \2617\ Id.
    \2618\ Id.
---------------------------------------------------------------------------

    The Commission has also considered the comment that proposed 
alternative estimates for system retirement costs \2619\ and has 
revised its economic analysis accordingly. Specifically, the Commission 
believes that this commenter has the expertise to provide reliable 
estimates because this industry group's members can inform it of their 
costs; furthermore, the Commission believes the estimates this 
commenter provided seem more reasonable than estimates provided in the 
Plan because estimates provided in the Plan exceeded the Commission's 
estimate of costs of implementing the Plan.\2620\
---------------------------------------------------------------------------

    \2619\ SIFMA Letter at 7.
    \2620\ See Notice, supra note 5, at 30727-28.
---------------------------------------------------------------------------

    To estimate the aggregate costs of system retirement, the 
Commission assumes that the $100,000 estimate would be appropriate for 
Insourcers and the $10,000 estimate would be appropriate for 
Outsourcers.\2621\ The Commission assumes that for firms that do not 
currently report to OATS, firms that were considered large for cost 
estimates (ELPs and Options Market Makers) will have similar system 
retirement costs to Insourcers because they are more similar in size 
and scope of operations to Insourcers than Outsourcers.\2622\ The 
Commission further assumes that non-OATS reporting firms that were 
considered small for cost estimates (new small firms and options floor 
brokers) will face similar system retirement costs to Outsourcers 
because they are more similar in size and scope of operations to 
Outsourcers than Insourcers.\2623\ With these assumptions, the 
Commission now estimates that broker-dealer system retirement costs 
would be $33.4 million, as described in Table 6. The Commission draws 
its estimates of system retirement costs for Participants and service 
providers from the Plan, which estimates aggregate costs of $343,000 
\2624\ across all Participants, and $21.3 million across all service 
providers. The Commission now estimates total industry costs for system 
retirement will be $55 million.
---------------------------------------------------------------------------

    \2621\ As discussed in the Notice, the Insourcing/Outsourcing 
decision is correlated with firm size. Insourcers tend to be larger 
firms, as do ELPs and Options Market Makers. These firms are likely 
to have more internal systems and more complex internal systems that 
will likely be more expensive to retire. On the other hand, 
Outsourcers, new reporters and options floor brokers are likely to 
be smaller firms with fewer internal systems that are less complex 
for retirement. Furthermore, new reporters and options floor brokers 
are likely to have fewer internal reporting systems than other 
broker-dealers because they are unlikely to have current OATS 
reporting obligations. Id. at 30718.
    \2622\ The Commission recognizes that there is uncertainty in 
the system retirement costs that broker-dealers will face generally. 
The estimates provided by the commenter are presented as a range, 
and the Commission's assumptions of which firms would fall at the 
top and the bottom of the range have significant uncertainty. If all 
1,800 broker-dealers anticipated to incur CAT reporting obligations 
bore $100,000 in system retirement costs, broker-dealer system 
retirement costs would be $180 million. The Commission believes 
system retirement costs will be far less than this because many 
broker-dealers currently have limited regulatory data reporting 
systems, and the majority of broker-dealers rely on service 
providers to perform much of their data reporting responsibilities.
    \2623\ The Commission recognizes that some new reporters and 
options floor brokers may choose to insource their CAT reporting 
activities, and thus may be considered similar in size and scope of 
operations to non-OATS reporting large firms. Because new reporters 
and options floor brokers do not currently report to OATS, the 
Commission believes that they will face lower system retirement 
costs than ELPs and Options Market Makers because the Commission 
believes many ELPs and Options Market Makers are members of an 
exchange that requires them to be able to report to OATS on request, 
while new small firms and options floor brokers are unlikely to be 
members of an exchange with this requirement.
    \2624\ The Notice estimated $310,000 for system retirement costs 
for Participants. The Commission is increasing this estimate by 
10.53% to account for the addition of two Participants. See Section 
V.F.1.b, supra.

              Table 6--Estimate of System Retirement Costs
------------------------------------------------------------------------
                                                            CAT system
                                                 Number     retirement
------------------------------------------------------------------------
Central Repository Participants (all)........  .........        $342,632
Service Bureaus (all, 13)....................  .........      21,300,000
Broker-Dealers:
    Insourcers...............................        126      12,600,000
    Outsourcers..............................        806       8,060,000
    New Small Firms..........................        799       7,990,000
    ELPs.....................................         14       1,400,000
    Options Market Makers....................         31       3,100,000

[[Page 84868]]

 
    Options Floor Brokers....................         24         240,000
                                              --------------------------
    Total BD.................................       1800      33,390,000
                                              --------------------------
    Total Industry...........................  .........      55,032,632
------------------------------------------------------------------------

3. Further Analysis of Costs
a. Costs Included in the Estimation
    In the Notice, the Commission noted that, in general, the CAT NMS 
Plan does not break down its cost estimates as a function of particular 
CAT NMS Plan requirements. However, the Commission considered which 
elements of the CAT NMS Plan were likely to be among the most 
significant contributors to the estimated CAT costs.\2625\ The 
Commission discussed its preliminary belief that significant sources of 
costs would include: The requirement to report customer information; 
\2626\ the requirement to report certain information as part of the 
Material Terms of the Order; the requirement to use listing exchange 
symbology; and the inclusion of Allocation Reports.
---------------------------------------------------------------------------

    \2625\ See Notice, supra note 5, at 30730-32.
    \2626\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.1.a.iii.
---------------------------------------------------------------------------

    In addition, the Commission discussed its preliminary belief that 
while certain costs could generally be quantifiably estimated, they 
were unlikely to be significant contributors to the overall costs of 
the Plan. These factors included: Clock synchronization requirements; 
Plan requirements that include the requirement that Options Market 
Makers send quote times to the exchanges; the requirement that the 
Central Repository maintain six years of CAT Data; and the inclusion of 
OTC Equity Securities in the initial phase of the implementation of the 
CAT NMS Plan. Furthermore, the Commission also explained that there 
were other sources of costs, namely costs associated with meeting 
certain targets such as error rates and management of PII, that could 
not be quantified by the Commission.
    The Commission noted that it believed that its estimates of the 
implementation costs and ongoing costs to industry included each of the 
costs discussed, because the provisions encapsulate major parts of the 
Plan. The Commission explained that it lacked the necessary information 
to estimate what portion of the costs of the Plan is attributable to 
some of these aforementioned elements because the Plan does not provide 
information on the costs attributable to reporting of this information, 
and the Commission had no other data from which it can independently 
estimate these costs.
    As discussed more fully below, the Commission has considered the 
comments it received regarding its analysis of these aforementioned 
costs, the Participants' response, and modifications to the Plan, and 
is updating its analysis in three ways. First, the Commission's 
analysis fully acknowledges the uncertainty in its cost estimates. 
Second, several comments disagreed with the Commission's belief that 
certain costs were included in the Commission's cost estimates. The 
Commission has analyzed each of these instances below and now believes 
that some costs, namely costs associated with Allocation Time and Quote 
Sent Time, were not included in the estimated costs in the Notice. As 
indicated in the Costs to Broker-Dealers, Costs to Participants, and 
the Costs of Building and Operating the Central Repository Sections 
above, the Commission has added these costs to the total costs for 
broker-dealers where estimates are available or otherwise recognizes 
them as additional to the existing estimates.\2627\ Third, several 
commenters disagreed with which costs the Commission noted as 
significant contributors to CAT costs. In response to comments, the 
Commission no longer judges whether quantified costs represent a 
significant contribution to total costs. Instead, it describes only the 
costs it cannot quantify in terms of whether the Commission believes 
such costs are a substantial proportion of costs of the CAT NMS Plan, 
and addresses those individually below. The Commission is cognizant 
that some of the costs for particular elements may be significant in 
isolation even if they are not a large proportion of the aggregate 
costs of the Plan. The following Sections expand on the analysis of the 
estimated costs above by exploring individual components of the CAT NMS 
Plan.
---------------------------------------------------------------------------

    \2627\ The Commission recognizes that Allocation Time may also 
increase the costs of the Central Repository and that Quote Sent 
Time may increase the costs of the Central Repository and to 
Participants. However, the Commission lacks sufficient information 
to add these costs to the existing estimates in these categories. 
Consequently, the Commission discusses the modifications 
qualitatively.
---------------------------------------------------------------------------

(1) Customer Information
    In the Notice, the Commission discussed its belief that the 
requirement in the CAT NMS Plan to report customer information for each 
transaction represents a significant source of costs.\2628\ The 
Commission explained that adapting systems to report customer 
information that is not included in current regulatory data on a 
routine basis could require significant and potentially difficult 
reprogramming because it could require gathering information from 
separate systems within a broker-dealer's infrastructure and 
consolidating it in one location, and redesigning an IT infrastructure 
to satisfy this requirement could interrupt other workflows within the 
broker-dealer, expanding the scope of systems that must be altered to 
accomplish CAT reporting.
---------------------------------------------------------------------------

    \2628\ See Notice, supra note 5, at 30730.
---------------------------------------------------------------------------

    The Commission received comments regarding the costs associated 
with reporting customer information. One commenter mentioned that the 
costs for providing customer information to the Central Repository 
represent a significant proportion of costs to the total 
industry.\2629\ One commenter requested clarification that only active 
accounts are reported as part of the customer definition process, and 
as a result of such clarification, this could reduce costs incurred for 
reporting customer information.\2630\ Two commenters stated that 
including Customer Identifying Information on the Initial Order Report 
would result in significant costs for the industry.\2631\
---------------------------------------------------------------------------

    \2629\ Data Boiler Letter at 37.
    \2630\ FIF Letter at 10.
    \2631\ TR Letter at 8-9; FIF Letter at 9-10, 86.
---------------------------------------------------------------------------

    The Participants responded to the comment regarding clarification 
of reporting only active accounts, stating that they have proposed to 
add a definition of ``Active Account'', defined as an account that has 
had activity in Eligible Securities within the last six months. 
Additionally, the Participants propose amending Section 6.4(d)(iv) of

[[Page 84869]]

the Plan to clarify that each Industry Member must submit an initial 
set of customer information for Active Accounts at the commencement of 
reporting to the Central Repository, as well as any updates, additions, 
or other changes in customer information, including any such customer 
information for any new Active Accounts.\2632\ In response to the 
comments regarding the expense associated with reporting Customer 
Identifying Information in the Initial Order Report, the Participants 
recommended modifications to the Plan to clarify that Customer 
Identifying Information and Customer Account Information does not need 
to be included on the Initial Order Report.\2633\
---------------------------------------------------------------------------

    \2632\ Response Letter I at 35.
    \2633\ Response Letter I at 34.
---------------------------------------------------------------------------

    The Commission considered these comments, the Participants' 
response and modifications to the Plan, and continues to believe that 
the requirement in the CAT NMS Plan to report customer information 
represents a significant proportion of total costs to the industry. No 
commenter provided cost estimates that would allow the Commission to 
estimate the costs, however. Further, the economic analysis did not 
explicitly account for Customer Identifying Information and Customer 
Account Information on the Initial Order Report, and the modification 
clarifies that the Plan does not require this information on order 
origination.
(2) Material Terms of the Order
    In the Notice, the Commission preliminarily explained that the 
requirement to report Material Terms of the Order that include an open/
close indicator for equities, order display information, and special 
handling instructions represent a significant source of cost. The 
Commission observed that not all broker-dealers are required to report 
these elements on every order and no market participants report an 
open/close indicator on orders to buy or sell equities. Thus, adapting 
some market participants' systems to report this information for each 
transaction could require significant and potentially difficult 
reprogramming that requires centralizing or copying information from 
multiple IT systems within the broker-dealer, which could dramatically 
increase the costs associated with implementing the changes required by 
CAT.
    The Commission received comments on the costs of the open/close 
indicator, but did not receive comments on other components of the 
Material Terms of the Order. Three commenters agreed with the 
Commission's analysis that an open/close indicator represents a 
significant proportion of costs of the Plan.\2634\ Two commenters 
indicated that it would require significant process changes across 
multiple systems,\2635\ and one provided a list of the different types 
of systems impacted by the open/close indicator.\2636\ Three commenters 
mentioned that currently, the open/close indicator is not populated for 
equities.\2637\ One of these commenters mentioned the inclusion of the 
open/close indicator for equities represents a ``market structure 
change.'' \2638\ Further, several commenters implied that the costs of 
the open/close indicator were not included in the cost estimates in the 
Notice.\2639\ The Participants did not directly address the costs of 
the open/close indicator but did indicate that it is currently only 
captured on certain options orders, implying that including this field 
in the Plan would be costly.\2640\ In particular, the Participants' 
response indicates that the open/close indicator is not captured on 
equities or on certain options transactions such as Options' Market 
Maker transactions.
---------------------------------------------------------------------------

    \2634\ TR Letter at 9; SIFMA Letter at 35-36; FIF Letter at 83-
86.
    \2635\ SIFMA Letter at 35; FIF Letter at 4, 84.
    \2636\ FIF Letter at 84.
    \2637\ TR Letter at 9, FIF Letter at 4, SIFMA Letter at 35.
    \2638\ FIF Letter at 85; TR Letter at 9.
    \2639\ Specifically, one commenter stated that the inclusion of 
the open/close indicator for equities was a surprise (See FIF Letter 
at 84) and two commenters wanted additional cost benefit analysis on 
the open/close indicator (See FIF Letter at 84; SIFMA Letter at 36).
    \2640\ Response Letter I at 21, 22.
---------------------------------------------------------------------------

    The Commission considered these comments, the Participants' 
response, and modifications to the Plan and is updating and revising 
its economic analysis regarding the costs of the open/close indicator 
for equities and certain options transactions below.
    The modifications to the Plan eliminating the requirement to report 
an open/close indicator for equities will reduce the compliance costs 
for broker-dealers, Participants, and the Central Repository, but the 
Commission cannot quantify the savings. While several commenters 
implied that the cost estimates in the Notice did not account for the 
open/close indicator in equities, the Commission notes that this data 
field was proposed in Rule 613 and discussed in the Proposing Release 
and Notice. Nonetheless, the commenters represent many broker-dealers 
and, therefore, the comments may indicate that a number of broker-
dealers indeed did not include these costs when responding to the cost 
survey. This raises uncertainty regarding how many broker-dealers did 
or did not account for these costs. Because of this uncertainty and the 
absence of comments detailing the costs, the Commission cannot update 
its cost estimates to recognize the Plan modifications. However, both 
the Commission and commenters agree that, absent a modification, market 
participants would have needed to adapt their systems to report open/
close information for each order because this indicator is not 
populated for equities today.
    The Participants' statement in the response letter that open/close 
indicators are not reported on some options orders is consistent with 
Commission experience and the analysis in the Notice. While the 
economic analysis in the Notice did not explicitly separate the costs 
associated with an open/close indicator for equities and an open/close 
indicator for options, the Commission continues to believe that the 
costs of the open/close indicator for options are included in the cost 
estimates above because the commenters who implied that the cost 
estimates do not include estimates of the open/close indicator 
specifically mentioned equities and not options. But because the Plan 
will no longer require the reporting of the open/close indicator for 
Options Market Maker transactions, the Commission now believes there 
will be additional cost savings associated with not having to report 
this indicator as part of CAT.
(3) Listing Exchange Symbology
    In the Notice, the Commission explained its preliminary belief that 
the requirement to use listing exchange symbology could represent a 
significant source of costs.\2641\ The Commission explained that 
because broker-dealers do not necessarily use listing exchange 
symbology when placing orders on other exchanges or off-exchange, this 
requirement could require broker-dealers to perform a translation 
process on their data before they submit CAT Data to the Central 
Repository.\2642\ The translation process could be costly to design and 
perform, and result in errors that would be costly for the broker-
dealers to correct. If other elements of the Plan were to necessitate a 
translation, then the listing exchange

[[Page 84870]]

symbology could be fairly low cost because it would be just another 
step in the translation. However, if the Plan has no other requirement 
that would necessitate a translation, the Commission explained that the 
costs of including listing exchange symbology on all CAT reports would 
include the costs of designing and performing the translation as well 
as the costs of correcting any errors caused by the translation.
---------------------------------------------------------------------------

    \2641\ See Notice, supra note 5, at 30730-30731.
    \2642\ For example, class A shares of ABC Company might be 
traded using ticker symbol ``ABC A'' on one exchange, ``ABC_A'' on 
another exchange, and ``ABC.A'' on a third. As written, the Plan 
would require all broker-dealers to use the listing exchange's 
symbol for its Central Repository reporting, regardless of the 
symbol in the order messages received or acted upon at the broker-
dealer or exchange.
---------------------------------------------------------------------------

    The Commission received several comments regarding costs associated 
with CAT Reporters using listing exchange symbology. One commenter 
stated that they did not expect the use of listing exchange symbology 
to be much more costly than the use of existing symbology.\2643\ 
Another commenter suggested that accepting only listing exchange 
symbology is costly and invasive.\2644\ One other commenter stated that 
listing exchange symbology would also be a significant source of costs 
for options.\2645\
---------------------------------------------------------------------------

    \2643\ FIF Letter at 12, 95.
    \2644\ Data Boiler Letter at 37-38.
    \2645\ Bloomberg Letter at 5.
---------------------------------------------------------------------------

    The Participants' response provided information on current 
practices relevant to the Commission's economic analysis. In 
particular, the Participants stated that based on discussions with the 
DAG, it was their understanding that all Industry Members subject to 
OATS or EBS reporting requirements currently use the symbology of the 
listing exchange when submitting such reports.\2646\ These Industry 
Members may use proprietary symbols when recording events internally, 
but the Participants stated that based on their understanding of 
current practices, Industry Members currently employ technical 
solutions and/or systems that allow them to translate symbology into 
the correct format of the listing exchange when submitting data to 
exchanges or when submitting to regulatory reporting systems such as 
OATS or EBS.\2647\
---------------------------------------------------------------------------

    \2646\ Response Letter II at 7.
    \2647\ Response Letter III at 13.
---------------------------------------------------------------------------

    The Commission considered the comments and the Participants' 
response and is revising its analysis and conclusion. Specifically, the 
Commission is incorporating the information from the Participants' 
response into its baseline of current broker-dealer practices. Because 
the Commission believes that broker-dealers already translate their 
order messages when routing orders, they should be able to apply those 
translations to other types of messages before recording the events or 
reporting them to CAT at a relatively low cost. Therefore, the 
Commission now believes that the incremental cost for CAT Reporters to 
translate from their existing symbology to listing exchange symbology 
would be smaller than as discussed in the Notice and would not be a 
substantial contributor to aggregate costs. This revised conclusion is 
consistent with commenters who indicated there would be costs, but did 
not indicate they would be large and did not provide cost estimates.
(4) Allocation Reports
    In the Notice, the Commission recognized that industry would bear 
certain costs associated with Allocation Reports, particularly the 
requirement that the reports include allocation times. The Commission 
understood that currently some broker-dealers already record allocation 
times, but that the broker-dealers that do not currently record these 
times will face implementation costs associated with changing their 
business processes to record them. The Commission explained that 
implementation costs for allocation reporting may include significant 
costs associated with incorporating additional systems into firms' 
regulatory data reporting infrastructure to facilitate this reporting, 
if such systems would not already be involved in recording or reporting 
order events. Furthermore, the Commission explained that Outsourcers 
could face significant implementation and ongoing costs associated with 
reporting Allocation Reports if their service bureaus do not extend 
their services to manage the servers that handle allocations.
    Three commenters noted that there would be costs associated with 
reporting allocation timestamps.\2648\ One of these commenters 
mentioned that the requirement to report allocation timestamps means 
that industry members would need to incur unnecessary costs to acquire 
additional resources, and that these resources could be better served 
implementing other critical requirements of the CAT Plan.\2649\ One 
commenter also provided cost estimates for reporting allocation 
timestamps at a granularity of one millisecond, as would be required in 
the Plan, and at a granularity of one second.\2650\ In particular, the 
commenter reported that it conducted a survey of a set of broker-
dealers to estimate the additional costs of the CAT NMS Plan that would 
be associated with the timestamp requirement on CAT Allocation Reports. 
Based on the results of the survey, the commenter estimated that the 
currently proposed allocation timestamp requirement, with a one 
millisecond timestamp granularity and a 50 millisecond clock offset, 
would cost the industry $88,775,000 in initial implementation costs and 
$13,925,000 in ongoing annual costs. The commenter further estimated 
that a modified allocation timestamp requirement, with a one second 
timestamp granularity and a one second clock offset, would cost the 
industry $44,050,000 in initial implementation costs and $5,035,833 in 
ongoing annual costs.\2651\ The commenter also indicated that neither 
the survey of broker-dealers used to estimate the cost estimates in the 
Plan nor the survey used to estimate the costs of clock synchronization 
requirements included the requirement of timestamps on Allocation 
Reports.\2652\
---------------------------------------------------------------------------

    \2648\ FSR Letter at 9; SIFMA Letter at 35; FIF Letter at 3-4, 
11, 86-89.
    \2649\ FSR Letter at 11.
    \2650\ FIF Letter at 87-89.
    \2651\ FIF Letter at 88, Table 6.
    \2652\ FIF Letter at 86.
---------------------------------------------------------------------------

    The Participants' response recommended a modification to the Plan 
that would specify a one-second timestamp for allocation time on 
Allocation Reports,\2653\ and the Plan has been amended to reflect this 
recommendation.
---------------------------------------------------------------------------

    \2653\ Response Letter I at 25.
---------------------------------------------------------------------------

    The Commission considered these comments, the Participants' 
response, and modifications to the Plan and is updating its analysis 
stated in the Notice. The comments that acknowledged that providing 
allocation timestamps represents a significant proportion of costs of 
the Plan are consistent with the Commission's analysis in the Notice. 
The Commission has analyzed the cost estimates received and believes 
them to be reliable because they are based on a survey of industry 
participants who are informed of the Allocation Time requirement and 
the changes that broker-dealers would need to make to comply with the 
requirement. Further, the Commission has analyzed the public 
information on the dates of the CAT Reporter survey and the release of 
public information on the inclusion of Allocation Time. In recognition 
of the modification to the timestamp granularity and the realization 
that Allocation Time costs were not included in the cost estimates in 
the Notice, the Commission is now adding the commenter's estimate of 
$44,050,000 in implementation costs

[[Page 84871]]

and $5,035,833 in ongoing costs to the estimates of costs to broker-
dealers.\2654\
---------------------------------------------------------------------------

    \2654\ See Section V.F.3.a(4), supra. The total cost estimates 
of the CAT Plan reflect these implementation and ongoing costs.
---------------------------------------------------------------------------

(5) Clock Synchronization
    In the Notice, the Commission discussed its preliminary belief that 
the clock synchronization requirements represented a less significant 
source of costs. The CAT NMS Plan estimated industry costs associated 
with the original 50 millisecond clock synchronization requirement, 
based on the FIF Clock Offset Survey.\2655\ The FIF Clock Offset Survey 
stated that broker-dealers currently spend $203,846 per year on clock 
synchronization activities, including documenting clock synchronization 
events.\2656\ The FIF Clock Offset Survey stated that firms expected 
the proposed 50 millisecond requirement to increase those costs by 
$109,197 per firm.\2657\ Based on discussions with industry, the 
Commission preliminarily believed that the majority of broker-dealers 
(Outsourcers) would not face significant direct costs for clock 
synchronization because timestamps for CAT Data reporting would be 
applied by service bureaus.\2658\ However, the Commission preliminarily 
estimated there are 171 firms that make the insourcing-outsourcing 
decision on a discretionary basis; \2659\ if these firms decided to 
insource their data reporting under CAT, they would likely face costs 
associated with complying with new clock synchronization requirements. 
The Commission preliminarily estimated that industry-wide 
implementation costs for the 50 millisecond clock synchronization 
requirement would be $268 million, with $25 million annually in ongoing 
costs.\2660\ The Commission preliminarily believed that approximately 
$18.7 million in broker-dealer ongoing costs would be attributable to 
clock synchronization requirements.\2661\ The Commission also 
preliminarily believed that service bureaus would face similar clock 
synchronization costs if the CAT NMS Plan is approved. Using 13 as an 
estimate of the number of service bureaus, approximately $6 million in 
service bureau ongoing costs would be attributable to clock 
synchronization requirements in the Plan.\2662\
---------------------------------------------------------------------------

    \2655\ See CAT NMS Plan, supra note 5, at Section D.12, and note 
247. In the Notice, the Commission noted that the survey has two 
limitations pertinent to specific cost estimates provided in the 
summary of survey results. First, cost estimates are likely to be 
significantly downward biased. Individual responses to cost data 
were gathered within a range; for example, a firm would quantify its 
expected costs as ``Between $500K and less than $1M'' or ``$2.5M and 
over.'' When aggregating these responses, FIF generally used the 
range midpoint as a point estimate; however, for the highest 
response, the range minimum was used (i.e., ``$2.5M and over'' was 
summarized as $2.5M.) This is likely to have produced a significant 
downward bias in aggregate survey responses. Second, the survey 
included only broker-dealers and service bureaus, thus the data 
excludes exchanges. The Commission preliminarily believed this 
limitation would not significantly impact industry costs because all 
exchanges currently maintain clock synchronization standards finer 
than those discussed as alternatives.
    \2656\ See FIF Clock Offset Survey, supra note 247. This is 
based on the current practice of the broker-dealers who responded to 
the survey.
    \2657\ See id. at 16. The $109,197 figure is obtained by 
subtracting the cost of maintaining current clock offsets of 
$203,846 annually from the estimated per-firm annual cost of 
maintaining a 50-millisecond clock offset of $313,043. See id. at 7 
(``Even where firms were at the target clock offset, many firms 
cited additional costs associated with compliance including logging 
and achieving greater degrees of reliability'').
    \2658\ See Section V.F.1.d, infra, for discussion of service 
bureau costs and the degree to which those costs might be passed on 
to broker-dealers.
    \2659\ These are the 126 current OATS reporters that report more 
than 350,000 OATS ROEs per month; the 31 options market-making 
firms; and the 14 ELPs.
    \2660\ See Section VI.H.2.a(1), infra, for a discussion of how 
these implementation costs might vary for different clock 
synchronization standards.
    \2661\ See id., for discussion of costs attributable to the 50 
millisecond clock synchronization tolerance proposed in the Plan, 
including the $109,197 estimate of per-firm implementation costs of 
the 50 millisecond clock synchronization requirement; see also CAT 
NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(A)(3). 171 
broker-dealers x $109,197 = $18,672,687. Note also that the 
Commission erroneously reported in the Notice that costs were $19.7 
million in implementation costs, but these estimated costs should 
have been $18.7 million in ongoing costs. See Notice, supra note 5, 
at 30762-63 for further information on the Commission's estimation.
    \2662\ The CAT NMS Plan states that the Vendor Study was 
distributed to 13 service bureaus or technology-providing firms 
identified by the DAG. See CAT NMS Plan, supra note 5, at Appendix 
C, Section B.7(b)(i)(A)(3). 13 service bureaus x $109,197 x 4.2 = 
$5,962,156.2. The 4.2 multiplier is the ratio between the total 
incremental ongoing charges to broker-dealers and the total 
incremental ongoing costs to service bureaus derived from the cost 
estimates above. See Notice, supra note 5, at 30763 n 1245. Note 
that the Commission erroneously reported in the Notice that costs 
were $1.4 million in implementation costs, but these estimated costs 
should have been $6 million in ongoing costs. The Commission 
believed clock synchronization costs are already included in cost 
estimates provided in the Vendor Study. In the Notice, the 
Commission explained its belief that these costs likely would 
ultimately be passed on to service bureaus' broker-dealer clients. 
See Notice, supra note 5 at 30726; see also Notice, supra note 5, at 
30762-63 for further information on the Commission's estimation.
---------------------------------------------------------------------------

    In addition, the Commission solicited comment in the Notice on 
alternatives to the Plan's one-size-fits all definition of ``industry 
standard.'' \2663\ Under these alternatives, ``industry standard'' 
would be defined in terms of the standard practices of different 
segments of the CAT Reporters. The Commission explained that these 
alternative approaches could result in clock offset tolerances shorter 
than the CAT NMS Plan's proposed 50 millisecond standard for some or 
all CAT Reporters, Using information from a survey,\2664\ the 
Commission estimated broker-dealer costs under various alternative 
standards.
---------------------------------------------------------------------------

    \2663\ See Notice, supra note 5, at 30759.
    \2664\ See FIF Clock Offset Survey, supra note 247.
---------------------------------------------------------------------------

    The Commission received several comments regarding costs associated 
with clock synchronization requirements. One commenter mentioned that 
managing multiple clock synchronization structures across report types 
would present unnecessary difficulties for broker-dealers and 
unnecessary reconciliation issues for the Commission and SROs.\2665\ 
Another commenter stated that clock synchronization will cost the 
industry $268 million for initial implementation of a 50 millisecond 
clock offset and $25 million for annual monitoring/maintenance, and 
that this represents a significant proportion of overall industry costs 
of the CAT NMS Plan.\2666\ Furthermore, as discussed in Section 
V.F.3.a.(4), the commenter also indicated that the survey of broker-
dealers used to estimate the costs of clock synchronization 
requirements did not include the requirement of timestamps on 
Allocation Reports.\2667\ The commenter estimated that the proposed 
allocation timestamp requirement would cost the industry $88,775,000 in 
initial implementation costs and $13,925,000 in ongoing annual costs 
and that a modified allocation timestamp requirement, with a one second 
timestamp granularity and a one second clock offset, would cost the 
industry $44,050,000 in initial implementation costs and $5,035,833 in 
ongoing annual costs.\2668\ Finally, this commenter highlighted several 
limitations in the Commission's cost estimates that result in these 
estimates understating industry cost.\2669\ First, the commenter said 
that the costs in the FIF survey do not represent ``insourcer'' 
implementation costs as the Commission assumed because the survey was 
skewed toward smaller broker-dealers. Second, the commenter said that 
the Commission stated that the FIF Clock Offset Survey underestimated 
the costs per firm because of the

[[Page 84872]]

methodology used to select a ``midpoint'' for the top cost range. 
Finally, the commenter said that the Commission should not have assumed 
staffing of \1/4\ full time employee (``FTE'') for initial 
implementation because it is incorrect to assume that all of the costs 
would be borne by a service bureau for all broker-dealers.
---------------------------------------------------------------------------

    \2665\ SIFMA Letter at 34.
    \2666\ FIF Letter at 108.
    \2667\ FIF Letter at 86.
    \2668\ FIF Letter at 88, Table 6.
    \2669\ Id. at 109.
---------------------------------------------------------------------------

    The Participants' response recommended a modification to the Plan 
changing the clock synchronization to 100 microseconds with regards to 
electronic systems, excluding certain manual systems; but stated that 
having multiple clock synchronization standards across an order 
lifecycle would complicate the linking process at the Central 
Repository, implying an increase in costs.\2670\ In addition, the 
Participants' response recommended a modification to the Plan that 
would specify a one-second timestamp for allocation time on Allocation 
Reports \2671\ and that would permit Industry Members to synchronize 
their Business Clocks used solely for reporting the time of allocation 
on Allocation Reports to within one second.\2672\ The Plan has been 
amended to reflect each of these recommendations. The Commission is 
also amending the Plan to state that the Participants should apply 
industry standards based on the type of CAT Reporter or system, rather 
than the industry as a whole.\2673\
---------------------------------------------------------------------------

    \2670\ Response Letter II at 5.
    \2671\ Response Letter I at 25.
    \2672\ Response Letter III at 14.
    \2673\ See CAT NMS Plan, supra note 5, at Section 6.8(c).
---------------------------------------------------------------------------

    The Commission has considered the comments received, the 
Participants' response, and modifications to the Plan regarding clock 
synchronization and is revising its analysis of the costs attributable 
to this element of the Plan. In response to the commenter that stated 
the Commission's estimate for clock synchronization costs represents a 
significant portion of overall costs, the Commission did not intend to 
imply in the Notice that the magnitude of the clock synchronization 
costs were trivial, but instead that these costs were less significant 
contributors to overall costs than other costs.
    In response to the commenter that stated the Commission's cost 
estimates associated with clock synchronization requirements were 
understated, the Commission recognizes the limitations in its analysis. 
However, the Commission lacks sufficient information to derive a more 
precise estimate. Although the participants in the FIF Clock Offset 
Survey \2674\ were skewed towards smaller firms that did not match the 
``insourcer'' model, as the commenter mentioned, it is unclear that the 
inclusion of such firms would bias the Commission's cost estimates 
downward. Also, the Commission's estimate of \1/4\ FTE for the clock 
synchronization implementation costs for Outsourcers is in line with 
its estimate of 1 FTE for the overall implementation costs for 
Outsourcers whereas multiplying the estimate from the survey results by 
the number of Outsourcers would yield a result that would be 
approximately 87% of the Commission's estimates for total 
implementation costs for outsourcers.\2675\ The Commission agrees, 
however, that the average cost calculated in the FIF Clock Offset 
Survey included an inherent downward bias due to the selection of the 
minimum value in the highest cost response range when calculating the 
average.\2676\ In conclusion, while the Commission recognizes a degree 
of uncertainty in its clock synchronization cost estimates, which may 
be downward biased, the commenter does not offer an alternative cost 
estimate, and the Commission does not have enough information to change 
its estimate.
---------------------------------------------------------------------------

    \2674\ See FIF Clock Offset Survey, supra note 247.
    \2675\ Compare the implied Outsourcer clock offset 
implementation cost estimate of $554,348 x 1,629 = $903,032,892 
($554,348 x 1,629 outsourcers) to total Outsourcer implementation 
costs of $1,040,506,000 (342,026,000 + 678,111,000 + 20,369,000). 
See Notice, supra note 5, at 30726.
    \2676\ See Notice, supra note 5, at n 968.
---------------------------------------------------------------------------

    The Commission agrees with the commenter that stated cost estimates 
in the Plan did not include the requirement of timestamps on Allocation 
Reports. In recognition of the modification to the Plan regarding 
timestamp requirements of Allocation Reports, and in realization that 
Allocation Time costs were not included in the cost estimates in the 
Notice, the Commission is now adding the commenter's estimate of 
$44,050,000 in implementation costs and $5,035,833 in ongoing costs for 
the inclusion of timestamps on Allocation Reports to the estimated 
costs of broker-dealers.\2677\
---------------------------------------------------------------------------

    \2677\ The total cost estimates of the CAT Plan reflect these 
implementation and ongoing costs. See Section V,F.2.a, infra.
---------------------------------------------------------------------------

    The Commission is unable to update cost estimates to account for 
the modifications to the clock synchronization standards for exchanges, 
but the Commission does not believe that the modifications will result 
in substantial cost increases for exchanges. The Commission does not 
have sufficient information to estimate clock synchronization costs for 
exchanges. However, based on information cited in the Notice \2678\ and 
the Participants' response,\2679\ the Commission understands that 
exchanges already maintain clock offsets of 100 microseconds or less. 
While the Commission recognizes that exchanges may still incur costs in 
additional logging and other actions to ensure they maintain clock 
offsets in compliance with the Plan, the Commission does not believe 
these additional costs will be substantial.
---------------------------------------------------------------------------

    \2678\ See Notice, supra note 5, at 30669.
    \2679\ Response Letter II at 4.
---------------------------------------------------------------------------

    The Commission does not agree with the Participants that having 
multiple clock synchronization standards within the same order 
lifecycle will complicate the linkage process at the Central 
Repository. As indicated in Section V.D.2.b.(2), the industry already 
operates with multiple clock synchronization standards. Therefore, 
regardless of whether the clock synchronization standards apply a one-
size-fits-all definition of industry standard or apply a different 
standard to exchanges, the linking process is already complicated by 
the fact that exchanges and many broker-dealers already synchronize 
some or all of their business systems to less than 50 milliseconds. The 
Commission therefore believes that the modifications to the Plan to set 
the clock synchronization standard for exchanges at 100 microseconds 
and base industry standards on the type of CAT Reporter or system will 
not increase the costs of the Central Repository.
    The Commission acknowledges that the requirement for the 
Participants to perform an assessment of clock synchronization 
standards, including consideration of industry standards based on the 
type of CAT Reporter, Industry Member and type of system, will impose 
additional costs on the Participants.\2680\ Furthermore, it is possible 
that the requirement to base industry standards on the type of CAT 
Reporter or system will ultimately lead to additional costs from more 
granular clock synchronization standards for some Industry Members in 
the future. However, any resulting proposed amendments to the Plan 
regarding clock synchronization standards would be subject to notice 
and comment.\2681\
---------------------------------------------------------------------------

    \2680\ See Section V.F.1.b, supra.
    \2681\ See Notice, supra note 5, at 30759-64.

---------------------------------------------------------------------------

[[Page 84873]]

(6) Quote Sent Time and OTC Equity Securities
    In the Notice, the Commission stated its preliminarily belief that 
other Plan requirements such as the requirement that Options Market 
Makers report Quote Sent Time to the exchanges would cost between $36.9 
million and $76.8 million over five years; \2682\ and the requirement 
to maintain six years of data at the Central Repository would cost 
approximately $5.59 million.\2683\ The cost to include OTC Equity 
Securities in the initial phase of the implementation of the Plan could 
not be estimated.\2684\ The Commission preliminarily concluded that 
these requirements did not represent a significant source of costs.
---------------------------------------------------------------------------

    \2682\ See FIF, SIFMA, and Security Traders Association, Cost 
Survey Report on CAT Reporting of Options Quotes by Market Makers 
(November 5, 2013), available at http://www.catnmsplan.com/industryfeedback/p601771.pdf; see also CAT NMS Plan, supra note 5, 
at Appendix C, Section B.7(b)(iv)(B).
    \2683\ See CAT NMS Plan, supra note 5, at Section 12(m).
    \2684\ See id. at Section 12(q). The Commission does not have 
the information necessary to precisely estimate the costs that are 
incurred by including OTC Equity Securities in the initial phase of 
the implementation of the CAT NMS Plan, because the Plan does not 
separately present the costs associated with OTC Equity Securities. 
Because of low trading activity in the OTC equity markets, any 
significant costs associated with including OTC Equity Securities 
would be in implementation costs. Further, broker-dealers that 
implement CAT Data reporting for NMS securities may not incur 
significant additional costs to implement CAT Data reporting for OTC 
Equity Securities.
---------------------------------------------------------------------------

    The Commission received a comment regarding the costs incurred by 
Option Market Makers regarding reporting Quote Sent Times. According to 
the FIF/SIFMA/STA Cost Survey Report on CAT Reporting of Options Quotes 
by Market Makers, the estimated 5-year cost to Options Market Makers 
for adding a timestamp to the quote times was between ``$39.9'' million 
and $76.8 million.\2685\ The commenter further stated that this is 
``not a trivial cost for providing one data element to the consolidated 
audit trail.'' \2686\ The Commission did not receive any comments on 
the requirement to retain an extra year of data in the Central 
Repository and the inclusion of OTC Equity Securities in the initial 
implementation phase of CAT. Furthermore, the issues were not addressed 
in the Participants' response and there were no changes in the Plan 
that would affect the Commission's conclusions.
---------------------------------------------------------------------------

    \2685\ FIF Letter at 65.
    \2686\ FIF Letter at 65.
---------------------------------------------------------------------------

    As such, in light of the comments received, the Commission 
continues to believe that the estimates in the Notice are reliable 
estimates for the costs for Option Market Makers to send the Quote Sent 
Time field to exchanges. In response to the comment that the five year 
costs of adding a timestamp to the quotes is not trivial, the 
Commission notes that the implied annual costs would be much lower than 
the five year costs and the Commission agrees that the costs of quote 
sent time are large. The Commission is no longer referring to 
quantified costs as significant or less significant contributors to 
overall costs.
    As noted above, in response to comments, the Commission 
acknowledges that the Allocation Time data field was not included in 
its cost estimates in the Notice.\2687\ For similar reasons, the 
Commission now also believes that the Quote Sent Time is also not 
included in the cost estimates in the Notice. Therefore, the Commission 
now adds these costs to the total costs to be incurred by broker-
dealers.\2688\ The Commission recognizes that Participants and the 
Central Repository will also incur costs to comply with the Quote Sent 
Time requirements; however the Commission lacks sufficient information 
to quantify these costs, and therefore, does not add them to the cost 
estimates above for Participants or the Central Repository.
---------------------------------------------------------------------------

    \2687\ See Notice, supra note 5, at Section IV.F.1.c(2).
    \2688\ See Section V.F.1.c.(2).B, supra.
---------------------------------------------------------------------------

    The Commission also recognizes that the modifications to the Plan 
to require the submission of the LEI for Customers, if an Industry 
Member has or acquires its Customer's LEI, and the LEI for Industry 
Members, if the Industry Member has one, could be an additional source 
of costs for broker-dealers. The Commission however does not believe 
that these costs will be substantial, because the Plan does not require 
Industry Members or others to obtain or submit an LEI if they do not 
already have an LEI.
(7) Other Costs
    In the Notice, the Commission stated its preliminary belief that 
there were other categories of costs in addition to the items discussed 
above, but that these categories were unlikely to represent significant 
contributions to the overall costs of the Plan. For example, in 
addition to providing CAT Reporters data on their Error Rates, the Plan 
stated that the Participants believed that in order to meet Error Rate 
targets, industry would require certain resources, including a stand-
alone testing environment, and time to test their reporting systems and 
infrastructure. There were also likely to be costs related to the Plan 
Processor's management of PII,\2689\ as well as related compliance 
costs associated with minimizing the costs and risks of a security 
breach.
---------------------------------------------------------------------------

    \2689\ The Commission also acknowledges that the costs 
associated with handling PII could create an incentive for service 
bureaus not to offer CAT Reporting services. Nonetheless, the 
Commission does not believe that this incentive would significantly 
alter the services available to broker-dealers. For further 
discussion, see Section V.G.1.e, infra. The Commission also notes 
that, pursuant to the exemptive relief granted by the Commission, 
the approach to the reporting of Customer information in the CAT NMS 
Plan could allow for the bifurcation of PII reporting from the 
reporting of order data. See Exemption Order, supra note 21, at 
11858-63.
---------------------------------------------------------------------------

    The Commission received a comment stating that the costs associated 
with the management of the PII included in the customer information 
reported could increase the costs of the CAT Plan.\2690\ Another 
commenter mentioned that underlying customer data is PII information 
and moving this sensitive data requires extreme precaution, which could 
also increase these costs.\2691\
---------------------------------------------------------------------------

    \2690\ Data Boiler Letter at 37.
    \2691\ TR Letter at 8-9; FIF Letter at 9-10, 86.
---------------------------------------------------------------------------

    The Commission considered these comments, as well as modifications 
to the Plan's security provisions, and is updating its analysis. While 
the Commission cannot quantify these costs, the Commission believes 
that costs associated with the management of PII, and related security 
costs associated with minimizing the costs and risks of a security 
breach, would increase in light of modifications to the Plan discussed 
above.\2692\ Specifically, the Commission believes the costs would 
increase in light of the requirement that the Plan Processor adhere to 
the NIST Cyber Security Framework in its entirety, the requirement that 
the CAT System be AICPA SOC 2 certified and audited by a qualified 
third-party auditor, the requirement that all CAT Data be encrypted, 
and the requirement that Customer Identifying Information and Customer 
Account Information, irrespective of whether it meets a common 
understanding of the definition of PII, should be considered PII for 
security purposes. The Commission believes these costs would represent 
a significant proportion of the total costs of the CAT Plan.
---------------------------------------------------------------------------

    \2692\ See Section IV.D.6, supra.
---------------------------------------------------------------------------

    As discussed above,\2693\ the Participants' response provided 
clarifying information on error correction timelines for customer 
information and PII, and identified an errant discussion of these error 
correction timelines in the Plan. The

[[Page 84874]]

Commission is amending the Plan to incorporate the Participants' 
clarification. The Commission does not believe the clarification 
regarding the timeline for communication of errors for customer and 
account information would warrant any changes to its analysis and 
conclusions regarding costs.
---------------------------------------------------------------------------

    \2693\ See Section V.E.1.d., supra.
---------------------------------------------------------------------------

    The Commission is also amending the Plan require that the CAT 
testing environment will be made available to Industry Members on a 
voluntary basis no later than six months prior to when Industry Members 
are required to report and that more coordinated, structured testing of 
the CAT System will begin no later than three months prior to when 
Industry Members are required to report data to CAT.\2694\ These 
amendments could increase the costs of the Plan as they relate to the 
provision of a testing environment.
---------------------------------------------------------------------------

    \2694\ See Section IV.D.8.a, supra.
---------------------------------------------------------------------------

b. Fees
    In the Notice, the Commission discussed a source of costs due to 
ancillary fees on both broker-dealers reporting to, and regulators 
accessing, the Central Repository.\2695\ The Commission preliminarily 
believed that ancillary fees levied on broker-dealers were unlikely to 
be levied broadly, because discussion in the Plan associated these fees 
with late and/or inaccurate reporting. The Plan also discussed 
ancillary fees possibly levied on regulators associated with the use of 
Central Repository data. The Commission recognized that costs estimated 
in Bids for constructing and operating the Central Repository already 
anticipate use of the CAT Data by regulators, and that additional fees 
to access the data might give regulators incentives to make less use of 
the data than anticipated in the Benefits Section. However, any fee 
schedule proposed by the Participants would be filed with the 
Commission. Consequently, the Commission preliminarily did not believe 
that the provisions for ancillary fees would likely significantly 
impact the costs or benefits of CAT.
---------------------------------------------------------------------------

    \2695\ See CAT NMS Plan, supra note 5, at Section 11.3(c).
---------------------------------------------------------------------------

    Three commenters supported levying fees on regulators that access 
CAT Data.\2696\ One commenter mentioned that any costs imposed in 
connection with a usage fee for the CAT will be offset by the costs 
that the SROs will save in retiring systems. In fact, imposing a user 
fee could create an incentive to eliminate those systems in a timely 
fashion.\2697\ While the Participants agreed there are potential 
benefits to charging a usage fee, they also stated that it is premature 
to establish such a fee until the Participants gain a better 
understanding of how the Plan will be used by the regulators and how 
such usage will impact the operational costs of the Plan.\2698\
---------------------------------------------------------------------------

    \2696\ SIFMA Letter at 18; DAG Letter at 5; STA Letter at 1.
    \2697\ SIFMA Letter at 18.
    \2698\ Response Letter II at 15.
---------------------------------------------------------------------------

    The Commission considered these comments, but does not believe that 
they would warrant changes to the Commission's preliminary analysis and 
conclusions regarding the ancillary fees under the Plan. Furthermore 
there were no modifications to the Plan that would warrant changes to 
this aspect of the economic analysis. The Commission disagrees with the 
comment that the usage fees would create an incentive for SROs to 
retire their systems earlier. In fact, the Commission notes that the 
usage fees could have the opposite effect--it could encourage the SROs 
to not use CAT for regulatory activities other than surveillance, which 
could incentivize them to retain these systems longer. The Commission 
continues to believe that ancillary costs do not represent a 
significant proportion of costs of the CAT NMS Plan.
4. Expected Costs of Security Breaches
    In the Notice, the Commission recognized that investors and market 
participants could face significant costs if CAT Data security were 
breached.\2699\ The Commission explained its belief that it is 
difficult to form reliable economic expectations for the costs of 
security breaches because there are few examples of security breaches 
analogous to the type that could occur under the CAT NMS Plan. However, 
the Commission provided a qualitative analysis of the expected costs of 
security breaches in the Notice by separating the expected costs of 
security breaches into two components: The risk of a security breach 
and the cost resulting from a security breach.\2700\
---------------------------------------------------------------------------

    \2699\ See Notice, supra note 5, at 30732-36.
    \2700\ See Notice, supra note 5, at Section IV.F.4a(2) for the 
risk of a security breach and Section IV.F.4a(1) for the costs 
resulting from a security breach.
---------------------------------------------------------------------------

    The Commission acknowledged in the Notice \2701\ that because many 
of the decisions that define security measures for the Central 
Repository are coincident with the selection of the Plan Processor, 
there is a degree of uncertainty with regards to security measures that 
would be implemented by the Plan Processor.\2702\ Consequently, there 
is uncertainty about the significance of the risks, the expected costs 
of a breach when considering the likelihood of a data breach, and the 
second-order effects.\2703\
---------------------------------------------------------------------------

    \2701\ See Notice, supra note 5, at 30733.
    \2702\ The Commission noted that, as discussed in the Plan, the 
Participants collected information from the Bidders regarding 
security and confidentiality during the RFP process, however, there 
was considerable diversity in the approaches proposed by the Bidders 
and the Participants chose to give the Plan Processor flexibility on 
many implementation details and state the requirements as a set of 
minimum standards. These requirements include both general security 
and PII treatment requirements. General security requirements are 
designed to address physical security, data security during 
transmissions, transactions, and while at-rest, confidentiality, and 
a cyber incident response plan. PII requirements include a separate 
PII-specific workflow, PII-specific authentication and access 
control, separate storage of PII data, and a full audit trail of PII 
access. Id.
    \2703\ Id.
---------------------------------------------------------------------------

a. Costs of a Security Breach
    The Commission discussed its belief in the Notice \2704\ that the 
form of the direct costs resulting from a security breach will vary 
across market participants and could be significant. It listed the 
following four types of costs. First, for broker-dealers, investment 
advisers, and other similar institutions, a security breach could leak 
highly-confidential information about trading strategies or 
positions,\2705\ which could be deleterious for market participants' 
trading profits and client relationships. Second, a data breach could 
also expose proprietary information about the existence of a 
significant business relationship with either a counterparty or client, 
which could reduce business profits.
---------------------------------------------------------------------------

    \2704\ Id. at 30732.
    \2705\ Although the Plan does not require reporting positions, 
observation of a broker-dealer's recent executions can offer 
information about their change in position, or, potentially, 
information about their actual position if the audit trail 
information breached contains all trading activity since the 
creation of the position.
---------------------------------------------------------------------------

    Third, a data breach could also potentially reveal PII of 
customers. Because some of the CAT Data stored in the Central 
Repository will contain PII such as names, addresses, and social 
security numbers, a security breach could raise the possibility of 
identity theft, which currently costs Americans billions of dollars per 
year.\2706\ Because PII will be stored in a single, centralized 
location rather than stored across multiple locations, a breach in the 
Central Repository could leak all PII, rather than a subset of PII that 
could be leaked if the information were stored in

[[Page 84875]]

multiple locations. As such, these costs associated with the risk of a 
security breach could be substantial in aggregate.
---------------------------------------------------------------------------

    \2706\ According to survey data, the Bureau of Justice 
Statistics reported $24.7 billion in identity theft costs in 2012, 
available at http://www.bjs.gov/content/pub/press/vit12pr.cfm.
---------------------------------------------------------------------------

    Fourth, a breach that reveals the activities of regulators within 
the Central Repository, such as data on the queries and processes run 
on query results, could compromise regulatory efforts or lead to 
speculation that could falsely harm the reputation of market 
participants and investors.
    The Commission received several comments regarding the costs of a 
security breach, which are summarized in more detail in Section IV.D.6. 
Some commenters asserted that the potential costs of a breach exceed 
those described by the Commission in the Notice because a breach could 
negatively affect not just individual firms and investors but also the 
broader financial markets. One commenter wrote that a bad actor gaining 
access to the Central Repository ``may pose tremendous threat to the 
U.S. financial stability.'' \2707\ Another wrote that a breach could be 
a ``threat to market stability or national security'' and ``would have 
serious impacts on the global economy.'' \2708\ The same commenter 
stated that ``we believe the CAT Data is on par with, and meets, the 
standards for classified information as set in Executive Order 13526 on 
Classified National Security Information. . . . We think that 
unauthorized disclosure or use of CAT Data could destabilize the U.S. 
and world financial markets by causing investor panic, mass selling and 
runs on financial institutions. The potential extent of damage to the 
U.S. markets and economy would be a matter of national security.'' 
Another commenter cited the Government Accountability Office, stating 
``the ineffective protection of cyber assets can result in the loss or 
unauthorized disclosure or alteration of information, [which] could 
lead to serious consequences and result in substantial harm to 
individuals and to the federal government.'' \2709\
---------------------------------------------------------------------------

    \2707\ Data Boiler Letter at 26.
    \2708\ MFA Letter at 2, 5.
    \2709\ FSR Letter at 5, which references the ``High-Risk Series: 
An Update'' a publication issued by the Government Accountability 
Office, GAO-15-290 at 235 (Feb. 2015).
---------------------------------------------------------------------------

    Commenters also asserted that the potential costs of a breach 
exceed those described by the Commission in the Notice because the 
Notice did not discuss costs related to breach management. One 
commenter stated that ``the Proposal fails to address who is 
responsible for the cost of the breach that occurs at the Central 
Repository,'' \2710\ and another commenter suggested that ``[because] 
the Plan Processor is responsible for constructing and operating the 
CAT . . . the Plan Processor should bear responsibility in the event of 
a data breach.'' \2711\ One commenter wrote that ``the cost of 
complying with the notification requirements under the Privacy Laws may 
be exorbitant.'' \2712\ Two commenters recommended the purchase of 
insurance by the Plan Processor or CAT NMS, LLC to cover the costs of a 
breach.\2713\ One commenter argued that the Plan Processor must 
promptly notify a customer of security breaches of his data because ``a 
security breach of a customer's trading data could compromise the 
customer's investment strategies even if the customer's PII was not 
compromised.'' \2714\ Another commenter observed that breach 
notification may take longer if the data breach happens at the site of 
a Participant, ``which could greatly harm registered funds and other 
victims of the breach.\2715\
---------------------------------------------------------------------------

    \2710\ FSR Letter at 7.
    \2711\ FSI Letter at 4.
    \2712\ FSR Letter at 8.
    \2713\ FSR Letter at 8; SIFMA Letter at 22.
    \2714\ MFA Letter at 9.
    \2715\ ICI Letter at 7.
---------------------------------------------------------------------------

    The Commission acknowledges that the costs of a breach, including 
breach management, could be quite high, especially during periods of 
market stress. Furthermore, the Commission understands that a breach 
could seriously harm not only investors and institutions but also the 
broader financial markets. The Commission is unable to provide 
quantitative estimates of those costs because there are few examples of 
security breaches analogous to the type that could occur under the Plan 
and because the Plan Processor has some discretion in developing its 
breach management plan.\2716\ The Commission notes, however, that the 
Plan Processor is responsible for CAT Data,\2717\ and it will develop a 
breach protocol and cyber incident response plan that will include 
notification of breach victims such as Customers, insurance coverage 
and liability, and details about the distribution of costs.\2718\
---------------------------------------------------------------------------

    \2716\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
4.1.5.
    \2717\ See Section III.26, supra.
    \2718\ See Section IV.D.6.j, supra.
---------------------------------------------------------------------------

b. Risk of a Security Breach
    The Commission discussed in the Notice \2719\ its belief that the 
risks of a security breach may not be significant because certain 
provisions of Rule 613 and the CAT NMS Plan appear reasonably designed 
to mitigate these risks. However, the Commission noted that the 
considerable diversity in the potential security approaches of the 
Bidders creates some uncertainty about the effectiveness of the 
eventual security procedures and hence, the risk of a security 
breach.\2720\
---------------------------------------------------------------------------

    \2719\ See Notice, supra note 5, at 30732-34.
    \2720\ The Commission notes that, at a minimum, the security of 
the CAT Data must be consistent with Reg SCI. 17 CFR 242.1000 to 
1007.
---------------------------------------------------------------------------

    In the Notice,\2721\ the Commission discussed the provisions of 
both Rule 613 and the Plan that provide safeguards designed to prevent 
security breaches.\2722\ First, governance provisions of the CAT NMS 
Plan could mitigate the risk of a security breach.\2723\ Second, the 
Plan includes specific provisions designed to ensure the security of 
data in-flight.\2724\ Third, Section 6.7(g) of the Plan requires that 
the Participants establish, maintain, and enforce written policies and 
procedures reasonably designed to (1) ensure the confidentiality of the 
CAT Data obtained from the Central Repository; and (2) limit the use of 
CAT Data obtained from the Central Repository solely for surveillance 
and regulatory purposes. Finally, the Plan includes further provisions 
designed to provide security for PII.\2725\
---------------------------------------------------------------------------

    \2721\ See Notice, supra note 5, at 30733.
    \2722\ The Commission noted that ``Rule 613(e)(4) requires 
policies and procedures that are designed to ensure the rigorous 
protection of confidential information collected by the Central 
Repository, and Rule 613(iv) requires that the Plan contain a 
discussion of the security and confidentiality of the information 
reported to the Central Repository. Rule 613 also restricts access 
to use only for regulatory purposes, and requires certain provisions 
that are designed to mitigate these security risks such as the 
appointment of a Chief Compliance Officer and annual audits of Plan 
Processor operating procedures.'' Id.
    \2723\ The Notice, supra note 5, at 30733 lists the following 
three governance mechanisms: Activities of the Compliance 
Subcommittee that could reduce the risk that information is released 
to unauthorized entities; the requirement that the Plan Processor 
submit a comprehensive security plan to the Operating Committee and 
update this security plan annually; and the establishment of a Chief 
Information Security Officer who is responsible for monitoring and 
addressing data security issues for the Plan Processor.
    \2724\ The Commission noted that ``the Plan requires that bulk 
extract data be encrypted, password protected and sent via secure 
methods of transmission.'' Id.
    \2725\ The Commission noted that regulators authorized to access 
PII would be required to complete additional authentications, and 
PII would be masked unless users have permissions to view PII. Id.
---------------------------------------------------------------------------

    Commenters made four types of comments about the Notice's economic 
analysis of the risk of a security breach. The first type of comment 
relates to protecting CAT Data that are extracted or downloaded from 
the Central Repository. Several commenters expressed strong concerns 
about allowing any entity, including

[[Page 84876]]

regulators, to extract or download data from the Central Repository 
because the risk of any data breach would greatly increase as the data 
are maintained at more sites.\2726\ One commenter suggested that 
allowing anyone to download the entire CAT database might threaten U.S. 
financial stability.\2727\ Some commenters also objected to excluding 
the Commission or its Staff from certain security-related parts of the 
CAT NMS Plan.\2728\
---------------------------------------------------------------------------

    \2726\ SIFMA Letter at 20; Fidelity Letter at 4; FIF Letter at 
134; ICI Letter at 7.
    \2727\ Data Boiler Letter at 26.
    \2728\ FIF Letter at 134; NYSE Letter at 2-4 (noting also that 
``[i]f employees of the Commission with access to the data stored in 
the Central Repository or other CAT systems are subject to security 
standards less stringent than those applicable to other authorized 
users, the data obtained and held by those individuals may be 
subject to heightened risk of a data breach''); Garrett Letter at 1-
2.
---------------------------------------------------------------------------

    The second type of comment relates to tailoring security 
requirements to the security risk of the particular data element. 
Several commenters argued that at-rest data and in-use data needs to 
have some of the same security measures that are required for in-flight 
data in order to keep risk at an acceptable level.\2729\ Another 
commenter wrote that maintaining different security standards for PII 
data and non-PII data ``creates the misimpression that all non-PII data 
merits less information security protection than PII data'' and 
recommended more accurately matching security requirements to the 
underlying risk through the imposition of ``additional levels of data 
classification to protect adequately commercially sensitive non-PII 
data.'' \2730\
---------------------------------------------------------------------------

    \2729\ SIFMA Letter at 20; MFA Letter at 8; FSR Letter at 4-8; 
Data Boiler Letter at 8.
    \2730\ ICI Letter at 6.
---------------------------------------------------------------------------

    The third type of comment relates to the overall risks of the 
system due to the unique nature of the database. Several commenters 
suggested that the Commission impose additional security requirements 
beyond what appears in the Notice because the scale and scope of the 
Central Repository will make it a particularly attractive target for 
well-funded hackers, individuals, and nation-states with objectives 
ranging from theft to insider trading to market disruption.\2731\ 
Additionally, a number of commenters recommended that the Plan include 
additional detail concerning the security of CAT Data.\2732\
---------------------------------------------------------------------------

    \2731\ ICI Letter at 3; Fidelity Letter at 3; FSI Letter at 4; 
SIFMA Letter at 19; MFA Letter at 5.
    \2732\ SIFMA Letter at 20; ICI Letter at 4; FSR Letter at 6; TR 
Letter at 8; FIF Letter at 131-132; Fidelity Letter at 4. The 
Commission responds to these comments in detail in Section IV.D.6.a, 
supra.
---------------------------------------------------------------------------

    The fourth type of comment relates to data governance. One 
commenter stated that the proposal for the CCO and CISO to be officers 
of the Company as well as employees of the Plan Processor creates a 
conflict of interest that would undermine the ability of these officers 
to carry out their responsibilities effectively under the Plan because 
they would owe a fiduciary duty to the Plan Processor rather than the 
CAT LLC.\2733\ The same commenter noted that the Notice did not specify 
the entity liable in the event of a data breach.\2734\ The commenter 
suggested that because the Plan Processor is responsible for 
constructing and operating the CAT, with the oversight of the Operating 
Committee, and will be solely in control of the system's information 
security, the Plan Processor should bear responsibility in the event of 
a data breach.\2735\
---------------------------------------------------------------------------

    \2733\ FSI Letter at 3. As discussed above in Section IV.D.6, 
the CCO and CISO each have responsibilities related the security of 
CAT Data.
    \2734\ FSI Letter at 4-5.
    \2735\ FSI Letter at 4-5.
---------------------------------------------------------------------------

    The Participants have responded to these comments. In response to 
the commenters that expressed concern about allowing any entity to 
extract or download CAT Data, the Participants noted that Rule 613 
requires regulators to develop and implement a surveillance system, or 
enhance existing surveillance systems to make use of CAT Data.\2736\ 
The Participants stated that ``eliminating or limiting bulk data 
extracts of the CAT Data may significantly and adversely impact the 
Participants' ability to effectively surveil their markets using CAT 
Data.'' \2737\ The Participants further noted that the Plan also 
requires that Participants have appropriate policies and procedures in 
place to protect all of the CAT Data they extract or download.\2738\ In 
response to the comments about excluding the Commission or its Staff 
from certain security requirements of the Plan, the Participants stated 
that they agreed that the Plan's security program must take into 
consideration all users with access to CAT Data, including the SEC, and 
they recommended removing the exclusions.\2739\
---------------------------------------------------------------------------

    \2736\ Response Letter I at 56.
    \2737\ Response Letter III at 10.
    \2738\ Response Letter III at 11.
    \2739\ Response Letter I at 60-61.
---------------------------------------------------------------------------

    In response to the commenter that suggested adding additional 
levels of data classification, the Participants determined that ``it is 
[not] necessary to expand the categories of other CAT Data.'' \2740\ In 
response to commenters that requested more detail regarding the 
security controls for CAT Data, the Participants noted that in the 
Adopting Release for Rule 613, the Commission stated that ``an outline 
or overview description of the policies and procedures that would be 
implemented under the NMS plan submitted to the Commission for its 
consideration would be sufficient to satisfy the requirement of the 
Rule.'' \2741\ In their response, the Participants also provided 
additional information about security procedures, including a high 
level description of the security requirements for the CAT System and 
additional details concerning certain security controls and protocols 
required of the Plan Processor.\2742\ The Participants also stated that 
they believe that ``publicly releasing too many details about the data 
security and information policies and procedures of the CAT System 
presents its own security concerns and is not advisable.'' \2743\ In 
response to comments about governance, the Participants agreed that the 
Plan should explicitly state that the CCO and CISO of the LLC should 
have fiduciary duties to the LLC in the same manner and extent as an 
officer of a Delaware corporation and recommended the Plan be amended 
accordingly.\2744\ Additionally, the Participants stated that they are 
``in the process of negotiating an agreement with potential Plan 
Processors. This agreement will cover liability, insurance, and 
indemnification.'' \2745\
---------------------------------------------------------------------------

    \2740\ Response Letter I at 57.
    \2741\ Response Letter I at 53-54.
    \2742\ Response Letter III at 7-8.
    \2743\ Response Letter I at 53-54.
    \2744\ Response Letter I at 17-19.
    \2745\ Response Letter I at 59.
---------------------------------------------------------------------------

    The Commission has considered the comment letters and the 
Participants' response letters. In response to the commenters that 
expressed concern about allowing any entity to extract or download CAT 
Data, the Commission notes that it believes that regulators need access 
to CAT Data outside the Central Repository to perform their duties 
effectively. As discussed above in Section IV.D.6.d, Participants that 
choose to extract or download CAT Data must have policies and 
procedures regarding CAT Data security that are equivalent to those of 
the Plan Processor for the Central Repository. And as discussed in 
Section IV.D.6.o, the rules and policies applicable to the Commission 
and its Staff will be different yet substantively as rigorous as those 
applicable to the Participants and their personnel. The Commission 
therefore believes that, due to these precautions, the regulatory use 
of CAT Data outside the Central Repository

[[Page 84877]]

should not increase the security risks to the CAT system.
    In response to the commenters that expressed concern about the 
security requirements for particular data elements, the Commission 
notes that it believes that the best use of limited resources is to 
tailor security requirements to the security risk of the particular 
data element. No commenter quantified the relative risk of a breach 
that comes from in-flight data versus at-rest data or in-use data, and 
the Commission continues to believe that the largest risk of a breach 
comes from in-flight data. Thus, the adopted Plan will maintain higher 
security standards for in-flight data than for at-rest data or in-use 
data. The Commission also continues to believe that PII data warrants 
more security considerations than non-PII data, but it disagrees with 
the one commenter that recommended multiple levels of security for non-
PII data.\2746\ In this case, the Commission does not believe that the 
benefits justify the costs of creating additional levels of data 
classification within non-PII data.
---------------------------------------------------------------------------

    \2746\ ICI Letter at 6.
---------------------------------------------------------------------------

    In response to the commenters that expressed concern about the 
risks of aggregating confidential data from disparate sources into one 
location, the Commission notes that it agrees that the CAT Data will be 
a particularly attractive target for bad actors. However, the 
Commission believes that the extensive, robust security requirements in 
the adopted Plan, as outlined in Section IV.D.6, provide appropriate, 
adequate protection for the CAT Data.
    In response to the comments regarding the lack of security details 
in the Plan, the Commission continues to believe that, as discussed in 
the Notice, there is a degree of uncertainty with respect to the 
security measures that would be implemented by the Plan Processor, and 
consequently, uncertainty about the risk of a data breach.\2747\ As 
discussed in more detail above,\2748\ the Commission notes that the 
Participants have provided some additional information regarding 
security procedures. Additionally, as discussed above, the Commission 
is amending the Plan to require that the Participants conduct 
background checks for the employees and contractors of the Participants 
that will use the CAT System,\2749\ and to require that the 
Participants provide the Commission with an evaluation of the 
information security program to ensure that the program is consistent 
with the highest industry standards for the protection of data.\2750\ 
The Commission believes that this additional information mitigates some 
of the uncertainty, but continues to believe that there is significant 
uncertainty with respect to the risk of a breach. However, the 
Commission also recognizes that publicly releasing too many details 
about security requirements could create additional risk, and as 
discussed in Section IV.D.6, believes a reasonable level of detail has 
been provided.\2751\
---------------------------------------------------------------------------

    \2747\ See Notice, supra note 5, at 30733.
    \2748\ See Section IV.D.6.a, supra.
    \2749\ See Section IV.D.6.c, supra.
    \2750\ See Section IV.H, supra.
    \2751\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.1(b) (discussing the manner in which the Central Repository will 
receive, extract, transform, load, and retain data); Section 6.10(c) 
(discussing the CAT user help desk).
---------------------------------------------------------------------------

    In response to comments about governance, the Commission notes that 
it has modified the Plan to address the concern regarding potential 
conflicts of interest on the part of the CCO and CISO. Specifically, as 
discussed in more detail above in Section IV.B.3, the CCO and CISO will 
have fiduciary duties to the CAT LLC in the same manner and extent as 
an officer of a Delaware corporation, and to the extent those duties 
conflict with duties the CCO and CISO have to the Plan Processor, the 
duties to the CAT LLC will control.\2752\ As discussed above in Section 
IV.D.6, the CCO and CISO each have responsibilities related the 
security of CAT Data, and the potential for a conflict of interest 
could create uncertainty as to whether these responsibilities will be 
carried out in a way that will minimize the risk of a security breach. 
The Commission believes that the modifications to the Plan should 
reduce this uncertainty.
---------------------------------------------------------------------------

    \2752\ Response Letter I at 17-19.
---------------------------------------------------------------------------

    In response to the commenter who noted that the Notice did not 
specify the entity liable in the event of a data breach, the Commission 
notes that the Plan requires the Plan Processor's cyber incident 
response plan to address insurance issues related to security breaches, 
and that as part of the discussions on insurance coverage and 
liability, further detail about the distribution of costs will be 
undertaken, including details about who might bear the cost of a breach 
and under what specific circumstances. The Commission believes that 
these provisions in the Plan should provide incentives for the Plan 
Processor to manage security risks. However, because the cyber incident 
response plan will not be developed until after the Plan Processor has 
been selected, the Commission does not know whether or under what 
circumstances the Plan Processor will bear the cost of a breach. While 
the Commission recognizes that this creates some uncertainty with 
respect to the incentives on the Plan Processor to minimize the risk of 
a security breach, the Commission is approving the Plan without further 
modification for the reasons discussed in Section IV.D.6.j, above.
5. Second Order Effects
    In the Notice, the Commission recognized that a number of second-
order effects could result from the approval of the Plan.\2753\ These 
included market-participant actions designed to avoid direct costs of a 
security breach; changes to CAT Reporter behavior due to increased 
surveillance; changes in CAT Reporter behavior to switch from one 
funding tier to another to qualify for lower fees; and changes in 
broker-dealer routing practices related to fee differentials across 
execution venues.
---------------------------------------------------------------------------

    \2753\ See Notice, supra note 5, at 30733-34.
---------------------------------------------------------------------------

a. Security-Related Second Order Effects
    In the Notice, the Commission recognized that the desire to avoid 
direct costs of a security breach could motivate actions that would 
cause second order effects.\2754\ The Commission illustrated this in 
the Notice by considering two specific examples of actions that 
Participants might take. First, if service bureaus perceive the costs 
and risks of a security breach to be great enough because of the 
addition of PII in the data, which is not included in current data, 
some could decide not to provide CAT Data reporting services.\2755\ 
Second, investors or other market participants could move their 
activity off-shore or cease market participation altogether to avoid 
having sensitive information stored in the Central Repository.\2756\ 
The Commission stated that it did not believe that the effect of the 
Plan on the risk or costs of a data breach would be great enough to 
result in significant second order effects.\2757\
---------------------------------------------------------------------------

    \2754\ Id.
    \2755\ The Commission noted that this could increase the 
potential for a short term strain on capacity and exacerbate the 
costs. Id. at 30733.
    \2756\ The Commission noted that consequences of changes in 
investor behavior in response to the threat of a breach include: 
Investors holding suboptimal portfolios; lost profits to the 
securities industry; and higher costs of raising capital for U.S.-
based securities issuers, if the public's willingness to participate 
in capital markets is sufficiently reduced. Id. at 30734.
    \2757\ Id.
---------------------------------------------------------------------------

    The Commission received two comments on this issue. Both comments 
suggested that industry members would have to purchase insurance or 
cease domestic operations if the Plan Processor was not required to 
purchase

[[Page 84878]]

an insurance policy that covers potential security breaches and extends 
to industry members to reimburse them for costs related to the 
breach.\2758\ Comments on another potential second order effect related 
to capital formation are addressed in more detail below in Section 
V.G.3.b.\2759\
---------------------------------------------------------------------------

    \2758\ FSR Letter at 2; SIFMA Letter at 22.
    \2759\ An analysis related to Capital Formation can be found in 
Section V.G.3., infra.
---------------------------------------------------------------------------

    In their response to comments, the Participants indicated that they 
are working on an agreement between themselves and the potential Plan 
Processors to cover liability, insurance, and indemnification, which 
would also make it less likely that industry members would move off-
shore or cease operations.\2760\
---------------------------------------------------------------------------

    \2760\ Response Letter I at 59.
---------------------------------------------------------------------------

    The Commission recognizes that the purchase of insurance to cover 
these costs is a potential second order effect. As such, the Commission 
is revising its economic analysis to acknowledge this additional second 
order effect, but otherwise continues to believe that the security-
related second order effects will be as anticipated in the Notice.
b. Changes to CAT Reporter Behavior
    In the Notice, the Commission also acknowledged that increased 
surveillance could impose some costs by altering the behavior of market 
participants. The Commission stated that benefits could accrue to the 
extent that improved surveillance, investigation, and enforcement 
capabilities allow for regulators to better identify and address 
violative behavior when it occurs, and to the extent that common 
knowledge of improved capabilities deters violative behavior.\2761\ In 
particular, the Commission acknowledged that some market participants 
could reduce economically beneficial behavior if those market 
participants believe that, because of enhanced surveillance, their 
activities would increase the level of regulatory scrutiny that they 
bear. Furthermore, the Commission stated that costs could accrue to the 
extent that some forms of market activity, which are permissible and 
economically beneficial to the market and investors, could come under 
greater scrutiny, which could create a disincentive to engage in that 
activity. For example, regulators could increase the number of 
inspections, examinations and enforcement proceedings that they 
initiate. To the extent that these activities result in a reduction in 
violative behavior, the market benefits by avoiding the costs of this 
behavior. To the extent, however, the additional regulatory activity 
increases the number of inspections, examinations and enforcement on 
permissible activities, market participants would incur the increased 
costs of facilitating these regulatory inquiries.
---------------------------------------------------------------------------

    \2761\ See Notice, supra note 5, at 30734.
---------------------------------------------------------------------------

    Although the Commission did not receive any comments on the second 
order effects it discussed in the Notice, it did receive two comments 
on a second order effect related to the granularity of timestamps. As 
discussed in the Notice, the Plan requires CAT reporters to report sub-
millisecond timestamps when the CAT reporter uses such timestamps 
internally.\2762\ Two commenters noted that this requirement may 
discourage CAT reporters from using sub-millisecond timestamps 
internally, since this would require finer timestamp resolution in CAT 
reporting.\2763\ The Commission also received a comment on a second-
order effect that could result from the tiered fee structure of broker-
dealers based on message traffic.\2764\ The commenter suggested that 
the structure of the funding model might cause second-order effects 
related to the differential message traffic of different activities, 
and these effects may vary across securities based on their liquidity.
---------------------------------------------------------------------------

    \2762\ Id. at 30764-65.
    \2763\ FIF Letter at 12; SIFMA Letter at 35.
    \2764\ SIFMA Letter at 16-17.
---------------------------------------------------------------------------

    In response to comments on the granularity of timestamps, the 
Participants state that the quality of CAT Data would improve if the 
Plan required such timestamps to be reported by CAT reporters that use 
such timestamps internally.\2765\ Furthermore, in response to the 
comment that the imposition of a fee on message traffic would 
discourage liquidity provision, the Participants note that they 
actively considered the market quality concerns in devising the 
proposed funding model, and one of the reasons for proposing a tiered, 
fixed fee funding model was to limit the disincentives to providing 
liquidity to the market. In particular, the Participants believed that 
a funding model based on message volume was far more likely to affect 
market behavior.\2766\
---------------------------------------------------------------------------

    \2765\ Response Letter I at 28-29.
    \2766\ Response Letter II at 16.
---------------------------------------------------------------------------

    With regards to comments on sub-millisecond timestamps, the 
Commission acknowledges that this requirement may prove to be a 
disincentive for market participants to use sub-millisecond timestamps 
internally; however, the Commission believes that for many market 
participants, capturing timestamps at a finer resolution supports 
analysis of the firm's data for business purposes that provide benefits 
such as improvement to trading strategies and measurement of execution 
costs, and the benefits of these business purposes may exceed the costs 
of reporting regulatory data with finer timestamps. However, the 
Commission acknowledges that for firms that do not perform such 
analyses, this requirement may prove to be a disincentive to adopting 
technologies that capture finer resolution timestamps.
    The Commission agrees with the comment about second order effects 
related to the tiering of broker-dealer fees based on message traffic 
and is adding this second-order effect to its analysis. The funding 
model anticipates Central Repository costs being spread across broker-
dealers according to activity tiers based on message traffic. This may 
cause broker-dealers to alter their behavior to avoid being assigned to 
a higher fee tier. For example, trading strategies that involve 
providing liquidity might be expected to generate more message traffic 
than strategies that take liquidity because providing liquidity 
generally requires posting many quotes on many venues. Furthermore, 
while a broker-dealer is seeking to provide liquidity, market prices 
may change causing the broker-dealer to have to update its quotes on 
many venues multiple times as it seeks to trade. Consequently, the 
funding model may create an incentive to take rather than provide 
liquidity, which could reduce levels of market liquidity. Furthermore, 
these effects may vary across securities based on the liquidity of the 
security. As the commenter noted, ``the quote-to-trade ratio for 
exchange-traded-products (``ETPs'') can be ten times greater than that 
for corporate stocks. This implies that market makers in ETPs may 
generate ten times the amount of message traffic per executed trade 
than market makers in corporate stock.'' \2767\ Consequently, the 
Commission also agrees that the tiered funding model for broker-dealers 
may create disincentives to provide liquidity in less liquid 
securities, possibly resulting in less liquid markets for securities 
that are already considered illiquid. As discussed below, the 
Commission recognizes the potential differential effect on those 
broker-dealers that engage in market making in liquid stocks versus 
illiquid stocks and on those broker-dealers that engage in liquidity 
taking strategies versus those that engage in other strategies.

[[Page 84879]]

Nonetheless, as explained above in Section IV.D.13.b, the Commission 
believes that the timestamp requirements contained in the CAT NMS Plan, 
including the requirement that a CAT Reporter report timestamps in 
increments finer than milliseconds if they do so in other systems, are 
reasonable and will improve regulators' ability to sequence events.
---------------------------------------------------------------------------

    \2767\ SIFMA Letter at 17.
---------------------------------------------------------------------------

c. Tiered Funding Model
    In the Notice, the Commission stated its preliminary belief that 
establishing a small number of discrete fee tiers, as occurs under the 
Plan, could create incentives for CAT Reporters to alter their behavior 
to switch from one tier to another, thereby qualifying for lower 
fees.\2768\ Specifically, the Plan states that CAT Reporters would be 
classified into a number of groups based on reporter type and market 
share of share volume or message traffic and assessed a fixed fee that 
is determined by this classification. The higher-activity groups would 
be assessed higher fees such that market participants who fall into the 
lower tiers have a fee advantage over the market participants that fall 
into the higher tiers. The Commission noted, however, that because this 
incentive is contingent on being near a fee-tier cutoff point, 
relatively few market participants will likely be affected and thus 
market quality effects will likely not be significant. Furthermore, for 
those market participants near a cutoff point, managing activity to 
avoid a higher fee tier would necessarily incur costs of lost business 
and potential loss of market share, and would possibly be difficult to 
implement, which should mitigate any effects on market quality.
---------------------------------------------------------------------------

    \2768\ See Notice, supra note 5, at 30734-35.
---------------------------------------------------------------------------

    The Commission also recognized that the tiering of fees could 
create calendar effects within markets. That is, the structure 
ultimately approved by the Operating Committee could affect market 
participant behavior near the end of a measuring period. For example, 
high levels of market activity during a measuring period might cause 
CAT Reporters to limit their activity near the end of a measurement 
period to avoid entering a higher fee tier. The Commission noted that 
the Operating Committee has discretion under the Plan governance 
structure to make the tier adjustments discussed in Section 11.1.d for 
individual CAT Reporters. This provision might mitigate incentives for 
individual market participants to alter market activities to reduce 
their expected CAT fees.
    The Commission did not receive any comments related to its economic 
analysis regarding the market quality effects, calendar effects, or 
other effects due to the tiered structure of the funding model. While 
the Commission is making certain modifications to the funding model, as 
described in Section IV.F above, the funding model will continue to 
utilize a tiered structure. Consequently, the Commission continues to 
believe that the tiered fee structure could create incentives for CAT 
Reporters to alter their behavior, but that market quality effects 
would likely not be significant. Nonetheless, the Commission expects 
that the required report by the Participants to study the impact of 
tiered-fees on market liquidity should provide insights into whether 
the fee model affects liquidity provision and ultimately market 
quality. This will assist the Commission's oversight of the Plan and 
assist the Operating Committee in understanding whether it needs to 
make adjustments to the Funding Model. Furthermore, for those market 
participants near a cutoff point, managing activity to avoid a higher 
fee tier would necessarily incur costs of lost business and potential 
loss of market share, and would possibly be difficult to implement, 
which should mitigate any effects on market quality.
    The Commission is also updating its analysis based on the amendment 
to the Plan to clarify that the Operating Committee may only change the 
tier to which a Person is assigned in accordance with a fee schedule 
filed with the Commission.\2769\ Consequently, the Commission no longer 
believes that this provision would mitigate incentives for individual 
market participants to alter market activities to reduce their expected 
CAT fees. The Commission continues to recognize that CAT Reporters may 
have incentives to alter their behavior to switch from one tier to 
another.
---------------------------------------------------------------------------

    \2769\ See CAT NMS Plan, supra note 5, at Section 11.1(d).
---------------------------------------------------------------------------

d. Differential CAT Fees Across Market Participants
    In the Notice, the Commission discussed the funding model proposed 
in the Plan, which is a bifurcated funding model in which costs are 
first allocated between the group of all broker-dealers and the group 
of all Execution Venues, then within these groups by market activity 
level.\2770\ The Commission discussed its preliminary belief that the 
bifurcated funding model proposed in the Plan almost certainly would 
result in differential CAT costs between Execution Venues because it 
will assess fees differently on exchanges and ATSs. First, message 
traffic to and from an ATS would generate fee obligations on the 
broker-dealer that sponsors the ATS, while exchanges would incur almost 
no message traffic fees.\2771\ Second, broker-dealers that internalize 
off-exchange order flow, generating off-exchange transactions outside 
of ATSs, would face a differential funding model compared to ATSs and 
exchanges.\2772\ Specifically, broker-dealers internalizing orders 
would only pay fees based on message traffic, whereas orders routed to 
ATSs and exchanges would lead to broker-dealer fees based on message 
traffic and ATS or exchange fees based on market share. If these fees 
are even partially passed on to customers, then the cost differentials 
that result might create incentives for broker-dealers to route order 
flow to those broker-dealers who internalize in order to minimize 
costs, creating a potential conflict of interest with broker-dealers' 
investor customers.
---------------------------------------------------------------------------

    \2770\ See Notice, supra note 5, at 30735-36.
    \2771\ See CAT NMS Plan, supra note 5, at Section 11.3.
    \2772\ Id.
---------------------------------------------------------------------------

    In addition, the Commission discussed its preliminary belief that 
the funding model shifts broker-dealer costs associated with the 
Central Repository to all broker-dealers and away from Options Market 
Makers. The Plan provides that broker-dealers would not report their 
options quotations, while equity market makers would report their 
equity quotations to the Central Repository. This differential 
treatment of market making quotes would affect funding costs by (a) 
decreasing the number of messages that must be reported and stored by 
Options Market Makers, and (b) charging broker-dealers that do not 
quote listed options a higher share of broker-dealer-assessed CAT fees 
than they would if Options Market Makers' quotes were included in the 
allocation of fees.
    Although this differential treatment would marginally increase the 
cost of providing other broker-dealer services relative to options 
market making, the Commission discussed its belief that this would not 
materially affect a market participant's willingness to provide broker-
dealer services other than options market making because (a) many 
market participants participate in both equities and options markets, 
and (b) broker-dealers participating in equity markets have significant 
infrastructure in place for serving that market and switching costs to 
participate in options market making are high.

[[Page 84880]]

    In the Notice, the Commission also discussed the allocation of 
costs between the Execution Venues and the other Industry Members 
(i.e., broker-dealers) and solicited comment on alternative funding 
models.\2773\ Specifically, the Commission noted that the CAT NMS Plan 
does not detail the proportions of fees to be borne by Execution Venues 
versus Industry Members. The Notice also pointed out that Execution 
Venues would be tiered by market share to determine their fees while 
Industry Members would be tiered by message traffic. In its analysis, 
the Commission noted that assessing CAT costs on market participants by 
message traffic may have the benefit of aligning market participants' 
incentives with the Participants' stated goal of minimizing costs. The 
Commission also explained that while a broker-dealer's choice of 
business model is likely to determine its level of message activity, 
the majority of an exchange's message traffic is passive receipt of 
quote updates.\2774\ Further, because quotes must be updated on all 
exchanges when prices change, exchanges with low market share are 
likely to have more message traffic (incurring CAT fees) per executed 
transaction (generating revenue).\2775\ The Commission further 
explained that bifurcated fee approaches, such as the one in the Plan, 
may cause one Execution Venue to be relatively cheaper if Execution 
Venues pass costs on to members and subscribers and may exacerbate 
conflicts of interest for broker-dealers routing customer orders.
---------------------------------------------------------------------------

    \2773\ See Notice, supra note 5, at 30766-69.
    \2774\ Using MIDAS data, Commission Staff analyzed the number of 
equity exchange proprietary feed messages and trades during the week 
of October 12, 2015 and provided the results in the Notice. The 
message per trade ratio varied across exchanges from 38.46 to 
987.17, with a median of 57.21.
    \2775\ The Commission's data analysis as reported in the Notice 
confirmed this for the smallest exchanges. Except for the smallest 
exchanges, the trade-to-message ratios range from about 0.016 trades 
for every quote update to about 0.026 trades for every quote update 
and appear constant across market share levels. However, the 
smallest exchanges by market share have only about 0.001 trades for 
every quote update to about 0.009 trades for every quote update.
---------------------------------------------------------------------------

    The Commission received comments that inform its analysis of 
differential fees across market participants, particularly focusing on 
the allocation to Participants versus broker-dealers. One commenter 
questioned why Participants were tiered by market share while broker-
dealers were treated differently (by message traffic), and noted this 
could place a larger burden on market makers of liquid securities. The 
commenter explicitly stated that it is not suggesting that market-share 
tiers are wrong, but believes there should be a reason why Participant 
tiers are based on one metric (market share) while broker-dealer tiers 
are based on another metric (message traffic).\2776\ The Commission 
received several comments on issues related to cost differentials 
between Participants and broker-dealers that were not discussed in the 
Notice. One commenter noted that the profits from the fees would only 
be distributed among the Participants and suggested these should be at 
least partially returned to broker-dealers.\2777\ Another commenter was 
concerned that SROs would use CAT profits to fund other SRO 
operations.\2778\ There were comments regarding the lack of 
transparency over fee calculations and metrics used to determine tiers, 
as well as the determination of the allocation split between broker-
dealers and Participants--all of which increases uncertainty in cost 
estimates.\2779\ Finally, there were a number of comments that 
described the potential for a conflict of interest in the allocation of 
fees, and discussing the relative burden of funding on broker-dealers 
to SROs, estimating that at least 88% of costs will be borne by broker-
dealers.\2780\
---------------------------------------------------------------------------

    \2776\ SIFMA Letter at 16-17.
    \2777\ KCG Letter at 5.
    \2778\ DAG Letter at 5.
    \2779\ SIFMA Letter at 16; FSI Letter at 6.
    \2780\ KCG Letter; SIFMA Letter; Fidelity Letter; FSR Letter; 
DAG Letter; Data Boiler Letter; Wachtel Letter; FSI Letter; STA 
Letter.
---------------------------------------------------------------------------

    There were no comments related to the economic analysis regarding a 
double charging of ATSs.\2781\ In addition, there were no comments 
regarding the economic analysis related to differences in costs between 
option market makers and equity market makers.\2782\
---------------------------------------------------------------------------

    \2781\ See Section VI.G.1.a.(1)A., supra.
    \2782\ While FIF recommends exempting equity market makers, they 
did not provide information that suggests revising the Commission's 
OMM vs equity market maker analysis. See FIF Letter at 65-66. 
Specifically, the letter says that equity market makers would get 
the same benefits as OMMs for the quotes that are not paired with 
orders.
---------------------------------------------------------------------------

    The Participants' response contains information that is relevant to 
the economic analysis with regards to transparency in funding and the 
allocation of costs. Specifically, the Participants commented that the 
Plan provides the Advisory Committee with the right to receive 
information concerning the operation of the CAT,\2783\ and that the 
Participants plan to provide the Advisory Committee with minutes of 
Operating Committee meetings.\2784\ The response addressed the concerns 
over transparency in decision making; however, the concerns regarding 
uncertainty in the metrics used to determine tiers and the final cost 
allocation split will not be resolved until the Plan Processor is 
chosen.
---------------------------------------------------------------------------

    \2783\ See CAT NMS Plan, supra note 5, at Section 4.13(d)-(e).
    \2784\ Response Letter I at 17.
---------------------------------------------------------------------------

    The Participants' supplemental response also contained information 
that is relevant to the economic analysis with respect to second order 
effects of the funding model. With regards to determining fees via 
message traffic for broker-dealers and market share for Participants, 
the Participants noted that message traffic is a key component of CAT 
operating costs, and that message traffic is strongly correlated with 
broker-dealer size. However, there is little correlation between 
message traffic and Execution Venue size, so charging large and small 
Execution Venues with similar message traffic would be inequitable. The 
Plan treats ATSs in the same manner as exchanges because their business 
models and anticipated burden on CAT are similar.\2785\
---------------------------------------------------------------------------

    \2785\ Response Letter II at 11, 13.
---------------------------------------------------------------------------

    On this topic, the Participants proposed one modification to the 
plan. The Participants proposed to amend the manner in which market 
share will be calculated for a national securities association that has 
trades reported by its members to its trade reporting facility or 
facilities for reporting transactions effected otherwise than on an 
exchange in NMS Stock or OTC Equity Securities. For such an 
association, its market share for purposes of the funding model would 
not include the share volume reported to the national securities 
association by an ATS, as such share volume will be included in the 
market share calculation for that ATS.\2786\
---------------------------------------------------------------------------

    \2786\ Response Letter II at 12.
---------------------------------------------------------------------------

    The Participants also responded that they expect to operate the CAT 
on a break-even basis--that is, the fees imposed and collected would be 
intended to cover CAT costs and an appropriate reserve for CAT costs, 
and any surpluses would be treated as an operational reserve to offset 
fees in future payment. In addition, the Participants subsequently 
stated that the CAT LLC will seek to qualify for tax exempt status as a 
``business league.'' \2787\
---------------------------------------------------------------------------

    \2787\ Participants' Letter at 1; Section IV.B.4, supra.
---------------------------------------------------------------------------

    With regards to fee transparency, the Participants noted that the 
details regarding the tiers are important considerations and are 
actively developing the tiers. Once the Plan

[[Page 84881]]

Processor is selected, the Operating Committee will work with the 
Processor to finalize the tiers, and broker-dealers and other 
participants will have the opportunity to comment on the proposal as 
part of the approval process for an immediately effective rule 
filing.\2788\
---------------------------------------------------------------------------

    \2788\ Response Letter II at 14. See supra note 1709.
---------------------------------------------------------------------------

    With regards to the allocation of costs between Participants and 
broker-dealers and the potential for a conflict of interest in 
determining this allocation, the Participants noted that the proposed 
funding model is designed to recover costs associated with creating, 
implementing, and operating CAT as opposed to addressing costs of 
compliance, which might be incurred regardless of the funding model. In 
addition, there are over 100 times more broker-dealers expected to 
report to CAT than Participants. Therefore, the 88% aggregate cost 
figure quoted in the comments is less than what broker-dealers would be 
expected to pay in aggregate on a per-CAT reporter basis.\2789\ With 
regard to the potential conflict of interest, the Participants noted 
that broker-dealers and the public will have the opportunity to comment 
on fees, the SEC will be required to evaluate the fees for consistency 
with the Exchange Act, the funding proposal expects that CAT will 
operate on a break-even basis, and Participants are prohibited from 
using regulatory fees for commercial purposes.\2790\
---------------------------------------------------------------------------

    \2789\ Response Letter II at 10-11.
    \2790\ Response Letter II at 17.
---------------------------------------------------------------------------

    The Commission is revising its economic analysis in light of 
comments, the Participants' response, and Plan modifications. First, 
the Commission recognizes the validity of the comment that the funding 
tiers would place a larger burden on market makers of liquid securities 
relative to illiquid securities and place a lower burden on liquidity 
takers relative to those who provide liquidity. This could increase the 
incentive to broker-dealers to transact in more illiquid securities and 
reduce the incentive to provide liquidity. In response to the comment 
seeking the rationale behind the bifurcation in the funding model, the 
Commission notes that the Notice provided a rationale that the 
Commission continues to believe makes economic sense. Specifically, as 
summarized above, the Commission continues to believe that because 
message traffic is passive for exchanges and a business decision for 
Broker-Dealers, the bifurcated funding model will help align the 
incentives of market participants with the Participants' stated goal of 
minimizing costs. More broadly, the Commission continues to believe 
that because the CAT NMS Plan does not detail the proportions of fees 
to be borne by Execution Venues versus Industry Members, its economic 
analysis contains uncertainty regarding the differential fees to be 
borne by Execution Venues versus Industry Members.
    With regards to the distribution of profits among SROs, the 
Commission is revising its economic analysis to incorporate the 
clarification in the Plan to the effect that profits from fees will go 
toward funding future costs instead of being redistributed among the 
SROs except in the two instances described above, as well as the 
modification to the Plan that reflects that the CAT LLC will seek to 
qualify for tax exempt status as a ``business league.'' \2791\ Broadly 
speaking, the Commission had been concerned about the competitive 
effects of distributing profits equally among SROs because, in 
profitable years, an equal distribution of profits would advantage 
smaller exchanges (larger exchanges in the case of losses). However, 
with the clarification and modification to the Plan, the Commission 
believes there will be little or no competitive effects resulting from 
distributions among SROs. The Commission also believes that this 
clarification and modification address commenter concerns about the 
distribution of CAT profits.
---------------------------------------------------------------------------

    \2791\ Participants' Letter at 1.
---------------------------------------------------------------------------

    The Commission is updating its analysis of the differential fees on 
exchanges and ATSs to incorporate Plan modifications that would change 
the way national securities associations are treated in the Funding 
Model. The modified Plan would no longer double-count ATS volume as 
share volume for the purposes of placing both ATSs and FINRA in tiers 
in the Funding Model. However, because of the uncertainty in the 
ultimate Funding Model, the Commission recognizes that this 
modification may not impact the fees paid by either ATSs or FINRA and 
may not alleviate any fee differentials between ATSs and exchanges. As 
described earlier in this Section, these fee differentials may arise 
because message traffic to and from an ATS would generate fee 
obligations on the broker-dealer that sponsors the ATS, while exchanges 
incur almost no message traffic fees.\2792\
---------------------------------------------------------------------------

    \2792\ See CAT NMS Plan, supra note 5 at Section 11.3.(b): 
(``For the avoidance of doubt, the fixed fees payable by Industry 
Members pursuant to this paragraph shall, in addition to any other 
applicable message traffic, include message traffic generated by: 
(i) An ATS that does not execute orders that is sponsored by such 
Industry Member; and (ii) routing orders to and from any ATS 
sponsored by such Industry Member.'') The Commission notes that 
exchange broker-dealers would be subject to message traffic fees as 
Industry Members under the Plan. However, the Commission notes that 
based on its analysis of OATS data from September 15-19, 2014, these 
broker-dealers are minor contributors to overall message traffic, 
accounting for less than 0.03% of OATS ROEs.
---------------------------------------------------------------------------

    In addition, the Commission notes that other over-the-counter 
volume, such as occurs when orders are executed off-exchange against a 
broker-dealer's inventory, will still be assessed share volume fees 
while the message traffic that resulted in the executions will also be 
subject to fees through the broker-dealers that had order events 
related to the transactions. This contrasts to executions that occur on 
exchanges, where the venue that facilitates the execution does not pay 
fees for message traffic that led to the execution. This difference in 
treatment could still result in costs that are passed on to investors 
because broker-dealers have the incentive to route orders in a way that 
results in less order flow to those who pay higher CAT fees.
    The Commission is not changing the economic analysis with respect 
to the allocation of costs between SROs and Broker-Dealers. As 
discussed in detail previously,\2793\ in response to the comments that 
suggested that Plan allocates 88% of the costs to broker-dealers, the 
Commission believes that the 88% figure cited is in reference to 
compliance costs, which are not ``allocated'' by the Plan. Fees to pay 
for the maintenance and operation of the Central Repository will be 
allocated via the funding model, and the current allocation of fees 
between broker-dealers and exchanges has not been determined.
---------------------------------------------------------------------------

    \2793\ See Section IV.E, infra.
---------------------------------------------------------------------------

    The Commission is updating the Economic Analysis to reflect some 
improvements in financial transparency as a result of amendments to the 
Plan. Specifically, the Commission's amendment to the Plan to require 
that CAT LLC financial statements be prepared in accordance with GAAP 
and audited by an independent public accounting firm may substitute to 
a certain extent for the added financial transparency sought by 
commenters.\2794\ Additionally, as per the Participants' response, all 
meeting minutes will be made available, and in addition, the Funding 
Model will be filed with the Commission and subject to public 
comment.\2795\ However, the Commission

[[Page 84882]]

continues to recognize uncertainty in the ultimate allocation of fees.
---------------------------------------------------------------------------

    \2794\ See CAT NMS Plan, supra note 5, at Section 9.2; see also 
Section IV.B.4; Participants' Letter II.
    \2795\ See supra note 1709 for further details on fee proposals.
---------------------------------------------------------------------------

G. Efficiency, Competition, and Capital Formation

    In determining whether to approve the CAT NMS Plan, and whether the 
Plan is in the public interest, Rule 613 requires the Commission to 
consider the impact of the Plan on efficiency, competition and capital 
formation.\2796\
---------------------------------------------------------------------------

    \2796\ 17 CFR 242.613(a)(5); see also 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    In the Notice, the Commission's analysis supported the preliminary 
belief that the Plan generally promotes competition.\2797\ However, the 
Commission recognized that the Plan could increase barriers to entry 
because of the costs to comply with the Plan. Further, the Commission's 
analysis in the Notice identified several limitations to competition, 
but stated that the Plan contains provisions to address some 
limitations and Commission oversight can also address the 
limitations.\2798\
---------------------------------------------------------------------------

    \2797\ See Notice, supra note 5, at 30738.
    \2798\ Id. at 30738-46.
---------------------------------------------------------------------------

    The Commission's analysis in the Notice also supported the 
preliminary belief that the Plan would improve the efficiency of 
regulatory activities and enhance market efficiency by deterring 
violative activity that harms market efficiency. Further, the analysis 
in the Notice supported the Commission's preliminary belief that the 
Plan would have modest positive effects on capital formation and that 
the threat of a security breach at the Central Repository would be 
unlikely to significantly harm capital formation.\2799\
---------------------------------------------------------------------------

    \2799\ Id. at 30748-50.
---------------------------------------------------------------------------

    At the same time, however, the Notice stated that the significant 
uncertainties discussed elsewhere in its economic analysis also affect 
the Commission's analysis of efficiency, competition, and capital 
formation.\2800\ Additionally, the Commission recognized that the 
Plan's likely effects on competition, efficiency and capital formation 
were dependent to some extent on the performance and decisions of the 
Plan Processor and the Operating Committee in implementing the Plan, 
and thus there was necessarily some further uncertainty in the 
Commission's analysis. Nonetheless, the Notice stated that the 
Commission preliminarily believed that the Plan contained certain 
governance provisions, as well as provisions relating to the selection 
and removal of the Plan Processor, that mitigate this concern regarding 
uncertainty by promoting decision-making that could, on balance, have 
positive effects on competition, efficiency, and capital formation.
---------------------------------------------------------------------------

    \2800\ Id. at 30738. As examples, the Commission recognized that 
the uncertainties around the improvements to data qualities could 
affect the conclusions on efficiency and the uncertainty regarding 
how the Operations Committee allocated the fees used to fund the 
Central Repository could affect the conclusions on competition.
---------------------------------------------------------------------------

    Overall, after considering comments, the Participants' response, 
and modifications to the Plan, the Commission is updating and revising 
its economic analysis of competition, efficiency, and capital 
formation. However, the revisions in the analysis do not impact the 
Commission's broad conclusions. The Commission continues to believe 
that the Plan generally will promote competition, improve the 
efficiency of regulatory activities, promote market efficiency, and 
have modest positive effects on capital formation. Further, the 
Commission continues to recognize the significant uncertainty and that 
certain provisions of the Plan could promote efficient decisions and 
implementation and could provide competitive incentives to the Plan 
Processor to promote good performance.
1. Competition
a. Market for Trading Services
    In the Notice, the Commission analyzed the CAT NMS Plan's likely 
economic effects on competition in the market for trading services, as 
compared to the Baseline of the competitive environment without the 
Plan. The Commission stated that it preliminarily believed that the 
Plan would not place a significant burden on competition for trading 
services.\2801\ The Commission also examined the effect of the funding 
model on competition in the market for trading services, including off-
exchange liquidity suppliers and ATSs. In addition, the Commission 
considered the effect of implementation and ongoing costs of the Plan, 
whether particular elements of the Plan could hinder competition, and 
the effect of enhanced surveillance on competition in the market for 
trading services. The Commission recognized the risk that the Plan 
would have negative effects on competition and increase the barriers to 
entry in this market, but discussed how the Plan provisions and 
Commission oversight could mitigate these risks.
---------------------------------------------------------------------------

    \2801\ Id. at 30739-42.
---------------------------------------------------------------------------

    The Commission discussed how the market for trading services--which 
is served by exchanges, ATSs, and liquidity providers (internalizers 
and others)--relies on competition to supply investors with execution 
services at efficient prices. These trading venues, which compete to 
match traders with counterparties, provide a framework for price 
negotiation and disseminating trading information. The Commission 
observed that, since the adoption of Regulation NMS in 2005, there has 
been a shift in the market share of trading volume among trading 
venues. From 2005 to 2013, there was an increase in the market share of 
newer national securities exchanges and a decline in market share on 
NYSE. In addition, the proportion of NMS Stocks trading off-exchange 
(which includes both internalization and ATS trading) increased.
    The Commission noted that the Plan examines the effect of the CAT 
NMS Plan on the market for trading services primarily from the 
perspective of the exchanges. The Plan asserts that distribution of 
regulatory costs incurred by the Plan would be distributed according to 
``the Plan's funding principles,'' calibrated to avoid placing ``undue 
burden on exchanges relative to their core characteristics,'' and would 
thus not cause any exchange to be at a relative ``competitive 
disadvantage in a way that would materially impact the respective 
Execution Venue marketplaces.'' \2802\ Likewise, the Plan asserts that 
its method of cost allocation would avoid discouraging entry into the 
Participant community because a potential entrant, like an ATS, would 
``be assessed exactly the same amount [of allocated CAT-related fees] 
for a given level of activity'' both before and after becoming an 
exchange.\2803\
---------------------------------------------------------------------------

    \2802\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.8(a)(i); see also id. at Section 11.2 (for a discussion of the 
Plan's funding principles).
    \2803\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.8(a)(i).
---------------------------------------------------------------------------

    In addition, in its final analysis described below, the Commission 
examines each of the issues in relation to competition in the market 
for trading services and revises its economic analysis in response to 
comments, the Participants' response, and modifications to the Plan.
(1) Funding
    The Commission noted that the Operating Committee will fund the 
Central Repository by allocating its costs across exchanges, FINRA, 
ATSs (``Execution Venues'') and broker-dealers (``Industry Members''), 
and will decide which proportion of costs would be funded by exchanges, 
FINRA, and ATSs and which portion would be funded by broker-dealers. 
The Commission observed that the Plan does not specify how the 
Operating Committee would select the method of allocation. The 
Commission believed

[[Page 84883]]

that any impacts of such fees on competition in the market for trading 
services will manifest either through the model for the fees itself or 
through the later allocation of the fees across market participant 
types, across equity or options exchanges, or within market participant 
types and markets, through the levels of fees paid by each tier.
A. Funding Model
    In the Notice, the Commission discussed its preliminary belief that 
the structure of the funding model could provide a competitive 
advantage to exchanges.\2804\ Specifically, the Commission noted that 
the Plan states that an entity would be assessed exactly the same 
amount for a given level of activity whether it acted as an ATS or an 
exchange. However, FINRA would be charged fees based on the market 
share of off-exchange trading. ATSs, which are FINRA members, would 
presumably pay a portion of the FINRA fee through their broker-dealer 
membership fees. In addition, ATSs would pay a fee for their market 
share, which is a portion of the total off-exchange market share. 
Therefore, ATS volume would effectively be charged once to the broker-
dealer operating the ATS and a second time to FINRA, which would result 
in ATSs paying more than exchanges for the same level of activity. 
Ultimately, if the funding model disadvantages ATSs relative to 
exchanges, trading volume could migrate to exchanges in response, and 
ATSs could have incentives to register as exchanges as well. 
Additionally, the Commission discussed its belief that the 
Participation Fee \2805\ could discourage new exchange entrants or the 
registration of an ATS as an exchange, increasing the barriers to entry 
to becoming an exchange. However, the Commission also explained that 
because the funding model seems to charge ATSs more for their market 
share than exchanges, ATSs could pay relatively less for their market 
share as an exchange than as an ATS, countering this barrier to entry 
depending on the magnitudes of the two fee types.
---------------------------------------------------------------------------

    \2804\ See Notice, supra note 5, at 30740.
    \2805\ The Participation Fee would be determined by the 
Operating Company and paid by national securities exchanges and 
national securities associations currently registered with the 
Commission (``Participants'') to fund costs incurred in creating, 
implementing and maintaining the CAT.
---------------------------------------------------------------------------

    As described earlier,\2806\ the Participants propose to amend the 
manner in which market share will be calculated for a national 
securities association that has trades reported by its members to its 
trade reporting facility or facilities for reporting transactions 
effected otherwise than on an exchange in NMS Stock or OTC Equity 
Securities.\2807\ For such an association, its market share for 
purposes of qualifying for a particular tier in the funding model would 
not include the share volume reported to the national securities 
association by an ATS, as such share volume will be included in the 
market share calculation for that ATS.\2808\ As discussed above in 
Section IV.F, the Commission is modifying the Plan as the Participants 
suggested.
---------------------------------------------------------------------------

    \2806\ See Section V.F.5.d, supra.
    \2807\ Response Letter II at 12.
    \2808\ Response Letter II at 12.
---------------------------------------------------------------------------

    This modification reduces the potential for the Plan to charge ATSs 
more than similarly situated exchanges, but it may not alleviate all 
the fee differentials between ATSs and exchanges. As described above, 
\2809\ these fee differentials may arise because message traffic to and 
from an ATS would generate fee obligations on the broker-dealer that 
sponsors the ATS, while exchanges incur almost no message traffic fees. 
Even with this modification, the Commission continues to believe that 
the Funding Model could provide a competitive advantage to exchanges 
over ATSs. However, the Commission is approving the Plan without 
further modification for the reasons discussed in Section IV.F, above.
---------------------------------------------------------------------------

    \2809\ See Section V.F.5.d, supra.
---------------------------------------------------------------------------

B. Allocation of Voting Rights and Fees
    In the Notice, the Commission recognized that the potential for a 
burden on competition and effects on competitors in the market for 
trading services could arise from provisions relating to the allocation 
and exercise of voting rights.\2810\ The Commission noted that the 
potential for concentration of influence over vote outcomes arises from 
proposed provisions to give one vote to each Plan Participant[thinsp]in 
an environment where some Participants are Affiliated SROs. Indeed, 
supermajority approval could be achieved through four of the 10 groups 
of Affiliated SROs and individual SROs, and majority approval could be 
achieved with just three such groups or individual SROs.\2811\ For 
example, the Participant groups with options exchanges could have the 
incentive to allocate a disproportionately low level of fees for 
options market share than for equity market share. The Commission noted 
that such an allocation could disadvantage competing Participants with 
only equities exchanges.
---------------------------------------------------------------------------

    \2810\ See Notice, supra note 5, at 30740-41.
    \2811\ At the time of the Notice, the twenty SROs that were 
Participants in the CAT NMS Plan included five sets of affiliated 
SROs (New York Stock Exchange LLC, NYSE Arca, Inc., and NYSE MKT LLC 
(the ``NYSE Group''); The NASDAQ Stock Market LLC, NASDAQ OMX BX, 
Inc., and NASDAQ OMX PHLX LLC (the ``NASDAQ Group''); BATS Exchange, 
Inc., BATS Y-Exchange, Inc., EDGX Exchange, Inc., and EDGA Exchange, 
Inc. (the ``BATS Group''); Chicago Board Options Exchange, Inc. and 
C2 Options Exchange, Inc. (the ``Chicago Options Group''); 
International Securities Exchange, LLC, ISE Gemini, LLC, and ISE 
Mercury, LLC (the ``ISE Group''); and five independent SROs 
(National Stock Exchange, Inc.; Chicago Stock Exchange, Inc.; BOX 
Options Exchange LLC; Miami International Securities Exchange LLC; 
and Financial Industry Regulatory Authority, Inc.). The BATS Group 
would have had four votes, the NYSE Group, the NASDAQ Group and the 
ISE Group each would have had three votes, and the Chicago Options 
Group would have had two votes. See CAT NMS Plan, supra note 5, at 
Appendix C, Section D.11(b). A majority approval would have required 
eleven votes. This could have included as few as four of the SROs 
and sets of affiliated SROs: The affiliated SROs that would have had 
four votes, two sets of affiliated SROs that would have had three 
votes, and one other SRO or set of affiliated SROs. Supermajority 
approval would have required fourteen votes. This could have 
included as few as five SROs and sets of affiliated SROs: The 
affiliated SROs that would have had four votes, three sets of 
affiliated SROs with three votes, and any additional SRO. Note also 
that as few as two sets of affiliated SROs could have blocked a 
Supermajority approval by casting seven ``no'' votes: The affiliated 
SROs with four votes and any one of the affiliated SROs with three 
votes.
---------------------------------------------------------------------------

    The Commission also noted that the inclusion of all exchanges on 
the Operating Committee could give the Plan Participants opportunities 
and incentives to share information and coordinate strategies in ways 
that could reduce the competition among exchanges or could create a 
competitive advantage for exchanges over venues for off-exchange 
trading.\2812\ However, the Commission stated that it preliminarily 
believed that certain provisions of the Plan would limit these 
potential burdens on competition. In particular, the Plan includes 
provisions designed to limit the flow of information between the 
employees of the Plan Participants who serve as members of the 
Operating Committee and other employees of the Plan Participants.\2813\
---------------------------------------------------------------------------

    \2812\ The Commission also noted that FINRA could represent the 
perspectives of the off-exchange portion of the market, but FINRA 
would have only one vote and exchanges would have twenty.
    \2813\ See CAT NMS Plan, supra note 5, at Section 9.6; see also 
Section III.24, supra.
---------------------------------------------------------------------------

    Additionally, the Commission agreed with the Plan's assessment that 
some governance features of the Plan will limit adverse effects on 
competition in the market for trading services. These include 
provisions limiting the incentive and ability of Operating Committee 
members to serve the private interests of their employers, such as the 
rules regulating conflicts of interest. Moreover, the Commission 
explained

[[Page 84884]]

that it may summarily abrogate and require the filing of Plan 
amendments that establish or change a fee in accordance with Rule 
608(a)(1) and review such amendments in accordance with Rule 608(b)(2) 
of Regulation NMS, if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or the maintenance of fair and orderly markets, to remove 
impediments to, and perfect the mechanisms of, a national market system 
or otherwise in furtherance of the purposes of the Act.\2814\ In such a 
case, if the Commission chooses to approve such amendment, it would be 
by order and with such changes or subject to such conditions as the 
Commission may deem necessary or appropriate.\2815\
---------------------------------------------------------------------------

    \2814\ 17 CFR 242.608(a)(1); 608(b)(2); 608(b)(3)(i); and 
608(b)(3)(iii). Pursuant to Rule 608(b)(2) of Regulation NMS, the 
Commission shall approve such amendment, with such changes or 
subject to such conditions as the Commission may deem necessary or 
appropriate, if it finds that such amendment is necessary or 
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 mechanisms of, a national market 
system, or otherwise in furtherance of the purposes of the Act. 
Approval of the amendment shall be by Commission order.
    \2815\ See Notice, supra note 5, at 30741; supra note 1709 for 
further details on fee proposals.
---------------------------------------------------------------------------

    Several commenters provided information relevant to the 
Commission's analysis of the potential impact of the allocation of fees 
on competition. In particular, three commenters suggested that there 
was an inherent conflict of interest as the SROs were the only ones 
with votes, yet will be involved in the decision to allocate funding 
responsibility across SROs and broker-dealers.\2816\ Such comments 
relate to the influence of voting rights on the allocation of fees to 
exchanges (SROs) compared to ATSs and internalizers (broker-dealers). 
The Commission notes also that certain EMSAC discussions recognized 
conflicts in the market for trading services.\2817\
---------------------------------------------------------------------------

    \2816\ Fidelity Letter at 5, SIFMA Letter at 27 and KCG Letter 
at 4.
    \2817\ See ``Recommendations Relating to Trading Venues 
Regulation'', Equity Market Structure Advisory Committee (``EMSAC'') 
Trading Venues Regulation Subcommittee, April 19, 2016, at 1, 
available at https://www.sec.gov/spotlight/emsac/emsac-trading-venues-subcommittee-recommendations-041916.pdf (describing four 
recommendations relating to the regulation of trading venues); see 
also EMSAC April 26, 2016 Transcript, available at https://www.sec.gov/spotlight/emsac/emsac-042616-transcript.txt.
---------------------------------------------------------------------------

    The Commission believes that the concerns expressed in the comments 
and the EMSAC discussions are consistent with the Commission's 
discussion and analysis of the potential impacts in the Notice. The 
Commission recognized in the Notice that bloc voting could create a 
competitive advantage for exchanges over trading venues for off-
exchange trading. The commenters did not address the Commission's 
discussion in the Notice of certain provisions in the Plan that would 
limit potential burdens on competition or of the role of the Commission 
in approving NMS Plan fee filings. The Commission notes that changes in 
the number of exchanges and in exchange groups since the Notice \2818\ 
affect the potential influence of bloc voting because fewer SRO groups 
will be needed for approval or to block an approval.\2819\ Nonetheless, 
the Commission continues to believe that provisions in the Plan and 
Commission oversight of the allocation of fees could mitigate these 
concerns.\2820\
---------------------------------------------------------------------------

    \2818\ Since the time of the Notice, the Commission approved a 
new exchange, the Investors' Exchange, LLC (``IEX''), which is an 
independent SRO, and two sets of affiliated SROs merged, the NASDAQ 
Group and the ISE Group.
    \2819\ The Plan now includes twenty-one SROs with votes on the 
Operating Committee, including four sets of affiliated SROs and six 
independent SROs. Compared to the time of the Notice (see supra note 
2811), the number of votes required for majority or Supermajority 
approval remains the same, but the number of SRO blocks required for 
approval or to block an approval has changed. Now, the NASDAQ-ISE 
Group has six votes instead of separate blocs of three votes each. A 
majority approval still requires eleven votes. This could include as 
few as three of the SROs and sets of affiliated SROs instead of the 
former four: The affiliated SROs that have six votes, the affiliated 
SROs that have four votes, and one other SRO or set of affiliated 
SROs. Supermajority approval still requires fourteen votes. This 
could include as few as four SROs and sets of affiliated SROs 
instead of the former five: The affiliated SROs that have six votes, 
the affiliated SROs that have four votes, the affiliated SROs that 
have three votes, and any additional SRO or group of affiliated 
SROs. Note also that, now, as few as two sets of affiliated SROs, 
instead of the former three, could block a Supermajority approval by 
casting eight ``no'' votes: The affiliated SROs with six votes, and 
the affiliated SRO with two votes.
    \2820\ See supra note 1709 for further details on fee proposals.
---------------------------------------------------------------------------

(2) Costs of Compliance
    In the Notice, the Commission explained that because all 
Participants but one compete in the market for trading services, the 
ability of affiliates to vote as a group could in principle allow a few 
large Participant groups to influence the outcome of competition in the 
market for trading services by making various decisions that can alter 
the costs of one set of competitors more than another set.\2821\ In 
addition, the Commission discussed the fact that the Plan calls for 
profits to be distributed equally among Participants, which could 
advantage smaller exchanges during profitable years and disadvantage 
smaller exchanges during loss years.\2822\
---------------------------------------------------------------------------

    \2821\ See Notice, supra note 5, at 30741-42.
    \2822\ Generally, smaller exchanges will have smaller fees. So, 
if there are profits, and each exchange receives the same nominal 
reimbursement amount, then the percentage reduction in fees from the 
redistributed profit will be greater for smaller exchanges, as they 
are starting with a smaller denominator in the ratio. This does not 
speak to the relative burden of compliance costs, however, which may 
still disadvantage smaller exchanges.
---------------------------------------------------------------------------

    The Commission explained that generally, smaller competitors could 
have implementation and ongoing costs of compliance that are 
disproportionate relative to their size. It noted that, to lessen the 
impact of funding the Central Repository on smaller exchanges and ATSs, 
the Plan would apply a tiered funding model that charges the smallest 
exchanges and ATSs the lowest fees. Likewise, the Plan would apply a 
tiered funding model that would charge the smallest broker-dealers, 
including liquidity suppliers, the lowest fees. However, the Commission 
noted that the Plan does not indicate whether off-exchange liquidity 
providers would pay fees similar to similarly-sized ATSs and exchanges. 
This is important because, as described earlier, broker-dealers 
internalizing orders off exchanges would only be allocated fees based 
on message traffic, whereas orders routed to ATSs and exchanges lead to 
broker-dealer fees based on message traffic and ATS or exchange fees 
based on market share. If these fees are even partially passed on to 
customers, then the cost differentials that result might create 
incentives for broker-dealers to route order flow to those broker-
dealers who internalize in order to minimize costs, creating a 
potential conflict of interest with broker-dealers' investor 
customers.\2823\
---------------------------------------------------------------------------

    \2823\ See Section V.F.5.d, supra.
---------------------------------------------------------------------------

    The Commission discussed the fact that the Plan provides that the 
Technical Specifications will not be finalized until after the 
selection of a Plan Processor, which will not occur until after any 
decision by the Commission to approve the Plan. The Commission 
recognized that the costs of compliance associated with future 
technical choices or the selection of the Plan Processor could 
exacerbate the relative cost differential across competitors. However, 
the Commission preliminarily believed that the governance provisions of 
the Plan and Commission oversight could help to mitigate such effects 
in the market for trading services.
    The Commission received several comments relevant to its analysis 
of the

[[Page 84885]]

potential impact of the costs of compliance on competition in the 
market for trading services. Specifically, as described earlier,\2824\ 
several commenters had concerns about the distribution of CAT profits 
among SROs, though none specifically discussed the potential 
differential impact on small versus large exchanges.\2825\ Further, the 
concerns of commenters and the EMSAC discussed in the Allocation of 
Fees section above also have implications for the Commission's 
analysis.
---------------------------------------------------------------------------

    \2824\ Id.
    \2825\ SIFMA Letter at 19; KCG Letter at 5; DAG Letter at 5.
---------------------------------------------------------------------------

    Regarding the distribution of CAT profits among SROs, as described 
earlier,\2826\ the Participants responded with a clarification that 
they expect to operate the CAT on a break-even basis and any surpluses 
would be treated as an operational reserve to offset fees in future 
payment. In addition, the Participants subsequently stated that the CAT 
LLC will seek to qualify for tax exempt status as a ``business 
league.'' \2827\
---------------------------------------------------------------------------

    \2826\ See Section V.F.5.d, supra.
    \2827\ Participants' Letter at 1; Section IV.B.4, supra.
---------------------------------------------------------------------------

    The Commission has considered the comments and the EMSAC discussion 
regarding voting blocs and believes that these concerns do not alter 
the analysis in the Notice for the same reasons as described 
above.\2828\ Overall, the Commission continues to believe that the 
ability of affiliates to vote as a group could in principle allow a few 
large Participant groups to influence the outcome of competition in the 
market for trading services by making various decisions that alter the 
costs of one set of competitors more than another set, but that 
Commission oversight and the governance provisions of the Plan and 
could help to mitigate these effects.\2829\ Also, in light of amendment 
to the Plan to reflect that the CAT LLC will seek to qualify for tax 
exempt status as a ``business league,'' \2830\ the Commission now 
believes that neither CAT profits or losses should affect competition 
in the market for trading services. The Commission maintains its 
conclusions regarding the impact of compliance costs on competition in 
the market for trading services, specifically, that compliance costs 
may be relatively more burdensome for small SROs, but that the tiered 
aspect of the funding model should serve to mitigate this. However, the 
Commission notes that the funding model continues to have 
uncertainties, and depends on the decisions of the Operating Committee.
---------------------------------------------------------------------------

    \2828\ See Section V.G.1.a(1)B, supra.
    \2829\ See supra note 2814.
    \2830\ Participants' Letter at 1. See also Section V.F.5.d, 
supra. for more detail on these modifications and the resulting 
economic effects.
---------------------------------------------------------------------------

(3) Enhanced Surveillance and Deterrence
    In the Notice, the Commission also discussed its preliminary belief 
that the CAT NMS Plan could promote competition in the market for 
trading services through enhanced surveillance and the deterrence of 
violative behavior that could inhibit competition.\2831\ Should the 
Plan deter violative behavior, passive liquidity suppliers, such as on 
or off-exchange market makers could increase profits as a result of 
reduced losses from others' violative behavior. This increase in 
profits could encourage new entrants or could spark greater 
competition, which would reduce transaction costs for investors. For 
example, if the Plan facilitates surveillance improvements that deter 
spoofing, the Commission stated that it could increase incentives to 
provide liquidity and promote lower transaction costs for investors, 
particularly in stocks that may lack a critical mass of competing 
liquidity providers or that could be targets for violative trading 
behavior.
---------------------------------------------------------------------------

    \2831\ See Section V.E.2.c, supra, for a discussion of how the 
CAT NMS Plan would enhance surveillance and deter violative 
behavior.
---------------------------------------------------------------------------

    The Commission did not receive comments related to its economic 
analysis on enhanced surveillance and deterrence of violative behavior 
affecting competition in the market for trading services. Therefore, 
the Commission continues to believe that the CAT NMS Plan could promote 
competition in the market for trading services through enhanced 
surveillance and the deterrence of violative behavior that could 
inhibit competition.
b. Market for Broker-Dealer Services
    In the Notice, the Commission analyzed the effect of the CAT NMS 
Plan on the market for broker-dealer services.\2832\ The Commission 
stated that it preliminarily believed that the costs of broker-dealers' 
compliance, particularly the cost to report order events to the Central 
Repository, would differ substantially between broker-dealers and might 
affect competition between smaller and larger broker-dealers. The 
Commission also noted that broker-dealers that outsource regulatory 
data reporting activities are expected to see their costs of regulatory 
data reporting increase, while broker-dealers that insource may see a 
decrease in their regulatory data reporting costs.\2833\ The Commission 
stated that it preliminarily believed this dynamic might affect 
competition between Outsourcers (that tend to be smaller) and 
Insourcers (that tend to be larger), and might increase barriers to 
entry in some segments of this market.
---------------------------------------------------------------------------

    \2832\ The market for broker-dealer services is described in the 
Notice, supra note 5, at 30742-44.
    \2833\ See Section V.E.2.c., supra.
---------------------------------------------------------------------------

    The Notice discussed the Plan's assertion that it will have little 
to no adverse effect on competition between large broker-dealers, and 
will not materially disadvantage small broker-dealers relative to large 
broker-dealers.\2834\ Regarding small broker-dealers, the Plan states, 
``. . . [the allocation of costs to broker-dealers based on their 
contribution to market activity] may be significant for some small 
firms, and may even impact their business models materially . . .'' and 
that the Participants were sensitive to the burdens the Plan could 
impose on small broker-dealers, noting that such broker-dealers could 
incur minimal costs under their existing regulatory reporting 
requirements ``because they are OATS-exempt or excluded broker-dealers 
or limited purpose broker-dealers.'' The Commission noted that the CAT 
NMS Plan attempts to mitigate its impact on these broker-dealers by 
proposing to follow a cost allocation formula that should charge lower 
fees to smaller broker-dealers; \2835\ furthermore, Rule 613 provides 
them additional time to commence their reporting requirements.
---------------------------------------------------------------------------

    \2834\ See CAT NMS Plan, supra note 5, at Appendix C 
B.8.(a)(ii).
    \2835\ See CAT NMS Plan, supra note 5, at Appendix C 
B.7.(b)(iv)(C) (``The fees to be assessed at each tier are 
calculated so as to recoup a proportion of costs appropriate to the 
message traffic from firms in each tier. Therefore, larger broker-
dealers, generating the majority of message traffic, will be in the 
higher tiers, and therefore be charged a higher fee. Smaller broker-
dealers with low levels of message traffic will be in lower tiers 
and will be assessed a minimal fee for the CAT. The Participants 
estimate that up to 75% of broker-dealers will be in the lower tiers 
of the Funding Model.'').
---------------------------------------------------------------------------

    The Commission preliminarily agreed with the Plan's general 
assessment of competition among broker-dealers, and also with the 
Plan's assessment of differential effects on small versus large broker-
dealers. The Commission agreed that the Plan's funding model was an 
explicit source of financial obligation for broker-dealers and 
therefore an important feature to evaluate when considering potential 
differential effects of the Plan on competition in the market for 
broker-dealers. However, the Commission preliminarily believed that the 
segments of the market most likely to experience higher barriers to 
entry are those that currently have no data

[[Page 84886]]

reporting requirements of the type the Plan requires and those that 
will involve more CAT Reporting obligations, such as the part of the 
broker-dealer market that involves connecting to exchanges, because of 
the technology infrastructure requirements and the potential to have to 
report several types of order events. Nonetheless, the Commission 
discussed its preliminary belief that any increases in the barriers to 
entry are justified because they are necessary in order for the CAT 
Data to include data from small broker-dealers. Specifically, the 
Commission noted that excluding small broker-dealers from reporting 
requirements would eliminate the collection of audit trail information 
from a segment of the broker-dealer community and would thus result in 
an audit trail that does not capture all orders by all participants in 
the securities markets.\2836\
---------------------------------------------------------------------------

    \2836\ See Notice, supra note 5, at 30743 (citing Adopting 
Release, supra note 14, at 45749).
---------------------------------------------------------------------------

    The Commission also recognized that the Plan could affect the 
current relative competitive positions of broker-dealers in the market 
for broker-dealer services because the economic impacts resulting from 
the Plan could benefit some broker-dealers and adversely affect others. 
However, the Commission stated that there is no clear reason to expect 
these impacts, should they occur, to decrease the current state of 
overall competition in the market for broker-dealer services so as to 
materially burden the price or quality of services received by 
investors on average.
    Regardless of the differential effects of the CAT NMS Plan on small 
versus large broker-dealers, the Commission discussed in the Notice 
that its preliminary view was that the CAT NMS Plan, in aggregate, will 
likely not reduce competition and efficiency in the overall market for 
broker-dealer services. The Commission explained that even if small 
broker-dealers potentially face a burden, this may not necessarily have 
an adverse effect on competition as a whole in the overall market for 
broker-dealer services. Under the Plan, broker-dealers could face high 
upfront costs to set up a processing environment to meet reporting 
responsibilities. As upfront, fixed costs, the burden could be greater 
for small broker-dealers. Instead of bearing these costs in-house, 
small broker-dealers could contract with outside vendors, which could 
lead to lower costs relative to not using a vendor for reporting 
services. Thus, the Commission explained that even firms that currently 
do not report to OATS, but will be CAT Reporters under the Plan, could 
face manageable upfront costs that permit them to continue in their 
line of business without a severe setback in their profitability.
    The Commission noted that a difficulty in assessing the likely 
impacts of the CAT NMS Plan on competition among broker-dealers is that 
competition in the markets for different broker-dealer services could 
be affected in different ways. If CAT costs represent a significant 
increase in overall business costs, the Plan could disadvantage broker-
dealers who are CAT Reporters in the market segments that do not 
require CAT reporting. For example, broker-dealers that, in addition to 
providing services related to market transactions that are reportable 
to CAT, also compete to provide fixed-income order entry as a line of 
business may be at a relative disadvantage to competitors in the fixed-
income market who do not provide broker-dealer services that are 
related to market activity that is reportable to CAT.
    The Commission recognized that the CAT NMS Plan could result in 
fewer broker-dealers providing specialized services that trigger CAT 
reporting obligations. The Commission also recognized, however, that 
fewer broker-dealers in a specialized segment of the market may not 
necessarily harm competition in that segment. In particular, the CAT 
compliance costs may be less of a relative burden for large broker-
dealers who may provide a larger portfolio of specialized services to 
clients. This portfolio may buffer large broker-dealers from business 
risk associated with specialization, and so large broker-dealers are 
likely to maintain their presence in specialized market segments. If a 
sufficient number of large broker-dealers maintain their presence in 
specialized market segments, a net decrease in broker-dealers may not 
affect the competition in such market segments to a level in which the 
market segment offers fewer or lower quality services or higher 
prices.\2837\ However, the Commission recognized that negative effects 
on competition in specialized market segments could result if broker-
dealers achieve a level of market concentration necessary to adversely 
affect prices for investors.
---------------------------------------------------------------------------

    \2837\ See Notice, supra note 5, at 30742-44.
---------------------------------------------------------------------------

    The Commission received a few comment letters regarding its 
analysis of the effect of the Plan on the market for broker-dealer 
services. As previously described,\2838\ the Commission received one 
comment that noted that message traffic tiers could place a larger 
burden on market makers of liquid securities and a lower burden on 
liquidity takers.\2839\ In addition, one commenter noted that the 
current phased implementation schedule poses risks to clearing firms 
who will have to support both large and small broker-dealers during CAT 
implementation, incurring more CAT implementation costs than broker-
dealers that do not have introducing broker-dealers.\2840\ Another 
comment estimated that CAT reporting costs, even at a $5,000 per month 
minimum, could reach 15% or more of revenue for a subset of small 
broker-dealers that are currently OATS exempt.\2841\ The commenter 
further stated that the Plan would have the greatest proportionate 
burden for those firms, which have the smallest justification for 
regulatory concern \2842\ and expressed concern regarding the ability 
for certain firms to say in business, stating that the Plan would 
``destroy the business model and profitability'' of such firms.
---------------------------------------------------------------------------

    \2838\ See Section V.F.5.d, supra.
    \2839\ SIFMA Letter at 16-17.
    \2840\ TR Letter at 3-4.
    \2841\ Wachtel Letter at 1-4.
    \2842\ Wachtel Letter at 2-4 (stating that customers of certain 
small firms are unlikely to engage in violative behavior such as 
market manipulation and insider trading).
---------------------------------------------------------------------------

    The Participants' response letter addressed comments related to the 
market for broker-dealer services. With regards to the funding model 
tiers placing a larger burden on market makers of liquid securities, 
the Participants did not comment on the relative burden, but argued 
that a fixed-fee funding model would reduce the disincentives to 
provide liquidity to the market and would lead to fewer market 
distortions than a strictly variable funding model.\2843\ With regards 
to the phased implementation schedule, the Participants noted that 
small broker-dealers may voluntarily begin reporting within two years 
instead of the required three years,\2844\ but did not address whether 
this poses risks for clearing firms supporting both large and small 
broker-dealers. The Participants also did not address the relative 
burden on OATS-exempt broker-dealers.
---------------------------------------------------------------------------

    \2843\ Response Letter II at 16.
    \2844\ Response Letter II at 20.
---------------------------------------------------------------------------

    In response to these comments, the Commission has revised its 
economic analysis of the effect of the Plan on the market for broker-
dealer services. First, the Commission now recognizes the potential 
differential effect on those broker-dealers that engage in market 
making in liquid stocks versus illiquid stocks and on those broker-
dealers that engage in liquidity taking strategies versus those that 
engage in other

[[Page 84887]]

strategies. The Commission believes that this differential effect could 
result in broker-dealers altering their activities, which could have 
the second order effects described above,\2845\ and could change the 
level of competition in certain market segments, such as those that 
specialize in providing services in more liquid securities. However, 
the Commission believes that services in liquid securities is the most 
competitive segment in the broker-dealer industry and therefore, does 
not believe that effects on competition would be material. In 
particular, based on Commission Staff experience, the Commission 
understands that quote competition in liquid securities comes from 
market makers on many exchanges, over-the-counter market makers, and 
customers who post quotations. These securities trade on one penny 
spreads and have deep order books. Further, consistent with the 
Participants' Response Letter II, the tiered nature of the funding 
model effectively fixes the fees. In highly competitive markets, fixed 
fees should not affect prices. Therefore, the highly competitive liquid 
securities markets should remain liquid and highly competitive under 
the Plan, despite the fees related to message traffic.
---------------------------------------------------------------------------

    \2845\ See Section V.F.5.b., supra.
---------------------------------------------------------------------------

    The Commission also agrees with the comment that certain broker-
dealers could face a disproportionately large burden of costs from 
reporting, even as high as 15% of revenue as the commenter noted, and 
already recognized this possibility in the economic analysis in the 
Notice. However, the Commission is not revising its conclusion that it 
is necessary for even the smallest broker-dealers to report to CAT. 
Specifically, the Commission believes that excluding certain broker-
dealers from reporting requirements would result in an audit trail that 
does not capture all orders by all participants in the securities 
markets, which could incentivize prospective wrongdoers to utilize 
these firms to evade regulatory oversight.
    With regards to competition, the Commission continues to believe 
that even if regulatory burdens from CAT reduce the number of small 
broker-dealers in specialized segments, overall competition in those 
segments may not be harmed.
    With regards to the comment on relative costs for clearing firms 
supporting large and small brokers during CAT implementation, the 
Commission acknowledges the costs of reporting to duplicative systems, 
and the relatively high costs to introducing broker-dealers. However, 
it is not clear why the additional costs to clearing firms servicing 
other broker-dealers would not be passed along to small broker-
dealers--the impact of which has already been discussed. As such, the 
Commission does not believe the impact on clearing firms due to the 
phased implementation schedule is sufficiently large to affect 
competition in this market, and is not changing the Economic Analysis 
as it relates to costs for clearing services.
    The Commission does not believe that the modifications to the 
funding model described above will affect the allocation of fees or the 
relative compliance costs among broker-dealers.\2846\ Overall, the 
Commission continues to believe that the CAT NMS Plan, in aggregate, 
would likely not reduce competition and efficiency in the overall 
market for broker-dealer services. Even if small broker-dealers, 
broker-dealers of liquid securities, or clearing firms of large and 
small broker-dealers potentially face a relatively high burden, this 
may not necessarily have an adverse effect on competition as a whole in 
the overall market for broker-dealer services, as the Commission 
explained in the Notice.
---------------------------------------------------------------------------

    \2846\ Id.
---------------------------------------------------------------------------

c. Market for Regulatory Services
    In the Notice, the Commission discussed its preliminary conclusion 
that the Plan could provide opportunities for increased competition in 
the market to provide regulatory services.\2847\ The Commission noted 
that SROs compete to provide regulatory services in at least two ways. 
First, because SROs are responsible for regulating trading within 
venues they operate, their regulatory services are bundled with their 
operation of the venue. Consequently, for a broker-dealer, selecting a 
trading venue also entails the selection of a provider of regulatory 
services surrounding the trading activity. Second, SROs could provide 
this supervision not only for their own trading venues, but for other 
SROs' trading venues as well through the use of Regulatory Service 
Agreements or a plan approved pursuant to Rule 17d-2 under the Exchange 
Act.\2848\ Consequently, SROs compete to provide regulatory services to 
trading venues they do not operate. The market for regulatory services 
in the equity and options markets currently has one dominant 
competitor, FINRA.
---------------------------------------------------------------------------

    \2847\ See Notice, supra note 5, at 30744-45.
    \2848\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------

    In the Notice, the Commission noted that under the Plan, designated 
regulatory Staff from all of the SROs would have access to CAT Data, 
which would reduce the differences in data access across SROs.\2849\ 
This in turn could reduce barriers to entry in providing regulatory 
services because data will be centralized and standardized, possibly 
reducing economies of scale in performing surveillance activities. 
Furthermore, because some types of previously infeasible surveillance 
will become possible with the availability of additional data, the 
Commission believes that SROs will have greater opportunities to 
innovate in the type of surveillance that is performed, and the 
efficiency with which it is performed. In addition, as Rule 
613(a)(3)(iv) requires, SROs will implement new or updated surveillance 
within 14 months after effectiveness of the CAT NMS Plan,\2850\ and 
thus any SRO could reconsider its approach to outsourcing its 
regulatory services and whether it wants to compete to provide 
regulatory services to others.
---------------------------------------------------------------------------

    \2849\ Without a Central Repository, an SRO wishing to compete 
as a regulatory services provider would need to invest in the IT 
infrastructure and enter into the data access agreements necessary 
to surveil broadly beyond its exchanges' data resources. By 
providing access to consolidated trade and order data to all SROs, 
CAT may reduce barriers to entry for this market. See Securities 
Exchange Act Release No. 74581 (March 25, 2015), 80 FR 18035 (April 
2, 2015) at 18057-58 (describing the barriers to entry of potential 
new national securities associations).
    \2850\ 17 CFR 242.613(a)(3)(iv).
---------------------------------------------------------------------------

    While the Commission did not receive any comments addressing the 
effects of the CAT NMS Plan on the market for regulatory services, nor 
was the issue addressed in the Participants' response, the Commission 
believes that certain EMSAC discussions are relevant to its analysis of 
competition in the market for regulatory services. In particular, the 
discussions regarding the EMSAC draft recommendation that the 
Commission should formalize by Rule the centralization of common 
regulatory functions across SROs into a single regulator reveal other 
potential considerations.\2851\ In particular, the EMSAC subcommittee 
on Trading Venues opined that some regulatory activities are 
duplicative and needlessly complex because they are dispersed

[[Page 84888]]

across SROs.\2852\ Further, the subcommittee argued that CAT will 
increase that duplicative regulatory oversight. In response to the 
EMSAC discussions, one commenter pointed out benefits in having 
competition between regulators.\2853\ This commenter explained that CAT 
Data could open up new frontiers for regulation that competition 
between multiple SROs could leverage off of.
---------------------------------------------------------------------------

    \2851\ See ``Recommendations Relating to Trading Venues 
Regulation'', Equity Market Structure Advisory Committee (``EMSAC'') 
Trading Venues Regulation Subcommittee, April 19, 2016, available at 
https://www.sec.gov/spotlight/emsac/emsac-trading-venues-subcommittee-recommendations-041916.pdf (describing four 
recommendations relating to the regulation of trading venues); see 
also EMSAC April 26, 2016 Transcript, available at https://www.sec.gov/spotlight/emsac/emsac-042616-transcript.txt.
    \2852\ See EMSAC April 26, 2016 Transcript, available at https://www.sec.gov/spotlight/emsac/emsac-042616-transcript.txt, at 111.
    \2853\ See NASDAQ comment on EMSAC, May 24, 2016, available at 
https://www.sec.gov/comments/265-29/26529-71.pdf.
---------------------------------------------------------------------------

    The Commission recognizes that increased competition in the market 
for regulatory services could create duplication of regulations, as the 
EMSAC discussed. But, ultimately, the Commission's conclusions related 
to competition--namely, that the Plan will provide opportunities for 
increased competition in the market to provide regulatory services--are 
unchanged from the Notice. The Commission recognizes, however, the 
uncertainty of whether EMSAC will make a formal recommendation to the 
Commission and whether and how the Commission would act with respect to 
such a recommendation.
d. Market for Regulatory Data Reporting Services
    In the Notice, the Commission analyzed the effect of the CAT NMS 
Plan on competition in the market for data reporting services with a 
focus on its impact on the costs incurred by broker-dealers to comply 
with the Plan.\2854\ As discussed in the Costs section above, the 
Commission preliminarily believed that many broker-dealers, 
particularly smaller broker-dealers, would fulfill their CAT reporting 
obligations by outsourcing to service bureaus and that the fees charged 
by the service bureaus would be a major cost driver for these broker-
dealers. Further, these fees would factor into the increase in barriers 
to entry in the market for broker-dealer services.\2855\ Therefore, the 
Commission preliminarily believed that any effects on competition in 
the market for regulatory data reporting services could have a 
significant effect on the costs incurred by broker-dealers in complying 
with the CAT NMS Plan.
---------------------------------------------------------------------------

    \2854\ See Notice, supra note 5, at 30745-46.
    \2855\ See Section V.G.1.b, supra.
---------------------------------------------------------------------------

    The Plan provided information on broker-dealers' use of third-party 
service providers to accomplish current regulatory data reporting. The 
Plan noted that while some broker-dealers perform their regulatory data 
reporting in-house, others outsource this activity. As noted in the 
Costs section of the Plan,\2856\ the Commission understands that most 
firms outsource the bulk of their regulatory data reporting to third-
party firms. The Commission preliminarily believed that the competition 
in the market to provide data reporting services is a product of firms 
choosing to perform this activity in-house or to outsource it based on 
a number of considerations including cost, with some firms choosing to 
outsource this activity across multiple service providers.
---------------------------------------------------------------------------

    \2856\ See Section V.F.1.c.(2).A, supra.
---------------------------------------------------------------------------

    The market for regulatory data reporting services is currently 
characterized by bundling, high switching costs, and barriers to entry. 
First, service bureaus often bundle regulatory data reporting services 
with an order-handling system service that provides broker-dealers with 
market access and order routing capabilities.\2857\ Additionally, they 
sometimes bundle regulatory data reporting services with trade clearing 
services. Second, switching costs for service bureaus may be high and 
involve complex onboarding processes and requirements. Furthermore, 
systems between service bureaus may be disparate, and switching service 
providers may require different or updated client documentation. 
Difficulty switching between service providers could limit the 
competition among service bureaus to provide data reporting services, 
and impact the costs that Outsourcers incur to secure regulatory data 
reporting services. Third, high information technology (``IT'') 
infrastructure costs also give rise to barriers to entry, which could 
slow the entry of new market participants into this market. Despite 
this, the Commission explained that based on information from broker-
dealer discussions arranged by Financial Information Forum it 
preliminarily believed that the market for regulatory data reporting 
services is generally expanding and the trend is for more, not less, 
outsourcing.\2858\
---------------------------------------------------------------------------

    \2857\ See Section V.F.1.c.(2).A, supra, for more information on 
broker-dealer use of service bureaus.
    \2858\ See Notice, supra note 5, at n.920.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed its preliminary belief that 
the Plan could alter the competitive landscape in the market for data 
reporting services in several ways. First, the Plan could increase the 
demand for data reporting services by requiring reporting by broker-
dealers that may have previously been exempt due to size under 
individual SRO rules.\2859\ Because more broker-dealers would be 
required to report regulatory data under the Plan, the Commission 
preliminarily believed there could be an opportunity for increased 
competition in this market which might benefit all Outsourcers by 
reducing costs or increasing innovation. However, the increase in 
demand for data reporting services could serve to entrench existing 
providers if they capture a large share of newly created demand; this 
could lead to relatively higher costs for broker-dealers than they 
would face in a more competitive market. The potential increase in 
demand for data reporting services also could impact the capacity of 
already existing service providers to meet this increase in demand, and 
this in turn could have implications for competition and pricing in the 
market for data reporting services. Considering the barriers to entry 
that characterize the market for data reporting services and this 
potential increase in demand, service bureaus could have less incentive 
to compete for broker-dealer clients because these clients are no 
longer scarce, and as such, the CAT NMS Plan could result in a decline 
in the competition for data reporting services. It is possible that 
broker-dealers seeking to establish relationships with service bureaus 
could have trouble securing them because of the need to on-board many 
broker-dealers at once, especially if the service bureaus have limited 
on-boarding capacity. In the short-run these capacity constraints and 
the high demand could increase the costs of reporting through a service 
bureau. However, the two year implementation period for large broker-
dealers and three year period for small broker-dealers could alleviate 
the reduction in competition due to the onboarding capacity strain 
because current service bureaus have time to increase their on-boarding 
capacity and new entrants have time to build the necessary IT 
infrastructure and a client base.
---------------------------------------------------------------------------

    \2859\ See, e.g., FINRA Rule 7470.
---------------------------------------------------------------------------

    Second, the Commission discussed in the Notice how the CAT NMS Plan 
could dramatically change the pool of firms demanding data reporting 
services, which would be skewed toward firms that are smaller and on 
average costlier to service, which could result in higher prices that 
could eventually be passed onto investors. In addition to small and 
medium sized broker-dealers that previously self-reported data to SROs, 
who now would be required to report, the CAT NMS Plan would also result 
in other broker-

[[Page 84889]]

dealers having data reporting responsibilities. The Commission 
preliminarily believed that these broker-dealers would predominantly be 
small. Because the Plan would require additional elements in regulatory 
data, particularly customer data, some broker-dealers that currently 
self-report could no longer find it economically feasible to do so.
    Third, in addition to possibly increasing demand for data reporting 
services, the Commission discussed how the CAT NMS Plan may have a 
mixed effect on the number of firms offering data reporting services. 
This could impact the competitiveness of this market, and affect the 
costs broker-dealers bear in securing these services. On one hand, the 
number of firms offering data reporting services could decrease, 
because the need to secure PII might increase the likelihood of 
liability and litigation risks in the event of a security breach.\2860\ 
On the other hand, it is possible that the number of service bureaus 
offering data reporting services would increase. New reporting 
requirements for broker-dealers could create opportunities for new 
entrants to meet this demand. This could increase capacity and result 
in innovation in providing these services, which could benefit broker-
dealers needing data reporting services by potentially reducing 
reporting costs, or at least reducing the potential for cost increases. 
Lower reporting costs for broker-dealers could in turn benefit the 
investors who are serviced by these broker-dealers, through reduced 
costs.
---------------------------------------------------------------------------

    \2860\ See Section V.F.4.a(3), supra, for a discussion of the 
potential exit of service bureaus from the market resulting from the 
risk of a security breach.
---------------------------------------------------------------------------

    Fourth, the Commission discussed how the Plan could decrease the 
demand for data reporting services. Many broker-dealers currently pay 
service bureaus to fulfill their regulatory data reporting; this may be 
because these broker-dealers find it would be more expensive to handle 
the translation of their order management system data into fixed 
formats, such as is required for OATS. If the Plan Processor allows 
broker-dealers to send data to the Central Repository in the formats 
that they use for normal operations, in drop copies for example, these 
broker-dealers may no longer see a cost advantage in engaging the 
services of a regulatory data reporting service provider because one of 
the costs associated with regulatory data reporting--having to 
translate data into a fixed format--will have been eliminated.\2861\ 
These broker-dealers may then choose to insource their regulatory data 
reporting.
---------------------------------------------------------------------------

    \2861\ The Plan does not mandate the data ingestion format. See 
CAT NMS Plan, supra note 5, at Appendix C, Section A.1(b). In the 
Notice, the Commission recognized that the CAT Reporters Study found 
no difference in expected costs for a fixed format, but requested 
comment on why the costs may be similar when it would seem logical 
that allowing flexible data reporting formats would reduce costs for 
broker-dealers. See Notice, supra note 5, at Section IV.F.5.
---------------------------------------------------------------------------

    The Commission preliminarily believed that this reduction in demand 
would not likely be realized and, if realized, would be unlikely to 
offset the increase in demand that would come from CAT reporters not 
currently subject to OATS reporting, who would now have reporting 
obligations. As noted in the Costs section of the Plan, of the 1,800 
expected CAT Reporters, 868 do not currently report to OATS.\2862\ This 
meant that the Commission expected a large proportion of CAT Reporters 
may be broker-dealers that currently do not have a service bureau for 
regulatory data reporting but would choose to engage one to manage 
their CAT reporting responsibilities. This is more than the 
Commission's estimate of 806 current outsourcing broker-dealers.\2863\ 
The Commission therefore noted that it is unlikely that the number of 
current Outsourcers that choose to become Insourcers would be larger 
than the number of non-OATS reporters that would elect to outsource. As 
a result, demand is more likely to increase. Further, the Commission 
explained that the proposed requirement for CAT reports to use listing 
exchange symbology could require pre-report data processing even if the 
Plan Processor allows for the receipt of reports in the formats that 
broker-dealers use for normal operations. As a result, the Commission 
explained that the CAT NMS Plan is unlikely to eliminate the costs of 
processing data prior to reporting that data to the Central Repository.
---------------------------------------------------------------------------

    \2862\ The Plan estimates that 1,800 broker-dealers are expected 
to have CAT reporting obligations. Based on data from FINRA, 932 
broker-dealers currently report OATS data. 1,800 - 932= 868. See 
Section VI.F.1.c.(2)A, supra.
    \2863\ Id.
---------------------------------------------------------------------------

    The Commission continues to believe that it is possible that the 
Plan would increase the demand for data reporting services by requiring 
regulatory data reporting by broker-dealers that may have previously 
been exempt due to size under individual SRO rules. Furthermore, the 
Commission continues to believe that the CAT NMS Plan may have a mixed 
effect on the number of firms offering data reporting services; this 
could impact the competitiveness of this market, and affect the costs 
broker-dealers bear in securing these services. Commenters did not 
provide any additional information or analysis that the Commission 
believes would warrant changes to its analysis or conclusions as set 
out in the Notice, nor does the Commission believe that the 
modifications to the Plan warrant changes to this aspect of the 
economic analysis.
2. Efficiency
    In the Notice, the Commission analyzed the potential impact of the 
Plan on efficiency.\2864\ The Plan included a discussion of certain 
efficiency effects anticipated if the Plan is approved; as part of its 
economic analysis, the Commission discussed these effects, as well as 
additional effects anticipated by the Commission. The Commission 
discussed its preliminary belief that the Plan would likely result in 
significant improvements in efficiency related to how regulatory data 
is collected and used. The Commission also explained that the Plan 
could result in improvements in market efficiency by deterring 
violative activity. However, the Commission noted that any potential 
gains to efficiency from the retirement of duplicative and outdated 
reporting systems would be delayed for up to two and a half years and 
the interim period of increased duplicative reporting would impose 
significant financial burden on Industry Members.
---------------------------------------------------------------------------

    \2864\ See Notice, supra note 5, at 30746-48.
---------------------------------------------------------------------------

    Overall, after considering comments, Participants' responses, and 
modifications to the Plan, the Commission is updating and revising its 
economic analysis on efficiency. However, the revisions in the analysis 
do not impact the Commission's broad conclusions. The Commission 
continues to believe that the Plan will generally improve the 
efficiency of regulatory activities and promote market efficiency.
a. Effect of the Plan on Efficiency
    Building off the discussion in the Plan, in the Notice, the 
Commission analyzed the effect of the Plan on the efficiency of 
detecting violative behavior through examinations and enforcement, on 
the efficiency of surveillance, on market efficiency through deterrence 
of violative behavior, on operational efficiency of CAT Reporters, and 
on efficiencies through reduced ad hoc data requests and quicker access 
to data.\2865\
---------------------------------------------------------------------------

    \2865\ Id.

---------------------------------------------------------------------------

[[Page 84890]]

    The Commission explained that currently, regulators' ability to 
efficiently supervise and surveil market participants and carry out 
their enforcement responsibilities is hindered by limitations in 
regulatory data.\2866\ Second, regulators' ability to efficiently 
perform cross-market surveillance is also hindered by limitations in 
regulatory data.\2867\ Finally, there are a number of other 
inefficiencies associated with the current system of regulatory data 
collection. These include: Delays in data availability to regulators; 
lack of direct access to data collected by other regulators results in 
numerous ad-hoc data requests; and the need for regulatory Staff to 
invest significant time and resources to reconciling disparate data 
sources.\2868\
---------------------------------------------------------------------------

    \2866\ See Section V.E.2.c, supra.
    \2867\ Id.
    \2868\ See Section V.D.2.b, supra. These other inefficiencies 
are discussed above in the Baseline and Benefits Sections.
---------------------------------------------------------------------------

    The Plan discussed a number of expected effects on efficiency such 
as: Monitoring for rule violations; performing surveillance; and 
supporting fewer reporting systems. The Commission preliminarily agreed 
with the Plan's assessments of the expected effects, and in addition, 
the Commission discussed how the Plan could also reduce violative 
behavior.
    First, the Plan concluded that SROs would experience improved 
efficiency in the detection of rule violations, particularly for 
violations that involve trading in multiple markets.\2869\ The Plan 
stated an expectation that SROs would need to expend fewer resources to 
detect violative cross-market activity, and such activity would be 
detected more quickly.\2870\ The Commission preliminarily agreed that 
the Plan would result in improvements in efficiency in the performance 
of examinations of market participants by SROs and the Commission. 
Improvements to data availability and access through the Central 
Repository could allow SROs and the Commission to more efficiently 
identify market participants for examination.\2871\ The Commission also 
agreed that the Plan would improve the efficiency of enforcement 
investigations. If regulatory data access improves, the quality and 
quantity of enforcement investigations could increase through 
improvements to the comprehensiveness and timeliness of data used to 
support investigations.
---------------------------------------------------------------------------

    \2869\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.8(b); see also Section V.E.2, supra.
    \2870\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.8(b).
    \2871\ See Section V.E.2.c, supra.
---------------------------------------------------------------------------

    Second, the Plan stated that the Participants believe that the CAT 
NMS Plan could improve the efficiency of surveillance.\2872\ This 
improvement is due to a number of factors including: Increased 
surveillance capacity; improved system speed, which would result in 
more efficient data analysis; and a reduction in surveillance system 
downtime.\2873\ The Plan also cited reduced monitoring costs,\2874\ but 
the Commission noted that estimates in the Costs section of the Plan 
predicted increased surveillance costs if the Plan is approved. The 
increased surveillance costs predicted in the Plan could reflect more 
effective surveillance. Although the Plan did not discuss the cost-
benefit tradeoff of increased surveillance directly, the Commission 
noted that achieving the level of surveillance that would be possible 
if the Plan is approved would likely be more expensive using currently 
available data sources, if it is achievable at all, due to the 
inefficiencies that currently exist in delivering regulatory 
supervision, which are discussed previously.\2875\
---------------------------------------------------------------------------

    \2872\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.8(b) (stating that the CAT NMS Plan could reduce monitoring costs, 
enable regulators to detect cross-market violative activity more 
quickly, provide regulators more fulsome access to unprocessed data 
and timely and accurate information on market activity, and provide 
CAT Reporters with long term efficiencies resulting from the 
increase in surveillance capabilities); see also Section V.E.2.c, 
supra.
    \2873\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.8(b). The Participants surveyed the 10 exchange-operating SRO 
groups on surveillance downtime. In conversations with Commission 
staff, the Participants informed Staff that average surveillance 
downtime was 0.03% from August 1, 2014 to August 31, 2015, and 
ranged from 0 to 0.21% across SROs.
    \2874\ Id.
    \2875\ See Section VI.E.2, supra.
---------------------------------------------------------------------------

    Third, the Plan also discussed increased efficiency due to the 
reduction in redundant reporting systems,\2876\ specifically increases 
in system standardization, which would allow consolidation of 
resources, including the sunsetting of legacy reporting systems and 
processes, as well as consolidated data processing envisioned from the 
Plan.\2877\ However, the Commission noted that it is aware that the 
Plan calls for a period of years during which Industry Members would 
face duplicative reporting systems before older regulatory data 
reporting systems are retired.\2878\ This period of duplicative 
reporting would impose a considerable financial burden on Industry 
Members.\2879\
---------------------------------------------------------------------------

    \2876\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(C) (discussing benefits of CAT to broker-dealers).
    \2877\ Id. at Appendix C, Section B.8(b).
    \2878\ Id. at Appendix C, Section B.9.
    \2879\ See Section VI.F.2, supra, for a discussion of 
duplicative reporting and whether broker-dealers would pass costs on 
to investors.
---------------------------------------------------------------------------

    The Plan also discussed two other possible efficiency improvements: 
A reduction in ad-hoc data requests and more fulsome access to raw 
data. While the Plan anticipated a decrease in ad-hoc data requests as 
a result of Plan-related data improvements, the Commission noted some 
types of ad-hoc data requests, such as, data requests for later-stage 
investigations might increase.\2880\ The Commission recognized that 
these increases in data requests would partially offset the efficiency 
improvements from the reduction in data requests noted above, but the 
Commission preliminarily believed that the Plan would reduce the total 
number of data requests.\2881\ Furthermore, the Plan anticipated more 
robust access to unprocessed regulatory data, which could improve the 
efficiency with which SROs and the Commission could respond to market 
events where they previously had to submit data requests and wait for 
data validation procedures to be completed before accessing data 
collected by other regulators.\2882\
---------------------------------------------------------------------------

    \2880\ Examples of data requests for later-stage investigations 
could include commissions paid or locate identifiers.
    \2881\ The Commission acknowledged that this decrease in total 
number of data requests may be partially offset by an increase in 
the number of investigations in general, because enhanced 
surveillance is likely to detect more potentially violative activity 
that would need to be investigated.
    \2882\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.8(b).
---------------------------------------------------------------------------

    In addition to the potential benefits to efficiency discussed in 
the Plan, the Commission also discussed that CAT may reduce violative 
behavior. Improvements in the efficiency of market surveillance, 
investigations, and enforcement could directly reduce the amount of 
violative behavior by identifying and penalizing market participants 
who violate rules and who would more easily go undetected in the 
current regime. Furthermore, market participants' awareness regarding 
improvements in the efficiency of market surveillance, investigations, 
and enforcement (or perceptions thereof), and the resultant increase in 
the probability of incurring a costly penalty for violative behavior, 
could deter violative behavior.\2883\ Reductions in

[[Page 84891]]

violative behavior through both of these economic channels could 
improve market efficiency.\2884\
---------------------------------------------------------------------------

    \2883\ See, e.g., Schelling, Thomas, ``The Strategy of Conflict: 
Prospectus for a Reorientation of Game Theory,'' Journal of Conflict 
Resolution, Vol. 2 No. 3 (1958); Ellsberg, Daniel, ``The Crude 
Analysis of Strategic Choices,'' American Economic Review, Vol. 51, 
No. 2 (1961).
    \2884\ The implicit assumption here is that violative behavior 
receives diminishing marginal gains and generates increasing 
marginal harm. See, e.g., Becker, Gary and William Landes, ``Essays 
in the Economics of Crime and Punishment,'' Columbia University 
Press (1974).
---------------------------------------------------------------------------

    The Commission received a comment on the cost estimates of the CAT 
NMS Plan and its effects on increasing the efficiency of surveillance 
activities. The commenter agreed with the Commission's findings that 
the estimate of total implementation cost was accurate, however, the 
commenter stated that it is implausible that CAT would reduce 
surveillance costs by more than 40% while simultaneously improving the 
effectiveness of surveillance.\2885\
---------------------------------------------------------------------------

    \2885\ Data Boiler Letter at 38.
---------------------------------------------------------------------------

    The Commission also received a comment on whether the CAT NMS Plan 
would increase the efficiency in detecting rule violations and 
subsequent gains to market efficiency due to the reduction in violative 
behavior.\2886\ The commenter disagreed with the Commission's analysis 
of the Plan's effect on market efficiency due to the reductions in 
violative behavior, arguing that effectively and efficiently deterring 
violative behavior should be done by using a system other than the CAT, 
preferably the commenter's proposed system which involves the use of 
real-time analytics.\2887\
---------------------------------------------------------------------------

    \2886\ Data Boiler Letter at 10, 35.
    \2887\ Data Boiler Letter at 10-13, 33, 38.
---------------------------------------------------------------------------

    The Commission also received numerous comments on whether the 
retirement of duplicative reporting systems and the reduction in ad-hoc 
data requests would generate gains to efficiency. One commenter 
disagreed with the Commission's analysis of the effect of the Plan on 
the reduction in duplicative reporting and ad-hoc requests.\2888\ Three 
commenters indicated that the period of duplicative reporting could 
also reduce the expected benefits of CAT.\2889\ One of these commenters 
suggested that the Plan's timeline for the retirement of duplicative 
reporting does not provide the SROs with sufficient incentives to 
migrate surveillances to CAT, implying that there could be a reduction 
in the efficiency of surveillance.\2890\ Another commenter emphasized 
the inherent complexities of dual reporting, and the impact that this 
would have on the efficiency and effectiveness of reporting during this 
period.\2891\
---------------------------------------------------------------------------

    \2888\ Data Boiler Letter at 38-39.
    \2889\ FIF Letter at 29-30; SIFMA Letter at 5; DAG Letter at 2.
    \2890\ SIFMA Letter at 5.
    \2891\ FIF Letter at 30.
---------------------------------------------------------------------------

    While the Participants did not directly respond to comments 
regarding efficiency, they did state that they expect cost savings as a 
result of moving surveillance operations from existing systems to the 
CAT.\2892\
---------------------------------------------------------------------------

    \2892\ Response Letter II at 16.
---------------------------------------------------------------------------

    The Commission considered these comments, the Participants' 
response, and modifications to the Plan, and is revising its analysis 
of the inefficiencies associated with duplicative reporting. The 
Commission is not revising its analysis or conclusions with regard to 
other aspects of efficiency.
    First, the Commission disagrees with the commenter who raised 
concerns about the surveillance cost estimates. As discussed above, all 
19 SROs \2893\ responded to the Participants Study regarding cost 
estimates, and most SROs have experience collecting audit trail data as 
well as expertise in their business practices. Furthermore, the 
commenter provided no reasoning or estimates to indicate that the 
Participants are unable to reasonably estimate their current data 
reporting costs, and the Participants' Response Letter II confirms the 
anticipated cost savings described in the Notice. Therefore, the 
Commission continues to believe that the cost estimates in the Notice 
are accurate, and that the CAT NMS Plan would improve the efficiency of 
surveillance by fostering increased surveillance capacity; improved 
system speed, which would result in more efficient data analysis; and a 
reduction in surveillance downtime.\2894\
---------------------------------------------------------------------------

    \2893\ At the time of the Participants Study, there were 19 
SROs. All responded to the study. See Section V.F.1.b, supra for 
discussion of the Participants Study and changes to cost estimates 
to account for additional Participants.
    \2894\ See supra note 2873.
---------------------------------------------------------------------------

    Second, the Commission disagrees with the commenter that stated 
that the CAT Plan would not improve market efficiency due to reductions 
in violative behavior, and that the Plan should adopt real-time 
analytics. The Commission continues to believe that real-time analytics 
are not necessarily required to reduce violative behavior. Analysis of 
raw data on T+1 and corrected data after T+3 can reveal violative 
activity nonetheless.
    Third, regarding the commenter who seems to imply that the 
Commission attributes savings in surveillance costs solely to the 
reduction in ad-hoc data requests, which is not the case. As discussed 
in the Notice, the Commission believes that it is possible that 
Participants and the Commission could realize efficiencies from having 
data standardized and centrally hosted that could allow them to handle 
fewer ad hoc data requests. In addition, the Plan could allow 
Participants and the Commission to automate some surveillance processes 
that may currently be labor intensive or processed on legacy systems, 
which could reduce costs because the primary driver of these costs is 
FTE costs.\2895\
---------------------------------------------------------------------------

    \2895\ See Notice, supra note 5, at 30711.
---------------------------------------------------------------------------

    The Commission agrees with the commenters that suggested that the 
period of duplicative reporting could be associated with reduced 
benefits from the Plan. In particular, the Commission now acknowledges 
that in addition to involving significant costs, the period of 
duplicative reporting would be associated with reduced benefits in the 
form of potentially lower data quality and potential loss of efficiency 
and effectiveness of reporting in the short-term. Examples of losses in 
efficiency could include conflicting field definitions in CAT and OATS; 
differences in required corrections to the same errors across two 
different systems; and contention for the same reporting resources 
applied across two or more systems.\2896\
---------------------------------------------------------------------------

    \2896\ FIF Letter at 30.
---------------------------------------------------------------------------

    Regarding the comment that SROs lack incentives to retire 
duplicative reporting systems, the Commission notes that the 
requirement that SROs implement surveillance using the Central 
Repository within 14 months of the Effective Date limits the incentives 
for the SROs to delay retiring duplicative systems because they will 
gain the capability of performing surveillance within CAT. However, the 
Commission acknowledges that small Industry Members will not yet be 
reporting to the Central Repository when the SROs gain this capacity. 
Consequently, SROs will by necessity be performing surveillance on data 
other than CAT Data until small Industry Members are reporting to the 
Central Repository and their CAT Data quality allows adequate 
surveillance using CAT Data. As discussed in Participants' Response 
Letter II, as the Participants face significant costs in running 
duplicative systems, and to the extent that such systems are extraneous 
for regulatory purposes, the Participants would desire to cease their 
operation.\2897\ Consequently, the Commission believes the SROs are 
incented to retire these duplicative systems and move surveillance 
solely to

[[Page 84892]]

the Central Repository as quickly as feasible.
---------------------------------------------------------------------------

    \2897\ Response Letter II at 20.
---------------------------------------------------------------------------

    After considering these comments and responses from the 
Participants, potential changes in the Plan, the Commission has updated 
its analysis of the effects of duplicative reporting on efficiency. 
First, the Commission has updated its estimate of the expected 
duplicative reporting period and now believes that it is likely to be 
shorter than estimated in the Notice.\2898\ This would potentially 
result in the Commission and SROs realizing gains to efficiency earlier 
than what was stated in the Notice. Second, as discussed previously, 
the Commission now acknowledges that duplicative reporting may not 
result in efficiencies with duplicative reporting costs of less than 
$1.7 billion.\2899\ Furthermore, the Commission now believes that the 
period of duplicative reporting may create inefficiencies, such as 
contention for the same reporting resources to correct errors across 
two different systems, and that might reduce the quality of data being 
reporting to CAT during the period of duplicative reporting.\2900\ 
Regardless of the loss in efficiency due to duplicative reporting, the 
Commission nonetheless believes that the Plan will result in long-term 
gains to efficiency for the reasons stated earlier in this Section.
---------------------------------------------------------------------------

    \2898\ See Section V.F.2.b, supra.
    \2899\ Id.
    \2900\ See supra note 2896.
---------------------------------------------------------------------------

b. Effects of Certain Costs of the Plan on Efficiency
    In the Notice, the Commission discussed the fact that the Plan 
anticipated that the implementation of CAT will introduce new costs 
related to data mapping and data dictionary creation, and add new 
expenditures, such as staff time for compliance with encryption 
requirements associated with the transmission of PII.\2901\ While the 
Commission recognized these are additional activities and costs that 
the Plan would require, it viewed these as additional costs rather than 
inefficiencies. While the Commission could not quantify the magnitude 
of these costs, it viewed these as having a relatively minor 
contribution to overall costs of the Plan because they impose technical 
requirements on systems that the industry will need to significantly 
alter to comply with other provisions in the Plan.\2902\ Commenters did 
not provide any additional information or analysis that the Commission 
believes would warrant changes to its analysis or conclusions regarding 
these costs and therefore continues to view these as costs rather than 
inefficiencies
---------------------------------------------------------------------------

    \2901\ See Notice, supra note 5, at 30748.
    \2902\ See Section VI.G.2.a, supra.
---------------------------------------------------------------------------

    Additionally, the Commission discussed the Plan's statement that 
there could be a market inefficiency effect related to the funding 
proposal for the Plan. The Plan indicated that the Funding Model for 
the Plan could create disincentives for the provision of liquidity, 
which could impair market quality and increase the costs to investors 
to transact.\2903\ The Commission discussed in the Notice two ways that 
the cost allocation methodology could negatively impact efficiency. 
First, data reporters could respond to the Funding Model by taking 
actions to limit their fee payments, such as exiting the market or 
reducing their activity levels. Second, the funding proposal for the 
CAT NMS Plan to align fees closely with the amounts that are required 
to cover costs could create incentives for the Plan Processor or 
Operating Committee to propose a cost schedule for the CAT that matches 
a given fee schedule, but is not the most efficient cost schedule for 
meeting CAT's regulatory objectives.
---------------------------------------------------------------------------

    \2903\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.8(b).
---------------------------------------------------------------------------

    The Commission received a comment about the concerns the funding 
proposal in the Plan poses for liquidity provision.\2904\ This comment 
echoed the concerns the Commission discussed in the Notice. The 
Participants responded to this comment and noted that they actively 
considered the market quality concerns in devising the proposed funding 
model, and one of the reasons for proposing a tiered, fixed fee funding 
model was to limit the disincentives to providing liquidity to the 
market. In particular, the Participants believed that a funding model 
based on message volume was far more likely to affect market 
behavior.\2905\
---------------------------------------------------------------------------

    \2904\ SIFMA Letter at 16-17.
    \2905\ Response Letter II at 16.
---------------------------------------------------------------------------

    In response to this comment, the Commission notes that it is 
amending the Plan to require the Participants to provide the Commission 
with a report on the impact of tiered-fees on market liquidity, 
including an analysis of the impact of the tiered-fee structure on 
Industry Members' provision of liquidity 36 months after effectiveness 
of the Plan.\2906\ While the Commission continues to recognize that 
negative effects on efficiency could result from the Funding Model, for 
the reasons discussed in Section IV.F above, the Commission is 
approving the Funding Model as amended by the Commission.\2907\
---------------------------------------------------------------------------

    \2906\ See Section IV.F.3., supra.
    \2907\ See Section IV.F, supra.
---------------------------------------------------------------------------

3. Capital Formation
a. Enhanced Investor Protection
    In the Notice, the Commission examined the potential effects on 
capital formation discussed in the Plan in addition to other potential 
effects on capital formation that the Commission believed could result 
if the Plan is approved.\2908\ The Plan's analysis regarding capital 
formation concluded that the Plan would generally not have a 
deleterious effect on capital formation and could bolster capital 
formation that could lead to increased investor participation in 
capital markets. The Commission agreed with the rationale of the Plan's 
analysis, but addressed some additional considerations regarding the 
scope of the Plan's effects on capital formation, as well as the 
channels through which these effects could accrue. The Commission 
preliminarily believed that the Plan would have a modest positive 
effect on capital formation.\2909\
---------------------------------------------------------------------------

    \2908\ See Notice, supra note 5, at 30748-49.
    \2909\ Id. at 30748-50.
---------------------------------------------------------------------------

    The Plan's analysis stated that the Plan may improve capital 
formation by improving investor confidence in the market due to 
improvements in surveillance. As discussed previously,\2910\ in the 
Notice the Commission discussed its preliminary belief that the Plan 
would provide substantial enhancements to investor protection through 
improvements to surveillance, particularly for cross-market 
trading.\2911\ Improved surveillance, as well as other regulatory 
activities, could decrease the rate of violative activity in the 
market, reducing investor losses due to violative activity. If 
investors expect fewer losses, this may increase capital formation by 
facilitating a market where investors could be more likely to mobilize 
capital into securities markets.
---------------------------------------------------------------------------

    \2910\ See Notice, supra note 5, at Section IV.E.2.c(1); see 
also CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(ii)(B)(1)-(2), B.7(b)(iii)(C).
    \2911\ FINRA currently provides cross-market surveillance, but 
limitations in the data (e.g., reliable cross-market linkages, 
customer identification, parent order identification) limit the 
scope and reliability of this surveillance.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed its preliminary belief that 
the CAT NMS Plan could provide additional increases to capital 
formation in the form of improved allocative efficiency of existing 
capital within the industry. If investors perceive an environment of 
improved surveillance,

[[Page 84893]]

they could be willing to allocate additional capital to liquidity 
provision or other activities that increase market efficiency. Further, 
an environment of improved surveillance could result in the reduction 
of capital allocated to violative activities that impose costs on other 
market participants, because these market participants may no longer 
find it desirable to engage in behavior that exposes them to regulatory 
action.
    The Commission explained, however, that market participants 
engaging in allowable activity that might be subject to additional 
regulatory scrutiny under the Plan could allocate capital to other 
activities to avoid this scrutiny, because even when activity is not 
violative, interacting with regulators can be costly for market 
participants.\2912\ This reallocation away from allowable activity to 
avoid regulatory interactions could result in capital allocations that 
are less efficient.
---------------------------------------------------------------------------

    \2912\ See Section V.E.2.c., supra, for a discussion of the 
potential for the efficiencies in surveillance, examinations, and 
investigations to increase the number of regulatory actions, 
including investigations of conduct that turns out not to violate 
laws or regulations.
---------------------------------------------------------------------------

    The Plan stated that the costs from CAT are unlikely to deter 
investor participation in the capital markets.\2913\ The Commission 
noted, however, that the final costs of the Plan and the Funding Model 
for CAT are not wholly certain at this time; thus, it is the 
Commission's view that there is uncertainty concerning the extent to 
which investors will bear Plan costs and consequently to what extent 
Plan costs could affect investors' allocation of capital. Despite these 
potential costs to investors, the Commission noted that investors could 
believe that any additional benefits they receive from the potential of 
a market that is more effectively regulated justify any additional 
costs they pay to access capital markets.
---------------------------------------------------------------------------

    \2913\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.8(c).
---------------------------------------------------------------------------

    The Commission received several comments on whether the Plan would 
improve capital formation through investor protection against abusive 
behavior, and by fostering investor participation. One commenter stated 
that the Commission needs the CAT Plan not only to understand 
breakdowns in trading markets, but also to rid the markets of 
increasingly abusive trading practices. Doing this will protect 
investors, and foster investor participation, thereby fueling capital 
formation.\2914\ Another commenter disagreed with the Commission's 
analysis and concluded that the Plan could adversely impact investors' 
trust in the markets because the Plan lacks connection with real-world 
problems (i.e., huge investment losses can be accumulated within a 
split-second; market collapse does not take more than one day; abusive 
use of financial engineering techniques to synthetically create trades/
derivatives to bypass controls).\2915\
---------------------------------------------------------------------------

    \2914\ Better Markets Letter at 3.
    \2915\ Data Boiler Letter at 39.
---------------------------------------------------------------------------

    In response to the commenter who mentioned that the Commission 
needs the CAT Plan to not only understand breakdowns in trading 
markets, but also rid the markets of abusive trading practices, the 
Commission has noted previously that CAT Data would help regulators 
with analysis and reconstruction of market events, and also help 
regulators identify violative behavior and abusive trading through 
their enforcement investigations.\2916\
---------------------------------------------------------------------------

    \2916\ See Section V.E.2.c(1), supra; Section V.E.2.c(3), supra.
---------------------------------------------------------------------------

    The Commission also disagrees with the commenter who concluded that 
the Plan could adversely impact investors' trust in the markets because 
the Plan lacks a connection with ``real-world problems.'' The 
Commission believes the Plan has a connection with these ``real-world 
problems'' because as stated above, CAT Data would help regulators 
analyze and reconstruct markets,\2917\ thereby helping them understand 
how split-second losses accumulate to investors and the underpinnings 
of market collapses. CAT Data would also help regulators with 
surveillance and investigation activities,\2918\ and potentially help 
them to understand the abusive use of financial engineering techniques. 
The Commission therefore believes that the benefits that CAT Data would 
provide regulators would also provide benefits to investors of a safer 
environment for allocating their capital and making financial 
decisions.
---------------------------------------------------------------------------

    \2917\ See Section V.E.2.a., supra.
    \2918\ See Section V.E.2.c., supra.
---------------------------------------------------------------------------

    Moreover, the changes to the Plan further support the Commission's 
preliminary conclusions. Requiring Industry Members to report their LEI 
to the Central Repository if they have one should result in a greater 
ability for regulators to identify traders based on their Customer-IDs 
for the purposes of SRO surveillance. Potentially improved data 
completeness in terms of Customer-IDs could result in greater benefits 
to surveillance that would spillover to capital formation than stated 
in the Notice.
b. Data Security
    In the Notice, the Commission agreed with the Plan's assessment 
that data security concerns are unlikely to materially affect capital 
formation.\2919\ In its discussion of capital formation, the Plan 
recognized that data security concerns could potentially impact capital 
formation through market participants' perception that sensitive 
proprietary data might be vulnerable in case of a data breach at the 
Central Repository. The Plan's analysis discussed the security measures 
that are required by Rule 613 and the manner in which they have been 
implemented in the Plan. It concluded that these security measures are 
sufficient and that it is unlikely market participants would reduce 
their participation in markets in a manner that would affect capital 
formation. The Commission agreed that concerns regarding data security 
are unlikely to substantially affect capital formation, but that some 
uncertainty about the risks exist because of the variations in the 
potential security solutions and their resulting effectiveness.\2920\
---------------------------------------------------------------------------

    \2919\ See Notice, supra note 5, at 30749-50.
    \2920\ Id. at 30749.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed how the consequences of a 
data breach, nonetheless, could be quite severe. A data breach could 
substantially harm market participants by exposing proprietary 
information, such as a proprietary trading strategy or the existence of 
a significant business relationship with either a counterparty or 
client. The Commission noted, however, that broker-dealers already bear 
such risks in transmitting regulatory data to SROs and the Commission. 
The Commission believed that the marginal increase in the risks to 
broker-dealers associated with a data breach would be unlikely to deter 
broker-dealers from participating in markets. Finally, the Commission 
noted that a data breach could potentially reveal PII of investors. To 
address the potential for harm to the investing public and the health 
of capital markets through such a breach, the Plan has enhanced 
requirements for security around PII. The Commission believed that the 
risk of a breach of PII data would not materially affect investors' 
willingness to participate in markets because they already face these 
risks with PII shared with broker-dealers, though not in one 
centralized location.
    Several commenters wrote about data security, and the comments are 
summarized above in Section IV.D.6. Only one commenter discussed the

[[Page 84894]]

effects of data security on capital formation. That commenter asserted 
that ``[i]f investors perceive that the CAT NMS plan leaves their 
trading strategies and position information vulnerable to discovery and 
predatory use, interest in equity investing may decrease to the 
detriment of liquidity and, ultimately, capital formation.'' \2921\ The 
Commission agrees that investors are sensitive to the protection of 
their data. The Plan amendments and Participants' responses to comments 
provide more details about the required security provisions and more 
clarity on the applicability of Regulation SCI standards. The 
Commission believes that these changes should increase the security of 
CAT Data, and that concerns regarding data security are unlikely to 
affect capital formation substantially even though there may still be 
uncertainty regarding potential security solutions and their 
effectiveness.\2922\
---------------------------------------------------------------------------

    \2921\ ICI Letter at 3.
    \2922\ See Notice, supra note 5, at 30749.
---------------------------------------------------------------------------

4. Related Considerations Affecting Competition, Efficiency and Capital 
Formation
    The Commission in the Notice recognized that the Plan's likely 
effects on competition, efficiency, and capital formation are dependent 
to some extent on the performance and decisions of the Plan Processor 
and the Operating Committee in implementing the Plan, and thus that 
there is necessarily some uncertainty in the Commission's 
analysis.\2923\ The Commission noted that nonetheless, it believed that 
the Plan contains certain governance provisions, as well as provisions 
relating to the selection and removal of the Plan Processor, that 
mitigate this uncertainty by promoting decision-making that could, on 
balance, have positive effects on competition, efficiency, and capital 
formation.\2924\
---------------------------------------------------------------------------

    \2923\ See Notice, supra note 5, at 30750; see also the 
discussion of the CAT governance structure in Notice, supra note 5, 
at Section IV.E.4.d, supra.
    \2924\ See Notice, supra note 5, at 30750.
---------------------------------------------------------------------------

a. The Efficiency of the Plan
(1) Plan Decision-Making Process
    The Commission in the Notice stated its preliminary belief that 
certain governance provisions in the Plan could create inefficiencies 
in the decision-making process, but that these inefficiencies are 
limited or exist to promote better decision-making.\2925\ Specifically, 
the Notice stated that the Plan specified three types of voting 
protocols and when each protocol applies: Unanimous voting (only in 
three circumstances), supermajority voting (in instances considered by 
the Participants to have a direct and significant impact on the 
functioning, management, and financing of the CAT system), or majority 
voting (other, routine matters that arise in the ordinary course of 
business; as a practical matter the default standard).\2926\ The 
Commission discussed how the Plan's voting protocols balanced the 
efficiency of the decision-making process against the value of 
considering minority and dissenting opinions. Furthermore, the 
Commission stated its preliminary agreement with the Plan's discussion 
of the need to balance efficiency in the voting protocols in the Plan 
and the Participants' conclusion that the inefficiencies in the voting 
protocols in the Plan are limited enough to strike a balance between 
the inefficiencies of the decision-making process and the quality of 
the decisions.\2927\
---------------------------------------------------------------------------

    \2925\ Id.
    \2926\ Id.
    \2927\ Id. at 30750-51.
---------------------------------------------------------------------------

    The Commission further noted that the Plan discusses the role of 
industry representation as part of the governance structure.\2928\ The 
Commission preliminarily agreed with the discussion in the Plan that 
including industry representation might result in a more efficiently 
designed CAT, but that an Advisory Committee also adds operational 
inefficiencies.\2929\ The Commission further stated its preliminary 
belief that as long as the Advisory Committee adds sufficiently useful 
information, the benefits from the Advisory Committee would justify any 
operational inefficiencies from the inclusion of the Advisory 
Committee.\2930\
---------------------------------------------------------------------------

    \2928\ Id. at 30751.
    \2929\ Id.
    \2930\ Id.
---------------------------------------------------------------------------

    The Commission is not revising its analysis of the efficiency of 
the Plan's decision-making process at this time. As discussed above, 
commenters provided information on concerns about current NMS Plan 
governance and made suggestions on how to more effectively include the 
Advisory Committee in decisions.\2931\ However, these commenters did 
not provide new insights into the efficiency of the decision-making 
process itself. As noted above, changes to plan governance to provide 
greater prominence to certain views could improve plan decision-making, 
to the extent that better-informed decisions would be superior 
decisions; on the other hand, larger or more diverse sets of voices 
could result in deadlocked or delayed decisions, which would impede the 
efficiency of the decision-making process under the CAT Plan. However, 
as noted above, the Commission is considering changes more broadly to 
NMS Plan governance, and any such changes may impact the CAT NMS 
Plan.\2932\
---------------------------------------------------------------------------

    \2931\ See Section V.E.3.d(2)B, supra.
    \2932\ Id.
---------------------------------------------------------------------------

(2) Level of Detail in the Plan
    The Commission in the Notice also considered an additional source 
of potential inefficiencies: Minimum standards for particular 
provisions or solutions in Appendix D of the Plan, rather than a 
specification of the solutions themselves in the Plan.\2933\ The 
Commission stated that while this approach creates uncertainties 
surrounding the economic effects of the Plan in the approval process, 
it also means that the Operating Committee and/or Selection Committee 
would effectively decide upon the unspecified details when selecting 
the Plan Processor and when approving the Technical Specifications, and 
as a result could act much more quickly and at a potentially lower cost 
than if solutions were specified in the Plan.\2934\ In addition, the 
Commission explained why specifying details in the Technical 
Specifications instead of the Plan could make the Plan more agile and 
efficient in its ability to upgrade and improve the CAT Systems 
quickly.
---------------------------------------------------------------------------

    \2933\ See Notice, supra note 5, at 30751
    \2934\ Id.
---------------------------------------------------------------------------

    Several commenters sought to have certain definitions included in 
the Plan.\2935\ Two commenters sought to have the Plan amended to 
specify certain of the Technical Specifications.\2936\ Participants 
commented that incorporating Technical Specifications in the Plan 
itself would interfere with the development of these specifications by 
the Plan Processor, and that these items are better suited for the 
Technical Specifications than the Plan.\2937\ In a similar context, 
Participants also stated that subjecting Technical Specifications to a 
full filing process with the Commission would introduce significant 
delays in the process of developing the Technical Specifications, but 
that matters that are sufficiently significant to require a

[[Page 84895]]

change to the Plan would be subjected to Commission review.\2938\
---------------------------------------------------------------------------

    \2935\ TR Letter at 9-10; FIF Letter at 95-96; SIFMA Letter at 
6.
    \2936\ TR Letter at 5; UnaVista Letter at 2; see also Bloomberg 
Letter at 6-7 (recommending that Section 6.3 of the Plan be amended 
to specify the use of a uniform, global, open, multi-asset 
identifier; suggesting one such identifier developed by the 
commenter).
    \2937\ Response Letter I at 40.
    \2938\ Id. at 42.
---------------------------------------------------------------------------

    The Commission believes that commenters' requests that certain 
items be defined in the Plan are an implicit assertion that the Plan 
strikes the wrong balance with respect to the tradeoff identified in 
the Notice. In the Notice, the Commission was willing to accept the 
uncertainty created through the lack of definitions, in exchange for 
the benefits of permitting the relevant parties the flexibility to 
adopt the definitions or technical specifications at a later date, when 
the optimal approach to those issues might be more apparent, along with 
the flexibility to readily make changes to those items if challenges 
arise. By requesting that definitions or technical specifications be 
moved to the Plan, commenters advocate the opposite position: That it 
is acceptable to risk an inefficient definition in the Technical 
Specifications now, or to encounter delay or difficulty in changing it 
later, in exchange for added certainty in the definition or 
specifications as a part of the Plan approval process. The Commission 
disagrees. Given the technical nature of the technical specifications, 
and that the Plan does specify certain minimum standards that provide a 
floor and therefore certainty with respect to at least certain of the 
definitions and specifications, the Commission continues to believe 
that the existing process appropriately balances the need for certainty 
with the benefits of a flexible process going forward.
(3) Implementation Efficiency
    In the Notice, the Commission recognized that provisions of the 
Plan should also promote efficiently implementing expansions to the CAT 
Data.\2939\ Appendix C of the Plan notes that the Plan Processor must 
ensure that the Central Repository's technical infrastructure is 
scalable and adaptable.\2940\ The Commission explained that these 
provisions should reduce the costs and time needed for expansions to 
the Central Repository.
---------------------------------------------------------------------------

    \2939\ See Notice, supra note 5, at 30751.
    \2940\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.5(a).
---------------------------------------------------------------------------

    Two commenters provided information relevant for the Commission's 
analysis of the efficiency of the initial implementation of the Plan 
more broadly.\2941\ In particular, the commenters expressed concerns 
that the timeline for implementation, including the testing and 
publication and iterative reviews of the Technical Specifications, 
would not allow for efficient implementation, potentially affecting the 
quality of the data coming to CAT from the beginning of its 
operations.\2942\ One commenter stated that building in additional 
capacity and flexibility to expand CAT further over time will increase 
the scope of efficiencies and ancillary benefits, including long-term 
cost reductions, even if that additional capacity and flexibility are 
not absolutely necessary to meet minimum Plan requirements.\2943\ Other 
commenters asserted that the Plan Processor selection should occur 
before Commission approval of the Plan, because the selection could 
negate a significant amount of uncertainty regarding the ultimate 
effects of the Plan.\2944\
---------------------------------------------------------------------------

    \2941\ SIFMA Letter at 23-24; FIF Letter at 37 (requesting two 
iterative reviews of order data and customer information 
specifications before implementation; noting that the 5 months 
allotted between the production of the customer information 
specification and implementation for large industry members is 
similarly insufficient to permit development and testing of a 
complex new function).
    \2942\ Id. Per one commenter, an aggressive timeline that 
results in ``[r]ushing to achieve artificial milestones established 
without knowledge of the development effort involved, or even the 
full functionality to be delivered, will only result in poorly built 
systems, inferior quality of data reporting, missed and delayed 
schedules and cost overruns, for the Plan Processor, the regulators 
and the broker-dealer community.'' See also FIF Letter at 36.
    \2943\ SIFMA Letter at 5-6. The commenter mentioned that such 
additional capacity and flexibility could be in the form of 
information, products, or functionality.
    \2944\ TR Letter at 4; see also FSR Letter at 10 (recommending 
``acceleration of the Plan Processor selection process'' in order to 
begin moving forward with formulation of technical specifications; 
``the release of final technical specifications should drive the 
implementation timeline'').
---------------------------------------------------------------------------

    Participants responded to the technical specifications point by 
stating that they recognize the benefit of iterative interactions 
between broker-dealers and the Plan Processor in terms of developing 
and executing final system specifications, which is why Appendix C of 
the Plan calls for the publication of iterative drafts, as 
necessary.\2945\ Participants responded to the comments regarding 
acceleration of Plan Processor selection by indicating that it would be 
infeasible to do so from a timing perspective; that the requirements of 
the CAT could change up until the point the Plan is approved, which 
could affect the selection process; and that selection is to be 
performed within two months of Plan effectiveness in any event.\2946\
---------------------------------------------------------------------------

    \2945\ Response Letter I at 41.
    \2946\ Response Letter I at 52.
---------------------------------------------------------------------------

    The Commission considered the comments and the Participants' 
responses and now recognizes that the timeline for implementation can 
affect the efficiency of the initial implementation of the Plan. The 
timeline for implementation in the Plan includes a requirement for the 
Plan Processor to develop the Technical Specifications by publishing 
iterative drafts, as needed, and to publish the Technical 
Specifications one year before Industry Members are required to begin 
reporting data to the Central Repository, and to commence testing of 
connectivity and acceptance three months before Industry Members begin 
reporting data to the Central Repository.\2947\ The Plan has also been 
amended to require that the development of the Technical Specifications 
will begin no later than fifteen months before Industry Member 
reporting commences. Furthermore, the Plan has been amended to require 
that the CAT testing environment will be made available to Industry 
Members on a voluntary basis no later than six months prior to when 
Industry Members are required to report and that more coordinated, 
structured testing of the CAT system will begin no later than three 
months prior to when Industry Members are required to report data to 
CAT.\2948\
---------------------------------------------------------------------------

    \2947\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
C.10.
    \2948\ See Section IV.D.8.a, supra.
---------------------------------------------------------------------------

    The Commission believes that the modification to the Plan requiring 
development of Technical Specifications at least 15 months before 
reporting begins will ensure more advance notice to the Participants 
about specific functionalities of CAT, and that this could potentially 
mitigate inefficiency in the implementation of the Plan. Moreover, 
modifications to the Plan requiring that the CAT testing environment be 
made available to Industry Members before they begin reporting will 
provide additional time for Industry Members to test their reporting 
procedures for the CAT System prior to implementation. They will also 
further mitigate inefficiencies related to the implementation of the 
Plan.\2949\ Further, as explained below, the Commission understands 
that the Bids of the three remaining Bidders propose accepting existing 
messaging protocols (e.g., FIX), rather than requiring CAT Reporters to 
use a new format.\2950\ This reduces some of the uncertainty regarding 
implementation times because CAT Reporters may not

[[Page 84896]]

need to build new systems to report data to the Central Repository.
---------------------------------------------------------------------------

    \2949\ See Section IV.D.8, supra, for further discussion of the 
comments regarding implementation and the Commission's response.
    \2950\ See Section V.H.12.b, supra.
---------------------------------------------------------------------------

    In response to the comment on building in additional capacity and 
flexibilities to expand further over time, the Commission believes that 
this comment is consistent with its analysis in the Notice that 
ensuring that the Central Repository's technical infrastructure is 
scalable and adaptable should reduce the costs and time needed for 
future expansions. Further, the Commission believes that provisions in 
the Plan already address this issue.\2951\
---------------------------------------------------------------------------

    \2951\ See Section IV.D.15, supra, for further discussion of 
scalability of the Plan.
---------------------------------------------------------------------------

    With respect to accelerating the selection of the Plan Processor, 
this could trade one potential inefficiency for another: Whereas there 
could be greater certainty about the effects of the Plan by locking in 
certain choices in advance, locking in those choices could result in 
inefficiencies if modifications to the Plan in the approval process 
change the Plan Processor selection. As inefficiencies in the choice of 
the Plan Processor could persist for the length of the Plan Processor's 
tenure, the Commission believes selecting the Plan Processor a short 
number of months after the approval of the Plan balances the need for 
expeditiously moving forward with implementation choices to provide 
sufficient time for implementation with the need to select the Plan 
Processor best positioned to achieve the regulatory benefits of the 
Plan.
b. Selection and Removal of the Plan Processor
    In the Notice, the Commission discussed the CAT NMS Plan's use of 
an ``RFP'' to select the Plan Processor that would design, build, and 
operate the Central Repository.\2952\ The winning bidder becomes the 
sole supplier of the operation of the Central Repository. The 
Commission stated its preliminary belief that this structure is 
necessary to achieve the benefits of a single consolidated source of 
regulatory data, but that the competitiveness of the selection process 
would thus influence the ultimate economic effect of the Plan.\2953\ 
The Commission further stated its preliminary belief that the selection 
process generally promotes competition, but that there are also a few 
potential limits on competition.\2954\ With respect to the Plan 
Processor's behavior following selection, the Commission stated its 
preliminary belief that the threat of replacement of the Plan Processor 
could incentivize it to set costs and performance competitively, but 
that the high cost of replacing the Plan Processor could limit these 
incentives.\2955\ These are discussed further below.
---------------------------------------------------------------------------

    \2952\ See Notice, supra note 5, at 30751
    \2953\ Id. It would do so because the ``effects depend in large 
part on the efficiency and effectiveness of the Plan Processor.'' 
Id.
    \2954\ Id.
    \2955\ Id. at 30752.
---------------------------------------------------------------------------

(1) Competitiveness of the Plan Processor Selection Process
    In the Notice, the Commission stated its belief that two elements 
determine the competitiveness of the bidding process: The voting 
process and the degree of transparency in the bidding process. The 
Commission discussed its preliminary belief that the Plan provisions 
relevant to these two factors could promote competition in the bidding 
process and limit the risk that the selection of the Plan Processor 
would be affected by a conflict of interest, thereby promoting better 
decision-making.\2956\ Specifically, the Commission noted that, in the 
voting process, there is ``a residual risk in having an SRO among the 
bidders; it is possible that voting Participants would be biased for or 
against that SRO because they compete with that SRO in another market 
(and could gain a competitive advantage in that market by acting as 
Plan Processor) or because of repeated interactions with that SRO.'' 
\2957\ Moreover, the Commission noted that ``to the extent the 
Operating Committee has specific preferred solutions as to how the Plan 
should be implemented, the degree to which the Committee is transparent 
about those preferences in the bidding process would affect the 
competitiveness of that process''--but that ``[t]he Commission has no 
reason to believe that the Operating Committee has preferred solutions 
beyond what is in the Plan that would significantly impact the 
competitiveness of the Plan Processor selection process.'' \2958\
---------------------------------------------------------------------------

    \2956\ Id.
    \2957\ Id.
    \2958\ Id.
---------------------------------------------------------------------------

    One commenter stated that, rather than a competitive process for 
selection of the Plan Processor, the selection of FINRA would best 
promote efficiencies, as it appears to have the required technology 
mostly in place, or can easily adapt existing technology to CAT's 
requirements; it already deals with the CAT Data; and it already 
regulates broker-dealers and ATSs that will submit data to the 
CAT.\2959\ The Participants responded that completing the competitive 
process is most likely to promote an innovative and efficient CAT 
solution.\2960\
---------------------------------------------------------------------------

    \2959\ Anonymous Letter I at 1, 19-20.
    \2960\ Response Letter I at 52.
---------------------------------------------------------------------------

    In the Commission's view, a competitive process for the selection 
of the Plan Processor is most likely to lead to the best outcome for 
the CAT. The commenter has raised a number of reasons why FINRA's bid 
may be the most persuasive. However, different approaches embodied in 
different bids would be expected to embody different tradeoffs. These 
tradeoffs can be considered as part of a competitive bidding process, 
with the best bid chosen in the end. The Commission believes that 
completing the competitive bidding process is most likely to result in 
a CAT system that best balances cost, benefits, and efficiencies.
(2) Competitive Incentives of the Selected Plan Processor
    In the Notice, the Commission discussed how the Plan could create 
competitive incentives for the selected Plan Processor by detailing 
strong requirements for the Plan Processor and providing an efficient 
mechanism to remove the selected Plan Processor and introduce an 
alternative Plan Processor in the event of underperformance. Here, the 
Commission stated its preliminary belief that the Plan provides the 
selected Plan Processor with competitive incentives because the Plan 
contains defined procedures for monitoring and removing the Plan 
Processor for failure to perform functions or otherwise. While removal 
for performance that is not ``reasonably acceptable'' is by Majority 
Vote of the Operating Committee, assessing the Plan Processor's 
performance and demonstrating failings may be difficult; if that 
standard is not met, then removal is by Supermajority Vote, which may 
be more challenging to attain. The degree of difficulty of removal thus 
could limit the Plan Processor's competitive incentives. Similarly, the 
potentially extensive costs of switching to another Plan Processor 
(including selection of a new Plan Processor, which could potentially 
require rebuilding the Central Repository and implementation of new 
Technical Specifications) could limit competitive incentives.\2961\
---------------------------------------------------------------------------

    \2961\ See Notice, supra note 5, at 30752-53. Specifically, with 
regard to removal, the Commission noted that ``[t]he Plan contains 
several provisions that would allow the Operating Committee to 
remove the Plan Processor''--including in specified circumstances by 
``only a Majority Vote'' which ``incentivizes the Plan Processor to 
perform well enough to avoid being removed'' but that it ``depend[s] 
significantly on strong oversight by the Operating Committee.'' Id. 
at 30753. However, the Commission also noted that it ``recognizes 
that the effort required to remove a Plan Processor could be 
significant'' and that ``significant switching costs could influence 
whether removing a Plan Processor despite poor performance makes 
economic sense''--such that ``the Plan Processor may only need to 
perform well enough to keep the inefficiencies associated with their 
performance from exceeding the cost to switch to another Plan 
Processor.'' Id.

---------------------------------------------------------------------------

[[Page 84897]]

    One commenter expressed a view that the continuing incentives of 
the Plan Processor are a legitimate concern, and that the contract with 
the Plan Processor should be rebid every 5 years, because it would 
``prevent the stagnation of the CAT system and encourage innovation'' 
and ``force the SEC to re-evaluate the performance of the system and 
the Plan Processor at least periodically, with the benefit of public 
input.'' \2962\ The Participants responded by asserting that the 
Operating Committee will be reviewing Plan Processor performance, and 
may remove the Plan Processor by Supermajority Vote at any time, or by 
a Majority Vote where the Plan Processor has failed to reasonably 
perform its obligations.\2963\
---------------------------------------------------------------------------

    \2962\ Better Markets Letter at 7.
    \2963\ Response Letter I at 52.
---------------------------------------------------------------------------

    The Commission has considered the views of the commenter on the 
competitive incentives of the Plan Processor and continues to believe 
that the Plan provides competitive incentives to control costs and 
promote the performance of the Plan. The commenter did not provide any 
additional information or analysis that the Commission believes would 
warrant changes to its analysis, nor does the Commission believe that 
the modifications to the Plan warrant changes to this aspect of the 
economic analysis. With respect to the comment that suggested rebidding 
every 5 years, the Commission agrees that a rebidding process after 
some period of time could provide a focal point for determining whether 
other technologies or other entities could be preferable to the 
incumbent Plan Processor. However, the existing provisions for removing 
a Plan Processor in the event of underperformance, and the existing 
authority of the Commission to oversee the CAT NMS Plan, already 
provide some incentives for continuous CAT innovation and cost 
reductions. Moreover, a bidding process is not a costless exercise; it 
requires hundreds or thousands of hours of work on the part of bidders 
to prepare and submit bids, and Plan Participants to review bids. 
Additionally, it is not clear whether the rebidding process sought by 
the commenter would consider the costs to switch as part of the 
incumbent's bid (in which case it would significantly advantage the 
incumbent), or would consider bids without reference to incumbency 
(which could result in the imposition of inefficient costs if the 
benefits of the new Plan Processor do not exceed the costs to switch).

H. Alternatives

    As part of its economic analysis, the Commission has considered the 
likely economic effects of a number of alternatives to the approaches 
taken in the CAT NMS Plan as amended. In the Notice, the Commission 
analyzed alternatives that could have a direct and significant impact 
on costs or benefits deriving from at least one of the four data 
qualities discussed above: Accuracy, completeness, accessibility, and 
timeliness.\2964\
---------------------------------------------------------------------------

    \2964\ See Notice, supra note 5, at 30754-76.
---------------------------------------------------------------------------

    The Commission has considered the comments received on the 
alternatives discussed in the Notice, and continues to believe that the 
likely economic effects of the alternatives will be consistent with the 
preliminary conclusions set out therein, except where noted 
below.\2965\ In several instances, the Commission did not receive any 
comments that disagreed with its analysis of the likely costs and 
benefits of a particular alternative, and the approach taken in the 
Plan with respect to these alternatives is consistent with the 
Commission's analysis. Where that is the case, the Commission has not 
discussed the alternative in this Order, and instead relies on the 
analysis in the Notice. These alternatives include: Requiring both 
Options Market Makers and Options Exchanges to report Options Market 
Maker quotations to the Central Repository; requiring CAT Reporters to 
report a unique Customer-ID for each Customer upon the original receipt 
or origination of an order; requiring CAT Reporters to report a 
universal CAT-Reporter-ID to the Central Repository for orders and 
certain Reportable Events; excluding the requirement to report 
Customer-IDs; excluding the requirement to report CAT-Reporter-IDs when 
a routed order is received; alternative intake capacity levels; data 
accessibility standards, and the exclusion of OTC Equity Securities.
---------------------------------------------------------------------------

    \2965\ Id.
---------------------------------------------------------------------------

    Where commenters disagreed with Commission with respect to its 
analysis of an alternative approach, the Commission discusses the 
comments below and considers whether any changes are warranted to the 
Commission's analysis and conclusions. Where commenters agreed with the 
Commission's analysis, but the Plan's approach differs in some respect 
from the approach discussed by the Commission and the commenters, the 
Commission summarizes its analysis and the comments received, below. 
Where a Plan modification supersedes the alternatives discussed in the 
Notice, the Commission considers comments on those alternatives in the 
discussion of the costs and benefits of the Plan, above.
    The Commission notes that some commenters also raised reasonable 
potential alternatives not discussed by the Commission in the Notice. 
If the Plan modifications do not incorporate the suggestions and the 
comment does not provide sufficient information for a fulsome economic 
analysis, the Commission responds to those comments above in the 
Discussion Section. If Plan modifications incorporate those 
suggestions, the Commission discusses the updates to its economic 
analysis to recognize the modification in the discussion of the costs 
and benefits of the Plan, above, and considers the points made by 
commenters therein.\2966\ If the Plan modifications do not incorporate 
the suggestions and the comment does provide sufficient information for 
an analysis of the economic effects of the alternative, the Commission 
discusses the alternative below.
---------------------------------------------------------------------------

    \2966\ See Section IV., supra.
---------------------------------------------------------------------------

1. Timestamp Granularity
    In the Notice, the Commission solicited comment on the benefits and 
costs of an alternative timestamp granularity requirement of less than 
one millisecond.\2967\ The Commission's preliminary analysis of 
alternative clock offset tolerance requirements suggested that 
millisecond timestamps may be inadequate to allow sequencing of the 
majority of unrelated Reportable Events across markets.\2968\ In 
addition, the Commission recognized that sub-millisecond timestamp 
reporting would bring certain benefits, but the benefits would be 
limited unless the Plan were to require a clock offset tolerance far 
lower than is proposed in the Plan. The Commission also recognized that 
implementation costs of sub-millisecond timestamps would likely vary 
across CAT Reporters, but such a requirement is unlikely to create 
significant additional costs for CAT Reporters.
---------------------------------------------------------------------------

    \2967\ See Notice, supra note 5, at 30764-65.
    \2968\ See Notice, supra note 5, at Section IV.E.1.b(2)B.
---------------------------------------------------------------------------

    Four commenters addressed this alternative. Three were supportive 
of the Plan, and one was supportive of the

[[Page 84898]]

alternative.\2969\ The commenters that supported the Plan generally 
indicated that one millisecond timestamps should be sufficient to 
sequence events.\2970\ One of these commenters added that it would be 
very difficult, costly, and disruptive to change the timestamp 
granularity for broker-dealers and would involve expanding database 
fields, expanding application interfaces, logging files and managing to 
a clock offset lower than 50 milliseconds.\2971\ This commenter focused 
primarily on broker-dealers while noting that exchanges already have 
more granular timestamps.\2972\ Another commenter that supported the 
millisecond standard in the Plan stated it was ``okay'' to require this 
standard, but added, ``if certain categories of market participants can 
originate, modify, cancel, route, execute[,] trade, and/or allocate an 
order in substantially less than one millisecond, then they should 
record and report the time of each reportable event using timestamps 
reflecting their sub-millisecond or microsecond processing 
capability.'' \2973\ The final commenter that supported the millisecond 
standard disagreed that CAT Reporters should be required to report more 
granular timestamps when the Reporter captures that level of detail in 
its normal practice. The commenter stated that such reporting would 
require changes to all layers of servers, software and databases 
between the point of timestamp capture to the final CAT reporting 
layer, and would be unnecessarily expensive.\2974\ The commenter 
supporting more granular timestamps stated that there would be benefits 
in certain circumstances, stating that the Plan's timestamp resolution 
``will be insufficient to show the precise time of the reportable 
activities'' and ``[f]or some practices, such as cancellations, 
stuffing, and other ``noisy'' behaviors . . . the Commission should 
require a more precise granularity to more comprehensibly and 
accurately capture the frequency and scale of such practices.'' \2975\
---------------------------------------------------------------------------

    \2969\ FIF Letter at 112; SIFMA Letter at 34-35; Better Markets 
Letter at 8; Data Boiler Letter at 21.
    \2970\ FIF Letter at 112; SIFMA Letter at 34-35; Data Boiler 
Letter at 21. FIF provided additional insight into event sequencing 
possibilities.
    \2971\ FIF Letter at 112.
    \2972\ FIF Letter at 112.
    \2973\ Data Boiler Letter at 21.
    \2974\ SIFMA Letter at 35.
    \2975\ Better Markets Letter at 8.
---------------------------------------------------------------------------

    In their response to the comment on the costs of requiring more 
granular timestamps when the Reporter captures that level of detail in 
its normal practice, the Participants stated their belief that as 
additional CAT Reporters capture timestamps that are more granular than 
that required by the Plan, the quality of data reported to the CAT will 
increase correspondingly.\2976\
---------------------------------------------------------------------------

    \2976\ Response Letter I at 28-29.
---------------------------------------------------------------------------

    The Commission considered these comments and the Participants' 
response and now believes that the costs of requiring sub-millisecond 
timestamps could be significant for some broker-dealers, and also 
across broker-dealers, because the broker-dealer industry does not 
broadly apply sub-millisecond timestamps. In response to the commenters 
that stated that exchanges and certain other categories of market 
participants already may be capable of sub-millisecond 
timestamps,\2977\ the Commission notes that if a CAT Reporter uses 
timestamps in increments finer than milliseconds, that CAT Reporter 
must use those finer increments when reporting to the Central 
Repository.\2978\ Therefore, the Central Repository will capture finer 
timestamps in those cases. In response to the commenter who stated that 
the reporting of finer timestamps would be unnecessarily expensive for 
those Reporters who choose to capture finer timestamps, the Commission 
agrees that some Reporters may need to update their reporting systems 
to report these finer timestamps and therefore may incur additional 
costs. However, it is unclear to the Commission, and it was left 
unspecified by the commenter, how many CAT Reporters would need to 
update their systems and furthermore whether these Reporters would 
already be updating their systems in response to the Plan's millisecond 
reporting standard, so that only incremental costs above this standard 
should be considered. Finally, the Commission agrees with the 
Participants' stated view that the Plan provides for the quality of CAT 
Data to improve as CAT Reporters use more granular timestamps.\2979\ 
However, because the broker-dealer industry does not broadly apply sub-
millisecond timestamps, many CAT Reporters will use timestamps to the 
millisecond, and the Commission continues to believe that millisecond 
timestamps may be inadequate to allow sequencing of the majority of 
unrelated Reportable Events. The commenters supporting the Plan either 
state that one millisecond is ``okay'' or state that it is not possible 
to sequence ``all'' events regardless of timestamp granularity. The 
Commission acknowledges that seeking to sequence ``all'' unrelated 
Reportable Events may not be possible, but maintains, as discussed in 
the Notice,\2980\ that a sub-millisecond timestamp could improve the 
ability to sequence the majority of orders, subject to limitations from 
the clock synchronization standard. However, the Commission is 
approving the Plan without modifying the requirements for timestamp 
granularity for the reasons discussed in Section IV.D.13, above.
---------------------------------------------------------------------------

    \2977\ FIF Letter at 112; Data Boiler Letter at 21.
    \2978\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.3(c).
    \2979\ Response Letter I at 29.
    \2980\ See Notice supra note 5, at 30684-85.
---------------------------------------------------------------------------

2. Error Rate
    In the Notice, the Commission solicited comments on the benefits 
and costs of alternative maximum Error Rates.\2981\ While the 
Commission believed that most regulatory uses would involve data after 
T+5, the Commission noted that regulators also have essential needs for 
uncorrected data prior to T+5. Therefore, a lower Error Rate in data 
available before T+5 could, in certain regulatory contexts, be 
meaningful. Additionally, because OATS currently has a lower observed 
error rate than the rate in the CAT NMS Plan, a reduction in CAT Error 
Rates may accelerate the retirement of OATS. Further, the Commission 
noted that reducing Error Rates could increase the implementation and 
ongoing costs incurred by CAT Reporters and the Central Repository as 
compared to costs estimated in the Plan.
---------------------------------------------------------------------------

    \2981\ Id. at 30765-66.
---------------------------------------------------------------------------

    The Commission received five comments on the level of the error 
rates.\2982\ Two commenters supported the CAT NMS Plan's initial 
maximum Error Rate of 5% for CAT Data reported to the Central 
Repository.\2983\ One of these commenters stated, ``the proposed 
initial maximum error rate provides the appropriate level [of] 
flexibility while ensuring the data will be capable of being used to 
conduct market reconstruction.'' \2984\ One of the commenters that 
supported the Plan's error rates conditioned the support on measuring 
the error rate using post-correction errors, but provided no 
explanation for the condition.\2985\ Another commenter that supported 
measuring the error rate post-correction stated the alignment of 
interests--the reporters would have an interest in the quality of the 
data most important to regulatory activities--but supported a ``de 
minimis'' error rate goal over time, indicating that uncertainty 
prevents the

[[Page 84899]]

ability to predict when the Plan could achieve that goal.\2986\ This 
commenter further stated that there are cost tradeoffs that CAT 
Reporters face when attempting to reduce their error rates. The 
commenter mentioned several methods that would increase the cost of 
implementation but that should decrease the overall yearly reporting 
cost for a Reporter and stated that Reporters will choose different 
approaches for correcting errors.\2987\
---------------------------------------------------------------------------

    \2982\ FSR Letter at 9; UnaVista Letter at 3-4; SIFMA Letter at 
6; FIF Letter at 50; Better Markets Letter at 9.
    \2983\ FSR Letter at 9; UnaVista Letter at 3-4.
    \2984\ UnaVista Letter at 3.
    \2985\ FSR Letter at 9.
    \2986\ FIF Letter at 51-52.
    \2987\ FIF Letter at 55-56.
---------------------------------------------------------------------------

    One commenter opposed the error rates in the Plan, arguing that 
they are too high,\2988\ while the other two commenters expressed 
significant uncertainty associated with assessing the appropriate error 
rates.\2989\ The commenter opposing the error rates in the Plan cited 
the industry's experience with OATS, while the commenters expressing 
uncertainty cited a lack of experience with reporting certain types of 
data (options, market making, customer information, and allocations) 
\2990\ or by certain types of reporters (those with no regulatory 
reporting experience),\2991\ steep learning curves to new 
reporting,\2992\ and a lack of information in the Plan about the 
definition of an error and how it will be corrected.\2993\
---------------------------------------------------------------------------

    \2988\ Better Markets Letter at 9.
    \2989\ SIFMA Letter at 6; FIF Letter at 50.
    \2990\ FIF Letter at 50.
    \2991\ FIF Letter at 50.
    \2992\ SIFMA Letter at 6.
    \2993\ SIFMA Letter at 6; FIF Letter at 50.
---------------------------------------------------------------------------

    Several commenters seemed to agree with the Commission that the 
error rates are important to retirement of duplicative systems, but 
that the specific error rate that could accelerate retirement is 
unknown.\2994\ However, another commenter did not think that error 
rates should have a direct impact on system retirement.\2995\
---------------------------------------------------------------------------

    \2994\ SIFMA Letter at 6; FIF Letter at 50.
    \2995\ UnaVista Letter at 3.
---------------------------------------------------------------------------

    Finally, one commenter opposed having different error rates for 
different types of CAT Reporters, stating that the Notice provided no 
compelling reason for excusing Small Industry Members from error rate 
requirements for the first two years while expressing an expectation 
that these reporters will account for a ``massive amount of data.'' 
\2996\
---------------------------------------------------------------------------

    \2996\ Better Markets Letter at 9.
---------------------------------------------------------------------------

    The Commission has considered these comments and acknowledges the 
significant uncertainty associated with the determination of an 
appropriate Maximum Error Rate, as identified by commenters.\2997\ This 
uncertainty arises from the fact that the Plan requires the reporting 
of certain types of data that are not currently reported, the Plan 
requires reporting by certain participants that do not have experience 
with such reporting requirements, and the Plan has a lack of 
information about the definition of an error and how it will be 
corrected. The Commission notes, however, that provisions of the Plan 
could allow adjustment of error rates as more information becomes 
available, particularly during testing, and that adjustments could be 
up or down depending on the results of this testing.
---------------------------------------------------------------------------

    \2997\ SIFMA Letter at 6; FIF Letter at 50.
---------------------------------------------------------------------------

    In response to the commenter that suggested that the maximum error 
rate in the Plan should be lower and cited the industry's experience 
with OATS,\2998\ the Commission reiterates what was mentioned in other 
comment letters and discussed above, that CAT reporting involves 
reporting certain types of data not currently reported and requires 
reporting by certain market participants that do not have experience 
with such reporting requirements, so that experience with OATS may not 
be applicable for CAT reporting. Therefore, the Commission continues to 
believe that reducing Error Rates in the Plan could increase the 
implementation and ongoing costs incurred by CAT Reporters and the 
Central Repository as compared to costs estimated in the Plan.
---------------------------------------------------------------------------

    \2998\ Better Markets Letter at 9.
---------------------------------------------------------------------------

    The Commission agrees with commenters who indicated the need to tie 
error rates to retirement of duplicative systems. The Commission 
believes that regulators may find it advantageous to retain other 
systems until CAT Data is at least as accurate as those systems, and 
therefore continues to believe that reducing the maximum error rate 
could accelerate their retirement. However, the CAT NMS Plan does not 
require a particular target Error Rate before other systems can be 
retired, so the Commission continues to be unable to assess the 
benefits of specific maximum error rates as they relate to system 
retirement.
    In response to the comments suggesting that the Plan focus only on 
post-correction error rates, the Commission agrees that the post-
correction error rates, which the Plan states will be de minimis, are 
most important to data quality, but retains the belief that lower pre-
correction error rates could be meaningful. This is because, as 
discussed in the Notice, regulators also have essential needs for 
uncorrected data prior to T+5, although the Commission believes that 
most regulatory uses would involve data after T+5.
    With respect to the comment that expressed concern that if small 
broker-dealers voluntarily report to CAT during the first two years of 
CAT operations, then the utility of CAT will be diminished because they 
would be permitted to report with limitless errors,\2999\ the 
Commission disagrees with this interpretation of the CAT NMS Plan, as 
discussed above because the Maximum Error Rate would apply to anyone 
reporting to CAT, whether mandated to do so in accordance with the CAT 
NMS Plan or voluntarily.\3000\
---------------------------------------------------------------------------

    \2999\ Better Markets Letter at 9.
    \3000\ See Section IV.D.10., supra.
---------------------------------------------------------------------------

3. Error Correction Timeline
    In the Notice, the Commission solicited comment on an alternative 
error correction timeline to that proposed in the CAT NMS Plan.\3001\ 
The CAT NMS Plan includes a deadline of T+3 for submission of corrected 
data to the Central Repository.\3002\ The CAT NMS Plan also discusses 
recommendations from Financial Information Forum and SIFMA to impose an 
alternative T+5 deadline.\3003\ The Participants state in the CAT NMS 
Plan that they believe it is important to retain the T+3 deadline in 
order to make data available to regulators as soon as possible.\3004\
---------------------------------------------------------------------------

    \3001\ See Notice, supra note 5, at 30766.
    \3002\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.1(a)(iv).
    \3003\ Id. In earlier comment letters submitted to the 
Participants, FIF and SIFMA maintained that the T+3 deadline may not 
be feasible and would prove costly to market participants. See 
Letter from Manisha Kimmel, Managing Director, FIF, to the 
Participants, dated November 19, 2014, available at http://www.catnmsplan.com/industryfeedback/p601972.pdf; Industry 
Recommendations for the Creation of a Consolidated Audit Trail 
(CAT), SIFMA, March 28, 2013, available at http://www.catnmsplan.com/industryfeedback/p242319.pdf.
    \3004\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.1(a)(iv).
---------------------------------------------------------------------------

    In the Notice, the Commission solicited comment on whether the CAT 
NMS Plan should impose a T+5 deadline for the submission of corrected 
data rather than the T+3 deadline. The Commission preliminarily 
believed that the delays in regulatory access from a T+5 deadline would 
reduce regulators' ability to conduct surveillance and slow the 
response to market events relative to the CAT NMS Plan. At the same 
time, the Commission also believed that T+5 error correction might 
reduce costs to industry relative to the CAT NMS Plan, although the 
Commission was not aware of any existing cost estimates.\3005\
---------------------------------------------------------------------------

    \3005\ See Notice, supra note 5, at 30766.
---------------------------------------------------------------------------

    Two commenters disagreed with the T+3 error correction deadline 
proposed

[[Page 84900]]

in the Plan.\3006\ One of the commenters noted that the T+3 deadline 
``appears too aggressive at this time,'' because ``the fact that roll-
out of the CAT will include a sharp learning curve for broker-dealers 
and regulators as they understand and absorb the intricacies of [a] new 
and complex system such as the CAT.'' The commenter further stated that 
``the CAT NMS Plan should be amended to maintain current error 
correction timeframes until CAT reporting errors are analyzed and 
better understood by broker-dealers and exchanges, and regulators.'' 
\3007\
---------------------------------------------------------------------------

    \3006\ FIF Letter at 3, 9, 52-53; KCG Letter at 9.
    \3007\ KCG Letter at 9.
---------------------------------------------------------------------------

    Likewise, the second commenter maintained that the T+3 deadline may 
not be achievable until ``the CAT system and its support infrastructure 
can be proven stable, . . . a body of supporting documentation . . . 
can be developed and absorbed by the CAT Reporters'', and CAT reporting 
errors are analyzed and better understood.\3008\ The commenter 
suggested that the current OATS approach, under which firms have five 
days from the date they receive notice of the error to submit a 
correction, should be kept in place for the first year of CAT reporting 
for each group of CAT Reporters. The commenter noted that ``a less 
aggressive, measured approach towards reduction in the error correction 
timeframe over time will produce better quality results, with less 
overall cost to the industry than the proposed approach.'' \3009\ Under 
this commenter's suggested approach, the deadline for the submission of 
corrected data would be 8:00 a.m. on T+6, with corrected data available 
to regulators by 8:00 a.m. on T+8, consistent with the current OATS 
approach.\3010\ One commenter stated that the current approach was 
``feasible.'' \3011\
---------------------------------------------------------------------------

    \3008\ FIF Letter at 52.
    \3009\ FIF Letter at 53.
    \3010\ FIF Letter at 59-60.
    \3011\ UnaVista Letter at 4.
---------------------------------------------------------------------------

    In their response, the Participants stated that they believe that 
the prompt availability of corrected data is ``imperative to the 
utility of the Central Repository,'' and that the three-day error 
correction period ``appropriately balances the need for regulators to 
access corrected data in a timely manner while taking into 
consideration the industry's concerns.'' \3012\ The Participants 
acknowledged that a five-day window for error correction is used for 
OATS reporting currently, but stated their belief that the window in 
the Plan would allow for better regulatory surveillance and market 
oversight.\3013\ The Participants also stated that, based on a review 
of OATS data from August 2016, most errors reported to OATS were 
corrected within six business days of submission (approximately 91.26% 
of error corrections), with 26.46% of error corrections occurring one 
day after submission, and 59.45% of error corrections occurring six 
days after submission (i.e., on the rejection repair deadline).\3014\ 
Additionally, approximately 0.48% of error corrections were made on the 
day of submission, approximately 4.86% of error corrections were made 
two to five days after submission, and the remaining approximately 
8.75% of error corrections were made seven to 36 days after 
submission.\3015\
---------------------------------------------------------------------------

    \3012\ Response Letter I at 30.
    \3013\ Response Letter I at 30.
    \3014\ Response Letter III at 13. The letter states that the 
percentages were determined by FINRA based on a review of OATS data 
from August 2016.
    \3015\ Response Letter III at 13.
---------------------------------------------------------------------------

    The Commission has considered the comments it received on whether 
the CAT NMS Plan should impose a T+5 deadline for the submission of 
corrected data, rather than the T+3 deadline, as well as the 
Participants' response.
    The Commission recognizes that broker-dealers and regulators may 
face a learning curve as they adjust from the current OATS approach, 
under which firms have five days from the date they receive notice of 
the error to submit a correction, to the T+3 error correction deadline 
imposed by the Plan, which will allow firms approximately two days from 
the date they receive notice of the error to submit the 
correction.\3016\ The Commission also recognizes that a T+5 deadline 
may be easier to achieve than the T+3 deadline, and therefore may be 
less costly. The Commission notes that, while the data provided by the 
Participants indicates that approximately 26% of error corrections 
currently are made on T+1, approximately 59% of OATS error corrections 
are currently made on T+6, the last day of the OATS error correction 
period, indicating that many OATS reporters will likely be required to 
change their error correction practices to achieve the T+3 deadline in 
the Plan. The Commission also recognizes that keeping a deadline of T+5 
for the first year of CAT reporting for each group of CAT Reporters may 
potentially improve the quality of CAT Data during that year. However, 
the Commission believes that a T+5 deadline would reduce the timeliness 
benefits of the Plan by delaying regulatory access to CAT Data during 
that year. The Commission continues to believe that the delays in 
regulatory access from a T+5 deadline would reduce regulators' ability 
to conduct surveillance and slow the response to market events relative 
to the CAT NMS Plan, and would largely negate the timeliness benefits 
discussed above in connection with the error correction timeline.\3017\
---------------------------------------------------------------------------

    \3016\ Under the Plan's approach, the deadline for the Plan 
Processor to validate customer data and generate error reports is 
5:00 p.m. on T+1, and the deadline for the submission of corrected 
data is 8:00 a.m. ET on T+3. See Appendix C, Section A.1(a)(iv).
    \3017\ See Section V.E.1.d, supra (noting that corrected OATS 
data is currently available to FINRA by T+8, and that under the 
Plan, regulators will be able to access corrected CAT Data three 
days earlier).
---------------------------------------------------------------------------

4. Requiring Listing Exchange Symbology
    In the Notice, the Commission solicited comment on an alternative 
to the CAT NMS Plan that would allow CAT Reporters to report using 
their existing symbologies, rather than listing exchange 
symbology.\3018\ The Commission discussed its preliminary belief that, 
in light of the requirement for the Plan Processor to maintain a 
complete symbology database, the requirement that CAT Reporters report 
using listing exchange symbology may result in unnecessary costs to CAT 
Reporters. Therefore, the Commission preliminarily believed that the 
alternative of allowing CAT Reporters to use their existing symbologies 
for reporting purposes could significantly reduce the costs for 
exchanges and broker-dealers to report order events to the Central 
Repository, as compared to the approach in the CAT NMS Plan, without a 
significant impact on the expected benefits of the Plan or the costs to 
operate the Central Repository.
---------------------------------------------------------------------------

    \3018\ See Notice, supra note 5, at 30769-70.
---------------------------------------------------------------------------

    The Commission received three comments relevant to this 
alternative. One commenter stated that, ``in order to minimize cost and 
invasiveness to the industry,'' the Central Repository should accept 
existing symbology ``as-is'' rather than requiring listing exchange 
symbology.\3019\ Another commenter stated that using listing exchange 
symbology was costly not only for equities, as discussed in the 
Notice,\3020\ but also for options.\3021\ The final commenter stated 
that, ``it would be more efficient to have the Central Repository 
manage the mapping tables in one place, as it is less error prone . . . 
than to have all reporting broker-dealers mapping to their separate 
tables,'' \3022\ and that the use of existing

[[Page 84901]]

symbology ``does provide a data quality advantage.'' \3023\ However, 
the commenter also stated that it did not expect the elimination of the 
requirement to use existing symbology to result in a large cost 
savings.\3024\ While the commenter did not explain why the cost savings 
would be minimal, as discussed in the Baseline Section above, the 
Participants' response notes that broker-dealers currently use listing 
exchange symbology to report to OATS and existing messaging protocols 
do not necessarily use a standard symbology. Therefore, in the absence 
of such a requirement, CAT reporters might use ``bespoke'' symbologies 
to report that would be difficult for the Central Repository to map.
---------------------------------------------------------------------------

    \3019\ Data Boiler Letter at 37-38.
    \3020\ See Notice, supra note 5, at 30730.
    \3021\ Bloomberg Letter at 5.
    \3022\ FIF Letter at 95.
    \3023\ FIF Letter at 95.
    \3024\ FIF Letter at 95.
---------------------------------------------------------------------------

    In the Participants' response, the Participants stated their belief 
that the requirement for CAT Reporters to use listing exchange 
symbology ``is the most efficient, cost-effective and least error prone 
approach to symbology,'' and that based on discussions with the DAG, it 
is their understanding that ``all Industry Members subject to OATS or 
EBS reporting requirements currently use the symbology of the listing 
exchange when submitting such reports.'' \3025\ They further stated 
that allowing CAT Reporters to determine symbology would ``require each 
CAT Reporter to submit regular mapping symbology information to the 
CAT, thereby increasing the complexity and likelihood for errors in the 
CAT.'' \3026\ However, the Participants stated that they ``understand 
that some industry messaging formats, such as some exchange binary 
formats, require symbology other than the primary listing exchange 
symbology,'' and that in these and similar cases, the Participants 
recommended that the Plan be amended to permit the use of the required 
symbology.\3027\ The Participants also added that, based on their 
understanding of current practices, Industry Members currently employ 
technical solutions and/or systems that allow them to translate 
symbology in the correct format when submitting data to 
exchanges.\3028\
---------------------------------------------------------------------------

    \3025\ Response Letter II at 7.
    \3026\ Response Letter II at 7.
    \3027\ Response Letter II at 7.
    \3028\ Response Letter III at 13.
---------------------------------------------------------------------------

    The Commission is revising its economic analysis of this 
alternative in light of the comments and the Participants' response. 
While commenters generally agreed with the Commission's analysis in the 
Notice, they seemed to indicate that the cost savings from a 
requirement to use existing symbology would not be large. Further, the 
additional baseline information in the Participants' response also 
suggests that the cost savings might not be significant. The 
Commission's analysis in the Notice hinged on the necessity of running 
an additional process on messaging protocol data prior to submitting 
the data. The Commission believed the cost savings and the data quality 
benefits would come from avoiding this additional process, which would 
need to be built and maintained and could add errors to the data. 
However, the Participants' response indicates that existing messaging 
protocols may already have integrated processes that translate symbols 
efficiently and accurately prior to routing to an exchange. While the 
Participants' response does not indicate that the messaging protocols 
translate symbols for other types of messages, the Commission presumes 
that the functionality should be transferable to other message types, 
including order originations and routes to other broker-dealers. 
Because this functionality operates for business purposes, broker-
dealers have a strong incentive to ensure its accuracy. Therefore, the 
Commission no longer believes that eliminating the requirement to 
translate symbols would improve accuracy and significantly reduce 
costs. In addition, the Commission now believes that eliminating the 
requirement could result in an additional cost to the Central 
Repository and a potential reduction in accuracy because it could 
involve having to map ``bespoke'' symbologies into one standardized 
symbology.
5. Clock Synchronization Logging Procedures
    In the Notice, the Commission solicited comments on an alternative 
that would require logging only exceptions to the clock offset (i.e., 
events in which a market participant checks the clock offset and 
applies changes to the clock).\3029\ While logging every event, 
including clock offset checks, may be cost effective with longer clock 
synchronization tolerances, the Commission questioned whether logging 
each event is cost effective with finer clock offset tolerances, given 
the large number of events expected for the proposed and alternative 
clock synchronization standards. The Commission explained that it could 
not quantify the reduction in costs from this alternative because it 
lacked data on the proportion of clock synchronization costs that are 
associated with event logging and the proportion of those costs that 
could be avoided by alternative event logging requirements. The 
Commission discussed its preliminary belief that any reduction in 
benefits from this alternative, as compared to the CAT NMS Plan's 
approach for clock synchronization, would be minor because the 
inclusion of clock synchronization checks that required no clock 
adjustment would not improve regulators' ability to sequence events. 
The Commission noted, however, that enforcement of clock 
synchronization requirements could be more difficult without 
comprehensive logging requirements that document firms' actions to 
comply with requirements; consequently, relaxing the logging 
requirement could also reduce incentives to comply with the clock 
synchronization requirements.
---------------------------------------------------------------------------

    \3029\ See Notice, supra note 5, at 30764. This is one of the 
alternatives suggested in the FIF Clock Offset Survey. See supra 
note 247.
---------------------------------------------------------------------------

    As discussed above,\3030\ one commenter supported the alternative 
raised by the Commission that any requirement to maintain a log of 
clock synchronization events should only require logging of clock 
synchronization exceptions, not all clock synchronization events, 
noting that requiring logging of all events would be costly for some 
broker-dealers.\3031\ However, the commenter did not provide any 
additional information that would allow the Commission to quantify the 
cost savings of logging only these events. Therefore, while the 
Commission continues to believe that there could be cost savings from 
logging only exceptions to the clock offset, the Commission remains 
unable to quantify the reduction in costs from this alternative. The 
Commission continues to believe that any reduction in benefits under 
this alternative approach would be minor, but that enforcement of clock 
synchronization requirements may be more difficult, which may reduce 
incentives to comply with the clock synchronization requirements.
---------------------------------------------------------------------------

    \3030\ See Section IV.D.13, supra.
    \3031\ FIF Letter at 108, 122.
---------------------------------------------------------------------------

6. Data Accessibility Standards
    In the Notice, the Commission solicited comment on alternative 
approaches to the manner in which the CAT NMS Plan provides data access 
to regulators.\3032\ The Commission discussed the requirements for 
regulatory access to the Central Repository, explaining that the CAT 
NMS Plan could result in many improvements to regulatory activities

[[Page 84902]]

such as surveillance, examinations, and enforcement, but that these 
benefits may not be fully realized if access to data is cumbersome or 
inefficient. The Commission solicited comment on each of the minimum 
data accessibility standards required in the Plan. The Commission also 
discussed several examples in particular, and requested comment on 
alternative standards that might be adopted in each case.
---------------------------------------------------------------------------

    \3032\ See Notice, supra note 5, at 30770.
---------------------------------------------------------------------------

    In the Notice, the Commission noted that the CAT NMS Plan requires 
query responses for various types of queries of 5 minutes, 10 minutes, 
3 hours, and 24 hours, where the simplest queries involving scanning 
narrow sets of data would be required to return in 5 minutes and 
complex queries scanning multiple days of data and returning large 
datasets would be required to return within 24 hours. While the 
benefits of direct access to CAT Data depend on reasonably fast query 
responses, the Commission recognized that faster query response times 
come at a cost. The Commission stated that it did not have detailed 
information on significant breakpoints in those costs to judge whether 
slightly longer response times than those in the Plan could 
significantly reduce the costs of developing, maintaining, and 
operating the Central Repository. The Commission recognized that the 
detailed information on numerous other minimum standards regarding 
regulator access to CAT Data is similarly unclear. Therefore, the 
Commission requested comment regarding all standards for regulatory 
access and whether technology creates natural breakpoints in costs such 
that a particular alternative could reduce the costs of the Plan 
without significantly reducing benefits or could increase benefits 
without significantly increasing costs.
    Commenters made a number of suggestions regarding data 
accessibility standards. One commenter stated that it was unclear 
whether the CAT would be able to support various types of data analysis 
by regulators within the Central Repository, and noted that, without 
that ability, all of the analyses must be done outside of the CAT 
Repository and within the regulators' own infrastructure, which would 
require bulk extraction and could lead to increased costs and security 
concerns due to the need to store multiple copies of CAT Data with 
various SROs.\3033\ The commenter recommended that the Plan clearly 
specify the analytical capability requirements with respect to the 
Central Repository.\3034\ Another commenter recommended that the CAT 
support real-time ingestion, processing and surveillance, and that the 
CAT provide regulators with access to real-time analytics.\3035\ One 
commenter believed that the proposed model and timeframe for regulatory 
access is consistent with the Commission's regulatory objectives, but 
recommended the use of pre-defined extract templates and uniform global 
formats such as ISO 20022 to allow for exchange of data between both 
national and global regulators.\3036\ That commenter also suggested 
that there should be an ability for regulators to perform analyses 
within the CAT environment, and that there should be flexible search/
filtering capabilities.\3037\
---------------------------------------------------------------------------

    \3033\ SIFMA Letter at 33.
    \3034\ SIFMA Letter at 33.
    \3035\ Data Boiler Letter at 1, 10.
    \3036\ UnaVista Letter at 4.
    \3037\ UnaVista Letter at 4.
---------------------------------------------------------------------------

    In their response, the Participants stated that, with respect to 
the analytical requirements of the Central Repository, they believe the 
details in the Plan are sufficient, and noted that Section 8 of 
Appendix D of the Plan describes various tools that will be used for 
surveillance and analytics. They also noted that it would be 
``counterproductive from a regulatory oversight perspective to provide 
significant detail regarding the surveillance processes of the 
regulators.'' \3038\ With respect to real-time ingestion, processing, 
surveillance, and analytics, the Participants noted that Rule 613 does 
not provide for real-time reporting.\3039\ With respect to pre-defined 
extract templates and uniform global formats, the Participants noted 
that the Plan requires data extracts to use common industry 
formats.\3040\ The Participants also stated that they expect that the 
requests from regulators other than those regulators permitted access 
to the CAT (such as foreign regulators and other U.S. government 
agencies) will be on an ad hoc basis pursuant to applicable information 
sharing agreements, and would be accommodated on a case-by-case 
basis.\3041\
---------------------------------------------------------------------------

    \3038\ Response Letter I at 42.
    \3039\ Response Letter I at 43.
    \3040\ Response Letter I at 43.
    \3041\ Response Letter I at 43.
---------------------------------------------------------------------------

    The Commission has considered the comments received and the 
Participants' response. With respect to the suggestion that the Plan 
clearly specify the analytical capability requirements with respect to 
the Central Repository,\3042\ the Commission notes that, while the Plan 
provides detail on the method of access and the type of queries that 
regulators could run, many of the decisions regarding access have been 
deferred until after the Plan Processor is selected and finalizes the 
Technical Specifications. In particular, as discussed in the Notice, 
the details of functionality and performance of the final system are 
still to be determined.\3043\ The Commission believes that an 
alternative approach that clearly specified the required analytical 
capabilities of the Central Repository would reduce the uncertainty 
with respect to the expected benefits of the Plan in terms of 
accessibility. However, the Commission does not have sufficient 
information to estimate the costs of requiring the Central Repository 
to provide specific analytical capabilities, because the Commission 
lacks information on the costs of building those capabilities into the 
Central Repository as opposed to using outside servers.
---------------------------------------------------------------------------

    \3042\ SIFMA Letter at 33.
    \3043\ See Notice, supra note 5, at 30691.
---------------------------------------------------------------------------

    The Commission does not agree with the commenter that stated that 
an approach requiring bulk extractions by regulators is likely to 
increase the Participants' costs significantly relative to an approach 
whereby regulators perform analyses within the Central 
Repository.\3044\ The Commission acknowledges that hosting large 
databases is costly, but it believes that SROs are likely to consider 
the cost implications when contemplating replicating large portions of 
the Central Repository within their IT infrastructure, and presumably 
will only replicate the data when it is efficient for them to do 
so.\3045\ In response to the commenter that stated that frequent bulk 
extractions of data by regulators may result in an increased security 
risk,\3046\ the Commission notes that, as discussed above,\3047\ in 
order to extract, remove, duplicate, or copy CAT Data into their own 
local server environment, the Participants will be required to have 
policies and procedures regarding CAT Data security that are equivalent 
to those implemented and maintained by the Plan Processor for the 
Central Repository,\3048\ and that each Participant must certify and 
provide evidence to the CISO of the Plan Processor that its policies 
and procedures for the security of CAT Data meet the same security 
standards applicable to the CAT Data that is reported to and collected 
and stored by the Central Repository. This

[[Page 84903]]

requirement should mitigate any increased security risk associated with 
bulk extractions.
---------------------------------------------------------------------------

    \3044\ SIFMA Letter at 33.
    \3045\ See Section V.F.1, supra, for further discussion of the 
costs of bulk downloads by the Participants.
    \3046\ See Section IV.D.6.f, supra.
    \3047\ Id.
    \3048\ See Section IV.D.6.o, supra.
---------------------------------------------------------------------------

    In response to the suggestion that the CAT NMS Plan incorporate 
real-time analytics,\3049\ the Commission notes that this would require 
real-time reporting. As discussed further above,\3050\ the Commission 
considered whether CAT Reporters should be required to report data in 
real-time when it adopted Rule 613 under Regulation NMS.\3051\ While 
the Commission acknowledged that there might be advantages to receiving 
data intraday, it stated that the greater majority of benefits that may 
be realized from development of the CAT do not require real-time 
reporting.\3052\ Further, the Commission recognized that not requiring 
real-time reporting upon implementation could result in cost savings 
for industry participants.\3053\ The Commission therefore believes that 
any alternative approach that required real-time reporting would 
increase the costs of the Plan significantly. However, the commenter 
did not provide sufficient information to allow the Commission to 
further analyze the benefits and costs of this alternative.
---------------------------------------------------------------------------

    \3049\ Data Boiler Letter at 1, 10.
    \3050\ See Section IV.D.3, supra.
    \3051\ See Adopting Release, supra note 14, at 45765. Indeed, 
Rule 613 stated that the CAT NMS Plan may not impose a reporting 
deadline earlier than 8:00 a.m. ET. 17 CFR 242.613(c)(3).
    \3052\ See Adopting Release, supra note 14, at 45768.
    \3053\ Id. at 45769.
---------------------------------------------------------------------------

    The Commission agrees with the commenter that suggested that using 
pre-defined extract templates and uniform global formats such as ISO 
20022 could have some benefits in terms of facilitating the exchange of 
data between national and global regulators. As the Participants note, 
the Plan requires data extracts to use common industry formats,\3054\ 
but it does not require a particular format.\3055\ However, as 
explained above and in Section IV.D.2, when selecting a Plan Processor, 
the Participants will consider whether a Bidder has proposed a format 
that is easily understood and adoptable by the industry, and the 
Commission believes that the message format decision must be made in 
connection with developing the overall architecture for CAT.
---------------------------------------------------------------------------

    \3054\ Response Letter I at 43.
    \3055\ For further discussion of the alternatives related to the 
data ingestion format, See Section V.H.12, infra.
---------------------------------------------------------------------------

7. Clock Synchronization Hours
    In the Notice, the Commission solicited comment on alternative 
requirements for the times during which clock synchronization is 
required that would provide more flexibility than the requirements of 
the Plan.\3056\ The Commission discussed its preliminary belief that an 
alternative that does not require synchronizing clocks when servers are 
not recording Reportable Events or when precise timestamps are not as 
important to sequencing, such as outside of normal trading hours, would 
not materially reduce benefits. Given the responses to the FIF Clock 
Offset Survey, the Commission also stated that it preliminarily 
believed that this alternative could reduce costs, because 
synchronization activities and log entries related to those events 
would not be as beneficial outside of normal trading hours. The 
Commission noted, however, that it did not have information necessary 
to quantify the cost reduction from this alternative because cost 
information available to the Commission is not broken down by time of 
day or server status.
---------------------------------------------------------------------------

    \3056\ See Notice, supra note 5, at 30764.
---------------------------------------------------------------------------

    One commenter supported alternative clock synchronization hours, 
stating off-hours clock synchronization ``isn't needed from either a 
business or regulator perspective'' and that ``without this provision, 
firms would require additional off-hours staffing, or it will prevent 
the off-hours support staff from focusing on more pressing issues that 
need to be resolved during off hours.'' \3057\ However, the commenter 
did not provide any additional information that would allow the 
Commission to quantify the potential cost savings. The Commission 
continues to believe that an alternative that does not require 
synchronizing clocks when servers are not recording Reportable Events 
or when precise timestamps are not as important to sequencing, such as 
outside of normal trading hours, would not materially reduce benefits. 
The Commission also believes that this alternative could reduce costs, 
but continues to lack the information necessary to quantify the 
potential cost reduction.
---------------------------------------------------------------------------

    \3057\ FIF Letter at 122-23.
---------------------------------------------------------------------------

8. Primary Market Transactions
    As set out in the Notice,\3058\ the CAT NMS Plan does not require 
the reporting of any primary market information to the Central 
Repository. However, as required by Rule 613(i), the CAT NMS Plan 
commits to incorporating a discussion of how and when to implement the 
inclusion of some primary market information into a document outlining 
how additional Eligible Securities could be reported to the Central 
Repository (the ``Discussion Document''), which would be jointly 
provided to the Commission within six months after effectiveness of the 
Plan.\3059\ Additionally, as required by Rule 613(a)(1)(vi), the Plan 
includes a discussion of the feasibility, benefits, and costs of 
including primary market transactions in the CAT NMS Plan.\3060\ As 
explained in the Notice,\3061\ the discussion in the CAT NMS Plan 
divides the primary market information into two categories: Information 
on top-account allocations and information on subaccount allocations. 
Top-account allocations refer to allocations to institutional clients 
and retail broker-dealers during the book-building process. Top-account 
institutions and broker-dealers make the subsequent subaccount 
allocations to the actual accounts receiving the shares. The Plan 
concludes that including information on subaccount allocations in the 
CAT would provide significant benefits without unreasonable costs, 
while including information on top-account allocations would provide 
marginal benefits at significantly higher costs.\3062\
---------------------------------------------------------------------------

    \3058\ See Notice, supra note 5, at 30772.
    \3059\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
C.9. Section 6.11 of the Plan satisfies a requirement in 17 CFR 
242.613(i) to plan for expansion.
    \3060\ 17 CFR 242.613(a)(1)(vi); CAT NMS Plan, supra note 5, at 
Appendix C, Section A.6.
    \3061\ See Notice, supra note 5, at 30772.
    \3062\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.6(b)-(c).
---------------------------------------------------------------------------

    As discussed in the Notice, the Plan states that ``the Participants 
are supportive of considering the reporting of Primary Market 
Transactions, but only at the subaccount level, and would incorporate 
analysis of this requirement, including how and when to implement such 
a requirement, into their document outlining how additional Eligible 
Securities could be reported to the Central Repository, in accordance 
with SEC Rule 613(i) and Section 6.11 of the Plan.'' \3063\ The Plan 
therefore would limit the discussion of reporting primary market 
transactions in the Discussion Document to the subaccount level.
---------------------------------------------------------------------------

    \3063\ Id. at Appendix C, Section A.6(c).
---------------------------------------------------------------------------

    In the Notice, the Commission solicited comment on the alternative 
approach that would broaden the required scope of the discussion of 
primary market allocation information in the Discussion Document to 
include an analysis of incorporating both top-account and subaccount 
allocation information for primary market transactions into the 
CAT.\3064\ To assess this alternative, the Commission examined the 
benefits and costs of ultimately including top-account

[[Page 84904]]

allocations in the CAT. The Commission preliminarily believed that the 
potential benefits of including top-account allocation information in 
the CAT could be significant and that the costs of including top-
account allocation information could be lower than what is described in 
the CAT NMS Plan and appropriate in light of significant potential 
benefits. For these reasons, the Commission preliminarily believed that 
top-account allocation information should not be excluded from the 
Discussion Document.\3065\
---------------------------------------------------------------------------

    \3064\ See Notice, supra note 5, at 30772.
    \3065\ Id.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed several benefits of 
including top-account allocation information, in addition to subaccount 
allocation information, for primary market transactions in CAT. First, 
the Commission noted that top-account allocation information would be 
necessary to surveil for prohibited activities in the book-building 
process and would improve the efficiency of investigations into such 
prohibited activities. For example, examinations of ``spinning,'' 
``laddering,'' and other ``quid pro quo'' arrangements would benefit 
from inclusion of top-account allocation information in CAT Data. 
Second, the Commission noted that top-account allocation information 
would provide very useful insights into IPO and follow-on allocations 
in market analysis and that such insights would help inform rulemaking 
and other policy decisions.\3066\
---------------------------------------------------------------------------

    \3066\ Id. at 30773.
---------------------------------------------------------------------------

    As discussed in the Notice,\3067\ the CAT NMS Plan estimates that 
for broker-dealers to implement a system to record and report both top-
account and subaccount allocation information for primary market 
transactions would cost $234.8 million, whereas implementing a system 
with only subaccount information would cost $58.7 million.\3068\ The 
inclusion of top-account allocation information accounts for the 
difference of $176.1 million.
---------------------------------------------------------------------------

    \3067\ Id.
    \3068\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.6(c).
---------------------------------------------------------------------------

    In the Notice, the Commission discussed its preliminary belief that 
the implementation costs of adding top-account allocation information 
may be lower than those estimated in the CAT NMS Plan, for several 
reasons. First, the Commission noted that, in combination with an 
alternative that would require less granular timestamps or a larger 
allowable clock offset on less time-sensitive systems, including the 
systems for reporting top-account allocation information, the costs for 
including top-account allocation information would be lower than 
indicated in the Plan. Second, the Commission noted that the Plan's 
estimate was sensitive to the number of underwriters. In particular, 
the estimates assumed that all underwriters participating in an 
offering would need to implement changes for top-account allocation 
information. In contrast, the Commission suspected that lead 
underwriters could have all of the information necessary to report the 
top-account allocation information. If so, then only the lead 
underwriters would need to implement systems changes to report top-
account allocation information. Estimating costs only for lead 
underwriters could result in a much smaller estimate.\3069\
---------------------------------------------------------------------------

    \3069\ See Notice, supra note 5, at 30773.
---------------------------------------------------------------------------

    The Commission noted that it did not have an estimate of the 
ongoing costs of underwriters reporting top-account allocation 
information. However, the Commission preliminarily estimated that the 
reporting of primary market transactions would generate a total of 1.2 
million CAT Reportable Events per year. The Commission noted that this 
total was much smaller than the number of Reportable Events in the 
secondary market (trillions). The Commission preliminarily believed 
that the ongoing costs of reporting primary market transactions would 
be a fraction of the ongoing costs of secondary market reporting and 
would likely be supported by staff already engaged to maintain CAT 
reporting.\3070\
---------------------------------------------------------------------------

    \3070\ Id. at 30773-74.
---------------------------------------------------------------------------

    The Commission received three comment letters that provided 
information relevant to the Commission's economic analysis of this 
alternative, though the comments focused more on the inclusion of 
primary market transactions in the initial phase of the Plan as opposed 
to in the Discussion Document. In particular, commenters provided 
information relevant to the baseline, benefits, and costs of the 
inclusion of top-account primary market information in the Plan.\3071\
---------------------------------------------------------------------------

    \3071\ Commenters also provided general information on primary 
market transactions that could inform the Discussion Document. See 
FIF Letter at 118-20; SIFMA Letter at 36; Hanley Letter at 1-6.
---------------------------------------------------------------------------

    Commenters provided information relevant to the current baseline of 
the underwriting process and primary market transaction records. One 
commenter documented significant diversity across underwriters in the 
volume of deals and workflows and provided more precise information on 
that diversity than included in the Notice or Plan.\3072\ The commenter 
further stated that the processes that handle top-account allocations 
are very separate from the secondary market systems. Another commenter 
described three stages in the offering process: (1) Preliminary 
indications of interest, (2) final top-account allocation, and (3) 
subsequent subaccount allocations.\3073\ Both commenters agreed that 
indications of interest in top-account allocations can change numerous 
times,\3074\ but one commenter indicates the existence of a final top-
account allocation (Stage 2) while the other does not.
---------------------------------------------------------------------------

    \3072\ FIF Letter at 118-19.
    \3073\ Hanley Letter at 4.
    \3074\ FIF Letter at 118; Hanley Letter at 4.
---------------------------------------------------------------------------

    Two commenters provided different perspectives on the benefits of 
including top-account allocation information in the Discussion 
Document. One commenter emphasized that many benefits could only be 
achieved by requiring the reporting of primary market transactions at 
both the top-account and the subaccount allocation levels.\3075\ In 
particular, the commenter maintained that because lead underwriters 
were responsible for the top-account allocations, some abuses, such as 
``spinning,'' ``laddering,'' ``quid pro quo,'' Rule 105 violations, and 
manipulation, could only be present in these allocations.\3076\ 
Further, this commenter also stated that top-account information would 
facilitate analyses of the value of discretionary allocation in book-
building for issuers. This commenter also indicated that final top-
account allocations should be sufficient to achieve such benefits, 
while also indicating that information on the indications of interest 
was crucial for the understanding of the capital formation process and 
for designing efficient regulations that would facilitate capital 
formation without compromising investor protection.\3077\ The other 
commenter believed that having only subaccount primary market 
allocation information is less valuable from a regulatory perspective 
than having both subaccount and top-account allocation 
information.\3078\
---------------------------------------------------------------------------

    \3075\ Hanley Letter at 4.
    \3076\ Hanley Letter at 4.
    \3077\ Hanley Letter at 5-6.
    \3078\ FIF Letter at 120.
---------------------------------------------------------------------------

    The Commission received three comment letters relevant to the costs 
of including top-account allocation information in the Plan. All three 
commenters indicated that it would be very costly to include top-
account allocations in the Plan,\3079\ but one

[[Page 84905]]

commenter limited this conclusion just to the inclusion of indications 
of interest.\3080\ According to the commenters, these costs generally 
stem from added complexity and a lack of standardization in book-
building processes. Another commenter noted that top-account 
allocations would be less feasible to report than subaccount 
allocations and cited to information from the DAG.\3081\ One commenter 
disagreed with the Plan's cost estimates of $176 million for including 
top-account allocation information in the Plan and provided an 
alternative estimate of $864,000 per year.\3082\ Another commenter 
indicated that the Plan's estimates amounted to guesswork and that the 
$176 million estimate in the Plan does not contemplate reporting all 
the events in a deal's lifecycle, but does not indicate which events it 
does include.\3083\
---------------------------------------------------------------------------

    \3079\ FIF Letter at 120; Hanley Letter at 4; SIFMA Letter at 
36.
    \3080\ Hanley Letter at 4.
    \3081\ SIFMA Letter at 36.
    \3082\ Hanley Letter at 4-5.
    \3083\ FIF Letter at 120.
---------------------------------------------------------------------------

    Two commenters recommended additional analysis on some or all top-
account allocation information, but neither specifically mentioned the 
Discussion Document. One commenter noted having little information 
about the requirements of reporting top-account allocation information 
and that subaccount allocation information is a good first step toward 
potentially collecting complete information on primary market 
activities that would allow time to study the complexities and 
difficulties associated with reporting top-account allocations.\3084\ 
This commenter also attempted a further study of more generally 
including primary market information in the Plan but noted that the 60-
day comment period did not permit a larger, more in depth study.\3085\ 
Another commenter suggested considering an alternate reporting scheme 
for indications of interest other than CAT that better balances the 
costs of producing data indications of interest but does not diminish 
the usefulness of such data.\3086\
---------------------------------------------------------------------------

    \3084\ FIF Letter at 13, 120.
    \3085\ FIF Letter at 119.
    \3086\ Hanley Letter at 5-6.
---------------------------------------------------------------------------

    In their response, the Participants reiterated their support for 
the inclusion in the CAT of subaccount allocations in Primary Market 
Transactions, but not top-account allocations, and reiterated the 
conclusions from the Plan that reporting top-account allocations would 
likely impose significant costs to CAT Reporters while only providing a 
marginal additional regulatory benefit over subaccount allocation 
data.\3087\ In response to comments regarding the scope of top-account 
allocation information, the Participants restated the definition in the 
Plan that top-account allocations are allocations to institutional 
clients or retail broker-dealers, which are conditional and may 
fluctuate until the offer syndicate terminates.\3088\ The Participants 
did not respond to the comment that the cost estimates in the Plan do 
not contemplate reporting all events in a deal's lifecycle and did not 
further discuss why top-account allocation information should not be 
included in the Discussion Document.
---------------------------------------------------------------------------

    \3087\ Response Letter I at 49.
    \3088\ Response Letter I at 50.
---------------------------------------------------------------------------

    The Commission is revising its analysis of the economic effects of 
including top-account primary market transactions in the CAT and thus 
of whether top-account allocations should be included in the Discussion 
Document in light of comments and the Participants' response. With 
respect to the benefits of including top-account allocation 
information, in addition to subaccount allocation information, in the 
CAT, none of the commenters disagreed with the Commission's analysis. 
In fact, the Commission is expanding its analysis to include the 
additional benefits noted by one commenter that the Commission had not 
previously considered, namely better understanding the economics of the 
offering process and better identifying manipulative activities.\3089\ 
Further, the Participants' response provided no new information on why 
Participants believe top-account allocations provide only a marginal 
regulatory benefit over sub-account allocation data. Therefore, the 
Commission continues to believe that top-account primary market 
allocation information would provide significant regulatory benefits.
---------------------------------------------------------------------------

    \3089\ Hanley Letter at 1-4.
---------------------------------------------------------------------------

    With respect to the costs of including top-account allocation 
information in the CAT, the Commission notes that the estimate of 
$864,000 per year provided by one of the commenters may not be 
comparable to the estimate of $176.1 million provided in the CAT NMS 
Plan. This is because the latter estimate reflects the implementation 
costs of adding top-account allocation information, while the former 
estimate seems to measure the ongoing annual costs to maintain the 
reporting.
    At the same time, the Commission believes that the commenter's 
analysis of costs is consistent with the Commission's analysis in the 
Notice in two respects. First, the commenter's analysis is consistent 
with the Commission's preliminary conclusion that requiring less 
granular timestamps for reporting top-account allocation information 
would result in lower costs for top-account allocation information than 
indicated in the Plan. Second, the commenter's estimate that reporting 
top-account allocation information would cost $864,000 per year in 
ongoing costs is consistent with the Commission's preliminary 
conclusion that the ongoing costs of reporting primary market 
transactions would be a fraction of the ongoing costs of secondary 
market reporting. Indeed, $864,000 per year represents a small fraction 
of the total ongoing annual cost of CAT, which the Commission estimates 
to be $1.7 billion per year.\3090\
---------------------------------------------------------------------------

    \3090\ See Section VI.F.2, supra.
---------------------------------------------------------------------------

    With respect to the commenter who indicated that the cost estimates 
in the Plan did not contemplate indications of interest, the Commission 
notes that the Plan defines top-account allocations to include 
indications of interest--``conditional and may fluctuate until the 
offering syndicate terminates'' \3091\--and suggests that its cost 
estimates for top-account allocations therefore include indications of 
interest. However, because this commenter conducted the study that 
provides the basis for the Plan's cost estimate, the Commission 
believes that the commenter is correct and that the cost estimates in 
the Plan do not represent the costs of top-account allocations as 
defined in the Plan (i.e., the estimates do not cover indications of 
interest). That said, no comments directly disagreed with the reasons 
that the Commission provided in the Notice for why the Commission 
preliminarily believed the costs estimates in the Plan overstated the 
costs of including top-account allocation information in the 
Plan.\3092\ Therefore, in light of the comments, the Commission is less 
clear on the magnitude of the costs of including top-account allocation 
information in the Plan.
---------------------------------------------------------------------------

    \3091\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.6(a).
    \3092\ See Notice, supra note 5, at 30773.
---------------------------------------------------------------------------

    In response to the commenters that indicated that additional 
analysis or consideration of including top-account allocation 
information in the Plan would be beneficial, the Commission notes that 
including this alternative in the Discussion Document provides an 
opportunity for this additional analysis and consideration. The 
Discussion Document will provide an outline of how the Participants 
could incorporate top-account allocation information into

[[Page 84906]]

the CAT Data and include details for each order and Reportable Event 
that may be required to be provided, which market participants may be 
required to provide the data, the implementation timeline, and a cost 
estimate. Indeed, in addition to the commenters' suggestions for more 
study, the Commission believes that the information from commenters 
regarding the benefits of the different types of top-account allocation 
information, and the questions surrounding the cost estimates in the 
Plan, suggest that investors could benefit from the additional analysis 
that would be included in the Discussion Document.
9. Periodic Updates to Customer Information
    In the Notice, the Commission solicited comment on an alternative 
that would eliminate the requirement for periodic full refreshes of 
customer information.\3093\ The Commission stated that the requirement 
for periodic full refreshes could be redundant if the initial list and 
daily updates are complete and accurate and would, therefore, provide 
no additional benefit. Further, not requiring these periodic refreshes 
could reduce the risk of a security breach of personally identifiable 
information. Therefore, the Commission preliminarily believed that 
removing the requirements for periodic full refreshes of customer 
information could minimally reduce the cost of the Plan without 
materially reducing the benefits.
---------------------------------------------------------------------------

    \3093\ See Notice, supra note 5, at 30775-76.
---------------------------------------------------------------------------

    The Commission received two comments relevant to this alternative. 
One commenter suggested ``having the functional support for a voluntary 
full refresh, but . . . eliminat[ing] the mandated requirement to 
provide full refreshes periodically,'' and stated that, ``the initial 
load, daily updates and standard error processing should be sufficient 
to maintain data integrity.'' \3094\ That commenter went on to state 
that it ``may be easier to define all active customers to CAT, or just 
active customers who have transacted in NMS securities.'' The commenter 
stated that removing the requirement may ``only slightly reduce the 
burden or cost,'' although it would improve the overall security of the 
CAT.\3095\ Another commenter stated their belief that, ``periodic 
refreshes of all customer information to the Central Repository is a 
bad idea.'' \3096\ In their response, the Participants stated that they 
believe that a periodic refresh of customer information is beneficial 
because it will help to ensure that all customer information remains 
accurate and up to date.\3097\ The Participants noted the provisions in 
the Plan with respect to information security.\3098\ The Participants 
also noted that the Plan provides that the Participants will define the 
scope of what constitutes a ``full'' customer information refresh with 
the assistance of the Plan Processor to determine the extent to which 
inactive or other accounts would need to be reported.\3099\
---------------------------------------------------------------------------

    \3094\ FIF Letter at 22.
    \3095\ FIF Letter at 93.
    \3096\ Data Boiler Letter at 41.
    \3097\ Response Letter I at 31-32.
    \3098\ Response Letter I at 31-32.
    \3099\ Response Letter I at 31-32.
---------------------------------------------------------------------------

    The Commission has considered the comments and the Participants' 
response and continues to believe that removing the requirements for 
periodic full refreshes of customer information could minimally reduce 
the cost of the Plan without materially reducing the benefits. 
Specifically, the Commission agrees that allowing market participants 
to periodically refresh their customer information but dropping the 
requirement that they refresh it regularly would reduce costs to 
broker-dealers because broker-dealers could choose to do a refresh when 
they believe a full refresh would be more cost effective than editing 
individual records, while not requiring them to do a refresh when they 
believe their customer information stored in the Central Repository is 
accurate. Having a full refresh as an option would save broker-dealers 
the costs associated with running a refresh procedure when it is not 
needed, but allowing it when it is efficient for the broker-dealer to 
update its customer information in this manner. The Commission 
disagrees with the comment that periodic refreshes are a ``bad idea'' 
in general. As discussed above,\3100\ the Commission recognizes that 
periodic refreshes introduce an opportunity for correct data in the 
Central Repository to be replaced by incorrect data due to a problem in 
the refresh procedure. However, the Commission also believes that 
periodic refreshes provide an opportunity for incorrect information in 
the Central Repository to be replaced with correct information. The 
Commission does not have information to estimate whether the former 
outcome is more likely than the latter, because it lacks information on 
the proportion of customer information records that are errant in 
existing databases in industry and the likelihood that data refresh 
procedures introduce incorrect data, and commenters did not provide 
this information. The Commission notes that the Participants' response 
does not address whether the periodic refreshes would be redundant, or 
why submitting the redundant information would be beneficial. However, 
the Commission acknowledges that, as set out in the Participants' 
response, the Plan provides that the Participants will work with the 
Plan Processor to determine the extent to which inactive or other 
accounts would need to be reported,\3101\ which may reduce the costs of 
the periodic refresh by reducing the number of accounts to which it 
applies.
---------------------------------------------------------------------------

    \3100\ See Section V.E.3.a, supra.
    \3101\ Response Letter I, at 31-32.
---------------------------------------------------------------------------

10. Bulk Data Downloads by CAT Reporters
    Several commenters discussed the Plan's treatment of bulk data 
downloads by CAT Reporters. Specifically, some commenters suggested 
that CAT Reporters should be allowed to access and export the data they 
report to the Central Repository. The Commission has considered the 
potential economic effects of that alternative approach, as discussed 
below.
    Several commenters suggested that the Plan permit CAT Reporters to 
access their own CAT Data through bulk data exports.\3102\ Another 
commenter stated that permitting CAT Reporters to download their own 
data from the Central Repository will provide benefits such as improved 
CAT reporting error rates and improved ability to meet regulatory, 
surveillance, and compliance requirements.\3103\ One commenter 
suggested that independent software vendors be permitted to access the 
CAT Data on behalf of their clients.\3104\ However, several commenters 
expressed strong concerns about allowing any entity to extract or 
download data from the Central Repository, suggesting that the risk of 
a data breach would greatly increase as the data are maintained at more 
sites.\3105\ Commenters also suggested that the risk increases when 
those entities downloading the data may have technology systems that 
are not subject to the same high security requirements at the Plan 
Processor.\3106\
---------------------------------------------------------------------------

    \3102\ FIF Letter at 1, 9, 60-61; KCG Letter at 7-8.
    \3103\ TR Letter at 8.
    \3104\ Bloomberg Letter at 7.
    \3105\ SIFMA Letter at 20; Fidelity Letter at 4; ICI Letter at 
6-7.
    \3106\ FSR Letter at 7.
---------------------------------------------------------------------------

    In their response, the Participants stated that they believe that 
there may be merit to providing Industry Member CAT Reporters and their 
vendors with bulk access to the CAT Reporters' own unlinked CAT Data, 
but noted that such

[[Page 84907]]

access also raises a variety of operational, security, cost and other 
issues related to the CAT. The Participants stated that they will 
consider this issue once the CAT is operational.\3107\
---------------------------------------------------------------------------

    \3107\ Response Letter I at 43-44.
---------------------------------------------------------------------------

    Currently, the CAT NMS Plan states that, initially, CAT Reporters 
will not have access to their data submissions through bulk data 
extracts.\3108\ The Commission agrees with commenters that an 
alternative approach that specified that CAT Reporters will be allowed 
to make bulk extractions of their own data from the Central Repository 
would help CAT Reporters correct errors and respond to regulatory 
inquiries. Specifically, the Commission believes that, by querying and 
analyzing the full set of data submitted to the CAT, as opposed to 
viewing only the errors, CAT Reporters may be able to better diagnose a 
problem that could be system-wide. This could facilitate corrections to 
the process that CAT reporters use to record and report order events to 
prevent future errors. The Commission also recognizes that there may be 
benefits to internal surveillance regarding compliance, tracking 
regulatory submissions by third parties, and CAT Reporter 
recordkeeping.\3109\ The Commission believes this could have benefits 
in terms of increasing the accuracy and timeliness of the CAT Data by 
allowing errors to be corrected faster and more effectively, and by 
possibly reducing reporting costs for some entities by making the error 
correction process easier and more efficient and eliminating the need 
for CAT Reporters to store the data they submit on their own systems.
---------------------------------------------------------------------------

    \3108\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
8.2.
    \3109\ FIF Letter at 60-61.
---------------------------------------------------------------------------

    However, the Commission notes that, under the Plan, CAT Reporters 
will be able to view their submissions online in a read-only, non-
exportable format, which will facilitate error identification and 
correction.\3110\ Commenters did not provide sufficient information to 
allow the Commission to assess the magnitude of the potential benefits 
of allowing bulk data exports in addition to read-only access,\3111\ 
and the Commission believes they may be modest. The Commission also 
notes that, to the extent CAT Reporters retain copies of their 
submissions, they may be able to refer to that data when correcting 
errors and responding to regulatory inquiries. Further, the Commission 
also agrees with commenters and the Participants that allowing CAT 
Reporters to engage in bulk data exports, even if limited to their own 
reported data, could increase the risk of a data breach insofar as it 
increases the number of systems that have access to the CAT Central 
Repository. As discussed above,\3112\ while uncertain, the costs of a 
security breach could be significant. The Commission recognizes that 
some CAT Reporters that would be downloading bulk data might already 
have access to the Central Repository in order to upload their data, 
but it notes that many may not, because their data may be reported by 
one or more third parties. The Commission notes that it is difficult to 
determine the magnitude by which the risk of a breach would increase, 
because many of the decisions that define security measures for the 
Central Repository are coincident with the selection of the Plan 
Processor, and there is considerable diversity in the potential 
security approaches of the Bidders. The Commission notes that the 
Participants state that they will reconsider the issue once the CAT is 
operational.\3113\
---------------------------------------------------------------------------

    \3110\ See CAT NMS Plan, supra note 5, at Appendix D, Section 
10.1.
    \3111\ For example, the Commission does not know how many of the 
errors that may need to be corrected may be rooted in a problem that 
a CAT Reporter would require bulk-downloaded data to detect.
    \3112\ See Section V.F.4.a, supra.
    \3113\ Response Letter I at 44.
---------------------------------------------------------------------------

11. Alternatives to the CAT NMS Plan
    In the Notice, the Commission recognized that approving the CAT NMS 
Plan is not the only available means of improving the completeness, 
accuracy, accessibility and timeliness of the data used in regulatory 
activities.\3114\ Therefore, the Commission solicited comment on the 
broad set of alternatives involving modifying existing systems to 
reduce their data limitations instead of approving the CAT NMS Plan.
---------------------------------------------------------------------------

    \3114\ See Notice, supra note 5, at 30776.
---------------------------------------------------------------------------

    The Commission discussed how, as one alternative to the CAT NMS 
Plan, it could require modifications to OATS. However, the Commission 
also noted that OATS would require significant modifications in order 
to provide the attributes that the Commission deems crucial for an 
effective audit trail. Furthermore, the Commission indicated that any 
OATS-based alternative to CAT that did not provide these attributes 
would limit the potential benefits of the alternative 
significantly.\3115\
---------------------------------------------------------------------------

    \3115\ Id.
---------------------------------------------------------------------------

    The Commission acknowledged that it does not have sufficient 
information to estimate the potential cost savings, if any, from 
mandating an OATS-based approach as an alternative to the CAT NMS Plan. 
However, the Commission noted that Rule 613 provided flexibility to the 
SROs to propose an approach based on OATS and that the SROs could have 
utilized an OATS-based approach if that approach had represented 
significant cost savings relative to the Plan's approach.\3116\
---------------------------------------------------------------------------

    \3116\ Id.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed another alternative, which 
would be for the Commission to modify other data sources instead of, or 
in combination with, OATS. However, the Commission also noted that like 
OATS, all of the current data sources have limitations that would need 
to be addressed in order to provide the attributes that the Commission 
deems crucial to an effective audit trail. Furthermore, the Commission 
preliminarily believed that modifying any other single data source 
would be more costly than modifying OATS while adopting an alternative 
to the CAT NMS Plan that relied on multiple data sources . . . would 
eliminate the benefits associated with having a single complete 
consolidated source from which regulators can access trade and order 
data, which the Commission considers to be very significant.\3117\
---------------------------------------------------------------------------

    \3117\ Id.
---------------------------------------------------------------------------

    Overall, the Commission preliminarily believed that mandating 
improvements to the completeness, accuracy, accessibility, and 
timeliness of current data sources without an NMS Plan that requires 
the consolidation of data and increased coverage across markets and 
broker-dealers would likely significantly limit the potential benefits 
relative to the Plan, possibly without providing significant cost 
savings.\3118\
---------------------------------------------------------------------------

    \3118\ Id.
---------------------------------------------------------------------------

    The Commission received one comment on the possibility of requiring 
modifications to OATS as an alternative to the CAT NMS Plan. The 
commenter agreed with the Commission's analysis and the CAT NMS Plan 
approach, noting that ``the vision of CAT has evolved through the years 
to become a much more comprehensive system than OATS or any other 
current system'' and that ``there is an opportunity now to take 
advantage of new technologies and the associated cost benefits they 
provide.'' \3119\ Another commenter suggested an alternate approach to 
the CAT NMS Plan where the Commission would host the system in-house, 
under its direct and sole control, retaining the prerogative to grant 
(or deny) access to the data to non-broker-dealer affiliated

[[Page 84908]]

SROs.\3120\ The commenter believed that collecting the data pursuant to 
an NMS Plan providing for SRO ownership, management and control over 
the data would limit the benefits of the Plan by potentially limiting 
the Commission's access to, and use of, CAT Data.\3121\
---------------------------------------------------------------------------

    \3119\ FIF Letter at 121.
    \3120\ Better Markets Letter at 3-5.
    \3121\ Specifically, the commenter stated that allowing the SROs 
ownership, management, and control over the data, without direct SEC 
oversight and control, would have ``serious and unacceptable'' 
consequences, because there will be a limited number of user 
accounts allocated to the SEC; there may be limitations on the SEC's 
access to the data for non-regulatory purposes; the potential exists 
for the CAT LLC to charge the SEC for accessing the CAT system and 
its data; the SEC does not participate directly in the governance of 
the CAT Plan; the CAT Plan Participants may dismiss the Plan 
Processor with no notice to the SEC; and the Plan Participants may 
make material changes to the functions and operations of the CAT NMS 
system (or matters related to the CAT data).
---------------------------------------------------------------------------

    The Commission has considered the comments and continues to believe 
that mandating improvements to the completeness, accuracy, 
accessibility, and timeliness of current data sources without an NMS 
Plan that requires the consolidation of data and increased coverage 
across markets and broker-dealers would likely significantly limit the 
potential benefits, possibly without providing significant cost 
savings. In response to the suggestion that the Commission host the 
system in-house, the Commission believes that the concerns expressed by 
the commenter with respect to the Commission's ability to access and 
utilize the CAT Data are mitigated by the Commission's direct oversight 
authority with respect to the CAT NMS Plan, including but not limited 
to its ability to observe all meetings, including those conducted in 
Executive Session, its review and approval of rule changes, and its 
examination and inspection authority over the SROs. Further, as 
discussed above,\3122\ SROs have specific obligations under the 
Exchange Act as front-line regulators of the securities markets, and 
accordingly are well-positioned to oversee the development and 
operation of the CAT in a manner that will best fulfill regulatory 
needs, subject to oversight by the Commission. The Commission therefore 
does not agree that an alternative to the CAT NMS Plan where the 
Commission hosted the system in-house would result in greater benefits 
as compared to the CAT NMS Plan approach.
---------------------------------------------------------------------------

    \3122\ See supra note 747.
---------------------------------------------------------------------------

12. Alternatives Discussed in the CAT NMS Plan
    In the Notice, the Commission recognized that the Plan discussed 
many alternatives that the Commission did not discuss in the 
Alternatives Section of the Notice.\3123\ Rule 613(a)(1)(xii) required 
the Participants to discuss in the Plan any reasonable alternative 
approaches that the Plan sponsors considered in developing the Plan, 
including a description of any such alternative approach; the relative 
advantages and disadvantages of each such alternative, including an 
assessment of the alternative's costs and benefits; and the basis upon 
which the Plan sponsors selected the approach reflected in the CAT NMS 
Plan. Such discussions appear in Section 12 of Appendix C of the Plan. 
The Commission reviewed these alternatives and did not include in the 
Alternatives Section of its Notice a discussion of all of the specific 
alternatives addressed in the Plan. In some cases, the Commission had 
no analysis to add beyond the analysis in the Plan. In other cases, the 
Plan did not require any specific alternative, so the Commission could 
not analyze the effect on the Plan of selecting a different 
alternative.
---------------------------------------------------------------------------

    \3123\ See Notice, supra note 5, at 30779-82 (Request for 
Comment Nos. 437-50).
---------------------------------------------------------------------------

    The Commission received sufficient comments to analyze some 
economic implications of alternatives related to the primary storage 
method, data ingestion format approaches, the process to develop the 
CAT, and user support and the help desk. However, the Commission still 
does not have sufficient information to add to the Plan's analysis of 
the alternatives regarding organizational structure,\3124\ personally 
identifiable information,\3125\ required reportable events,\3126\ data 
feed connectivity,\3127\ industry testing,\3128\ user management,\3129\ 
and quality assurance.\3130\
---------------------------------------------------------------------------

    \3124\ The Commission received one comment on its request for 
comment regarding the organizational structure. Better Markets 
opposes the for-profit nature of the CAT LLC and the fact that the 
Commission would not control that corporation. See Section IV.B.4, 
supra, discusses the Participants' and the Commission's responses to 
that comment. Specifically, the CAT LLC will not be for-profit.
    \3125\ Many commenters suggested alternative approaches to 
maintain the security and confidentiality of PII. See Section 
IV.D.7.b, supra, for a summary of these comments and the 
Commission's response.
    \3126\ Data Boiler suggested including the ``results order 
event'' and the ``CAT feedback order event'' as a ``way to introduce 
randomness for the sake of improving information security control.'' 
While the Commission is sensitive to security, the Commission still 
does not have sufficient information to distinguish these order 
events from the required order event types to ascertain the benefits 
other than the security benefits mentioned by this commenter or to 
analyze the costs of reporting these order types. See Data Boiler 
Letter at 42.
    \3127\ Data Boiler suggested receiving SIP data in real-time, 
but did so conditional on the Central Repository receiving the data 
in real-time. Because the SROs may already get SIP data in real-time 
for other purposes and the CAT reporting will be on T+1, the 
Commission still does not have sufficient information to fully 
analyze the alternative of receiving SIP data in real-time. See Data 
Boiler Letter at 42; see also Section IV.D.3, supra, for the 
Commission's response to this comment.
    \3128\ Data Boiler suggested not mandating an approach to 
industry testing because ``appropriate management flexibilities/
discretions are needed,'' but did not provide further explanation 
that would allow the Commission to better understand the economic 
tradeoffs. See Data Boiler Letter at 42. Further, FIF suggested 
specific testing standards but did not provide further explanation 
that would allow the Commission to better understand the economic 
tradeoffs of specifying these standards. See FIF Letter at 13, 125-
26; see also Section IV.D.12, supra, for the Commission's response 
to these comments.
    \3129\ FIF stated that the Plan does not need to require a 
specific approach to user management, but that the Plan should 
specify some functionality and criteria for evaluation of the 
approach. For example, the user management system should provide for 
on-boarding and support levels of entitlement. See FIF Letter at 
129-30. The commenter did not provide further explanation that would 
allow the Commission to better understand the costs and benefits of 
specifying these functionalities or not specifying an approach. 
Further, SIFMA provided specific suggestions for user management but 
did not specifically address the relative economic effects of 
various alternatives. See SIFMA Letter at 21.
    \3130\ Data Boiler suggested not mandating an approach to 
quality assurance because appropriate management flexibilities/
discretions are needed, but did not provide further explanation that 
would allow the Commission to better understand the economic 
tradeoffs. See Data Boiler Letter at 42.
---------------------------------------------------------------------------

a. Primary Storage
    In the Notice, the Commission solicited comment on whether the CAT 
NMS Plan should mandate a particular data storage method and on how a 
storage method could affect the costs and benefits of the Plan.\3131\ 
The CAT NMS Plan states that bidders proposed two methods of primary 
data storage: Traditionally-hosted storage architecture and 
infrastructure-as-a-service.\3132\ The CAT NMS Plan does not mandate a 
specific method for primary storage, but does indicate that the storage 
solution would meet the security, reliability, and accessibility 
requirements for the CAT, including storage of PII data, separately. 
The CAT

[[Page 84909]]

NMS Plan also indicates several considerations in the selection of a 
storage solution including maturity, cost, complexity, and reliability 
of the storage method.
---------------------------------------------------------------------------

    \3131\ See Notice, supra note 5, at 30780.
    \3132\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
D.12(c). Traditionally-hosted storage architecture is a model in 
which an organization would purchase and maintain proprietary 
servers and other hardware to store CAT Data. Infrastructure-as-a-
service is a provisioning model in which an organization outsources 
the equipment used to support operations, including storage, 
hardware, servers, and networking components, to a third party who 
charges for the service on a usage basis.
---------------------------------------------------------------------------

    The Commission received three comment letters in response to this 
alternative.\3133\ All three commenters recommended not mandating a 
particular storage method. One commenter suggested that mandating the 
storage method would ``make the structure too rigid and static, 
hindering the flexibility for future scalability.'' \3134\ Another 
commenter claimed too little information in that the ``eventual Plan 
Processor is in a better position to define the storage methods'' 
stating that evaluation considers ``total system design, not storage 
methods in isolation.'' \3135\ The third commenter did not provide 
arguments supporting its recommendation, but did point out that the 
method of storage would allow the ability to return results of queries 
at varying time intervals.\3136\ The commenters did not discuss the 
relative costs and benefits of the specific architectures mentioned in 
the Plan but one commenter indicated that its own system could enable 
ultrafast analysis/pattern recognition and save significant 
space.\3137\ Based on these comments, the Commission believes that 
mandating a particular storage method could be costly, but Commission 
did not receive comments on the benefits of mandating a storage method 
or on the costs or benefits of particular storage methods. Therefore, 
the Commission has more information than at the time of the Notice 
regarding the costs of mandating a particular storage method but still 
cannot fully analyze the economic effects.
---------------------------------------------------------------------------

    \3133\ FIF Letter at 125; FSI Letter at 3; Data Boiler Letter at 
8.
    \3134\ Data Boiler Letter at 8.
    \3135\ FIF Letter at 125.
    \3136\ FSI Letter at 3.
    \3137\ Data Boiler Letter at 8.
---------------------------------------------------------------------------

b. Data Ingestion Format
    In the Notice, the Commission requested comment on whether the Plan 
should mandate a particular approach to data ingestion.\3138\ The CAT 
NMS Plan does not mandate the format in which data must be reported to 
the Central Repository.\3139\ Rather, the Plan provides that the Plan 
Processor will determine the electronic format in which data must be 
reported, and that the format will be described in the Technical 
Specifications.\3140\ The Plan discusses the tradeoffs between 
requiring that the CAT Reporters report data to CAT in a uniform 
defined format, in existing messaging protocols, or a hybrid of 
both.\3141\ The Plan does not require any approach, but will determine 
the approach in conjunction with the selection of the Plan Processor. 
An example of a uniform defined format includes the current process for 
reporting data to OATS.\3142\ Several bidders proposed to leverage the 
OATS format and enhance it to meet the requirements of Rule 613. The 
Plan states that this could reduce the burden on certain CAT Reporters 
(i.e., current OATS Reporters) and simplify the process for those CAT 
Reporters to implement the CAT.\3143\ The other alternative, accepting 
existing messaging protocols, would allow CAT Reporters to submit 
copies of their order handling messages that are typically used across 
the order lifecycle and within order management processes, such as 
FIX.\3144\ The Plan states that using existing messaging protocols 
could result in quicker implementation times and simplify data 
aggregation.\3145\ The Plan further notes that surveys revealed no cost 
difference between the two approaches,\3146\ but that FIF members 
prefer using the FIX protocol.\3147\
---------------------------------------------------------------------------

    \3138\ See Notice, supra note 5, at 30780-81.
    \3139\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
D.12(f); see also id. at Appendix C, Section A.1(a).
    \3140\ Id. at Appendix D, Section 2.1.
    \3141\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(i)(A)(2), Section D.12(f). These are also called ``Approach 
1'' and ``Approach 2'' elsewhere in this economic analysis.
    \3142\ This is Approach 2 in the CAT Reporters Study. See CAT 
NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(A)(2).
    \3143\ Id. at Appendix C, Section D.12(f).
    \3144\ This is Approach 1 in the CAT Reporters Study. Id. at 
Appendix C, Section B.7(b)(i)(A)(2).
    \3145\ Id. at Appendix C, Section D.12(f).
    \3146\ Id.
    \3147\ Id.
---------------------------------------------------------------------------

    While the Plan discussed a ``uniform defined format'' as different 
from existing messaging protocols such as FIX, the Commission 
understands that the term ``uniform defined format'' can also apply to 
FIX. To clarify the distinction between the two approaches, the 
Commission refers to one approach as requiring a ``specialized 
delimited flat file'' approach and the other as requiring existing 
messaging protocols.
    In addition to soliciting comment on whether the Plan should 
mandate an approach, the Commission also requested information on the 
relative costs and benefits, including implementation and ongoing costs 
of the data ingestion format approaches.\3148\ Further, the Commission 
noted that the survey results that the costs of the approaches are 
similar did not seem intuitive and requested comment on why the costs 
appear similar in the survey results.\3149\
---------------------------------------------------------------------------

    \3148\ See Notice, supra note 5, at 30780-81.
    \3149\ See Notice, supra note 5, at 30737 (Request for Comment 
Nos. 318 and 331).
---------------------------------------------------------------------------

    As an alternative to the Plan, four commenters seemed to support 
specifying an approach to data ingestion format.\3150\ One commenter 
stated that mandating an approach in the Plan would give industry more 
time to prepare and would limit the chances that broker-dealers would 
need to make significant changes after seeing the Technical 
Specifications, which could seriously compromise the implementation 
schedule.\3151\ In particular, this commenter stated that the data 
ingestion format approach is a critical component of the Plan and ``an 
optimum solution that meets the needs of industry at reasonable cost 
and is minimally disruptive'' would require that the approach be 
``widely reviewed and vetted across the industry.'' \3152\ Another 
commenter suggested mandating the approach for consistency and 
transparency.\3153\ The other two commenters that supported mandating 
the approach in the Plan provided arguments regarding the effects of a 
specific approach but not the effects of mandating an approach.
---------------------------------------------------------------------------

    \3150\ FIF Letter at 91; FIX Trading Letter at 1; Better Markets 
Letter at 7; ICI Letter at 13.
    \3151\ FIF Letter at 90.
    \3152\ FIF Letter at 90.
    \3153\ FIX Trading Letter at 1.
---------------------------------------------------------------------------

    Another alternative would be to specify the actual format in the 
Plan. Of the four commenters who supported mandating the approach, one 
also supported mandating the format in the Plan.\3154\
---------------------------------------------------------------------------

    \3154\ Better Markets Letter at 7.
---------------------------------------------------------------------------

    Six commenters provided information on the tradeoffs or economic 
effects of various approaches or formats.\3155\ While some commenters 
addressed the alternatives of a specialized delimited flat file such as 
a modified OATS, existing messaging protocol such as FIX, or a hybrid 
of the two,\3156\ others commented more generally on the impacts of 
non-uniform formats or standards without indicating whether they 
consider a messaging protocol to be non-uniform or uniform format or 
standard.\3157\ Only one commenter specifically addressed why the costs 
of reporting using Plan-mandated

[[Page 84910]]

messaging protocols would be similar to reporting in a specialized 
delimited flat file format, and that commenter asserted that the costs 
should be the same for either approach because accepting existing 
message protocols would require a more expensive infrastructure and the 
cost would likely be passed down to the CAT Reporters.\3158\ The six 
commenters also provided mixed information on the economic effects of 
various considerations,\3159\ such as accepting multiple formats or a 
single format,\3160\ and accepting only widely used existing formats, 
new specialized delimited flat file formats, or existing bespoke 
broker-dealer formats.\3161\
---------------------------------------------------------------------------

    \3155\ These comments are summarized in more detail in Section 
IV.D.2, supra.
    \3156\ FIF Letter at 90-91; FIX Trading Letter at 1. ICI 
provided a messaging protocol as an example, but did not recommend a 
messaging protocol specifically.
    \3157\ ICI Letter at 13; Better Markets Letter at 7-8; UnaVista 
Letter at 2-3.
    \3158\ Data Boiler Letter at 36.
    \3159\ See Section IV.D.2, supra, for a complete summary of 
these comments as well as the Participants' and Commission's 
responses.
    \3160\ Data Boiler Letter at 41; FIF Letter at 91; FIX Trading 
Letter at 1; UnaVista Letter at 2-3; ICI Letter at 13; Better 
Markets Letter at 7-8.
    \3161\ Data Boiler Letter at 41; FIF Letter at 90-91; FIX 
Trading Letter at 1; ICI Letter at 13; Better Markets Letter at 7.
---------------------------------------------------------------------------

    In response to comments, the Participants explained that they 
continue to believe that the Plan should not mandate a specific message 
format.\3162\ That said, the Participants understand that the message 
format used for reporting to the Central Repository must be easily 
understood and adopted by the industry, and this factor will be 
considered as the Participants evaluate each Bidder's solution. 
Moreover, the Participants also will take into consideration that the 
Plan Processor must be able to reliably and accurately convert data to 
a uniform electronic format for consolidation and storage, regardless 
of the message formats in which the CAT Reporters would be required to 
report data to the Central Repository. The message format(s) ultimately 
selected for reporting to the Central Repository will be described in 
the Technical Specifications, which will be approved by the Operating 
Committee. In addition, the Participants indicated that the Bids of the 
three remaining Bidders propose accepting existing messaging protocols 
(e.g., FIX), rather than requiring CAT Reporters to use a new 
format.\3163\
---------------------------------------------------------------------------

    \3162\ Response Letter I at 29; see also Section IV.D.2, supra, 
for a complete discussion of the Participants' response.
    \3163\ Response Letter III at 13.
---------------------------------------------------------------------------

    The Commission has considered the comments and Participants' 
responses in relation to whether the Plan should mandate a specific 
approach and believes that there are certain costs and benefits 
associated with mandating the approach in the Plan and that not 
mandating the approach is a source of uncertainty in assessing the 
economic effects of the Plan. The Commission believes that the risks to 
the implementation schedule (and therefore an increase in 
implementation costs) of not mandating an approach would be lower if 
CAT Reporters could submit their reports to CAT in the message 
protocols they currently use for business purposes because such 
implementation would involve updating current systems rather than 
building new systems. The Commission understands from the Participants' 
response that all remaining Bidders would have within the Plan 
Processor the ability to accept existing message protocols. Therefore, 
those CAT Reporters currently using the messaging protocols accepted by 
the eventual Plan Processor would not need to make significant systems 
changes. However, the Commission recognizes that the mixed information 
regarding the economic effects of particular approaches or formats 
reflects the level of uncertainty in the range of benefits and costs 
associated with the selection of data ingestion formats and thus the 
impact of the lack of transparency in the Plan on this economic 
analysis.
    In response to the comment that the costs of the two approaches 
should be similar, the Commission notes that the costs of the 
approaches do not seem consistent with the comment. Whereas the 
commenter's statements would suggest that the costs of message 
protocols would be lower for broker-dealers, vendors, and SROs, and 
higher for building and operating the Central Repository, and similar 
in aggregate, the costs actually appear similar for each survey group. 
Therefore, the Commission continues to recognize that the survey result 
indicating that the costs of the approaches are similar does not seem 
intuitive.
    Finally, the Commission notes the potential for the Plan Processor 
to use the opportunity to select a message format that entrenches 
itself by increasing the costs of replacement due to 
underperformance.\3164\ However, as explained above and in Section 
IV.D.2 the Participants will consider whether a Bidder has proposed a 
format that is easily understood and adoptable by the industry, and the 
Commission believes that the message format decision must be made in 
connection with developing the overall architecture for CAT.
---------------------------------------------------------------------------

    \3164\ See Section V.I.4.b.(2), supra, for a discussion of how 
the costs of switching Plan Processors limits the competitive 
incentives of the selected Plan Processor and of the provisions that 
promote good performance by the Plan Processor.
---------------------------------------------------------------------------

c. Process To Develop CAT
    In the Notice, the Commission requested comment on whether the CAT 
NMS Plan should mandate a particular development process and the impact 
on the relative costs and benefits of particular processes.\3165\ 
Bidders proposed, and the Plan describes, several processes for 
development of the CAT: The agile or iterative development model, the 
waterfall model, and hybrid models.\3166\ The CAT NMS Plan does not 
mandate a particular development process because any of the options 
could be utilized to manage the development of CAT.\3167\ The CAT NMS 
Plan notes that the agile model is more flexible and more susceptible 
to the early delivery of software for testing and feedback, but that 
the agile model makes it more difficult to accurately estimate the 
effort and time required for development. The waterfall model would 
also facilitate longer-term planning and coordination among multiple 
vendors or project streams.\3168\
---------------------------------------------------------------------------

    \3165\ See Notice supra note 5, at 30781.
    \3166\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
D.12(g). An agile methodology is an iterative model in which 
development is staggered and provides for continuous evolution of 
requirements and solutions. A waterfall model is a sequential 
process of software development with dedicated phases for 
Conception, Initiation, Analysis, Design, Construction, Testing, 
Production/Implementation and Maintenance. Id.
    \3167\ Id.
    \3168\ Id.
---------------------------------------------------------------------------

    Two commenters suggested that the Plan not mandate a particular 
development method.\3169\ One commenter stated that ``appropriate 
management flexibilities/discretions are needed.'' \3170\ The other 
commenter cited bidder expertise and that the Plan Processor should be 
allowed to choose the ``methodology most appropriate for the specific 
development effort.'' \3171\ The commenter continued on to say that 
``the different development methodologies can each be equally effective 
in an implementation plan, depending on many factors and tradeoffs.'' 
While providing information on the costs of mandating a method, neither 
provided relative costs and benefits of specific methods.
---------------------------------------------------------------------------

    \3169\ FIF Letter at 49; Data Boiler Letter at 42.
    \3170\ Data Boiler Letter at 42.
    \3171\ FIF Letter at 49.
---------------------------------------------------------------------------

    Based on these comments, the Commission believes that mandating a 
specific development process in the Plan could be costly because 
mandating the process removes the ability for the Plan Processor to 
select the lowest cost or most effective methodology for a given 
implementation. The Commission recognizes that the Plan will involve 
one big implementation initially, but

[[Page 84911]]

may also involve many subsequent implementations based on amendments to 
the Plan or changes in the technical specifications. The nature of 
these implementations could vary greatly and the same development 
methodology may not be most effective in all situations. Therefore, the 
Commission recognizes that mandating a specific development process 
would be costly.
d. User Support and Help Desk
    In the Notice, the Commission requested comment on whether the CAT 
NMS Plan should specify the standards for user support and on the 
relative costs and benefits of the alternative standards.\3172\ The CAT 
NMS Plan discusses several alternatives related to how the Plan 
Processor provides a CAT help desk that would be available 24 hours a 
day, 7 days a week and be able to manage 2,500 calls per month.\3173\ 
Specifically, alternatives relate to the number of user support staff 
members, the degree to which the support team is dedicated to CAT, and 
whether the help desk is located in the United States or offshore. The 
CAT NMS Plan discusses the benefit and cost tradeoffs,\3174\ but does 
not mandate any of the particular alternatives. Instead, the CAT NMS 
Plan commits to considering each Bidder's user support proposals in the 
context of the overall Bid.
---------------------------------------------------------------------------

    \3172\ See Notice, supra note 5, at 30781.
    \3173\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
D.12(j). The RFP specified these standards. Id.
    \3174\ See id. The Plan states that a larger support staff could 
be more effective, but would be more costly. Further, a dedicated 
CAT support team would have a deeper knowledge of CAT but would be 
more costly. Finally, a U.S.-based help desk could facilitate 
greater security and higher quality service, but would be more 
costly. Id.
---------------------------------------------------------------------------

    Two commenters addressed alternatives regarding user support and a 
help desk.\3175\ One commenter recommended that customer support 
guidelines and functionalities be specified in the Plan \3176\ while 
the other suggested that the costs of user support and a help desk 
could be ``minimized or eliminated'' under different data collection 
and reporting methods.\3177\ The commenter that supported specifying 
guidelines and functionalities in the Plan stated that ``the level of 
service provided is directly tied to the industry's ability to meet the 
aggressive quality goals and error rates, and directly tied to customer 
service costs in bidders' proposals, and ultimately in costs to be 
borne by the industry.'' Therefore, the commenter said they ``should be 
dictated by the Plan and not left to Plan Processor discretion.'' 
Rather than focus on the size and location of the support team and 
whether the team is dedicated to CAT, the commenter suggests specific 
standards and functionalities such as wait times, a tracking system, 
and the ability for web submission or ``on-line chat.''
---------------------------------------------------------------------------

    \3175\ FIF Letter at 125-29; Data Boiler Letter at 42.
    \3176\ FIF Letter at 125-29.
    \3177\ Data Boiler Letter at 42.
---------------------------------------------------------------------------

    In their response, the Participants clarified that the CAT Help 
Desk staff will be trained to support CAT Reporters as needed, and 
noted that this may include, for example, training related to data 
access tools, data submission requirements, and customer support.\3178\
---------------------------------------------------------------------------

    \3178\ See Response Letter I at 38.
---------------------------------------------------------------------------

    The Commission has considered these comments and recognizes the 
benefits of the Plan specifying certain functionalities and standards 
while letting the Plan Processor select the size and location of the 
support team necessary to meet these functionalities and standards. In 
particular, the Commission agrees with the commenter that specifying 
guidelines and functionalities can facilitate the accomplishment of the 
benefits described herein and could result in lower costs to the 
industry relative to the Plan. However, the Commission also agrees that 
the Plan Processor may be in a better position to determine the size 
and location of the support team needed to satisfy the guidelines and 
functionalities.
VI. Paperwork Reduction Act
    Certain provisions of Rule 613 contain ``collection of information 
requirements'' within the meaning of the Paperwork Reduction Act of 
1995 (``PRA'').\3179\ The Commission published notice requesting 
comment on the collection of information requirements in the Notice and 
submitted the proposed collection to the Office of Management and 
Budget (``OMB'') for review in accordance with 44 U.S.C. 3507 and 5 CFR 
1320.11. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid OMB control number. The control number for Rule 613 
is OMB Control No. 3235-0671 and the title of the collection of 
information is ``Creation of a Consolidated Audit Trail Pursuant to 
Section 11A of the Securities Exchange Act of 1934 and Rules 
Thereunder.'' The Commission is adopting this collection of 
information.
---------------------------------------------------------------------------

    \3179\ 44 U.S.C. 3501 et. seq.
---------------------------------------------------------------------------

    The Commission has amended the CAT NMS Plan, resulting in ``a new 
collection of information'' ``CAT NMS Plan Reporting and Disclosure 
Requirements.'' The new collection of information is described in 
Section VI.E., below. The Commission is requesting public comment on 
the new collection of information requirement in this Order. We are 
applying for an OMB control number for the proposed new collection of 
information in accordance with 44 U.S.C. 3507(j) and 5 CFR 1320.13, and 
OMB has not yet assigned a control number to the new collection. 
Responses to the new collection of information would be mandatory. An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid OMB control number.
    This Order includes the Commission's estimates of the costs 
associated with the requirements of Rule 613, as imposed by the CAT NMS 
Plan. Similarly, the Commission is discussing below its estimates of 
the burden hours associated with the information collection 
requirements of the CAT NMS Plan, as filed by the Participants, and as 
subsequently amended by the Commission.\3180\ These estimates are based 
on the requirements of Rule 613 and take into account the Exemption 
Order.\3181\ Information and estimates contained in the CAT NMS Plan 
that was submitted by the Participants also informed these estimates 
because they provide a useful, quantified point of reference regarding 
potential burdens and costs. In the Notice, the Commission requested 
comment on the collection of information requirements associated with 
the CAT NMS Plan that were required by Rule 613. As noted above, the 
Commission received 24 comment letters on the Notice.\3182\ Although 
the Commission did not receive any comments on the hourly burdens 
associated with the information collections required by Rule 613, a 
number of comments were submitted that addressed the Commission's cost

[[Page 84912]]

estimates related to these collections.\3183\
---------------------------------------------------------------------------

    \3180\ See Section VI.E., infra.
    \3181\ See Exemption Order, supra note 21. The Commission 
acknowledges that the CAT NMS Plan as filed contains provisions in 
addition to those required by Rule 613 (e.g., requiring the 
inclusion of OTC Equity Securities; the availability of historical 
data for not less than six years in a manner that is directly 
available and searchable without manual intervention from the Plan 
Processor; a complete symbology database to be maintained by the 
Plan Processor, including the historical symbology; as well as issue 
symbol information and data using the listing exchange symbology 
format). See CAT NMS Plan, supra note 5, at Section 1.1 (defining 
``Eligible Security'' as all NMS securities and all OTC Equity 
Securities); Section 6.5(b)(1); Appendix C, Section A.1(a); Appendix 
D, Section 2.
    \3182\ See supra note 6.
    \3183\ In addition to the discussion that follows, the 
Commission's cost estimates and responses to cost comments are 
discussed in detail in Section V.F., supra.
---------------------------------------------------------------------------

A. Summary of Collection of Information Under Rule 613
    Rule 613 requires that the CAT NMS Plan must provide for an 
accurate, time-sequenced record of an order's life, from receipt or 
origination, through the process of routing, modification, cancellation 
and execution.\3184\ The Central Repository, created by the 
Participants, would be required to receive, consolidate and retain the 
data required under the Rule.\3185\ Such data must be accessible to 
each Participant, as well as the Commission, for purposes of performing 
regulatory and oversight responsibilities.\3186\
---------------------------------------------------------------------------

    \3184\ See 17 CFR 242.613(c)(1).
    \3185\ See 17 CFR 242.613(e)(1).
    \3186\ See 17 CFR 242.613(e)(1), (e)(2).
---------------------------------------------------------------------------

    Rule 613 provides that the CAT NMS Plan must require that all 
Participants that are exchanges, and their members, record and report 
to the Central Repository certain data for each NMS security registered 
or listed on a national securities exchange, or admitted to unlisted 
trading privileges on such exchange, and each Participant that is a 
national securities association, and its members, record and report for 
each NMS security for which transaction reports are required to be 
submitted to the national securities association in a uniform 
electronic format or in a manner that would allow the Central 
Repository to convert the data to a uniform electronic format for 
consolidation and storage. This data must be recorded contemporaneously 
with the Reportable Event and reported to the Central Repository in no 
event later than 8:00 a.m. ET on the trading day following the day such 
information has been recorded by the national securities exchange, 
national securities association, or member.\3187\
---------------------------------------------------------------------------

    \3187\ See 17 CFR 242.613(c)(3).
---------------------------------------------------------------------------

    Rule 613 also provides that the CAT NMS Plan must require each 
member of a Participant to record and report to the Central Repository 
other information which may not be available until later in the 
clearing process no later than 8:00 a.m. ET on the trading day 
following the day the member receives such information.\3188\ Rule 613 
also requires the Participants to provide to the Commission, at least 
every two years after the effectiveness of the CAT NMS Plan, a written 
assessment of the operation of the consolidated audit trail.\3189\
---------------------------------------------------------------------------

    \3188\ See 17 CFR 242.613(c)(4).
    \3189\ See 17 CFR 242.613(b)(6).
---------------------------------------------------------------------------

    Rule 613 requires all Participants to make use of the consolidated 
information, either by each developing and implementing new 
surveillance systems, or by enhancing existing surveillance 
systems.\3190\ The Rule also requires the CAT NMS Plan to require 
Participants to submit to the Commission a document outlining the 
manner in which non-NMS securities and primary market transactions in 
NMS and non-NMS securities can be incorporated into the consolidated 
audit trail.\3191\
---------------------------------------------------------------------------

    \3190\ See 17 CFR 242.613(a)(3)(iv).
    \3191\ See 17 CFR 242.613(i).
---------------------------------------------------------------------------

1. Central Repository
    Rule 613 provides that the CAT NMS Plan must require the creation 
and maintenance of a Central Repository that would be responsible for 
the receipt, consolidation, and retention of all data submitted by the 
Participants and their members.\3192\ The Rule also requires that the 
CAT NMS Plan require the Central Repository to retain the information 
reported pursuant to subparagraphs (c)(7) and (e)(7) of the Rule for a 
period of not less than five years in a convenient and usable standard 
electronic data format that is directly available and searchable 
electronically without any manual intervention.\3193\ The Plan 
Processor is responsible for operating the Central Repository in 
compliance with the Rule and the CAT NMS Plan. In addition, the Rule 
provides that the CAT NMS Plan must include: Policies and procedures to 
ensure the security and confidentiality of all information submitted to 
the Central Repository,\3194\ including safeguards to ensure the 
confidentiality of data; \3195\ information barriers between regulatory 
and non-regulatory staff with regard to access and use of data;\3196\ a 
mechanism to confirm the identity of all persons permitted to use the 
data; \3197\ a comprehensive information security program for the 
Central Repository that is subject to regular reviews by the CCO; 
\3198\ and penalties for non-compliance with policies and procedures of 
the Participants or the Central Repository with respect to information 
security.\3199\ Further, the Rule provides that the CAT NMS Plan must 
include policies and procedures to be used by the Plan Processor to 
ensure the timeliness, accuracy, integrity, and completeness of the 
data submitted to the Central Repository,\3200\ as well as policies and 
procedures to ensure the accuracy of the consolidation by the Plan 
Processor of the data.\3201\
---------------------------------------------------------------------------

    \3192\ See 17 CFR 242.613(e)(1).
    \3193\ See 17 CFR 242.613(e)(8). The Commission notes that the 
CAT NMS Plan proposes to require that the Central Repository retain 
data reported in a convenient and usable standard electronic data 
format that is directly available and searchable electronically 
without any manual intervention for six years. See CAT NMS Plan, 
supra note 5, at Section 6.5(b)(i).
    \3194\ See 17 CFR 242.613(e)(4)(i).
    \3195\ See 17 CFR 242.613(e)(4)(i)(A).
    \3196\ See 17 CFR 242.613(e)(4)(i)(B).
    \3197\ See 17 CFR 242.613(e)(4)(i)(C).
    \3198\ Id.
    \3199\ See 17 CFR 242.613(e)(4)(i)(D).
    \3200\ See 17 CFR 242.613(e)(4)(ii).
    \3201\ See 17 CFR 242.613(e)(4)(iii).
---------------------------------------------------------------------------

2. Data Collection and Reporting
    Rule 613 provides that the CAT NMS Plan must require each 
Participant, and any member of such Participant, to record and 
electronically report to the Central Repository details for each order 
and Reportable Event documenting the life of an order through the 
process of original receipt or origination, routing, modification, 
cancellation, and execution (in whole or part) for each NMS 
security.\3202\ Rule 613 requires the CAT NMS Plan to require each 
national securities exchange and its members to record and report to 
the Central Repository the information required by Rule 613(c)(7) for 
each NMS security registered or listed for trading on an exchange, or 
admitted to unlisted trading privileges on such exchange.\3203\ Rule 
613 provides that the CAT NMS Plan must require each Participant that 
is a national securities association, and its members, to record and 
report to the Central Repository the information required by Rule 
613(c)(7) for each NMS security for which transaction reports are 
required to be submitted to the Participant.\3204\ The Rule requires 
each Participant and any member of a Participant to record the 
information required by Rule 613(c)(7)(i) through (v) contemporaneously 
with the Reportable Event, and to report this information to the 
Central Repository by 8:00 a.m. ET on the trading day following the day 
such information has been recorded by the Participant or member of the 
Participant.\3205\ The Rule requires each Participant and any member of 
a Participant to record and report the information required by Rule 
613(c)(7)(vi) through (viii) to the Central Repository by 8:00 a.m. ET 
on the trading day following the day the

[[Page 84913]]

Participant or member receives such information.\3206\ The Rule 
requires each Participant and any member of such Participant to report 
information required by Rule 613(c)(7) in a uniform electronic format 
or in a manner that would allow the Central Repository to convert the 
data to a uniform electronic format for consolidation and 
storage.\3207\
---------------------------------------------------------------------------

    \3202\ See 17 CFR 242.613(c)(1), (c)(5), (c)(6), (c)(7).
    \3203\ See 17 CFR 242.613(c)(1), (c)(5).
    \3204\ See 17 CFR 242.613(c)(1), (c)(6).
    \3205\ See 17 CFR 242.613(c)(3).
    \3206\ See 17 CFR 242.613(c)(4).
    \3207\ See 17 CFR 242.613(c)(2).
---------------------------------------------------------------------------

    Such information must also be reported to the Central Repository 
with a timestamp of a granularity that is at least to the millisecond 
or less to the extent that the order handling and execution systems of 
a Participant or a member utilize timestamps in finer increments.\3208\ 
The Commission understands that any changes to broker-dealer recording 
and reporting systems to comply with Rule 613 may also include changes 
to comply with the millisecond timestamp requirement.
---------------------------------------------------------------------------

    \3208\ See 17 CFR 242.613(d)(3).
---------------------------------------------------------------------------

3. Collection and Retention of National Best Bid and National Best 
Offer, Last Sale Data and Transaction Reports
    Rule 613(e)(7) provides that the CAT NMS Plan must require the 
Central Repository to collect and retain on a current and continuing 
basis: (i) Information on the National Best Bid and National Best Offer 
(``NBBO'') for each NMS Security; (ii) transaction reports reported 
pursuant to a transaction reporting plan filed with the Commission 
pursuant to, and meeting the requirements of, Rule 601 of Regulation 
NMS; and (iii) Last Sale Reports reported pursuant to the OPRA 
Plan.\3209\ The Central Repository must retain this information for no 
less than five years.\3210\
---------------------------------------------------------------------------

    \3209\ See 17 CFR 242.613(e)(7); 17 CFR 242.601.
    \3210\ See 17 CFR 242.613(e)(8).
---------------------------------------------------------------------------

4. Surveillance
    Rule 613(f) provides that the CAT NMS Plan must require that every 
Participant develop and implement a surveillance system, or enhance 
existing surveillance systems, reasonably designed to make use of the 
consolidated information contained in the consolidated audit trail. 
Rule 613(a)(3)(iv) provides that the CAT NMS Plan must require that the 
surveillance systems be implemented within fourteen months after 
effectiveness of the CAT NMS Plan.
5. Participant Rule Filings
    Rule 613(g)(1) requires each Participant to file with the 
Commission, pursuant to Section 19(b)(2) of the Exchange Act and Rule 
19b-4 thereunder,\3211\ a proposed rule change to require its members 
to comply with the requirements of Rule 613 and the CAT NMS Plan 
approved by the Commission.\3212\ The burden of filing such a proposed 
rule change is already included under the collection of information 
requirements contained in Rule 19b-4 under the Exchange Act.\3213\
---------------------------------------------------------------------------

    \3211\ 15 U.S.C. 78s(b)(2); 17 CFR 240.19b-4.
    \3212\ See 17 CFR 242.613(g)(1).
    \3213\ See Securities Exchange Act Release No. 50486 (October 5, 
2004), 69 FR 60287, 60293 (October 8, 2004) (File No. S7-18-04) 
(describing the collection of information requirements contained in 
Rule 19b-4 under the Exchange Act). The Commission has submitted 
revisions to the current collection of information titled ``Rule 
19b-4 Filings with Respect to Proposed Rule Changes by Self-
Regulatory Organizations'' (OMB Control No. 3235-0045). According to 
the last submitted revision, for Fiscal Year 2012 SROs submitted 
1,688 Rule 19b-4 proposed rule changes.
---------------------------------------------------------------------------

6. Document on Expansion to Other Securities
    Rule 613(i) provides that the CAT NMS Plan must require the 
Participants to jointly provide to the Commission, within six months 
after the CAT NMS Plan is effective, a document outlining how the 
Participants could incorporate into the CAT information regarding: (1) 
Equity securities that are not NMS securities; \3214\ (2) debt 
securities; and (3) primary market transactions in equity securities 
that are not NMS securities and in debt securities.\3215\
---------------------------------------------------------------------------

    \3214\ As noted above, the CAT NMS Plan would require the 
inclusion of OTC Equity Securities, while Rule 613 does not include 
such a requirement. See supra note 3181.
    \3215\ See 17 CFR 242.613(i).
---------------------------------------------------------------------------

7. Written Assessment of Operation of the Consolidated Audit Trail
    Rule 613(b)(6) provides that the CAT NMS Plan must require the 
Participants to provide the Commission a written assessment of the 
consolidated audit trail's operation at least every two years, once the 
CAT NMS Plan is effective.\3216\ Such written assessment shall include, 
at a minimum, with respect to the CAT: (i) An evaluation of its 
performance; (ii) a detailed plan for any potential improvements to its 
performance; (iii) an estimate of the costs associated with any such 
potential improvements; and (iv) an estimated implementation timeline 
for any such potential improvements, if applicable.\3217\ As required 
by Rule 613(b)(6), the Participants submitted a CAT NMS Plan that 
includes these minimum requirements. The Commission is subsequently 
amending the requirements set forth in the CAT NMS Plan to change the 
reporting frequency from every two years to annual, as well as to 
provide additional specificity regarding the elements of the written 
assessment.\3218\ As amended, the annual written assessment must 
include the following: (i) An evaluation of the information security 
program of the CAT to ensure that the program is consistent with the 
highest industry standards for protection of data; (ii) an evaluation 
of potential technological upgrades based upon a review of 
technological advancements over the preceding year, drawing on 
technology expertise, whether internal or external; (iii) an evaluation 
of the time necessary to restore and recover CAT Data at a back-up 
site; (iv) an evaluation of how the Plan Processor and Participants are 
monitoring Error Rates and to explore the imposition of Error Rates 
based on product, data element or other criteria; (v) a copy of the 
evaluation required by the CAT NMS Plan in Section 6.8(c) of the Plan 
that the Plan Processor evaluate whether industry standards have 
evolved such that: (1) The synchronization standard in Section 6.8(a) 
of the CAT NMS Plan should be shortened; or (2) the required timestamp 
in Section 6.8(b) of the CAT NMS Plan should be in finer increments; 
and (vi) an assessment of whether any data elements reported to the CAT 
should be added, deleted or changed; and (vii) an estimate of the costs 
and benefits associated with any potential improvements to the 
performance of the CAT, including an assessment of the potential impact 
on competition, efficiency, capital formation, and investor protection.
---------------------------------------------------------------------------

    \3216\ See 17 CFR 242.613(b)(6).
    \3217\ See id.
    \3218\ See Section IV.H., supra.
---------------------------------------------------------------------------

B. Proposed Use of Information

1. Central Repository
    Rule 613 states that the Central Repository is required to receive, 
consolidate and retain the data required to be submitted by the 
Participants and their members.\3219\ Participant and Commission staff 
would have access to the data for regulatory purposes.\3220\
---------------------------------------------------------------------------

    \3219\ See 17 CFR 242.613(e)(1).
    \3220\ See 17 CFR 242.613(e)(2).
---------------------------------------------------------------------------

2. Data Collection and Reporting
    The Commission believes that the data collected and reported 
pursuant to the requirements of Rule 613 would be used by regulators to 
monitor and surveil the securities markets and detect and investigate 
activity, whether on one market or across markets. The data collected 
and reported pursuant to Rule 613 would also be used by regulators for 
the evaluation of tips and complaints and for complex enforcement 
inquiries

[[Page 84914]]

or investigations, as well as inspections and examinations. Further, 
the Commission believes that regulators would use the data collected 
and reported to conduct timely and accurate analysis of market activity 
for reconstruction of broad-based market events in support of 
regulatory decisions.
3. Collection and Retention of NBBO, Last Sale Data and Transaction 
Reports
    The CAT NMS Plan must require the Central Repository to collect and 
retain NBBO information, transaction reports, and Last Sale Reports in 
a format compatible with the order and event information collected 
pursuant to Rule 613(c)(7).\3221\ Participant and Commission staff 
could use this data to easily search across order, NBBO, and 
transaction databases. The Commission believes that having the NBBO 
information in a uniform electronic format compatible with order and 
event information would assist Participants in enforcing compliance 
with federal securities laws, rules, and regulations, as well as their 
own rules.\3222\ The Commission also believes that a CAT NMS Plan 
requiring the Central Repository to collect and retain the transaction 
reports and Last Sale Reports in a format compatible with the order 
execution information would aid regulators in monitoring for certain 
market manipulations.\3223\
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    \3221\ See 17 CFR 242.613(e)(7).
    \3222\ The Commission and Participants use the NBBO to, among 
other things, evaluate members for compliance with numerous 
regulatory requirements, such as the duty of best execution or Rule 
611 of Regulation NMS. See 17 CFR 242.611; see also, e.g., ISE Rule 
1901 and Phlx Rule 1084.
    \3223\ Rules 613(e)(7)(ii) and (iii) require that transaction 
reports reported pursuant to an effective transaction reporting plan 
and Last Sale Reports reported pursuant to the OPRA Plan be reported 
to the Central Repository. This requirement should allow regulators 
to evaluate certain trading activity. For example, trading patterns 
of reported and unreported trades may cause Participant or 
Commission staff to make further inquiries into the nature of the 
trading to ensure that the public was receiving accurate and timely 
information regarding executions and that market participants were 
continuing to comply with trade reporting obligations under 
Participant rules. Similarly, patterns in the transactions that are 
reported and unreported to the consolidated tape could be indicia of 
market abuse, including failure to obtain best execution for 
customer orders or possible market manipulation. The Commission and 
the Participants would be able to review information on trades not 
reported to the tape to determine whether they should have been 
reported, whether Section 31 fees should have been paid, and/or 
whether the trades are part of a manipulative scheme.
---------------------------------------------------------------------------

4. Surveillance
    The requirement in Rule 613(f) that the Participants develop and 
implement a surveillance system, or enhance existing surveillance 
systems, reasonably designed to make use of the consolidated 
information in the consolidated audit trail,\3224\ is intended to 
position regulators to make full use of the consolidated audit trail 
data in order to carry out their regulatory obligations. In addition, 
because trading and potentially manipulative activities could take 
place across multiple markets, and the consolidated audit trail data 
would trace the entire lifecycle of an order from origination to 
execution or cancellation, new or enhanced surveillance systems may 
also enable regulators to investigate potentially illegal activity that 
spans multiple markets more efficiently.
---------------------------------------------------------------------------

    \3224\ 17 CFR 242.613(f).
---------------------------------------------------------------------------

5. Document on Expansion to Other Securities
    Rule 613(i) requires the CAT NMS Plan to require the Participants 
to jointly provide to the Commission, within six months after the CAT 
NMS Plan is effective, a document outlining how the Participants could 
incorporate into the CAT information regarding certain products that 
are not NMS securities.\3225\ A document outlining a possible expansion 
of the consolidated audit trail could help inform the Commission about 
the Participants' strategy for potentially accomplishing such an 
expansion over a reasonable period of time. Moreover, such document 
would aid the Commission in assessing the feasibility and impact of 
possible future proposals by the Participants to include such 
additional securities and transactions in the consolidated audit trail.
---------------------------------------------------------------------------

    \3225\ See 17 CFR 242.613(i); see also supra note 439.
---------------------------------------------------------------------------

6. Written Assessment of Operation of the Consolidated Audit Trail
    Rule 613(b)(6) requires the CAT NMS Plan to require the 
Participants to provide the Commission a written assessment of the 
CAT's operation at least every two years, once the CAT NMS Plan is 
effective that includes a plan for potential improvements, an estimate 
of the costs associated with any such improvement, as well as the 
potential impact on competition, efficiency and capital formation, and 
a timeline.\3226\ The Commission has subsequently modified this 
requirement as imposed by the CAT NMS Plan to change the reporting 
frequency to annual and require that the written assessment include the 
benefits of any potential improvements and the impact on investor 
protection, as well as to provide more specificity on what the 
assessment must address.\3227\ The assessment is now required to 
include evaluations of the following: The information security program; 
potential technological upgrades; the time to restore and recover CAT 
Data at a back-up site; how the Plan Processor and the Participants are 
monitoring Error Rates and exploring imposing Error Rates based on 
other criteria; a copy of the evaluation required in Section 6.8(a) of 
the CAT NMS Plan that the Plan Processor evaluate whether industry 
standards have evolved such that: (i) The clock synchronization 
standard in Section 6.8(a) of the CAT NMS Plan should be shortened; 
(ii) the required timestamp in Section 6.8(b) of the CAT NMS Plan 
should be in finer increments; and an assessment of whether any data 
elements reported to the CAT should be added, deleted or changed. The 
Commission believes that requiring these specific issues to be 
addressed in the Participants' annual written assessment will focus the 
Plan Processor and the Participants on critical technological and other 
developments, and should help ensure that CAT technology remains up-to-
date, resilient and secure, and provides accurate CAT Data. Further, 
the Commission believes that it is important that the Participants 
consider not just the costs, but also the potential benefits associated 
with any improvements to the performance of the CAT, including the 
impact on investor protection.
---------------------------------------------------------------------------

    \3226\ 17 CFR 242.613(b)(6).
    \3227\ See Section IV.H., supra.
---------------------------------------------------------------------------

C. Respondents

1. National Securities Exchanges and National Securities Associations
    The information collection titled ``Creation of a Consolidated 
Audit Trail Pursuant to Section 11A of the Securities Exchange Act of 
1934 and Rules Thereunder'' and the proposed information collection 
apply to the 21 Participants (the 20 national securities exchanges and 
the one national securities association (FINRA)) currently registered 
with the Commission.\3228\
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    \3228\ The Participants are: Bats BZX Exchange, Inc., Bats BYX 
Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, 
Incorporated, Chicago Board Options Exchange, Incorporated, Chicago 
Stock Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, 
Inc., Financial Industry Regulatory Authority, Inc., International 
Securities Exchange, LLC, ISE Gemini, LLC, Miami International 
Securities Exchange LLC, NASDAQ BX, Inc., NASDAQ PHLX LLC, The 
NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York 
Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. ISE Mercury 
and IEX will become Participants in the CAT NMS Plan and are thus 
accounted for as Participants for purposes of this Order. See supra 
note 10.

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[[Page 84915]]

2. Members of National Securities Exchanges and National Securities 
Association
    The information collection titled ``Creation of a Consolidated 
Audit Trail Pursuant to Section 11A of the Securities Exchange Act of 
1934 and Rules Thereunder'' also applies to the Participants' broker-
dealer members, that is, Industry Members. The Commission believes that 
Rule 613 applies to 1,800 broker-dealers. The Commission understands 
that there are currently 4,138 broker-dealers; however, not all broker-
dealers are expected to have CAT reporting obligations. The 
Participants report that approximately 1,800 broker-dealers currently 
quote or execute transactions in NMS Securities, Listed Options or OTC 
Equity Securities and would likely have CAT reporting 
obligations.\3229\
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    \3229\ The Commission understands that the remaining 2,338 
registered broker-dealers either trade in asset classes not 
currently included in the definition of Eligible Security or do not 
trade at all (e.g., broker-dealers for the purposes of underwriting, 
advising, private placements). See Notice, supra note 5, at 30712, 
n.864.
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D. Total Initial and Annual Reporting and Recordkeeping Burden

1. Burden on National Securities Exchanges and National Securities 
Associations
a. Central Repository
    Rule 613 requires the Participants to jointly establish a Central 
Repository tasked with the receipt, consolidation, and retention of the 
reported order and execution information. The Participants reflected 
this requirement in the CAT NMS Plan. The Participants issued an RFP 
soliciting Bids from entities to act as the consolidated audit trail's 
Plan Processor.\3230\ Bidders were asked to provide total one-year and 
annual recurring cost estimates to estimate the costs to the 
Participants for implementing and maintaining the Central 
Repository.\3231\ There are currently three remaining Bidders, any of 
which could be selected to be the Plan Processor. The Plan Processor 
would be responsible for building, operating, administering and 
maintaining the Central Repository.
---------------------------------------------------------------------------

    \3230\ See Notice, supra note 5, at 30616.
    \3231\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(i)(B). The CAT NMS Plan listed the following as primary 
drivers of Bid costs: (1) Reportable volumes of data ingested into 
the Central Repository; (2) number of technical environments that 
would have to be built to report to the Central Repository; (3) 
likely future rate of increase of reportable volumes; (4) data 
archival requirements; and (5) user support and/or help desk 
resource requirements. Id.
---------------------------------------------------------------------------

    The Plan's Operating Committee, which consists of one voting 
representative of each Participant,\3232\ would be responsible for the 
management of the LLC, including the Central Repository, acting by 
Majority or Supermajority Vote, depending on the issue.\3233\ In 
managing the Central Repository, among other things, the Operating 
Committee would have the responsibility to authorize the following 
actions of the LLC: (1) Interpreting the Plan; \3234\ (2) determining 
appropriate funding-related policies, procedures and practices 
consistent with Article XI of the CAT NMS Plan; \3235\ (3) terminating 
the Plan Processor; (4) selecting a successor Plan Processor (including 
establishing a Plan Processor Selection Committee to evaluate and 
review Bids and make a recommendation to the Operating Committee with 
respect to the selection of the successor Plan Processor); \3236\ (5) 
entering into, modifying or terminating any Material Contract; \3237\ 
(6) making any Material Systems Change; \3238\ (7) approving the 
initial Technical Specifications or any Material Amendment to the 
Technical Specifications proposed by the Plan Processor; \3239\ (8) 
amending the Technical Specifications on its own motion; \3240\ (9) 
approving the Plan Processor's appointment or removal of the CCO, CISO, 
or any Independent Auditor in accordance with Section 6.1(b) of the CAT 
NMS Plan; \3241\ (10) approving any recommendation by the CCO pursuant 
to Section 6.2(a)(v)(A); \3242\ (11) selecting the members of the 
Advisory Committee; \3243\ (12) selecting the Operating Committee 
chair; \3244\ and (13) determining to hold an Executive Session of the 
Operating Committee.\3245\
---------------------------------------------------------------------------

    \3232\ See id. at Section 4.2(a).
    \3233\ See Notice, supra note 5, at 30702.
    \3234\ See CAT NMS Plan, supra note 5, at Section 4.3(a)(iii).
    \3235\ See id. at Section 4.3(a)(vi).
    \3236\ See id. at Section 4.3(b)(i).
    \3237\ See id. at Section 4.3(b)(iv).
    \3238\ See id. at Section 4.3(b)(v).
    \3239\ See id. at Section 4.3(b)(vi).
    \3240\ See id. at Section 4.3(b)(vii).
    \3241\ See id. at Section 4.3(b)(iii).
    \3242\ See id. at Section 4.3(a)(iv).
    \3243\ See id. at Section 4.3(a)(ii). Section 4.13(e) of the CAT 
NMS Plan states that the members of the Advisory Committee shall 
have the right to receive information concerning the operation of 
the Central Repository; provided that the Operating Committee 
retains the authority to determine the scope and content of 
information supplied to the Advisory Committee, which shall be 
limited to that information that is necessary and appropriate for 
the Advisory Committee to fulfill its functions. The Commission is 
amending this section to state that the members of the Advisory 
Committee shall receive the same information concerning the 
operation of the Central Repository as the Operating Committee; 
provided, however, that the Operating Committee may withhold 
information it reasonably determines requires confidential 
treatment. See Section IV.B.2, supra. The Commission does not 
believe this amendment would change the hourly burden or external 
cost imposed on Participants for management of the Central 
Repository.
    \3244\ See id. at Section 4.3(a)(i).
    \3245\ See id. at Section 4.3(a)(v).
---------------------------------------------------------------------------

    Additionally, in managing the Central Repository, the Operating 
Committee would have the responsibility and authority, as appropriate, 
to: (1) Direct the LLC to enter into one or more agreements with the 
Plan Processor obligating the Plan Processor to perform the functions 
and duties contemplated by the Plan to be performed by the Plan 
Processor, as well as such other functions and duties the Operating 
Committee deems necessary or appropriate; \3246\ (2) appoint as an 
Officer of the Company the individual who has direct management 
responsibility for the Plan Processor's performance of its obligations 
with respect to the CAT; \3247\ (3) approve policies, procedures, and 
control structures related to the CAT System that are consistent with 
Rule 613(e)(4), Appendix C and Appendix D of the CAT NMS Plan that have 
been developed and will be implemented by the Plan Processor; \3248\ 
(4) approve any policy, procedure or standard (and any material 
modification or amendment thereto) applicable primarily to the 
performance of the Plan Processor's duties as the Plan Processor; 
\3249\ (5) for both the CCO and CISO, render their annual performance 
reviews and review and approve their compensation; \3250\ (6) review 
the Plan Processor's performance under the Plan at least once each 
year, or more often than once each year upon the request of two or more 
Participants that are not Affiliated Participants; \3251\ (7) in 
conjunction with the Plan Processor, approve and regularly review (and 
update as necessary) SLAs governing the performance of the Central 
Repository; \3252\ (8) maintain a Compliance Subcommittee for the 
purpose of aiding the CCO as necessary; \3253\ and (9) designate by 
resolution one or more Subcommittees it deems necessary or desirable in 
furtherance of the management of the business and affairs of the 
Company.\3254\
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    \3246\ See id. at Section 6.1(a).
    \3247\ See id. at Section 4.6(b).
    \3248\ See id. at Section 6.1(c).
    \3249\ See id. at Section 6.1(e).
    \3250\ See id. at Section 6.2(a)(iv), (b)(iv).
    \3251\ See id. at Section 6.1(n).
    \3252\ See id. at Section 6.1(h).
    \3253\ See id. at Section 4.12(b).
    \3254\ See id. at Section 4.12(a).
---------------------------------------------------------------------------

    The CAT NMS Plan will also establish a Selection Committee 
comprised of one Voting Senior Officer from each

[[Page 84916]]

Participant,\3255\ which is tasked with the review and evaluation of 
Bids and the selection of the Initial Plan Processor.\3256\ The 
Selection Committee would determine, by Majority Vote, whether 
Shortlisted Bidders will have the opportunity to revise their 
Bids.\3257\ The Selection Committee would review and evaluate all 
Shortlisted Bids, including any permitted revisions submitted by 
Shortlisted Bidders, and in doing so, may consult with the Advisory 
Committee (or the DAG until the Advisory Committee is formed) and such 
other Persons as the Selection Committee deems appropriate.\3258\ After 
receipt of any permitted revisions, the Selection Committee would 
select the Initial Plan Processor from the Shortlisted Bids in two 
rounds of voting where each Participant has one vote via its Voting 
Senior Officer in each round.\3259\ Following the selection of the 
Initial Plan Processor, the Participants would file with the Commission 
a statement identifying the Initial Plan Processor and including the 
information required by Rule 608.\3260\
---------------------------------------------------------------------------

    \3255\ See id. at Section 5.1(a).
    \3256\ See id. at Section 5.1.
    \3257\ See id. at Section 5.2(d)(i).
    \3258\ See id. at Section 5.2(d)(ii).
    \3259\ See id. at Section 5.1(e).
    \3260\ See id. at Section 6.7(a)(i).
---------------------------------------------------------------------------

    For its initial and ongoing internal burden and cost estimates 
associated with the management of the Central Repository, the 
Commission is relying on estimates provided in the CAT NMS Plan for the 
development of the CAT NMS Plan, which the Participants ``have accrued, 
and will continue to accrue,'' \3261\ and have described in the CAT NMS 
Plan as ``reasonably associated with creating, implementing, and 
maintaining the CAT upon the Commission's adoption of the CAT NMS 
Plan.'' \3262\
---------------------------------------------------------------------------

    \3261\ See id. at Appendix C, Section B.7(b)(iii).
    \3262\ See id.
---------------------------------------------------------------------------

    The Commission believes that the activities of the Operating 
Committee and the Selection Committee overlap with those undertaken by 
the Participants to develop the CAT NMS Plan. The CAT NMS Plan 
describes the costs incurred by the Participants to develop the CAT NMS 
Plan as including ``staff time contributed by each Participant to, 
among other things, determine the technological requirements for the 
Central Repository, develop the RFP, evaluate Bids received, design and 
collect the data necessary to evaluate costs and other economic 
impacts, meet with Industry Members to solicit feedback, and complete 
the CAT NMS Plan submitted to the Commission for consideration.'' 
\3263\ For the building and management of the Central Repository, the 
Selection Committee and the Operating Committee would have comparable 
responsibilities. The Selection Committee would be required to review 
and evaluate all Shortlisted Bids, including any permitted revisions 
submitted by Shortlisted Bidders, and then to select the Initial Plan 
Processor from those Bids. As part of its overall management of the 
Central Repository, the Operating Committee would have responsibility 
for decisions associated with the technical requirements of the Central 
Repository.\3264\ Furthermore, the Operating Committee would be 
required to establish a Selection Committee to evaluate Bids received 
to select a successor Plan Processor,\3265\ and would also be required 
to authorize the selection of the members of the Advisory 
Committee,\3266\ comprising members of the industry, to advise the 
Participants on the implementation, operation, and administration of 
the Central Repository.\3267\ Because the responsibilities of the 
Operating Committee and the Selection Committee are similar to those 
described in the CAT NMS Plan for the development of the CAT NMS Plan 
itself, the Commission believes that it is reasonable to use the CAT 
NMS Plan estimates as the basis for its burden and cost estimates for 
the initial and ongoing management of the Central Repository.
---------------------------------------------------------------------------

    \3263\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii).
    \3264\ For example, the Operating Committee would be required to 
authorize the following actions of the LLC: Entering into, modifying 
or terminating any Material Contract (see id. at Section 
4.3(b)(iv)); making any Material Systems Change (see id. at Section 
4.3(b)(v)); amending the Technical Specifications on its own motion 
(see id. at Section 4.3(b)(vii)); and approving the initial 
Technical Specifications or any Material Amendment to the Technical 
Specifications proposed by the Plan Processor (see id. at Section 
4.3(b)(vi)). Further, the Operating Committee would be able to 
approve policies, procedures, and control structures related to the 
CAT System that are consistent with Rule 613(e)(4), Appendix C and 
Appendix D of the CAT NMS Plan that have been developed and will be 
implemented by the Plan Processor (see id. at Section 6.1(c)); and 
in conjunction with the Plan Processor, approve and regularly review 
(and update as necessary) SLAs governing the performance of the 
Central Repository (see id. at Section 6.1(h)).
    \3265\ See id. at Section 4.3(b)(i).
    \3266\ See id. at Section 4.3(a)(ii).
    \3267\ See id. at Section 4.13(d).
---------------------------------------------------------------------------

(1) Initial Burden and Costs To Build the Central Repository
    Each Participant would contribute an employee and a substitute for 
the employee to serve on the Operating Committee that would oversee the 
Central Repository.\3268\ Additionally, each Participant would select a 
Voting Senior Officer to represent the Participant as a member of the 
Selection Committee responsible for the selection of the Plan Processor 
of the Central Repository.\3269\
---------------------------------------------------------------------------

    \3268\ In the case of Affiliated Participants, one individual 
may be the primary representative for all or some of the Affiliated 
Participants, and another individual may be the substitute for all 
or some of the Affiliated Participants. See id. at Section 4.2(a).
    \3269\ In the case of Affiliated Participants, one individual 
may be (but is not required to be) the Voting Senior Officer for 
more than one or all of the Affiliated Participants. Where one 
individual serves as the Voting Senior Officer for more than one 
Affiliated Participant, such individual will have the right to vote 
on behalf of each such Affiliated Participant. See id. at Section 
5.1(a).
---------------------------------------------------------------------------

A. Notice Estimates--Initial Burden and Costs
    In the Notice, the Commission preliminarily estimated that, over 
the 12-month period after the effectiveness of the CAT NMS Plan within 
which the Participants would be required to select an Initial Plan 
Processor \3270\ and begin reporting to the Central Repository,\3271\ 
each Participant would incur an initial internal burden of 720 burden 
hours associated with the management of the creation of the Central 
Repository and the selection of the Plan Processor (including filing 
with the Commission the statement identifying the Initial Plan 
Processor and including the information required by Rule 608), for an 
aggregate initial estimate of 14,407 burden hours.\3272\
---------------------------------------------------------------------------

    \3270\ Rule 613(a)(3)(i) requires the selection of the Plan 
Processor within 2 months after effectiveness of the CAT NMS Plan. 
See 17 CFR 242.613(a)(3)(i).
    \3271\ Rule 613(a)(3)(iii) requires the Participants to provide 
to the Central Repository the data required by Rule 613(c) within 
one year after effectiveness of the CAT NMS Plan. See 17 CFR 
242.613(a)(3)(iii).
    \3272\ The Commission based this estimate on the internal burden 
estimate provided in the CAT NMS Plan related to the development of 
the CAT NMS Plan. See CAT NMS Plan, supra note 5, at Appendix C, 
Section B.7(b)(iii) (stating ``. . . the Participants have accrued, 
and will continue to accrue, direct costs associated with the 
development of the CAT NMS Plan. These costs include staff time 
contributed by each Participant to, among other things, determine 
the technological requirements for the Central Repository, develop 
the RFP, evaluate Bids received, design and collect the data 
necessary to evaluate costs and other economic impacts, meet with 
Industry Members to solicit feedback, and complete the CAT NMS Plan 
submitted to the Commission for consideration. The Participants 
estimated that they have collectively contributed 20 FTEs in the 
first 30 months of the CAT NMS Plan development process''). The 
Commission believed the staff time incurred for the development of 
the CAT NMS Plan would be comparable to the staff time incurred for 
the activities required of the Operating Committee and the Selection 
Committee for the creation and management of the Central Repository 
once the Plan is effective. (20 FTEs/30 months) = 0.667 FTEs per 
month for all of the Participants to develop the CAT NMS Plan. 
Converting this into burden hours, (0.667 FTEs) x (12 months) x 
(1,800 burden hours per year) = 14,407 initial burden hours for all 
of the Participants to develop the CAT NMS Plan. (14,407 burden 
hours for all Participants/20 Participants) = 720 initial burden 
hours for each Participant to develop the CAT NMS Plan.

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[[Page 84917]]

    Additionally, the Commission preliminarily estimated that the 
Participants would collectively spend $2,400,000 on external public 
relations, legal and consulting costs associated with building the 
Central Repository and the selection of the Plan Processor for the 
Central Repository, or $120,000 per Participant.\3273\ The Commission 
based this estimate on the estimate provided in the CAT NMS Plan for 
public relations, legal and consulting costs incurred in preparation of 
the CAT NMS Plan. Because the Participants described such costs as 
``reasonably associated with creating, implementing and maintaining the 
CAT,'' \3274\ the Commission preliminarily believed these external cost 
estimates should also be applied to the creation and implementation of 
the Central Repository.
---------------------------------------------------------------------------

    \3273\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii) (stating ``the Participants have incurred public 
relations, legal and consulting costs in preparation of the CAT NMS 
Plan. The Participants estimated the costs of these services to be 
$8,800,000''). $2,400,000 for all Participants over 12 months = 
($8,800,000/44 months between the adoption of Rule 613 and the 
filing of the CAT NMS Plan) x (12 months). ($2,400,000/20 
Participants) = $120,000 per Participant over 12 months.
    \3274\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii).
---------------------------------------------------------------------------

    Using the estimates in the CAT NMS Plan, which are based on the 
Bids of the six Shortlisted Bidders,\3275\ the Commission preliminarily 
estimated that the initial one-time cost to develop the Central 
Repository would be an aggregate initial external cost to the 
Participants of $91.6 million,\3276\ or $4.6 million per 
Participant.\3277\ The Commission preliminarily estimated that each 
Participant would incur initial one-time external costs of $7 million 
\3278\ to build the Central Repository, or an aggregate initial one-
time external cost across all Participants of $140 million.\3279\ The 
estimates in the CAT NMS Plan, as well as the Commission's preliminary 
estimate includes internal technological, operational, administrative 
and ``any other material costs.'' \3280\
---------------------------------------------------------------------------

    \3275\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(i)(B). See also id. at Appendix C, Section B.7(b)(iv)(A)(1). 
The Commission noted that the cost associated with the build and 
maintenance of the Central Repository includes compliance with the 
requirement in Rule 613(e)(8) that the Central Repository retain 
information collected pursuant to Rule 613(c)(7) and (e)(7) in a 
convenient and usable standard electronic data format that is 
directly available and searchable electronically without any manual 
intervention for a period of not less than five years. See id. at 
Section 6.1(d)(i) (requiring the Plan Processor to comply with the 
recordkeeping requirements of Rule 613(e)(8)). See also id. at 
Appendix C, Section D.12(l) (stating that Rule 613(e)(8) requires 
data to be available and searchable for a period of not less than 
five years, that broker-dealers are currently required to retain 
data for six years under Rule 17a-4(a), and that the Participants 
are requiring CAT Data to be kept online in an easily accessible 
format for regulators for six years, though this may increase the 
cost to run the CAT). The Commission notes that changes in 
technology between the time the Bids were submitted and the time the 
Central Repository is built could result in changes to the costs to 
build and operate the Central Repository.
    \3276\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(i)(B) (describing the minimum, median, mean and maximum 
Bidder estimates for the build and maintenance costs of the Central 
Repository).
    \3277\ Id. The Bidders provided a range of estimates. For 
purposes of this Paperwork Burden Act analysis, the Commission used 
the build cost of the maximum Bidder estimate. $4,580,000 = 
$91,600,000/20 SROs.
    \3278\ $7 million for each Participant to build the Central 
Repository = ($4.6 million per Participant in initial one-time costs 
to compensate the Plan Processor to build the Central Repository) + 
($2.4 million per Participant in initial one-time public relations, 
legal and consulting costs associated with the building of the 
Central Repository and the selection of the Initial Plan Processor).
    \3279\ $140 million for all of the Participants to build the 
Central Repository = $7 million per Participant to build the Central 
Repository) x (20 Participants). Id.
    \3280\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(i)(B).
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B. Order Estimates--Initial Burden and Costs
    Subsequent to the publication of the Notice, the Participants 
submitted revised Central Repository cost estimates to reflect the 
proposed development and maintenance costs of the final three 
Shortlisted Bidders.\3281\ In addition, with the registration of IEX as 
a national securities exchange in June 2016,\3282\ the expected number 
of Participants has increased from 20 to 21. As a result, the 
Commission is modifying its estimates of the initial burden and costs 
of the Central Repository.
---------------------------------------------------------------------------

    \3281\ See Response Letter III at 14-15.
    \3282\ IEX became a registered national securities exchange on 
June 17, 2016. See Securities Exchange Act Release No. 78101 (June 
17, 2016), 81 FR 41142 (June 23, 2016).
---------------------------------------------------------------------------

    After incorporating the revisions to the Central Repository cost 
estimates and the increase in the number of Participants, the 
Commission now estimates that, over the 12-month period after the 
effectiveness of the CAT NMS Plan within which the Participants would 
be required to select an Initial Plan Processor \3283\ and begin 
reporting to the Central Repository,\3284\ each Participant would incur 
an initial internal burden of 686.05 burden hours associated with the 
management of the creation of the Central Repository and the selection 
of the Plan Processor (including filing with the Commission the 
statement identifying the Initial Plan Processor and including the 
information required by Rule 608), for an aggregate initial estimate of 
14,407 burden hours.\3285\
---------------------------------------------------------------------------

    \3283\ Rule 613(a)(3)(i) requires the selection of the Plan 
Processor within 2 months after effectiveness of the CAT NMS Plan. 
See 17 CFR 242.613(a)(3)(i).
    \3284\ Rule 613(a)(3)(iii) requires the Participants to provide 
to the Central Repository the data required by Rule 613(c) within 
one year after effectiveness of the CAT NMS Plan. See 17 CFR 
242.613(a)(3)(iii).
    \3285\ The Commission based this estimate on the internal burden 
estimate provided in the CAT NMS Plan related to the development of 
the CAT NMS Plan. See CAT NMS Plan, supra note 5, at Appendix C, 
Section B.7(b)(iii) (stating ``. . . the Participants have accrued, 
and will continue to accrue, direct costs associated with the 
development of the CAT NMS Plan. These costs include staff time 
contributed by each Participant to, among other things, determine 
the technological requirements for the Central Repository, develop 
the RFP, evaluate Bids received, design and collect the data 
necessary to evaluate costs and other economic impacts, meet with 
Industry Members to solicit feedback, and complete the CAT NMS Plan 
submitted to the Commission for consideration. The Participants 
estimated that they have collectively contributed 20 FTEs in the 
first 30 months of the CAT NMS Plan development process''). The 
Commission believed the staff time incurred for the development of 
the CAT NMS Plan would be comparable to the staff time incurred for 
the activities required of the Operating Committee and the Selection 
Committee for the creation and management of the Central Repository 
once the Plan is effective). (20 FTEs/30 months) = 0.667 FTEs per 
month for all of the Participants to develop the CAT NMS Plan. 
Converting this into burden hours, (0.667 FTEs) x (12 months) x 
(1,800 burden hours per year) = 14,407 initial burden hours for all 
of the Participants to develop the CAT NMS Plan. (14,407 burden 
hours for all Participants/21 Participants) = 686.05 initial burden 
hours for each Participant associated with the management of the 
creation of the Central Repository and the selection of the Plan 
Processor.
---------------------------------------------------------------------------

    The Commission has not changed its estimate that the Participants 
will collectively spend $2,400,000 on external public relations, legal 
and consulting costs associated with the building of the Central 
Repository. However, the individual Participant cost estimate has 
decreased from $120,000 per Participant (as the Commission 
preliminarily estimated in the Notice \3286\) to $114,285.71 per 
Participant, due to the increase in the number of Participants.\3287\ 
As noted in

[[Page 84918]]

the Notice, the Commission is basing this estimate on the estimate 
provided in the CAT NMS Plan for public relations, legal and consulting 
costs incurred in preparation of the CAT NMS Plan. Because the 
Participants described such costs as ``reasonably associated with 
creating, implementing and maintaining the CAT,'' \3288\ the Commission 
believes these external cost estimates should also be applied to the 
creation and implementation of the Central Repository.
---------------------------------------------------------------------------

    \3286\ See Notice, supra note 5, at Section V.D.l.a(1).
    \3287\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii) (stating ``the Participants have incurred public 
relations, legal and consulting costs in preparation of the CAT NMS 
Plan. The Participants estimate the costs of these services to be 
$8,800,000''). $2,400,000 for all Participants over 12 months = 
($8,800,000/44 months between the adoption of Rule 613 and the 
filing of the CAT NMS Plan) x (12 months). ($2,400,000/21 
Participants) = $114,285.71 per Participant over 12 months.
    \3288\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii).
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    As noted above, the Participants updated the Central Repository 
estimates to reflect the estimates of the final three Shortlisted 
Bidders.\3289\ Using the revised estimates, the Commission estimates 
that the initial one-time cost to develop the Central Repository would 
be an aggregate initial external cost to the Participants of $65 
million,\3290\ or $3,095,238.09 per Participant.\3291\ Therefore, the 
Commission now estimates that each Participant would incur initial one-
time external costs of $3,209,523.80 \3292\ to build the Central 
Repository, or an aggregate initial one-time external cost across all 
Participants of $67,399,999.80.\3293\
---------------------------------------------------------------------------

    \3289\ See Response Letter III at 14-15.
    \3290\ See id.
    \3291\ Id. The Participants provided a range of Bidder 
estimates. For purposes of this Paperwork Burden Act analysis, the 
Commission is using the build cost of the maximum estimate. 
$3,095,238.09 = $65,000,000/21 Participants.
    \3292\ $3,209,523.80 for each Participant to build the Central 
Repository = ($3,095,238.09 per Participant in initial one-time 
costs to compensate the Plan Processor to build the Central 
Repository) + ($114,285.71 per Participant in initial one-time 
public relations, legal and consulting costs associated with the 
building of the Central Repository and the selection of the Initial 
Plan Processor).
    Commission staff notes that the Notice for the CAT NMS Plan 
contained an erroneous estimate of the initial one-time external 
costs to the Participants to build the Central Repository, 
estimating that each Participant would incur a cost of $7 million. 
The correct estimate was $4,476,190.47 per Participant. However, the 
Commission has subsequently revised its estimated costs to account 
for updated estimates provided by the Participants. See supra note 
3289.
    \3293\ $67,399,999.80 for all of the Participants to build the 
Central Repository = ($3,209,523.80 per Participant to build the 
Central Repository) x (21 Participants).
---------------------------------------------------------------------------

(2) Ongoing, Annual Burden Hours and Costs for the Central Repository
    After the Central Repository has been developed and implemented, 
there would be ongoing costs for operating and maintaining the Central 
Repository, including the cost of systems and connectivity upgrades or 
changes necessary to receive and consolidate the reported order and 
execution information from Participants and their members; the cost to 
store data, and make it available to regulators, in a uniform 
electronic format, and in a form in which all events pertaining to the 
same originating order are linked together in a manner that ensures 
timely and accurate retrieval of the information; the cost of 
collecting and maintaining the NBBO and transaction data in a format 
compatible with the order and event information collected pursuant to 
the Rule; the cost of monitoring the required validation parameters, 
which would allow the Central Repository to automatically check the 
accuracy and completeness of the data submitted and reject data not 
conforming to these parameters consistent with the requirements of the 
Rule; and the cost of paying the CCO and CISO. The CAT NMS Plan 
provides that the Plan Processor would be responsible for the ongoing 
operations of the Central Repository.\3294\ The Operating Committee 
would continue to be responsible for the management of the Central 
Repository. In addition, the CAT NMS Plan states that the Participants 
would incur costs for public relations, legal, and consulting costs 
associated with maintaining the CAT upon approval of the CAT NMS 
Plan.\3295\
---------------------------------------------------------------------------

    \3294\ See CAT NMS Plan, supra note 5, at Section 6.1.
    \3295\ See id. at Appendix C, Section B.7(b)(iii).
---------------------------------------------------------------------------

A. Notice Estimates--Ongoing Burden and Costs
    In the Notice, the Commission preliminarily estimated that each 
Participant would incur an ongoing annual internal burden of 720 burden 
hours associated with the continued management of the Central 
Repository, for an aggregate annual estimate of 14,407 burden hours 
across the Participants.\3296\
---------------------------------------------------------------------------

    \3296\ The Commission based this estimate on the internal burden 
estimate provided in the CAT NMS Plan for the development of the CAT 
NMS Plan. The Commission noted that the CAT NMS Plan describes the 
internal burden estimate for the development of the CAT NMS Plan as 
a cost the Participants will continue to accrue; therefore, the 
Commission preliminarily believed that it is reasonable to use this 
burden estimate as the basis for its ongoing internal burden 
estimate for the maintenance of the Central Repository, particularly 
as the Commission believed the reasons for the staff time incurred 
for the development of the CAT NMS Plan would be comparable to those 
of the staff time to be incurred by the Operating Committee and the 
Selection Committee for the continued management of the Central 
Repository. See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii) (stating ``. . . the Participants have accrued, and will 
continue to accrue, direct costs associated with the development of 
the CAT NMS Plan. These costs include staff time contributed by each 
Participant to, among other things, determine the technological 
requirements for the Central Repository, develop the RFP, evaluate 
Bids received, design and collect the data necessary to evaluate 
costs and other economic impacts, meet with Industry Members to 
solicit feedback, and complete the CAT NMS Plan submitted to the 
Commission for consideration. The Participants estimate that they 
have collectively contributed 20 FTEs in the first 30 months of the 
CAT NMS Plan development process''). (20 FTEs/30 months) = 0.667 
FTEs per month for all of the Participants to continue management of 
the Central Repository. Converting this into burden hours, (0.667 
FTEs) x (12 months) x (1,800 burden hours per year) = 14,407 ongoing 
annual burden hours for all of the Participants to continue 
management of the Central Repository. (14,407 ongoing annual burden 
hours for all Participants/20 Participants) = 720 ongoing annual 
burden hours for each Participant to continue management of the 
Central Repository.
---------------------------------------------------------------------------

    Additionally, the Commission preliminarily estimated that the 
Participants would collectively spend $800,000 annually on external 
public relations, legal and consulting costs associated with the 
continued management of the Central Repository, or $40,000 per 
Participant.\3297\
---------------------------------------------------------------------------

    \3297\ The Commission based this external cost estimate on the 
public relations, legal and consulting external cost estimate 
provided in the CAT NMS Plan associated with the preparation of the 
CAT NMS Plan (which the Participants consider ``reasonably 
associated with creating, implementing, and maintaining the CAT upon 
the Commission's adoption of the CAT NMS Plan''). See CAT NMS Plan, 
supra note 5, at Appendix C, Section B.7(b)(iii) (stating ``the 
Participants have incurred public relations, legal and consulting 
costs in preparation of the CAT NMS Plan. The Participants estimated 
the costs of these services to be $8,800,000''). $2,400,000 for all 
Participants over 12 months = ($8,800,000/44 months between the 
adoption of Rule 613 and the filing of the CAT NMS Plan) x (12 
months). Because the Central Repository will have already been 
created, the Commission believed it is reasonable to assume that the 
Participants will have a lesser need for public relations, legal and 
consulting services. The Commission estimated that the Participants 
will incur one-third of the external cost associated with 
development and implementation of the Central Repository to maintain 
the Central Repository. $800,000 = (0.333) x ($2,400,000). 
($800,000/20 Participants) = $40,000 per Participant over 12 months.
---------------------------------------------------------------------------

    The CAT NMS Plan includes the estimates the six Shortlisted Bidders 
provided for the annual ongoing costs to the Participants to operate 
the Central Repository.\3298\ The CAT NMS Plan did not categorize the 
costs included in the ongoing costs, but the Commission believed they 
would comprise external technological, operational and administrative 
costs, as the Participants described the costs included in the initial 
one-time external cost to build the Central Repository.\3299\ Using 
these estimates, the Commission preliminarily

[[Page 84919]]

estimated that the annual ongoing cost to the Participants \3300\ to 
compensate the Plan Processor for building, operating and maintaining 
the Central Repository would be an aggregate ongoing external cost of 
$93 million,\3301\ or approximately $4.7 million per Participant.\3302\ 
Therefore, the Commission preliminarily estimated that each Participant 
would incur ongoing annual external costs of $4,740,000 \3303\ to 
maintain the Central Repository, or aggregate ongoing annual external 
costs across all Participants of $94,800,000.\3304\
---------------------------------------------------------------------------

    \3298\ See Section V.F.1.a, supra, for a discussion of the total 
five-year operating costs for the Central Repository presented in 
the CAT NMS Plan. See also CAT NMS Plan, supra note 5, at Appendix 
C, Section B.7(b)(i)(B).
    \3299\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(i)(B).
    \3300\ See supra note 3276.
    \3301\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(i)(B).
    \3302\ The Bidders provided a range of estimates. For purposes 
of this Paperwork Burden Act analysis, the Commission preliminarily 
used the maximum operation and maintenance cost estimate. $4,650,000 
= $93,000,000/20 Participants. See also Section V.F.1.a, supra. The 
Commission noted several uncertainties that may affect the Central 
Repository cost estimates, including (1) that the Participants have 
not yet selected a Plan Processor and the Shortlisted Bidders have 
submitted a wide range of cost estimates for building and operating 
the Central Repository; (2) the Bids submitted by the Shortlisted 
Bidders may not be final because they may be revised before the 
final selection of the CAT Processor; and (3) neither the Bidders 
nor the Commission can anticipate the evolution of technology and 
market activity with precision, as improvements in available 
technology may allow the Central Repository to be built and operated 
at a lower cost than is currently anticipated, but if levels of 
anticipated market activity are materially underestimated, the 
capacity of the Central Repository may need to be increased, 
resulting in an increase in costs.
    \3303\ $4,740,000 for each Participant to build the Central 
Repository = ($4.7 million per Participant in ongoing annual costs 
to build the Central Repository) + ($40,000 per Participant in 
ongoing annual public relations, legal and consulting costs 
associated with the maintenance of the Central Repository).
    \3304\ $94,800,000 for all of the Participants to maintain the 
Central Repository = ($4,740,000 per Participant to compensate the 
Plan Processor and for external public relations, legal and 
consulting costs associated with the maintenance of the Central 
Repository) x (20 Participants).
---------------------------------------------------------------------------

B. Comments/Responses on Ongoing Costs
    One commenter provided an alternate estimate for Central Repository 
ongoing costs of $28 million-$36 million.\3305\ The commenter did not 
provide additional information or analysis to support this estimate, 
but the Commission notes that the commenter cited a study of the costs 
of the Volcker Rule in support of estimates for costs to Industry 
Members.\3306\ If the commenter is basing its estimates on the costs 
expected from the Volcker Rule, the Commission notes that the 
requirements of Rule 613 are significantly different than the 
requirements of the Volcker Rule. The Commission also notes that the 
estimates provided in the Notice are the result of a competitive 
bidding process specific to the CAT and the Commission deems them 
credible.
---------------------------------------------------------------------------

    \3305\ Data Boiler Letter at 15.
    \3306\ Data Boiler Letter at 15.
---------------------------------------------------------------------------

C. Order Estimates--Ongoing Burden and Costs
    As noted above, subsequent to the publication of the Notice, the 
Participants submitted revised Central Repository cost estimates to 
reflect the proposed development and maintenance costs of the final 
three Shortlisted Bidders.\3307\ In addition, with the registration of 
IEX as a national securities exchange in June 2016,\3308\ the expected 
number of Participants has increased from 20 to 21. As a result, the 
Commission is modifying its estimates of the ongoing burden and costs 
of the Central Repository.
---------------------------------------------------------------------------

    \3307\ See Response Letter III at 14-15. The Commission 
continues to believe that estimating Central Repository costs using 
estimates from the Bids is reliable and is therefore updating its 
cost estimates to reflect the updates provided by the Participants.
    \3308\ See supra note 3282.
---------------------------------------------------------------------------

    After incorporating the revisions to the Central Repository cost 
estimates and the increase in the number of Participants, the 
Commission now estimates that each Participant would incur an ongoing 
annual internal burden of 686.05 burden hours associated with the 
continued management of the Central Repository, for an aggregate annual 
estimate of 14,407 burden hours across the Participants.\3309\
---------------------------------------------------------------------------

    \3309\ The Commission is basing this estimate on the internal 
burden estimate provided in the CAT NMS Plan for the development of 
the CAT NMS Plan. The Commission notes that the CAT NMS Plan 
describes the internal burden estimate for the development of the 
CAT NMS Plan as a cost the Participants will continue to accrue; 
therefore, the Commission believes that it is reasonable to use this 
burden estimate as the basis for its ongoing internal burden 
estimate for the maintenance of the Central Repository, particularly 
as the Commission believes the reasons for the staff time incurred 
for the development of the CAT NMS Plan would be comparable to those 
of the staff time to be incurred by the Operating Committee and the 
Selection Committee for the continued management of the Central 
Repository. See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii) (stating ``. . . the Participants have accrued, and will 
continue to accrue, direct costs associated with the development of 
the CAT NMS Plan. These costs include staff time contributed by each 
Participant to, among other things, determine the technological 
requirements for the Central Repository, develop the RFP, evaluate 
Bids received, design and collect the data necessary to evaluate 
costs and other economic impacts, meet with Industry Members to 
solicit feedback, and complete the CAT NMS Plan submitted to the 
Commission for consideration. The Participants estimate that they 
have collectively contributed 20 FTEs in the first 30 months of the 
CAT NMS Plan development process''). (20 FTEs/30 months) = 0.667 
FTEs per month for all of the Participants to continue management of 
the Central Repository. Converting this into burden hours, (0.667 
FTEs) x (12 months) x (1,800 burden hours per year) = 14,407 ongoing 
annual burden hours for all of the Participants to continue 
management of the Central Repository. (14,407 ongoing annual burden 
hours for all Participants/21 Participants) = 686.05 ongoing annual 
burden hours for each Participant to continue management of the 
Central Repository.
---------------------------------------------------------------------------

    The Commission has not changed its estimate that the Participants 
would collectively spend $800,000 annually on external public 
relations, legal and consulting costs associated with the continued 
management of the Central Repository. However, the individual 
Participant cost estimate has decreased from $40,000 per Participant 
(as the Commission preliminarily estimated in the Notice \3310\) to 
$38,095.24 per Participant \3311\ due to the increase in the number of 
Participants.\3312\
---------------------------------------------------------------------------

    \3310\ See Notice, supra note 5, at Section V.D.l.a(1).
    \3311\ The Commission is basing this external cost estimate on 
the public relations, legal and consulting external cost estimate 
provided in the CAT NMS Plan associated with the preparation of the 
CAT NMS Plan (which the Participants consider ``reasonably 
associated with creating, implementing, and maintaining the CAT upon 
the Commission's adoption of the CAT NMS Plan''). See CAT NMS Plan, 
supra note 5, at Appendix C, Section B.7(b)(iii) (stating ``the 
Participants have incurred public relations, legal and consulting 
costs in preparation of the CAT NMS Plan. The Participants estimate 
the costs of these services to be $8,800,000''). $2,400,000 for all 
Participants over 12 months = ($8,800,000/44 months between the 
adoption of Rule 613 and the filing of the CAT NMS Plan) x (12 
months). Because the Central Repository will have already been 
created, the Commission believes it is reasonable to assume that the 
Participants will have a lesser need for public relations, legal and 
consulting services. The Commission is estimating that the 
Participants will incur one-third of the external cost associated 
with development and implementation of the Central Repository to 
maintain the Central Repository. $800,000 = (0.333) x ($2,400,000). 
($800,000/21 Participants) = $38,095.24 per Participant over 12 
months.
    \3312\ See supra note 3282.
---------------------------------------------------------------------------

    As noted above, the Participants updated the Central Repository 
estimates to reflect the estimates of the final three Shortlisted 
Bidders.\3313\ Using the revised estimates, the Commission now 
estimates that the annual ongoing cost to the Participants to 
compensate the Plan Processor for building, operating and maintaining 
the Central Repository would be an aggregate ongoing external cost of 
$55 million,\3314\ or $2,619,047.62 per Participant.\3315\ Therefore, 
the

[[Page 84920]]

Commission estimates that each Participant would incur ongoing annual 
external costs of $2,657,142.86 \3316\ to maintain the Central 
Repository, or aggregate ongoing annual external costs across all 
Participants of $55,800,000.06.\3317\
---------------------------------------------------------------------------

    \3313\ See Response Letter III at 14-15.
    \3314\ Id.
    \3315\ The Participants provided a range of Bidder estimates. 
See id. For purposes of this Paperwork Burden Act analysis, the 
Commission is using the maximum operation and maintenance cost 
estimate. $2,619,047.62 = $55,000,000/21 Participants. The 
Commission noted several uncertainties that may affect the Central 
Repository cost estimates, including (1) that the Participants have 
not yet selected a Plan Processor and the Shortlisted Bidders have 
submitted a wide range of cost estimates for building and operating 
the Central Repository; (2) the Bids submitted by the Shortlisted 
Bidders may not be final because they may be revised before the 
final selection of the CAT Processor; and (3) neither the Bidders 
nor the Commission can anticipate the evolution of technology and 
market activity with precision, as improvements in available 
technology may allow the Central Repository to be built and operated 
at a lower cost than is currently anticipated, but if levels of 
anticipated market activity are materially underestimated, the 
capacity of the Central Repository may need to be increased, 
resulting in an increase in costs.
    \3316\ $2,657,142.86 for each Participant to maintain the 
Central Repository = ($2,619,047.62 per Participant in ongoing 
annual costs to maintain the Central Repository) + ($38,095.24 per 
Participant in ongoing annual public relations, legal and consulting 
costs associated with the maintenance of the Central Repository).
    \3317\ $55,800,000.06 for all of the Participants to maintain 
the Central Repository = ($2,657,142.86 per Participant to 
compensate the Plan Processor and for external public relations, 
legal and consulting costs associated with the maintenance of the 
Central Repository) x (21 Participants).
---------------------------------------------------------------------------

b. Data Collection and Reporting
    Rule 613(c)(1) requires the CAT NMS Plan to provide for an 
accurate, time-sequenced record of orders beginning with the receipt or 
origination of an order by a Participant, and further to document the 
life of the order through the process of routing, modification, 
cancellation and execution (in whole or in part) of the order. Rule 
613(c) requires the CAT NMS Plan to impose requirements on Participants 
to record and report CAT information to the Central Repository in 
accordance with specified timelines.
    Rule 613(c) would require the collection and reporting of some 
information that Participants already collect to operate their business 
and are required to maintain in compliance with Section 17(a) of the 
Exchange Act and Rule 17a-1 thereunder.\3318\ For instance, the 
Commission believes that the national securities exchanges keep records 
pursuant to Section 17(a) of the Exchange Act and Rule 17a-1 thereunder 
in electronic form, of the receipt of all orders entered into their 
systems, as well as records of the routing, modification, cancellation, 
and execution of those orders. However, Rule 613 requires the 
Participants to collect and report additional and more detailed 
information, and to report the information to the Central Repository in 
a uniform electronic format, or in a manner that would allow the 
Central Repository to convert the data to a uniform electronic format 
for consolidation and storage.
---------------------------------------------------------------------------

    \3318\ 15 U.S.C. 78q(a); 17 CFR 240.17a-1.
---------------------------------------------------------------------------

    For its estimates of the Participants' costs to report CAT Data, 
the Commission is relying on the cost data provided by the Participants 
in the CAT NMS Plan. The Commission believes that such reliance is 
appropriate because the estimates in the CAT NMS Plan are based on 
Participants' responses to the Participants Study undertaken to 
estimate CAT-related costs for hardware and software, FTE costs, and 
third-party providers, if the Commission approves the CAT NMS 
Plan.\3319\ The Commission is providing below its paperwork burden 
estimates for the initial burden hours and external costs, and ongoing, 
annual burden hours and external costs to be incurred by the 
Participants to comply with the data reporting requirements of Rule 
613.\3320\
---------------------------------------------------------------------------

    \3319\ Third-party provider costs are generally legal and 
consulting costs, but may include other outsourcing. The template 
used by respondents is available at http://catnmsplan.com/PastEvents/ under the Section titled ``6/23/14'' at the ``Cost Study 
Working Template'' link.
    \3320\ The Commission notes that throughout this Paperwork 
Reduction Act analysis, it is categorizing the FTE cost estimates 
for the Participants, as well as the broker-dealer respondents, that 
were provided in the CAT NMS Plan as an internal burden. To convert 
the FTE cost estimates into internal burden hours, the Commission: 
(1) Divided the FTE cost estimates by a divisor of $424,350, which 
is the Commission's estimated average salary for a full-time 
equivalent employee in the securities industry in a job category 
associated with regulatory data reporting; and then (2) multiplied 
the quotient by 1,800 (the number of hours a full-time equivalent 
employee is estimated to work per year). See CAT NMS Plan, supra 
note 5, at Appendix C, Section B.7(b)(ii)(C), n.192. The 
Participants represented that the cost per FTE is $401,440. The 
$401,440 figure used in the CAT NMS Plan was based on a Programmer 
Analyst's salary ($193 per hour) from SIFMA's Management & 
Professional Earnings in the Securities Industry 2008, multiplied by 
40 hours per week, then multiplied by 52 weeks per year. The 
Commission has updated this number to include recent salary data for 
other job categories associated with regulatory data reporting in 
the securities industry, using the hour and multiple methodology 
used by the Commission in its paperwork burden analyses. The 
Commission is using $424,350 as its annual cost per FTE for purposes 
of its cost estimates. The $424,350 FTE cost = 25% Compliance 
Manager + 75% Programmer Analyst (0.25) x ($283 per hour x 1,800 
working hours per year) + (0.75) x ($220 per hour x 1,800 working 
hours per year). The $283 per hour figure for a Compliance Manager 
and the $220 per hour figure for a Programmer Analyst are from 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2013, modified by the Commission to account for an 1,800-
hour work-year and multiplied by 5.35 to account for bonuses, firm 
size, employee benefits and overhead.
---------------------------------------------------------------------------

(1) Initial Burden Hours and External Cost
    The CAT NMS Plan provides the following average costs that the 
Participants would expect to incur to adopt the systems changes needed 
to comply with the data reporting requirements of the CAT: $10,300,000 
in aggregate FTE costs for internal operational, technical/development, 
and compliance functions; $770,000 in aggregate third party legal and 
consulting costs; and $17,900,000 in aggregate total costs.\3321\
---------------------------------------------------------------------------

    \3321\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(B)(2). Of the $17,900,000 in aggregate total costs, 
$11,070,000 is identified (subtotal of FTE costs and outsourcing), 
but the remaining $6,830,000 is not identified in the CAT NMS Plan. 
The Commission believes that the $6,830,000 may be attributed to 
hardware costs because the Participants have not provided any 
hardware costs associated with data reporting elsewhere and the 
Commission believes that the Participants will likely incur external 
costs to purchase upgraded hardware to report data to the Central 
Repository.
---------------------------------------------------------------------------

A. Notice Estimates--Initial Burden and Costs
    In the Notice, based on estimates provided in the CAT NMS Plan, the 
Commission preliminarily estimated that the initial internal burden 
hours to develop and implement the needed systems changes to capture 
the required information and transmit it to the Central Repository in 
compliance with the Rule for each Participant would be approximately 
2,185 burden hours.\3322\ The Commission also preliminarily estimated 
that each Participant would, on average, incur approximately $38,500 in 
initial third party legal and consulting costs \3323\ for a total of 
$380,000 in initial external costs.\3324\ Therefore, the Commission 
preliminarily estimated that, for all Participants, the estimated 
aggregate one-time burden would be 43,690 hours \3325\ and the 
estimated aggregate

[[Page 84921]]

initial external cost would be $7,600,000.\3326\
---------------------------------------------------------------------------

    \3322\ ($10,300,000 anticipated initial FTE costs)/(20 SROs) = 
$515,000 in anticipated initial FTE costs per Participant. ($515,000 
in anticipated initial FTE costs per Participant)/($424,350 FTE 
costs per Participant) = 1.214 anticipated FTEs per Participant for 
the implementation of data reporting. (1.214 FTEs) x (1,800 working 
hours per year) = 2,184.5 initial burden hours per Participant to 
implement CAT Data reporting.
    \3323\ ($770,000 anticipated initial third party costs)/(20 
Participants) = $38,500 in initial anticipated third party costs per 
Participant.
    \3324\ To determine the total initial external cost per 
Participant, the Commission subtracted the anticipated initial FTE 
cost estimates for the Participants as provided in the Plan from the 
total aggregate initial costs to the Participants and divided the 
remainder by 20 Participants. ($17,900,000 total aggregate initial 
cost to Participants) - ($10,300,000 initial FTE cost to 
Participants) = $7,600,000. ($7,600,000)/20 Participants = $380,000 
in initial external costs per Participant. See CAT NMS Plan, supra 
note 5, at Appendix C, Section B.7(b)(iii)(B)(1) for the 
Participants' anticipated costs associated with the implementation 
of regulatory reporting to the Central Repository.
    \3325\ 43,690 initial burden hours = (20 Participants) x 
(2,184.5 initial burden hours).
    \3326\ $7,600,000 = ($380,000 in initial external costs) x (20 
Participants).
---------------------------------------------------------------------------

B. Comments/Responses on Initial Costs
    One commenter believed that estimates of current data reporting 
costs to Participants were ``grossly underestimated,'' \3327\ and 
stated that the implementation cost estimate of $17.9 million for 
Participants was ``not too far off,'' but felt the Participants' 
estimated costs for legal and consulting services and additional 
employees were not reliable.\3328\
---------------------------------------------------------------------------

    \3327\ Data Boiler Letter at 35.
    \3328\ Data Boiler Letter at 35.
---------------------------------------------------------------------------

    The Commission has considered the comment and continues to believe 
that the Participant cost estimates presented in the Plan are credible 
and is thus not changing its cost estimates of Participants' Data 
Recording and Reporting in response to the commenter. All 19 
Participants \3329\ responded to the Participants Study that served as 
the basis of the estimates, and most Participants have experience 
collecting audit trail data as well as expertise in the requirements of 
the CAT and in their business practices. The commenter did not provide 
an explanation for why the Participants were unable to reasonably 
estimate their own current data reporting costs.
---------------------------------------------------------------------------

    \3329\ There were 19 Participants at the time the Participants 
conducted the study.
---------------------------------------------------------------------------

C. Order Estimates--Initial Burden and Costs
    As noted earlier, subsequent to the publication of the Notice, the 
expected number of Participants has increased from 20 to 21.\3330\ As a 
result, the Commission is modifying its estimates of the initial burden 
and costs of Participants' data collection and reporting. After 
incorporating the increase in the number of Participants, the 
Commission now estimates that the initial internal burden hours to 
develop and implement the needed systems changes to capture the 
required information and transmit it to the Central Repository in 
compliance with the Rule for each Participant would be approximately 
2,080.80 burden hours.\3331\ The Commission also now estimates that 
each Participant would, on average, incur approximately $36,666.67 in 
initial third party legal and consulting costs \3332\ for a total of 
$361,904.76 in initial external costs.\3333\ Therefore, the Commission 
now estimates that, for all Participants, the estimated aggregate one-
time burden would be 43,696.80 hours \3334\ and the estimated aggregate 
initial external cost would be approximately $7,600,000.\3335\
---------------------------------------------------------------------------

    \3330\ See supra note 3282.
    \3331\ ($10,300,000 anticipated initial FTE costs)/(21 
Participants) = $490,476.19 in anticipated initial FTE costs per 
Participant. ($490,476.19 in anticipated initial FTE costs per 
Participant)/($424,350 FTE costs per Participant) = 1.156 
anticipated FTEs per Participant for the implementation of data 
reporting. (1.156 FTEs) x (1,800 working hours per year) = 2,080.8 
initial burden hours per Participant to implement CAT Data 
reporting.
    \3332\ ($770,000 anticipated initial third party costs)/(21 
Participants) = $36,666.67 in initial anticipated third party costs 
per Participant.
    \3333\ To determine the total initial external cost per 
Participant, the Commission subtracted the anticipated initial FTE 
cost estimates for the Participants as provided in the Plan from the 
total aggregate initial costs to the Participants and divided the 
remainder by 21 Participants. ($17,900,000 total aggregate initial 
cost to Participants) - ($10,300,000 initial FTE cost to 
Participants) = $7,600,000. ($7,600,000)/21 Participants = 
$361,904.76 in initial external costs per Participant. See CAT NMS 
Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(B)(1) for the 
Participants' anticipated costs associated with the implementation 
of regulatory reporting to the Central Repository.
    \3334\ 43,696.80 initial burden hours = (21 Participants) x 
(2,080.80 initial burden hours).
    \3335\ $7,599,999.96 = ($361,904.76 in initial external costs) x 
(21 Participants).
---------------------------------------------------------------------------

(2) Ongoing, Annual Burden Hours and External Cost
    Once a Participant has established the appropriate systems and 
processes required for collection and transmission of the required 
information to the Central Repository, the Commission estimates that 
Rule 613 would impose on each Participant ongoing annual burdens 
associated with, among other things, personnel time to monitor each 
Participant's reporting of the required data and the maintenance of the 
systems to report the required data; and implementing changes to 
trading systems that might result in additional reports to the Central 
Repository. The CAT NMS Plan provides the following average aggregate 
costs that the Participants would expect to incur to maintain data 
reporting systems to be in compliance with Rule 613: $7,300,000 in 
anticipated annual FTE costs for operational, technical/development, 
and compliance functions related to data reporting; $720,000 in annual 
third party legal, consulting, and other costs; \3336\ and $14,700,000 
total annual costs.\3337\
---------------------------------------------------------------------------

    \3336\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(B)(2). The CAT NMS Plan did not identify the other 
costs.
    \3337\ Of the $14,700,000 in aggregate total annual costs, 
$8,020,000 is identified (subtotal of FTE costs and outsourcing), 
but the remaining $6,680,000 is not identified in the CAT NMS Plan. 
The Commission believes that this amount may be attributed to 
hardware costs because the Participants have not provided any 
hardware costs associated with data reporting elsewhere and the 
Commission believes that the Participants will likely incur costs to 
upgrade their hardware to report data to the Central Repository.
---------------------------------------------------------------------------

A. Notice Estimates--Ongoing Burden and Costs
    In the Notice, based on estimates provided in the CAT NMS Plan, the 
Commission believed that it would take each Participant 1,548 ongoing 
burden hours per year \3338\ to continue compliance with Rule 613. The 
Commission preliminarily estimated that it would cost, on average, 
approximately $36,000 in ongoing third party legal and consulting and 
other costs \3339\ and $370,000 in total ongoing external costs per 
Participant.\3340\ Therefore, the Commission preliminarily estimated 
that the estimated aggregate ongoing burden for all Participants would 
be approximately 30,966 hours \3341\ and an estimated aggregate ongoing 
external cost of $7,400,000.\3342\
---------------------------------------------------------------------------

    \3338\ ($7,300,000 in anticipated Participant annual FTE costs)/
(20 Participants) = $365,000 in anticipated per Participant annual 
FTE costs. ($365,000 in anticipated per Participant FTE costs)/
($424,350 FTE cost per Participant) = 0.86 anticipated FTEs per 
Participant. (0.86 FTEs) x (1,800 working hours per year) = 1,548.3 
burden hours per Participant to maintain CAT Data reporting.
    \3339\ ($720,000 in annual third party costs)/(20 Participants) 
= $36,000 per Participant in anticipated annual third party costs.
    \3340\ To determine the total external annual cost per 
Participant, the Commission subtracted the anticipated annual FTE 
cost estimates for the Participants as provided in the Plan from the 
total aggregate annual costs to the Participants and divided the 
remainder by 20 Participants. ($14,700,000 total aggregate annual 
cost to Participants) - ($7,300,000 annual FTE cost to Participants) 
= $7,400,000. ($7,400,000)/20 Participants = $370,000 in annual 
external costs per Participant. See CAT NMS Plan, supra note 5, at 
Appendix C, Section B.7(b)(iii)(B)(1) for the Participants' 
anticipated maintenance costs associated with regulatory reporting 
to the Central Repository.
    \3341\ 30,966 annual burden hours = (20 Participants) x (1,548.3 
annual burden hours).
    \3342\ $7,400,000 = ($370,000 in total annual external costs) x 
(20 Participants).
---------------------------------------------------------------------------

B. Comments/Responses on Ongoing Costs
    One commenter noted that the Participants' ongoing data reporting 
cost estimates do not include a ``per-message toll charge in the CAT 
funding model.'' \3343\ The Commission considered this comment, but 
notes that the Participants are not charged for message traffic 
according to the Plan's funding model.
---------------------------------------------------------------------------

    \3343\ Data Boiler Letter at 35.
---------------------------------------------------------------------------

    One commenter noted that the Participants' ongoing data reporting 
cost estimates do not include a ``per-message toll charge in the CAT 
funding model.'' \3344\ The Commission

[[Page 84922]]

considered this comment, but notes that the Participants are not 
charged for message traffic according to the Plan's funding model.
---------------------------------------------------------------------------

    \3344\ Data Boiler Letter at 35.
---------------------------------------------------------------------------

C. Order Estimates--Ongoing Burden and Costs
    As noted earlier, subsequent to the publication of the Notice, the 
expected number of Participants has increased from 20 to 21.\3345\ As a 
result, the Commission is modifying its estimates of the ongoing burden 
and costs of Participants' data reporting. After incorporating the 
increase in the number of Participants, the Commission now estimates 
that it would take each Participant 1,474.20 ongoing burden hours per 
year \3346\ to continue compliance with Rule 613. The Commission now 
estimates that it would cost, on average, approximately $34,285.71 in 
ongoing third party legal and consulting and other costs \3347\ and 
$352,380.95 in total ongoing external costs per Participant.\3348\ 
Therefore, the Commission now estimates that the estimated aggregate 
ongoing burden for all Participants would be approximately 30,958.20 
hours \3349\ and an estimated aggregate ongoing external cost of 
approximately $7,400,000.\3350\
---------------------------------------------------------------------------

    \3345\ See supra note 3282.
    \3346\ ($7,300,000 in anticipated Participant annual FTE costs)/
(21 Participants) = $347,619.08 in anticipated per Participant 
annual FTE costs. ($347,619.05 in anticipated per Participant FTE 
costs)/($424,350 FTE cost per Participant) = 0.819 anticipated FTEs 
per Participant. (0.819 FTEs) x (1,800 working hours per year) = 
1,474.20 burden hours per Participant to maintain CAT Data 
reporting.
    \3347\ ($720,000 in annual third party costs)/(21 Participants) 
= $34,285.71 per Participant in anticipated annual third party 
costs.
    \3348\ To determine the total external annual cost per 
Participant, the Commission subtracted the anticipated annual FTE 
cost estimates for the Participants as provided in the Plan from the 
total aggregate annual costs to the Participants and divided the 
remainder by 21 Participants. ($14,700,000 total aggregate annual 
cost to Participants) - ($7,300,000 annual FTE cost to Participants) 
= $7,400,000. ($7,400,000)/21 Participants = $352,380.95 in annual 
external costs per Participant. See CAT NMS Plan, supra note 5, at 
Appendix C, Section B.7(b)(iii)(B)(1) for the Participants' 
anticipated maintenance costs associated with regulatory reporting 
to the Central Repository.
    \3349\ 30,958.20 annual burden hours = (21 Participants) x 
(1,474.20 annual burden hours).
    \3350\ $7,399,999.95 = ($352,380.95 in total annual external 
costs) x (21 Participants).
---------------------------------------------------------------------------

c. Collection and Retention of NBBO, Last Sale Data and Transaction 
Reports
    Rule 613(e)(7) provides that the CAT NMS Plan must require the 
Central Repository to collect and retain on a current and continuous 
basis NBBO information for each NMS security, transaction reports 
reported pursuant to an effective transaction reporting plan, and Last 
Sale Reports reported pursuant to the OPRA Plan.\3351\ Additionally, 
the CAT NMS Plan must require the Central Repository to maintain this 
data in a format compatible with the order and event information 
consolidated and stored pursuant to Rule 613(c)(7).\3352\ Further, the 
CAT NMS Plan must require the Central Repository to retain the 
information collected pursuant to paragraphs (c)(7) and (e)(7) of Rule 
613 for a period of not less than five years in a convenient and usable 
uniform electronic format that is directly available and searchable 
electronically without any manual intervention.\3353\ The Commission 
notes that the CAT NMS Plan includes these data as ``SIP Data'' to be 
collected by the Central Repository.\3354\ As it concluded in the 
Notice Paperwork Reduction Act analysis,\3355\ the Commission believes 
the burden associated with SIP Data is included in the burden to the 
Participants associated with the implementation and maintenance of the 
Central Repository.
---------------------------------------------------------------------------

    \3351\ See 17 CFR 242.613(e)(7).
    \3352\ Id.
    \3353\ See 17 CFR 242.613(e)(8).
    \3354\ See CAT NMS Plan, supra note 5, at Section 6.5(a)(ii).
    \3355\ See Notice, supra note 5, at Section V.D.1.c.
---------------------------------------------------------------------------

d. Surveillance
    Rule 613(f) provides that the CAT NMS Plan must require that every 
national securities exchange and national securities association 
develop and implement a surveillance system, or enhance existing 
surveillance systems, reasonably designed to make use of the 
consolidated information contained in the consolidated audit trail. 
Rule 613(a)(3)(iv) provides that the CAT NMS Plan must require that the 
surveillance systems be implemented within fourteen months after 
effectiveness of the CAT NMS Plan.
(1) Initial Burden Hours and External Cost
    The CAT NMS Plan states that the estimated total cost to the 
Participants to implement surveillance programs within the Central 
Repository is $23,200,000.\3356\ This amount includes legal, 
consulting, and other costs of $560,000, as well as $17,500,000 in FTE 
costs for operational, technical/development, and compliance staff to 
be engaged in the creation of surveillance programs.\3357\
---------------------------------------------------------------------------

    \3356\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(B)(2).
    \3357\ Id. The Commission also notes that based upon the data 
provided by the Participants, the source of the remaining $5,140,000 
in initial costs to implement new or enhanced surveillance systems 
is unspecified. The Commission believes that this amount may be 
attributed to hardware costs because the Participants have not 
provided any hardware costs associated with surveillance elsewhere 
and the Commission believes that the Participants will likely incur 
costs to implement new or enhanced surveillance systems reasonably 
designed to make use of the consolidated audit trail data.
---------------------------------------------------------------------------

A. Notice Estimates--Initial Burden and Costs
    In the Notice, based on the estimates provided in the CAT NMS Plan, 
the Commission preliminarily estimated that the initial internal burden 
hours to implement new or enhanced surveillance systems reasonably 
designed to make use of the consolidated audit trail data for each 
Participant would be approximately 3,711.6 burden hours,\3358\ for an 
aggregate initial burden hour amount of 74,232 burden hours.\3359\ The 
Commission also preliminarily estimated that each Participant would, on 
average, incur an initial external cost of approximately $28,000 \3360\ 
for outsourced legal, consulting and other costs in order to implement 
new or enhanced surveillance systems, for a total of $285,000 in 
initial external costs,\3361\ for an aggregate one-time initial 
external cost of $5,700,000 to implement new or enhanced surveillance 
systems.\3362\
---------------------------------------------------------------------------

    \3358\ ($17,500,000 in anticipated initial FTE costs)/(20 
Participants) = $875,000 in anticipated FTE costs per Participant. 
($875,000 in anticipated initial FTE costs per Participant)/
($424,350 FTE cost per Participant) = 2.06 anticipated initial FTEs 
per Participant. (2.06 FTEs) x (1,800 working hours per year) = 
3,711.6 initial burden hours per Participant to implement new or 
enhanced surveillance systems.
    \3359\ (3,711.6 initial burden hours per Participant to 
implement new or enhanced surveillance systems) x (20 Participants) 
= 74,232 aggregate initial burden hours.
    \3360\ $28,000 = $560,000/20 Participants.
    \3361\ $285,000 = ($23,200,000 in total initial surveillance 
costs -$17,500,000 in FTE costs)/(20 Participants).
    \3362\ $5,700,000 = $285,000 x 20 Participants.
---------------------------------------------------------------------------

B. Comments/Responses on Initial Burden and Costs
    One commenter implied that savings on surveillance were unlikely, 
and stated that the lack of an analytical framework did not facilitate 
the identification of suspicious activities.\3363\ Another commenter 
noted that uncertainties in the manner in which regulators will access 
data in the Central Repository create significant cost 
uncertainties.\3364\ On the other hand, the commenter asserted that the 
CAT could permit more efficient market surveillance activity by the 
Participants, which would allow for cost savings.\3365\
---------------------------------------------------------------------------

    \3363\ Data Boiler Letter at 33.
    \3364\ SIFMA Letter at 33.
    \3365\ SIFMA Letter at 18.

---------------------------------------------------------------------------

[[Page 84923]]

    The Commission has considered these comments and continues to 
believe that Participant cost estimates presented in the Plan are 
credible. As noted above, all 19 Participants \3366\ responded to the 
Participants Study, and most Participants have experience collecting 
audit trail data as well as expertise in the requirements of CAT as 
well as in their business practices. Regarding the comment about the 
inclusion of an analytical framework in surveillance cost estimates in 
the Plan, the Plan does incorporate an analytical framework; \3367\ 
therefore, the Commission believes that Participant cost estimates 
already account for such a framework.
---------------------------------------------------------------------------

    \3366\ There were 19 Participants at the time the Participants 
conducted the study.
    \3367\ See Section V.E.2.c(1), supra.
---------------------------------------------------------------------------

C. Order Estimates--Initial Burden and Costs
    As noted earlier, subsequent to the publication of the CAT NMS Plan 
Notice, the expected number of Participants has increased from 20 to 
21.\3368\ As a result, the Commission is modifying its estimates of the 
initial burden and costs to implement new or enhanced surveillance 
systems reasonably designed to make use of the consolidated audit trail 
data. After incorporating the increase in the number of Participants, 
the Commission now estimates that the initial internal burden hours to 
implement new or enhanced surveillance systems for each Participant 
would be approximately 3,535.20 burden hours,\3369\ for an aggregate 
initial burden hour amount of 74,239.20 burden hours.\3370\ The 
Commission also now estimates that each Participant would, on average, 
incur an initial external cost of approximately $26,666.67 \3371\ for 
outsourced legal, consulting and other costs in order to implement new 
or enhanced surveillance systems, for a total of $271,428.57 in initial 
external costs,\3372\ for an aggregate one-time initial external cost 
of approximately $5,700,000 to implement new or enhanced surveillance 
systems.\3373\
---------------------------------------------------------------------------

    \3368\ See supra note 3282.
    \3369\ ($17,500,000 in anticipated initial FTE costs)/(21 
Participants) = $833,333.33 in anticipated FTE costs per 
Participant. ($833,333.33 in anticipated initial FTE costs per 
Participant)/($424,350 FTE cost per Participant) = 1.964 anticipated 
initial FTEs per Participant. (1.964 FTEs) x (1,800 working hours 
per year) = 3,535.20 initial burden hours per Participant to 
implement new or enhanced surveillance systems.
    \3370\ (3,535.20 initial burden hours per Participant to 
implement new or enhanced surveillance systems) x (21 Participants) 
= 74,239.20 aggregate initial burden hours.
    \3371\ $26,666.67 = $560,000/21 Participants.
    \3372\ $271,428.57 = ($23,200,000 in total initial surveillance 
costs - $17,500,000 in FTE costs)/(21 Participants).
    \3373\ $5,699,999.97 = ($271,428.57 in initial external costs) x 
(21 Participants).
---------------------------------------------------------------------------

(2) Ongoing, Annual Burden Hours and External Cost
    The CAT NMS Plan states that the estimated total annual cost 
associated with the maintenance of surveillance programs for the 
Participants is $87,700,000.\3374\ This amount includes annual legal, 
consulting, and other costs of $1,000,000, as well as $66,700,000 in 
annual FTE costs for internal operational, technical/development, and 
compliance staff to be engaged in the maintenance of surveillance 
programs.\3375\
---------------------------------------------------------------------------

    \3374\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(B)(2).
    \3375\ Id. The Commission also notes that based upon the data 
provided by the Participants, the source of the remaining 
$21,000,000 in ongoing costs to maintain the new or enhanced 
surveillance systems is unspecified. The Commission believes that 
this amount may be attributed to hardware costs because the 
Participants have not provided any hardware costs associated with 
surveillance elsewhere and the Commission believes that the 
Participants would likely incur costs associated with maintaining 
the new or enhanced surveillance systems.
---------------------------------------------------------------------------

A. Notice Estimates--Ongoing Burden and Costs
    In the Notice, based on the estimates provided in the CAT NMS 
Plan,\3376\ the Commission preliminarily estimated that the ongoing 
internal burden hours to maintain the new or enhanced surveillance 
systems reasonably designed to make use of the consolidated audit trail 
data for each Participant would be approximately 14,146 annual burden 
hours,\3377\ for an aggregate annual burden hour amount of 282,920 
burden hours.\3378\ The Commission also preliminarily estimated that 
each Participant would, on average, incur an annual external cost of 
approximately $50,000 \3379\ for outsourced legal, consulting and other 
costs in order to maintain the new or enhanced surveillance systems, 
for a total estimated ongoing external cost of $1,050,000,\3380\ for an 
estimated aggregate ongoing external cost of $21,000,000 to maintain 
the surveillance systems.\3381\
---------------------------------------------------------------------------

    \3376\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(B)(2).
    \3377\ ($66,700,000 in anticipated ongoing FTE costs)/(20 
Participants) = $3,335,000 in anticipated ongoing FTE costs per 
Participant. ($3,335,000 in anticipated ongoing FTE costs per 
Participant)/($424,350 FTE cost per Participant) = 7.86 anticipated 
FTEs per Participant. (7.86 FTEs) x (1,800 working hours per year) = 
14,146 ongoing burden hours per Participant to maintain the new or 
enhanced surveillance systems.
    \3378\ (14,146 annual burden hours per Participant to maintain 
new or enhanced surveillance systems) x (20 Participants) = 282,920 
aggregate annual burden hours.
    \3379\ $50,000 = $1,000,000 for ongoing legal, consulting and 
other costs associated with maintenance of surveillance programs/20 
Participants.
    \3380\ $1,050,000 = ($87,700,000 in total ongoing surveillance 
costs - $66,700,000 in ongoing FTE costs)/20 Participants
    \3381\ $21,000,000 = $1,050,000 x 20 Participants.
---------------------------------------------------------------------------

B. Order Estimates--Ongoing Burden and Costs
    As noted earlier, subsequent to the publication of the Notice, the 
expected number of Participants has increased from 20 to 21.\3382\ As a 
result, the Commission is modifying its estimates of the ongoing burden 
and costs to maintain the new or enhanced surveillance systems 
reasonably designed to make use of the consolidated audit trail data. 
After incorporating the increase in the number of Participants, the 
Commission now estimates that the ongoing internal burden hours for 
each Participant would be approximately 13,473 annual burden 
hours,\3383\ for an aggregate annual burden hour amount of 282,933 
burden hours.\3384\ The Commission also now estimates that each 
Participant would, on average, incur an annual external cost of 
approximately $47,619.05 \3385\ for outsourced legal, consulting and 
other costs in order to maintain the new or enhanced surveillance 
systems, for a total estimated ongoing external cost of 
$1,000,000,\3386\ for an estimated aggregate ongoing external cost of 
$21,000,000 across the 21 Participants to maintain the surveillance 
systems.\3387\
---------------------------------------------------------------------------

    \3382\ See supra note 3282.
    \3383\ ($66,700,000 in anticipated ongoing FTE costs)/(21 
Participants) = $3,176,190.48 in anticipated ongoing FTE costs per 
Participant. ($3,176,190.48 in anticipated ongoing FTE costs per 
Participant)/($424,350 FTE cost per Participant) = 7.485 anticipated 
FTEs per Participant. (7.485 FTEs) x (1,800 working hours per year) 
= 13,473 ongoing burden hours per Participant to maintain the new or 
enhanced surveillance systems.
    \3384\ (13,473 annual burden hours per Participant to maintain 
new or enhanced surveillance systems) x (21 Participants) = 282,933 
aggregate annual burden hours.
    \3385\ $47,619.05 = ($1,000,000 for ongoing legal, consulting 
and other costs associated with maintenance of surveillance 
programs)/(21 Participants).
    \3386\ $1,000,000 = ($87,700,000 in total ongoing surveillance 
costs - $66,700,000 in ongoing FTE costs)/(21 Participants).
    \3387\ $21,000,000 = ($1,000,000) x (21 Participants).
---------------------------------------------------------------------------

e. Document on Expansion to Other Securities
    Rule 613(i) provides that the CAT NMS Plan must require the 
Participants to jointly provide to the Commission, within six months 
after the CAT NMS

[[Page 84924]]

Plan is effective, a document outlining how the Participants could 
incorporate into the CAT information regarding: (1) Equity securities 
that are not NMS securities; \3388\ (2) debt securities; and (3) 
primary market transactions in equity securities that are not NMS 
securities and debt securities.\3389\ The document must also detail the 
order and Reportable Event data that each market participant may be 
required to provide, which market participants may be required to 
provide such data, an implementation timeline, and a cost estimate. 
Thus, the Participants must, among other things, undertake an analysis 
of technological and computer system acquisitions and upgrades that 
would be required to achieve such an expansion.
---------------------------------------------------------------------------

    \3388\ As noted above, the CAT NMS Plan would require the 
inclusion of OTC Equity Securities, while Rule 613 does not include 
such a requirement. See supra note 439.
    \3389\ See 17 CFR 242.613(i).
---------------------------------------------------------------------------

A. Notice Estimates--Initial Burden and Costs
    In the Notice, the Commission preliminarily estimated that it would 
take each Participant approximately 180 burden hours of internal legal, 
compliance, business operations and information technology staff time 
to create a document addressing expansion of the consolidated audit 
trail to additional securities as required by Rule 613(i).\3390\ The 
Commission preliminarily estimated that on average, each Participant 
would outsource 25 hours of external legal time to create the document, 
for an aggregate one-time external cost of approximately $10,000.\3391\ 
Therefore, the Commission preliminarily estimated that the one-time 
initial burden of drafting the document required by Rule 613 would be 
180 initial burden hours plus $10,000 in initial external costs for 
outsourced legal counsel per Participant, for an estimated aggregate 
initial burden of 3,600 hours and an estimated aggregate initial 
external cost of $200,000.\3392\
---------------------------------------------------------------------------

    \3390\ The Commission based this estimate on the internal burden 
provided in the CAT NMS Plan related to the development of the CAT 
NMS Plan. See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii) (stating ``[t]he Participants estimate that they have 
collectively contributed 20 FTEs in the first 30 months of the CAT 
NMS Plan development process''). Because this document is much more 
limited in scope than the CAT NMS Plan, and because the Commission 
assumes that in drafting the CAT NMS Plan, the Participants have 
already contributed time toward considering how the CAT can be 
expected to be expanded in accordance with Rule 613(i), the 
Commission applied the CAT NMS Plan development internal burden over 
a 6-month period (Rule 613(i) requires this document to be submitted 
to the Commission within six months after effectiveness of the CAT 
NMS Plan), divided by half. 0.667 FTEs required for all Participants 
per month to develop the CAT NMS Plan = (20 FTEs/30 months). 0.667 
FTEs x 6 months = 4 FTEs. 4 FTEs/2 = 2 FTEs needed for all of the 
Participants to create and submit the document. 2 FTEs x 1,800 
working hours per year = 3,600 burden hours. 3,600 burden hours/20 
Participants = 180 burden hours per Participant to create and file 
the document.
    \3391\ $10,000 = (25 hours of outsourced legal time per 
Participant) x ($400 per hour rate for outside legal services). The 
Commission derived the total estimated cost for outsourced legal 
counsel based on the assumption that the report required by Rule 613 
would require approximately fifteen percent of the Commission's 
approximated burden of drafting and filing the CAT NMS Plan. This 
assumption is based on the Participants leveraging their knowledge 
gained from their drafting and filing of the CAT NMS Plan and 
applying it to efficiently preparing the report required by Rule 613 
with respect to other securities' order and Reportable Events, 
implementation timeline and cost estimates.
    \3392\ The initial burden hour estimate is based on: (20 
Participants) x (180 initial burden hours to draft the report). The 
initial external cost estimate is based on: (20 Participants) x 
($10,000 for outsourced legal counsel).
---------------------------------------------------------------------------

B. Order Estimates--Initial Burden and Costs
    As noted earlier, subsequent to the publication of the Notice, the 
expected number of Participants has increased from 20 to 21.\3393\ As a 
result, the Commission is modifying its estimates of the initial burden 
and costs of the document on expansion to additional securities. After 
incorporating the increase in the number of Participants, the 
Commission now estimates that it would take each Participant 
approximately 171.43 burden hours of internal legal, compliance, 
business operations and information technology staff time to create a 
document addressing expansion of the CAT to additional securities as 
required by Rule 613(i).\3394\ The Commission now estimates that on 
average, each Participant would outsource 25 hours of external legal 
time to create the document, for an aggregate one-time external cost of 
approximately $10,000.\3395\ Therefore, the Commission now estimates 
that the one-time initial burden of drafting the document required by 
Rule 613 would be 171.43 initial burden hours plus $10,000 in initial 
external costs for outsourced legal counsel per Participant, for an 
estimated aggregate initial burden of 3,600.3 hours and an estimated 
aggregate initial external cost of $210,000.\3396\
---------------------------------------------------------------------------

    \3393\ See supra note 3282.
    \3394\ The Commission is basing this estimate on the internal 
burden provided in the CAT NMS Plan related to the development of 
the CAT NMS Plan. See CAT NMS Plan, supra note 5, at Appendix C, 
Section B.7(b)(iii) (stating ``[t]he Participants estimate that they 
have collectively contributed 20 FTEs in the first 30 months of the 
CAT NMS Plan development process''). Because the expansion document 
is much more limited in scope than the CAT NMS Plan, and because the 
Commission assumes that in drafting the CAT NMS Plan, the 
Participants have already contributed time toward considering how 
the CAT can be expected to be expanded in accordance with Rule 
613(i), the Commission is applying the CAT NMS Plan development 
internal burden over a 6-month period (Rule 613(i) requires this 
document to be submitted to the Commission within six months after 
effectiveness of the CAT NMS Plan), divided by half. 0.667 FTEs 
required for all Participants per month to develop the CAT NMS Plan 
= (20 FTEs/30 months). 0.667 FTEs x 6 months = 4 FTEs. 4 FTEs/2 = 2 
FTEs needed for all of the Participants to create and submit the 
document. 2 FTEs x 1,800 working hours per year = 3,600 burden 
hours. (3,600 burden hours)/(21 Participants) = 171.43 burden hours 
per Participant to create and file the document.
    \3395\ $10,000 = (25 hours of outsourced legal time per 
Participant) x ($400 per hour rate for outside legal services). The 
Commission derived the total estimated cost for outsourced legal 
counsel based on the assumption that the report required by Rule 613 
would require approximately fifteen percent of the Commission's 
approximated burden of drafting and filing the CAT NMS Plan. This 
assumption is based on the Participants leveraging their knowledge 
gained from their drafting and filing of the CAT NMS Plan and 
applying it to efficiently preparing the report required by Rule 613 
with respect to other securities' order and Reportable Events, 
implementation timeline and cost estimates.
    \3396\ The initial burden hour estimate is based on: (21 
Participants) x (171.43 initial burden hours to draft the report). 
The initial external cost estimate is based on: (21 Participants) x 
($10,000 for outsourced legal counsel).
---------------------------------------------------------------------------

f. Written Assessment of Operation of the Consolidated Audit Trail
    Rule 613(b)(6) provides that the CAT NMS Plan must require the 
Participants to provide the Commission a written assessment of the 
CAT's operation at least every two years, once the CAT NMS Plan is 
effective.\3397\ The assessment must address, at a minimum, with 
respect to the CAT: (i) An evaluation of its performance; (ii) a 
detailed plan for any potential improvements to its performance; (iii) 
an estimate of the costs associated with any such potential 
improvements; and (iv) an estimated implementation timeline for any 
such potential improvements, if applicable.\3398\ Thus, the 
Participants must, among other things, undertake an analysis of the 
CAT's technological and computer system performance.
---------------------------------------------------------------------------

    \3397\ 17 CFR 242.613(b)(6); see also Notice, supra note 5, at 
30700.
    \3398\ See 17 CFR 242.613(b)(6).
---------------------------------------------------------------------------

    The CAT NMS Plan states that the CCO would oversee the assessment 
required by Rule 613(b)(6), and would allow the Participants to review 
and comment on the assessment before it is submitted to the 
Commission.\3399\ The CCO would be an employee of the Plan Processor 
and would be compensated by the Plan Processor.\3400\ The Commission

[[Page 84925]]

assumes that the overall cost and associated burden on the Participants 
to implement and maintain the Central Repository includes both the 
compensation for the Plan Processor as well as its employees for the 
implementation and maintenance of the Central Repository.
---------------------------------------------------------------------------

    \3399\ See CAT NMS Plan, supra note 5, at Section 6.6.
    \3400\ Id. at Section 6.2(a).
---------------------------------------------------------------------------

A. Notice Estimates--Ongoing Burden and Costs
    In the Notice, the Commission preliminarily estimated that it would 
take each Participant approximately 45 annual burden hours of internal 
legal, compliance, business operations, and information technology 
staff time to review and comment on the assessment prepared by the CCO 
of the operation of the consolidated audit trail as required by Rule 
613(b)(6).\3401\ The Commission preliminarily estimated that on 
average, each Participant would outsource 1.25 hours of legal time 
annually to assist in the review of the assessment, for an ongoing 
annual external cost of approximately $500.\3402\ Therefore, the 
Commission preliminarily estimated that the ongoing annual burden of 
submitting a written assessment at least every two years, as required 
by Rule 613(b)(6), would be 45 ongoing burden hours per SRO plus $500 
of external costs for outsourced legal counsel per Participant per 
year, for an estimated aggregate annual ongoing burden of 900 hours 
\3403\ and an estimated aggregate ongoing external cost of 
$10,000.\3404\
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    \3401\ The Commission calculated the total estimated burden 
hours based on a similar formulation used for calculating the total 
estimated burden hours of Rule 613(i)'s requirement for a document 
addressing expansion of the CAT to other securities. See Notice, 
supra note 5, at Section V.D.1.f. The Commission assumed that the 
review and potential revision of the written assessment required by 
Rule 613(b)(6) would be approximately one-half as burdensome as the 
document required by Rule 613(i) as the Participants are delegating 
the responsibility to prepare the written assessment required by 
Rule 613(b)(6) to the CCO and the Participants would only need to 
review the written assessment and revise it as necessary. As noted 
in note 3394, supra, to estimate the Rule 613(i) burden, the 
Commission is applying the internal burden estimate provided in the 
CAT NMS Plan for Plan development over a 6-month period, and 
dividing the result in half. See CAT NMS Plan, supra note 5, at 
Appendix C, Section B.7(b)(iii). To estimate the Rule 613(b)(6) 
written assessment burden, the Commission is dividing the result 
further by half. 0.667 FTEs required for all Participants per month 
to develop the CAT NMS Plan = (20 FTEs/30 months). 0.667 FTEs x 6 
months = 4 FTEs. 4 FTEs/2 = 2 FTEs needed for all of the 
Participants to create and submit the Rule 613(i) document. 2 FTEs/2 
= 1 FTE needed for all of the Participants to review and comment on 
the written assessment. (1 FTE x 1,800 working hours per year) = 
1,800 ongoing annual burden hours per year for all of the 
Participants to review and comment on the written assessment. (1,800 
burden hours/20 Participants) = 90 ongoing annual burden hours per 
Participant to review and comment on the written assessment prepared 
by the CCO. The Commission noted that this assessment must be filed 
with the Commission every two years and is providing an annualized 
estimate of the burden associated with the assessment as required 
for its Paperwork Reduction Act analysis. To provide an estimate of 
the annual burden associated with the assessment as required for its 
Paperwork Reduction Act analysis, Commission divided the 90 ongoing 
burden hours in half (over two years) = 45 ongoing annual burden 
hours per Participant to review and comment on the written 
assessment prepared by the CCO.
    \3402\ $500 = ($400 per hour rate for outside legal services) x 
(1.25 hours). Because the written assessment was a biennial 
requirement, the Commission divided the cost of the written 
assessment in half (over two years) to estimate the annual ongoing 
external cost per Participant for outside legal services to review 
and comment on the written assessment prepared by the CCO.
    \3403\ 900 ongoing annual burden hours = (45 ongoing annual 
burden hours) x (20 Participants).
    \3404\ $10,000 = 20 Participants x ($400 per hour rate for 
outside legal services) x (1.25 hours).
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B. Order Estimates--Ongoing Burden and Costs
    As noted above,\3405\ the Commission has subsequently amended this 
requirement as imposed by the CAT NMS Plan to change the reporting 
frequency from every two years to annual, to require that the benefits 
of potential improvements, and their impact on investor protection, be 
discussed, as well as to provide additional specificity regarding the 
content of the report.\3406\ As amended, the content of the report must 
include the following: (i) An evaluation of the information security 
program of the CAT to ensure that the program is consistent with the 
highest industry standards for protection of data; (ii) an evaluation 
of potential technological upgrades based upon a review of 
technological advancements over the preceding year, drawing on 
technological expertise, whether internal or external; (iii) an 
evaluation of the time necessary to restore and recover CAT Data at a 
back-up site; (iv) an evaluation of how the Plan Processor and 
Participants are monitoring Error Rates and addressing the application 
of Error Rates based on product, data element or other criteria; (v) a 
copy of the evaluation required by the CAT NMS Plan in Section 6.8(c) 
that the Plan Processor evaluate whether industry standards have 
evolved such that: (1) The synchronization standard in Section 6.8(a) 
of the CAT NMS Plan should be shortened; or (2) the required timestamp 
in Section 6.8(b) of the CAT NMS Plan should be in finer increments.
---------------------------------------------------------------------------

    \3405\ See Section VI.A.7., supra.
    \3406\ See Section IV.H., supra.
---------------------------------------------------------------------------

    The CAT NMS Plan states that the CCO would oversee the assessment 
required by Rule 613(b)(6), and would allow the Participants to review 
and comment on the assessment before it is submitted to the 
Commission.\3407\ The Commission believes the responsibility to oversee 
the assessment as amended should continue to belong to the CCO and is 
not amending the CAT NMS Plan to require a different process.
---------------------------------------------------------------------------

    \3407\ See CAT NMS Plan, supra note 5, at Section 6.6.
---------------------------------------------------------------------------

    As a result, the Commission is modifying its estimates of the 
ongoing burden and costs related to the written assessment of the 
operation of the CAT, as well as to account for an increase in the 
expected number of Participants from 20 to 21, subsequent to the 
publication of the Notice.\3408\ The Commission now estimates that it 
would take each Participant approximately 171.43 annual burden hours of 
internal legal, compliance, business operations, and information 
technology staff time to review and comment on the assessment prepared 
by the CCO of the operation of the CAT.\3409\ The Commission now 
estimates that on average, each Participant would outsource 2.5 hours 
of legal time annually to assist in the review of the assessment, for 
an ongoing annual external cost of approximately $1,000.\3410\ 
Therefore, the Commission

[[Page 84926]]

now estimates that the ongoing annual burden of submitting a written 
assessment annually would be 171.43 ongoing burden hours per SRO plus 
$1,000 of external costs for outsourced legal counsel per Participant 
per year, for an estimated aggregate annual ongoing burden of 
approximately 3,600.03 hours \3411\ and an estimated aggregate ongoing 
external cost of $21,000.\3412\
---------------------------------------------------------------------------

    \3408\ See supra note 3282.
    \3409\ As it did when making its preliminary estimate, the 
Commission calculated the total estimated burden hours based on a 
similar formulation used for calculating the total estimated burden 
hours of Rule 613(i)'s requirement for a document addressing 
expansion of the CAT to other securities. See Section VI.D.1.e., 
supra. Specifically, as noted above, the Commission assumed that the 
review and potential revision of the written assessment would be 
approximately one-half as burdensome as the document required by 
Rule 613(i) when making its preliminary estimate. The Commission 
then further divided the burden by half because this report is 
required to be furnished every two years.
    The Commission has amended the CAT NMS Plan to add more 
specificity to the requirement to provide the written assessment. As 
a result, the Commission now estimates that the written assessment 
would now be as burdensome (instead of half as burdensome) as the 
document addressing expansion required by Rule 613(i). 2 FTEs needed 
for all of the Participants to create and submit the document 
required by Rule 613(i) (and now for all of the Participants to 
review and comment on the written assessment). (2 FTEs) x (1,800 
working hours per year) = 3,600 ongoing annual burden hours per year 
for all of the Participants to review and comment on the written 
assessment. (3,600 burden hours per year)/(21 Participants) = 171.43 
ongoing annual burden hours per Participant to review and comment on 
the written assessment prepared by the CCO.
    The Commission also has amended the CAT NMS Plan to require this 
assessment to be provided annually instead of once every two years. 
To account for this change, the Commission is no longer dividing the 
ongoing burden hours for providing the written assessment in half to 
determine the annualized estimate of the burden.
    \3410\ $1,000 = ($400 per hour rate for outside legal services) 
x (2.5 hours). The Commission has amended the CAT NMS Plan to add 
more specificity to the requirement to provide the written 
assessment and is now requiring this assessment to be provided 
annually instead of once every two years. Because the written 
assessment is no longer a biennial requirement, the Commission is no 
longer dividing the cost of the written assessment in half (over two 
years) to estimate the annual ongoing external cost per Participant 
for outside legal services to review and comment on the written 
assessment prepared by the CCO.
    \3411\ 3,600.03 ongoing annual burden hours = (171.43 ongoing 
annual burden hours) x (21 Participants).
    \3412\ $21,000 = (21 Participants) x ($400 per hour rate for 
outside legal services) x (2.5 hours).
---------------------------------------------------------------------------

2. Burden on Members of National Securities Exchanges and National 
Securities Associations
a. Data Collection and Reporting
    Rule 613(c)(1) requires the CAT NMS Plan to provide for an 
accurate, time-sequenced record of orders beginning with the receipt or 
origination of an order by a broker-dealer member of a Participant, and 
further documenting the life of the order through the process of 
routing, modification, cancellation and execution (in whole or in part) 
of the order. Rule 613(c) requires the CAT NMS Plan to impose 
requirements on broker-dealer members to record and report CAT Data to 
the Central Repository in accordance with specified timelines.
    In calculating the burden on members of national securities 
exchanges and national securities associations, the Commission 
categorized broker-dealer firms by whether they insource or outsource, 
or are likely to insource or outsource, CAT Data reporting 
obligations.\3413\ The Commission believes that firms that currently 
report high numbers of OATS ROEs strategically would decide to either 
self-report their CAT Data or outsource their CAT Data reporting 
functions (Insourcers), while the firms with the lowest levels of 
activity would be unlikely to have the infrastructure and specialized 
employees necessary to insource CAT Data reporting and would almost 
certainly outsource their CAT Data reporting functions 
(Outsourcers).\3414\ The Commission recognizes that more active firms 
that will likely be CAT Reporters and insource regulatory data 
reporting functions may not have current OATS reporting obligations 
because they either are not FINRA members, or because they do not trade 
in NMS equity securities.\3415\
---------------------------------------------------------------------------

    \3413\ The Commission acknowledges the inherent difficulty in 
establishing precise burden estimates because the Commission does 
not know the exact method of data reporting the Participants would 
decide for broker-dealers. For these estimates, the Commission is 
relying, in part, on the cost data provided by the Participants in 
the CAT NMS Plan, and, as noted earlier, on its own estimates of the 
costs that broker-dealers are likely to face for CAT implementation 
and ongoing reporting in compliance with Rule 613. See CAT NMS Plan, 
supra note 5, at Appendix C, Section B.7(b); see Section 
V.F.1.c.(2)B., supra.
    \3414\ See Notice, supra note 5, at 30718.
    \3415\ The Commission also recognizes as discussed above that 
some broker-dealer firms may strategically choose to outsource 
despite the Plan's working assumption that these broker-dealers 
would insource their regulatory data reporting functions.
---------------------------------------------------------------------------

    The Commission estimates that there are 126 OATS-reporting 
Insourcers and 45 non-OATS reporting Insourcers (14 ELPs and 31 Options 
Market Makers).\3416\ The Commission's estimation categorizes the 
remaining 1,629 broker-dealers that the Plan anticipates would have CAT 
Data reporting obligations as Outsourcers.\3417\
---------------------------------------------------------------------------

    \3416\ See Section V.F.1.c(2)B., supra.
    \3417\ Id.
---------------------------------------------------------------------------

(1) Notice Estimates
A. Insourcers
i. Large Non-OATS-Reporting Broker-Dealers
    In the CAT NMS Plan, the Participants, based on the Reporters 
Study's large broker-dealer cost estimates, estimated the following 
average initial external cost and FTE count figures that a large non-
OATS reporting broker-dealer would expect to incur to adopt the systems 
changes needed to comply with the data reporting requirements of Rule 
613 under Approach 1: $450,000 in external hardware and software costs; 
8.05 internal FTEs; \3418\ and $9,500 in external third party/
outsourcing costs.\3419\ The Participants also estimated the following 
average ongoing external cost and internal FTE count figures that a 
large non-OATS reporting broker-dealer would expect to incur to 
maintain data reporting systems to be in compliance with Rule 613: 
$80,000 in external hardware and software costs; 7.41 internal FTEs; 
\3420\ and $1,300 in external third party/outsourcing costs.\3421\
---------------------------------------------------------------------------

    \3418\ Approach 1 also provided $3,200,000 in initial internal 
FTE costs. The Commission believed the $3,200,000 in internal FTE 
costs is the Participants' estimated cost of the 8.05 FTEs. (8.05 
FTEs) x ($401,440 Participants' assumed annual cost per FTE provided 
in the CAT NMS Plan) = $3,231,592. See CAT NMS Plan, supra note 5, 
at n. 192. See also supra note 3320.
    \3419\ See CAT NMS Plan, supra note 5, at Section 
B.7(b)(iii)(c)(2)(a). The Commission believed that the third party/
outsourcing costs may be attributed to the use of service bureaus 
(potentially), technology consulting, and legal services.
    \3420\ Approach 1 also provided $3,000,000 in internal FTE costs 
related to maintenance. The Commission believes the $3,000,000 in 
ongoing internal FTE costs is the Participants' estimated cost of 
the 7.41 FTEs. (7.41 FTEs) x ($401,440 Participants' assumed annual 
cost per FTE provided in the CAT NMS Plan) = $2,974,670. See CAT NMS 
Plan, supra note 5, at n.192.
    \3421\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not break down these 
third party costs into categories.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed the Participants' estimates 
and explained that the Commission also relied on the Reporters Study's 
large broker-dealer cost estimates in estimating costs for large 
broker-dealers that can practicably decide between insourcing or 
outsourcing their regulatory data reporting functions. In the Notice, 
the Commission preliminarily estimated that there are 14 large broker-
dealers that are not OATS reporters currently in the business of 
electronic liquidity provision that would be classified as 
Insourcers.\3422\ Additionally, the Commission estimated that there are 
31 broker-dealers that may transact in options but not in equities that 
can be classified as Insourcers.\3423\ The Commission assumed the 31 
Options Market Makers and 14 ELPs would be typical of the Reporters 
Study's large, non-OATS reporting firms; for these firms, the 
Commission relied on the cost estimates provided under Approach 1\3424\ 
for large, non-OATS reporting firms in the CAT NMS Plan.
---------------------------------------------------------------------------

    \3422\ These broker-dealers are not FINRA members and thus have 
no regular OATS reporting obligations. See supra note 2560.
    \3423\ See supra note 2562.
    \3424\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(i)(A)(2). The Reporters Study requested broker-dealer 
respondents to provide estimates to report to the Central Repository 
under two approaches. Approach 1 assumes CAT Reporters would submit 
CAT Data using their choice of industry protocols. Approach 2 
assumes CAT Reporters would submit data using a pre-specified 
format. Approach 1's aggregate costs are higher than those for 
Approach 2 for all market participants except in one case where 
service bureaus have lower Approach 1 costs. See supra note 2568. 
For purposes of this Paperwork Reduction Act analysis, the 
Commission did not rely on the cost estimates for Approach 2 because 
overall the Approach 1 aggregate estimates represent the higher of 
the proposed approaches. The Commission believed it would be more 
comprehensive to use the higher of the two estimates for its 
Paperwork Reduction Act analysis estimates.
---------------------------------------------------------------------------

    The Notice explained that once a large non-OATS reporting broker-
dealer has established the appropriate systems and processes required 
for collection and

[[Page 84927]]

transmission of the required information to the Central Repository, 
such broker-dealers would be subject to ongoing annual burdens 
associated with, among other things, personnel time to monitor each 
large non-OATS reporting broker-dealer's reporting of the required data 
and the maintenance of the systems to report the required data; and 
implementing changes to trading systems that might result in additional 
reports to the Central Repository.
(a) Large, Non-OATS Reporting Broker-Dealers--Initial Burden and Costs
    In the Notice, the Commission preliminarily estimated that the 
average initial burden associated with implementing regulatory data 
reporting to capture the required information and transmit it to the 
Central Repository in compliance with the Rule for each large, non-OATS 
reporting broker-dealer would be approximately 14,490 initial burden 
hours.\3425\
---------------------------------------------------------------------------

    \3425\ 14,490 initial burden hours = (8.05 FTEs for implementing 
CAT Data reporting systems) x (1,800 working hours per year).
---------------------------------------------------------------------------

    The Commission also preliminarily estimated that these broker-
dealers would, on average, would incur approximately $450,000 in 
initial costs for hardware and software to implement the systems 
changes needed to capture the required information and transmit it to 
the Central Repository, and an additional $9,500 in initial third 
party/outsourcing costs.\3426\
---------------------------------------------------------------------------

    \3426\ See supra note 3421.
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily estimated that the average 
one-time initial burden per ELP and Options Market Maker would be 
14,490 internal burden hours and external costs of $459,500,\3427\ for 
an estimated aggregate initial burden of 652,050 hours \3428\ and an 
estimated aggregate initial external cost of $20,677,500.\3429\
---------------------------------------------------------------------------

    \3427\ ($450,000 in initial hardware and software costs) + 
($9,500 initial third party/outsourcing costs) = $459,500 in initial 
external costs to implement data reporting systems.
    \3428\ The Commission preliminarily estimates that 45 large non-
OATS reporting broker-dealers would be impacted by this information 
collection. (45 large non-OATS reporting broker-dealers) x (14,490 
burden hours) = 652,050 initial burden hours to implement data 
reporting systems.
    \3429\ ($450,000 in hardware and software costs) + ($9,500 third 
party/outsourcing costs) x 45 large, non-OATS reporting broker-
dealers = $20,677,500 in initial external costs to implement data 
reporting systems.
---------------------------------------------------------------------------

(b) Large, Non-OATS Reporting Broker-Dealers--Ongoing Burden and Costs
    In the Notice, the Commission preliminarily estimated that it would 
take a large non-OATS reporting broker-dealer 13,338 burden hours per 
year \3430\ to continue to comply with the Rule. The Commission also 
preliminarily estimated that it would cost, on average, approximately 
$80,000 per year per large non-OATS reporting broker-dealer to maintain 
systems connectivity to the Central Repository and purchase any 
necessary hardware, software, and other materials, and an additional 
$1,300 in third party/outsourcing costs.\3431\
---------------------------------------------------------------------------

    \3430\ 13,338 ongoing burden hours = (7.41 ongoing FTEs to 
maintain CAT data reporting systems) x (1,800 working hours per 
year).
    \3431\ See supra note 3421.
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily estimated that the average 
ongoing annual burden per large non-OATS reporting broker-dealer would 
be approximately 13,338 hours, plus $81,300 in external costs \3432\ to 
maintain the systems necessary to collect and transmit information to 
the Central Repository, for an estimated aggregate ongoing burden of 
600,210 hours \3433\ and an estimated aggregate ongoing external cost 
of $3,658,500.\3434\
---------------------------------------------------------------------------

    \3432\ ($80,000 in ongoing external hardware and software costs) 
+ ($1,300 ongoing external third party/outsourcing costs) = $81,300 
in ongoing external costs per large non-OATS reporting broker-
dealer.
    \3433\ The Commission estimated that 45 large non-OATS reporting 
broker-dealers would be impacted by this information collection. (45 
large non-OATS reporting broker-dealers) x (13,338 burden hours) = 
600,210 aggregate ongoing burden hours.
    \3434\ ($80,000 in ongoing external hardware and software costs) 
+ ($1,300 ongoing external third party/outsourcing costs) x (45 
large non-OATS reporting broker-dealers) = $3,658,500 in aggregate 
ongoing external costs.
---------------------------------------------------------------------------

ii. Large OATS-Reporting Broker-Dealers
    In the CAT NMS Plan, the Participants, based on the Reporters 
Study's large broker-dealer cost estimates, estimated the following 
average initial external cost and internal FTE count figures that a 
large OATS-reporting broker-dealer would expect to incur as a result of 
the implementation of the consolidated audit trail under Approach 1: 
$750,000 in hardware and software costs; 14.92 internal FTEs; \3435\ 
and $150,000 in external third party/outsourcing costs.\3436\ The 
Participants also estimated the following average ongoing external cost 
and internal FTE count figures that a large OATS-reporting broker-
dealer would expect to incur to maintain data reporting systems to be 
in compliance with Rule 613: $380,000 in ongoing external hardware and 
software costs; 10.03 internal FTEs; \3437\ and $120,000 in ongoing 
external third party/outsourcing costs.\3438\
---------------------------------------------------------------------------

    \3435\ Approach 1 also provided $6,000,000 in initial internal 
FTE costs. The Commission believes the $6,000,000 in initial 
internal FTE costs is the Participants' estimated cost of the 14.92 
FTEs. (14.92 FTEs) x ($401,440 Participants' assumed annual cost per 
FTE provided in the CAT NMS Plan) = $5,989,485. See CAT NMS Plan, 
supra note 5, at Appendix C, Section B.7(b)(ii)(C), n.192; see also 
supra note 3320.
    \3436\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(C)(2)(a). The CAT NMS Plan did not break down these 
third party costs into categories. The Commission believes that 
these costs may be attributed to the use of service bureaus, 
technology consulting, and legal services.
    \3437\ Approach 1 also provided $4,000,000 in internal FTE costs 
related to maintenance. The Commission believes the $4,000,000 in 
ongoing internal FTE costs is the Participants' estimated cost of 
the 10.03 FTEs. (10.03 FTEs) x ($401,440 Participants' assumed 
annual cost per FTE provided in the CAT NMS Plan) = $4,026,443. See 
CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(C), 
n.192; see also supra note 3320.
    \3438\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not categorize these 
third party costs. The Commission believes that these costs may be 
attributed to the use of service bureaus, technology consulting, and 
legal services.
---------------------------------------------------------------------------

    In the Notice, the Commission discussed the Participants' estimates 
and explained that the Commission also relied on the Reporters Study's 
large broker-dealer cost estimates in estimating costs for large 
broker-dealers that can practicably decide between insourcing or 
outsourcing their regulatory reporting functions. In the Notice, based 
on the Commission's analysis of data provided by FINRA and discussions 
with market participants, the Commission estimated that 126 broker-
dealers, which reported more than 350,000 OATS ROEs between June 15 and 
July 10, 2015, would strategically decide to either self-report CAT 
Data or outsource their CAT data reporting functions.\3439\
---------------------------------------------------------------------------

    \3439\ See Notice, supra note 5, at 30718; see also id., at 
n.901 (stating that the Commission believes that broker-dealers that 
report fewer than 350,000 OATS ROEs per month are unlikely to be 
large enough to support the infrastructure required for insourcing 
data reporting activities).
---------------------------------------------------------------------------

    The Notice explained that once a large OATS-reporting broker-dealer 
has established the appropriate systems and processes required for 
collection and transmission of the required information to the Central 
Repository, such broker-dealers would be subject to ongoing annual 
burdens and costs associated with, among other things, personnel time 
to monitor each broker-dealer's reporting of the required data and the 
maintenance of the systems to report the required data; and 
implementing changes to trading systems which might result in 
additional reports to the Central Repository.
(a) Large OATS-Reporting Broker-Dealers--Initial Burden and Costs
    In the Notice, the Commission preliminarily estimated that the 
average initial burden to develop and

[[Page 84928]]

implement the needed systems changes to capture the required 
information and transmit it to the Central Repository in compliance 
with the Rule for large OATS-reporting broker-dealers would be 
approximately 26,856 internal burden hours.\3440\
---------------------------------------------------------------------------

    \3440\ 26,856 initial burden hours per large OATS-reporting 
broker-dealer = (14.92 FTEs for implementation of CAT data reporting 
systems) x (1,800 working hours per year).
---------------------------------------------------------------------------

    The Commission also preliminarily estimated that these large OATS-
reporting broker-dealers would, on average, incur approximately 
$750,000 in initial external costs for hardware and software to 
implement the systems changes needed to capture the required 
information and transmit it to the Central Repository, and an 
additional $150,000 in initial external third party/outsourcing 
costs.\3441\
---------------------------------------------------------------------------

    \3441\ See CAT NMS Plan, supra note 5, at Section 
B.7(b)(iii)(C)(2)(a).
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily estimated that the average 
one-time initial burden per large OATS-reporting broker-dealer would be 
26,856 burden hours and external costs of $900,000,\3442\ for an 
estimated aggregate initial burden of 3,383,856 hours \3443\ and an 
estimated aggregate initial external cost of $113,400,000.\3444\
---------------------------------------------------------------------------

    \3442\ ($750,000 in initial external hardware and software 
costs) + ($150,000 initial external third party/outsourcing costs) = 
$900,000 in initial external costs per large OATS-reporting broker-
dealer to implement CAT data reporting systems.
    \3443\ The Commission preliminarily estimates that 126 large 
OATS-reporting broker-dealers would be impacted by this information 
collection. 126 large OATS-reporting broker-dealers x 26,856 burden 
hours = 3,383,856 initial burden hours to implement data reporting 
systems.
    \3444\ ($750,000 in initial external hardware and software 
costs) + ($150,000 initial external third party/outsourcing costs) x 
126 large OATS-reporting broker-dealers = $113,400,000 in initial 
external costs to implement data reporting systems.
---------------------------------------------------------------------------

(b) Large OATS-Reporting Broker-Dealers--Ongoing Burden and Costs
    In the Notice, the Commission preliminarily estimated that it would 
take a large OATS-reporting broker-dealer 18,054 ongoing burden hours 
per year \3445\ to continue compliance with the Rule. The Commission 
preliminarily estimated that it would cost, on average, approximately 
$380,000 per year per large OATS-reporting broker-dealer to maintain 
systems connectivity to the Central Repository and purchase any 
necessary hardware, software, and other materials, and an additional 
$120,000 in external ongoing third party/outsourcing costs.\3446\
---------------------------------------------------------------------------

    \3445\ 18,054 ongoing burden hours = (10.03 ongoing FTEs for 
maintenance of CAT data reporting systems) x (1,800 working hours 
per year).
    \3446\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(C)(2)(b).
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily estimated that the average 
ongoing annual burden per large OATS-reporting broker-dealer would be 
approximately 18,054 burden hours, plus $500,000 in external costs 
\3447\ to maintain the systems necessary to collect and transmit 
information to the Central Repository, for an estimated aggregate 
burden of 2,274,804 hours \3448\ and an estimated aggregate ongoing 
external cost of $63,000,000.\3449\
---------------------------------------------------------------------------

    \3447\ ($380,000 in ongoing external hardware and software costs 
+ $120,000 in ongoing external third party/outsourcing costs) = 
$500,000 in ongoing external costs per large OATS-reporting broker-
dealer.
    \3448\ The Commission preliminarily estimates that 126 large 
OATS-reporting broker-dealers would be impacted by this information 
collection. (126 large OATS-reporting broker-dealers) x (18,054 
burden hours) = 2,274,804 aggregate ongoing burden hours.
    \3449\ ($380,000 in ongoing external hardware and software costs 
+ $120,000 in ongoing external third party/outsourcing costs) x 126 
large OATS-reporting broker-dealers = $63,000,000 in aggregate 
ongoing external costs.
---------------------------------------------------------------------------

B. Outsourcers
i. Small OATS-Reporting Broker-Dealers
    Based on data provided by FINRA, the Commission estimates that 
there are 806 broker-dealers that report fewer than 350,000 OATS ROEs 
monthly. The Commission believes that these broker-dealers generally 
outsource their regulatory reporting obligations because during the 
period June 15-July 10, 2015, approximately 88.9% of their 350,000 OATS 
ROEs were reported through service bureaus, with 730 of these broker-
dealers reporting more than 99% of their OATS ROEs through one or more 
service bureaus.\3450\ The Commission estimates that these firms 
currently spend an aggregate of $100.1 million on annual outsourcing 
costs.\3451\ The Commission estimates these 806 broker-dealers would 
spend $100.2 million in aggregate to outsource their regulatory data 
reporting to service bureaus to report in accordance with Rule 
613,\3452\ or $124,373 per broker-dealer.\3453\ These external 
outsourcing cost estimates are calculated using the information from 
staff discussions with service bureaus and other market participants, 
as applied to data provided by FINRA.\3454\
---------------------------------------------------------------------------

    \3450\ See Notice, supra note 5, at 30718. Because of the 
extensive use of service bureaus in these categories of broker-
dealers, the Commission assumes that these broker-dealers are likely 
to use service bureaus to accomplish their CAT data reporting.
    \3451\ The average broker-dealer in this category reported 
15,185 OATS ROEs from June 15-July 10, 2015; the median reported 
1,251 OATS ROEs. Of these broker-dealers, 39 reported more than 
100,000 OATS ROEs during the sample period. See Section 
V.F.1.c.(2)B., supra.
    \3452\ Id.
    \3453\ $124,373 = $100,200,000/806 broker-dealers. This amount 
is the average estimated annual outsourcing cost to firms that 
currently report fewer than 350,000 OATS ROEs per month. Id.
    \3454\ See Section V.F.1.c.(2)B., supra.
---------------------------------------------------------------------------

    Firms that outsource their regulatory data reporting would still 
face internal staffing burdens associated with this activity. These 
employees would perform activities such as answering inquiries from 
their service bureaus, and investigating reporting exceptions. Based on 
conversations with market participants, the Commission estimates that 
these firms currently have 0.5 full-time employees devoted to these 
activities.\3455\ The Commission estimates that these firms would need 
to hire one additional full-time employee for one year to implement CAT 
reporting requirements.\3456\
---------------------------------------------------------------------------

    \3455\ Id.
    \3456\ Id.
---------------------------------------------------------------------------

    Small OATS-reporting broker-dealers that outsource their regulatory 
data reporting would likely face internal staffing burdens and external 
costs associated with ongoing activity, such as maintaining any systems 
that transmit data to their service providers. Based on conversations 
with market participants, the Commission estimates these firms would 
need 0.75 FTEs on an ongoing basis to perform or monitor CAT 
reporting.\3457\
---------------------------------------------------------------------------

    \3457\ See Section IV.F.1.c.(2)B., supra.
---------------------------------------------------------------------------

(a) Small OATS-Reporting Broker-Dealers--Initial Burden and Costs
    In the Notice, the Commission preliminarily estimated that the 
average initial burden to implement the needed systems changes to 
capture the required information and transmit it to the Central 
Repository in compliance with the CAT NMS Plan for small OATS-reporting 
broker-dealers would be approximately 1,800 burden hours.\3458\ The 
Commission believed the burden hours would be associated with work 
performed by internal technology, compliance and legal staff in 
connection with the implementation of CAT data reporting. The 
Commission also preliminarily estimated that each small OATS-reporting 
broker-dealer would incur approximately $124,373 in initial external 
outsourcing costs.\3459\
---------------------------------------------------------------------------

    \3458\ This estimate assumed that, based on the expected FTE 
count provided, a small OATS-reporting broker-dealer would have to 
hire 1 new FTE for implementation. The salary attributed to the 1 
FTE would be (1 x $424,350 FTE cost) = $424,350 per year. To 
determine the number of burden hours to be incurred by the current 
0.5 FTE for implementation, multiply 0.5 FTE by 1,800 hours per year 
= 900 initial burden hours.
    \3459\ The Commission preliminarily believed the outsourcing 
cost would be the cost of the service bureau, which would include 
the compliance and legal costs associated with changing to CAT Data 
reporting. The Commission assumes these costs of changing to CAT 
Data reporting would be included in the cost of the service bureau 
because the broker-dealers would be relying on the expertise of the 
service bureau to report their data to CAT on their behalf. See 
Notice, supra note 5, at Section IV.F.1.C(2), n. 941.

---------------------------------------------------------------------------

[[Page 84929]]

    Therefore, the Commission preliminarily estimated that the average 
one-time initial burden per small OATS-reporting broker-dealer would be 
1,800 burden hours and external costs of $124,373, for an estimated 
aggregate initial burden of 1,450,800 hours \3460\ and an estimated 
aggregate initial external cost of $100,244,638.\3461\
---------------------------------------------------------------------------

    \3460\ The Commission preliminarily estimates that 806 small 
OATS-reporting broker-dealers would be impacted by this information 
collection. (806 small OATS-reporting broker-dealers x 1,800 burden 
hours) = 1,450,800 aggregate initial burden hours.
    \3461\ ($124,373 in outsourcing costs) x (806 small OATS-
reporting broker-dealers) = $100,244,638 in aggregate initial 
external costs.
---------------------------------------------------------------------------

(b) Small OATS-Reporting Broker-Dealers--Ongoing Burden and Costs
    In the Notice, the Commission preliminarily believed that it would 
take a small OATS-reporting broker-dealer 1,350 ongoing burden hours 
per year \3462\ to continue compliance with the Rule. The Commission 
preliminarily believed the burden hours would be associated with work 
performed by internal technology, compliance and legal staff in 
connection with the ongoing operation of CAT Data reporting. The 
Commission preliminarily estimated that it would cost, on average, 
approximately $124,373 in ongoing external outsourcing costs \3463\ to 
ensure ongoing compliance with Rule 613.
---------------------------------------------------------------------------

    \3462\ 1,350 ongoing burden hours = (0.75 FTE for maintenance of 
CAT Data reporting systems) x (1,800 working hours per year).
    \3463\ See Notice, supra note 5, at Section IV.F.1.c(2)B.ii. See 
supra note 3459.
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily estimated that the average 
ongoing annual burden per small OATS-reporting broker-dealer would be 
approximately 1,350 hours, plus $124,373 in external costs, for an 
estimated aggregate ongoing burden of 1,088,100 hours \3464\ and an 
estimated aggregate ongoing external cost of $100,244,638.\3465\
---------------------------------------------------------------------------

    \3464\ The Commission preliminarily estimates that 806 small 
OATS-reporting broker-dealers would be impacted by this information 
collection. (806 small OATS-reporting broker-dealers x 1,350 burden 
hours) = 1,088,100 aggregate ongoing burden hours to ensure ongoing 
compliance with Rule 613.
    \3465\ $100,244,638 = $124,373 in ongoing outsourcing costs x 
806 broker-dealers.
---------------------------------------------------------------------------

ii. Small Non-OATS-Reporting Broker-Dealers
    In addition to firms that currently report to OATS, the Commission 
estimates there are 799 broker-dealers that are currently exempt from 
OATS reporting rules due to firm size, or excluded because all of their 
order flow is routed to a single OATS reporter, such as a clearing 
firm, that would incur CAT reporting obligations.\3466\ A further 24 
broker-dealers have SRO memberships only with one Participant; \3467\ 
the Commission believes this group is comprised mostly of floor brokers 
and further believes these firms would experience CAT implementation 
and ongoing reporting costs similar in magnitude to small equity 
broker-dealers that currently have no OATS reporting 
responsibilities.\3468\
---------------------------------------------------------------------------

    \3466\ See Section V.F.1.c.(2)B., supra. Rule 613 does not 
exclude from data reporting obligations SRO members that quote or 
execute transactions in NMS Securities and Listed Options that route 
to a single market participant; see also CAT NMS Plan, supra note 5, 
at Appendix C, Section B.7(b)(ii)(B)(2).
    \3467\ See Section V.F.1.c.(2)B., supra.
    \3468\ Id.
---------------------------------------------------------------------------

    The Commission assumes these broker-dealers would have very low 
levels of CAT reporting, similar to those of the lowest activity firms 
that currently report to OATS. For these firms, the Commission assumes 
that under CAT they would incur the average estimated service bureau 
cost of broker-dealers that currently report fewer than 350,000 OATS 
ROEs per month, which is $124,373 annually.\3469\ Furthermore, because 
these firms have more limited data reporting requirements than other 
firms, the Commission assumes these firms currently have only 0.1 full-
time employees currently dedicated to regulatory data reporting 
activities.\3470\ The Commission assumes these firms would require 2 
full-time employees for one year to implement CAT.\3471\
---------------------------------------------------------------------------

    \3469\ Id.
    \3470\ Id.
    \3471\ Id.
---------------------------------------------------------------------------

    Small non-OATS-reporting broker-dealers that outsource their 
regulatory data reporting would likely face internal staffing burdens 
and costs associated with ongoing activity, such as maintaining any 
systems that transmit data to their service providers. Based on 
conversations with market participants, the Commission estimates these 
firms would need 0.75 full-time employees annually to perform or 
monitor CAT reporting.
(a) Small Non-OATS-Reporting Broker-Dealers--Initial Burden and Costs
    In the Notice, the Commission preliminarily estimated that the 
average initial burden to develop and implement the needed systems 
changes to capture the required information and transmit it to the 
Central Repository in compliance with the Rule for small, non-OATS-
reporting broker-dealers would be approximately 3,600 initial burden 
hours.\3472\ The Commission believed the burden hours would be 
associated with work performed by internal technology, compliance and 
legal staff in connection with the implementation of CAT Data 
reporting. The Commission also preliminarily estimated that each small 
non-OATS-reporting broker-dealer would incur approximately $124,373 in 
initial external outsourcing costs.\3473\
---------------------------------------------------------------------------

    \3472\ 3,600 initial burden hours = (2 FTEs for implementation 
of CAT Data reporting systems) x (1,800 working hours per year).
    \3473\ See Section V.F.1.c.(2)B., supra.
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily estimated that the average 
one-time initial burden per small OATS-reporting broker-dealer would be 
3,600 burden hours and external costs of $124,373 for an estimated 
aggregate initial burden of 2,962,800 hours \3474\ and an estimated 
aggregate initial external cost of $102,358,979.\3475\
---------------------------------------------------------------------------

    \3474\ The Commission preliminarily estimates that 823 small 
non-OATS-reporting broker-dealers would be impacted by this 
information collection. (823 small non-OATS-reporting broker-dealers 
x 3,600 burden hours) = 2,962,800 aggregate initial burden hours.
    \3475\ ($124,373 in outsourcing costs) x (823 small non-OATS-
reporting broker-dealers) = $102,358,979 in aggregate initial 
external costs.
---------------------------------------------------------------------------

(b) Small Non-OATS-Reporting Broker-Dealers--Ongoing Burden and Costs
    In the Notice, the Commission preliminarily believed that it would 
take a small non-OATS-reporting broker-dealer 1,350 ongoing burden 
hours per year \3476\ to continue compliance with the Rule. The 
Commission preliminarily estimated that it would cost, on average, 
approximately $124,373 in ongoing external outsourcing costs \3477\ to 
ensure ongoing compliance with Rule 613.
---------------------------------------------------------------------------

    \3476\ 1,350 ongoing burden hours = (0.75 FTEs for maintenance 
of CAT data reporting systems) x (1,800 working hours per year).
    \3477\ The Commission assumed these firms would have very low 
levels of CAT reporting, similar to those of the lowest activity 
firms that currently report to OATS. For these firms, the Commission 
assumes that under CAT they would incur the average estimated 
service bureau cost of firms that currently OATS report fewer than 
350,000 OATS ROEs per month of $124,373 annually.
---------------------------------------------------------------------------

    Therefore, the Commission preliminarily estimated that the average 
ongoing annual burden per small non-OATS-reporting broker-dealer would 
be approximately 1,350 hours, plus $124,373 in external costs, for an 
estimated aggregate ongoing burden of 1,111,050 hours \3478\ and an 
estimated

[[Page 84930]]

aggregate ongoing external cost of $102,358,979.\3479\
---------------------------------------------------------------------------

    \3478\ The Commission preliminarily estimated that 823 small 
non-OATS-reporting broker-dealers would be impacted by this 
information collection. (823 small non-OATS-reporting broker-dealers 
x 1,350 burden hours) = 1,111,050 aggregate ongoing burden hours to 
ensure ongoing compliance with Rule 613.
    \3479\ ($124,373 in ongoing external outsourcing costs) x 823 = 
$102,358,979 in aggregate ongoing external costs to ensure ongoing 
compliance with Rule 613.
---------------------------------------------------------------------------

(2) Comments/Responses on Broker-Dealer Data Collection and Reporting 
Costs
    As noted above, the Commission's estimates are based on whether 
broker-dealers currently insource or outsource, or are likely to 
insource or outsource, their CAT Data reporting obligations. The 
Commission provided in the Notice an analysis of the compliance cost 
estimates for broker-dealers that included analyzing whether estimates 
provided in the Plan and based on a Reporters Study survey were 
reliable.\3480\ The Commission preliminarily believed that the cost 
estimates for small broker-dealers were not reliable. The Commission 
then developed and calibrated its Outsourcing Cost Model to estimate 
average current data reporting costs and average Plan compliance costs 
for broker-dealers that the Commission expects will rely on service 
bureaus to perform their CAT Data reporting responsibilities 
(Outsourcers).\3481\ For the Insourcers, the Commission continued to 
rely on the large broker-dealer estimates from the Plan.\3482\ The 
Commission's preliminary initial and ongoing burden hour and cost 
estimates, as well as the Plan's estimates, are aggregate estimates for 
a broker-dealer's compliance with the data collection and reporting 
requirement under Rule 613; they do not quantify the burden hours or 
external cost estimates for each individual component comprising the 
broker-dealer's data collection and reporting responsibility.
---------------------------------------------------------------------------

    \3480\ See Notice, supra note 5, at 30712-26.
    \3481\ See Section V.F.1.c(1), supra.
    \3482\ Id.
---------------------------------------------------------------------------

    The Commission received comments on the reliability of its 
Outsourcing Cost Model for small broker-dealers and its re-estimation 
of costs. One commenter believed that the Commission's estimates of 
service bureau charges for a small firm were reasonable.\3483\ Another 
commenter noted that Outsourcers must expend internal resources even 
when relying on their service providers to accomplish current data 
reporting.\3484\ A third commenter stated that broker-dealers that 
clear for others may have higher implementation costs since they may 
have to support more broker-dealers as a result of the CAT.\3485\
---------------------------------------------------------------------------

    \3483\ See Data Boiler Letter at 36.
    \3484\ Specifically, this commenter references EBS reporting, 
but indicates that Industry Members sometimes must also be involved 
in preparing EBS request responses. See FIF Letter at 34.
    \3485\ See TR Letter, at 3-4.
---------------------------------------------------------------------------

    With respect to the comment that the Outsourcing Cost Model does 
not account for internal expenses, the Commission notes that its cost 
estimates explicitly assume that Outsourcers have employee expenses 
that cover these activities.\3486\ In response to the commenters 
concerned that the Commission's estimates do not account for an 
increase in costs for broker-dealers that clear for other broker-
dealers or provide support to introducing broker-dealers, the 
Commission continues to believe in the reliability of the analysis of 
broker-dealers implementation costs presented in the Notice, and notes 
that the Reporters Study estimates for large broker-dealers are likely 
to include these expenses because respondents are likely to include 
broker-dealers that provide these services. The Commission 
acknowledges, however, that there are some broker-dealers that would be 
classified as Outsourcers or new reporters and the additional 
implementation costs that these firms face due to clearing for other 
broker-dealers or supporting introducing broker-dealers are not 
captured by the Outsourcing Cost Model. The Commission cannot estimate 
the number of broker-dealers that would bear these costs because the 
Commission lacks data on the number of broker-dealers that clear for 
other broker-dealers that would be classified as new reporters or 
Outsourcers. Furthermore, the Commission lacks data to estimate the 
magnitude of these costs because the Plan does not provide this data 
and the Commission is unaware of any data available to it that it could 
use to estimate these costs.
---------------------------------------------------------------------------

    \3486\ See Notice, supra note 5, at 30723.
---------------------------------------------------------------------------

    The Commission also received several comments on uncertainties in 
the cost estimates for broker-dealers arising from not knowing the 
choice of Plan Processor,\3487\ not having Technical 
Specifications,\3488\ differences in bids preventing broker-dealers 
from providing more definitive cost estimates,\3489\ and a lack of 
detail in the CAT NMS Plan.\3490\
---------------------------------------------------------------------------

    \3487\ TR Letter at 4; FSI Letter at 6.
    \3488\ See, e.g., FSR Letter at 10; and Fidelity Letter at 6.
    \3489\ FSI Letter at 6.
    \3490\ SIFMA Letter at 42 and FSI Letter at 6.
---------------------------------------------------------------------------

    In response to comment letters that identified these sources of 
uncertainties related to the costs broker-dealers will incur, the 
Commission acknowledges that such costs depend on the technical 
specifications, which are likely to remain unknown until the Plan 
Processor is selected. The Commission also notes that final Bids will 
not be submitted until after the Plan is approved, so the Commission is 
unable to quantify the degree of variation in broker-dealer 
implementation costs across Bids.
    Additionally, the Commission received a number of comments relating 
to the costs of the individual components comprising the broker-dealer 
data collection and reporting requirement, such as customer 
information, the open/close indicator for equities, listing exchange 
symbology, allocation report timestamp, and quote sent time. In the 
Notice, as noted above, the Commission provided aggregate burden hour 
and external cost estimates for the broker-dealer data collection and 
reporting requirement of Rule 613. Although the costs of these specific 
data elements were not discussed in the Notice Paperwork Reduction Act 
analysis, the Commission has considered these comments because they 
relate to the overall data collection and reporting information 
collection.
A. Customer Information
    In the Notice, the Commission stated that it believed the 
requirement in the CAT NMS Plan to report customer information for each 
transaction represents a significant source of costs.\3491\ One 
commenter believed that the costs for providing customer information to 
the Central Repository would comprise a significant proportion of costs 
to the total industry and that the costs associated with the management 
of sensitive information could increase costs.\3492\
---------------------------------------------------------------------------

    \3491\ See Notice, supra note 5, at Section IV.F.3.a.
    \3492\ Data Boiler Letter at 37.
---------------------------------------------------------------------------

    Two commenters stated that including Customer Identifying 
Information on new order reports would result in significant costs for 
the industry.\3493\ In Response Letter I, the Participants suggested 
that the Commission amend (and the Commission has accordingly amended) 
the CAT NMS Plan to clarify that Customer Identifying Information and 
Customer Account Information would not be reported with the original 
receipt or origination of an order.\3494\
---------------------------------------------------------------------------

    \3493\ TR Letter at 8-9; FIF Letter at 9-10, 86.
    \3494\ Response Letter I at 34.
---------------------------------------------------------------------------

    One commenter requested clarification that only active accounts 
would be reported as part of the

[[Page 84931]]

customer definition process, which could reduce costs incurred for 
reporting customer information.\3495\ In Response Letter I, the 
Participants suggested that the Commission amend the Plan to add a 
definition of ``Active Account,'' defined as an account that has had 
activity in Eligible Securities within the last six months. 
Additionally, the Participants suggested that the Commission amend (and 
the Commission has amended) Section 6.4(d)(iv) of the Plan by 
clarifying that each broker-dealer must submit an initial set of 
customer information for Active Accounts at the commencement of 
reporting to the Central Repository, as well as any updates, additions, 
or other changes in customer information, including any such customer 
information for any new Active Accounts.\3496\
---------------------------------------------------------------------------

    \3495\ FIF Letter at 10.
    \3496\ Response Letter I at 35.
---------------------------------------------------------------------------

    The Commission considered these comments and the Participants' 
responses and continues to believe that the requirement in the CAT NMS 
Plan to report customer information represents a significant proportion 
of total costs to the industry. The Commission is not amending its 
broker-dealer data collection and reporting external cost estimates in 
response to commenters. Commenters did not provide cost estimates that 
would allow the Commission to estimate such costs, and the amendments 
to the Plan clarify that the Plan does not require customer information 
to be reported on order origination.
B. Open/Close Indicator for Equities
    The Commission received comments on the costs to report an open/
close indicator on orders to buy or sell equities. Several commenters 
agreed with the Commission's analysis that an open/close indicator 
represents a significant proportion of costs to the Plan.\3497\ Two 
commenters indicated that it would require significant process changes 
across multiple systems,\3498\ and one provided a list of the different 
types of systems impacted by the open/close indicator.\3499\ Some 
commenters mentioned that the open/close indicator is currently not 
populated for equities.\3500\ Further, several commenters implied that 
the costs of the open/close indicator were not included in the cost 
estimates in the Notice.\3501\ In Response Letter I, the Participants 
indicated that the open/close indicator is not captured on equities or 
on certain options transactions such as Options' Market Maker 
transactions.\3502\
---------------------------------------------------------------------------

    \3497\ TR Letter at 9; SIFMA Letter at 35-36; FIF Letter at 83-
86.
    \3498\ SIFMA Letter at 35; FIF Letter at 4, 84.
    \3499\ FIF Letter at 84.
    \3500\ TR Letter at 9, FIF Letter at 4, 83-85, SIFMA Letter at 
35.
    \3501\ Specifically, one commenter stated that the inclusion of 
the open/close indicator for equities was a surprise (FIF Letter at 
84) and two commenters wanted additional cost benefit analysis on 
the open/close indicator (FIF Letter at 84; SIFMA Letter at 36).
    \3502\ Response Letter I at 21, 22.
---------------------------------------------------------------------------

    The Commission considered these comments and is modifying the Plan 
to eliminate the requirement to report an open/close indicator for 
equities and on Options Market Maker quotations. Although the 
Commission believes this will reduce the compliance costs for broker-
dealers, Participants, and the Central Repository, the Commission 
cannot quantify the savings and is thus not amending its external cost 
estimates in response to commenters.
    The Participants' statement that open/close indicators are not 
reported on some options orders is consistent with the Commission's 
experience and the analysis in the Notice. While the economic analysis 
in the Notice did not explicitly separate the costs associated with an 
open/close indicator for equities and an open/close indicator for 
options, the Commission believes that the costs of the open/close 
indicator for options are included in the cost estimates of the Notice. 
However, because the Plan will no longer require the reporting of the 
open/close indicator for Options Market Maker quotations, the 
Commission now believes there will be an additional cost savings 
associated with not having to report this indicator as part of CAT.
C. Listing Exchange Symbology
    In the Notice, the Commission explained its belief that the 
requirement to use listing exchange symbology could represent a 
significant source of costs,\3503\ because broker-dealers do not 
necessarily use listing exchange symbology when placing orders on other 
exchanges or off-exchange. One commenter stated that it did not expect 
the use of listing exchange symbology to be much more costly than the 
use of existing symbology.\3504\ However, another commenter suggested 
that accepting only listing exchange symbology is costly and 
invasive.\3505\ One other commenter stated that listing exchange 
symbology would also be a significant source of costs to options.\3506\ 
The Participants responded in Response Letter II that it was their 
understanding that all broker-dealers subject to OATS or EBS reporting 
requirements currently use the listing exchange symbology when 
submitting such reports.\3507\ Further, they stated in Response Letter 
III that broker-dealers currently use symbology translation solutions 
when submitting data to exchanges or when submitting to regulatory 
reporting systems such as OATS or EBS.\3508\
---------------------------------------------------------------------------

    \3503\ See Notice, supra note 5, at 30730-30731.
    \3504\ FIF Letter at 12, 95.
    \3505\ Data Boiler Letter at 37-38.
    \3506\ Bloomberg Letter at 5.
    \3507\ Response Letter II at 7.
    \3508\ Response Letter III at 13.
---------------------------------------------------------------------------

    The Commission considered the comments and now believes that the 
incremental cost for CAT Reporters to translate from their existing 
symbology to listing exchange symbology would be less than as discussed 
in the Notice and would not be a substantial contributor to aggregate 
costs. The Commission is not amending its external cost estimates for 
broker-dealer data collection and reporting in response to commenters.
D. Allocation Report Timestamp
    Several commenters noted that there would be costs associated with 
reporting timestamps on allocation reports.\3509\ One of these 
commenters mentioned that the requirement to report allocation 
timestamps would mean that broker-dealers would incur unnecessary costs 
to acquire additional resources.\3510\ One commenter estimated that the 
currently proposed allocation timestamp requirement, with a one 
millisecond timestamp granularity and a 50 millisecond clock offset, 
would cost the industry $88,775,000 in initial implementation costs and 
$13,925,000 in ongoing annual costs.\3511\ The commenter further 
estimated that a modified allocation timestamp requirement, with a one 
second timestamp granularity and a one second clock offset, would cost 
the industry $44,050,000 in initial implementation costs and $5,035,833 
in ongoing annual costs.\3512\ In Response Letter I, the Participants 
recommended an amendment to the Plan that would specify a one-second 
timestamp for allocation time on Allocation Reports,\3513\ and the 
Commission is amending the Plan to reflect this recommendation.
---------------------------------------------------------------------------

    \3509\ FSR Letter, at 9; SIFMA Letter, at 35; FIF Letter, at 3-
4, 11, 86-89.
    \3510\ FSR Letter at 9.
    \3511\ FIF Letter at 87-89.
    \3512\ FIF Letter at 88, Table 6.
    \3513\ Response Letter I at 25.
---------------------------------------------------------------------------

    The Commission considered these comments and is increasing its 
external cost estimates for broker-dealer data collection and reporting 
in response to the comments. The Commission is now

[[Page 84932]]

adding one commenter's estimate of $44,050,000 in implementation costs 
and $5,035,833 in ongoing costs to the estimates of costs to broker-
dealers.\3514\ The Commission believes the cost estimates received to 
be credible because they are based on a survey of industry participants 
who are informed of the Allocation Time requirement and the changes 
that broker-dealers would need to make to comply with the requirement.
---------------------------------------------------------------------------

    \3514\ See Section V.F.3.a(4), supra. The total cost estimates 
of the CAT Plan reflect these implementation and ongoing costs.
---------------------------------------------------------------------------

E. Quote Sent Time
    In the Notice, the Commission estimated that the requirement that 
Options Market Makers submit quote sent times to the exchanges would 
cost between $36.9 million and $76.8 million over five years.\3515\ The 
Commission concluded that this requirement did not represent a 
significant source of costs. The Commission received a comment stating 
that the estimated 5-year cost to Options Market Makers for adding a 
timestamp to the quote times was between the range of $39.9 million and 
$76.8 million. The commenter further stated that this is ``not a 
trivial cost for providing one data element to the consolidated audit 
trail.'' \3516\ The Commission continues to believe that the estimates 
in the Notice are credible estimates for the costs for Options Market 
Makers to send the Quote Sent Time field to exchanges. In response to 
the comment, the Commission notes that the implied annual costs would 
be much lower than the five year costs and the Commission agrees that 
the costs of quote sent time are significant.
---------------------------------------------------------------------------

    \3515\ See FIF, SIFMA, and Security Traders Association, Cost 
Survey Report on CAT Reporting of Options Quotes by Market Makers 
(November 5, 2013), available at http://www.catnmsplan.com/industryfeedback/p601771.pdf; see also CAT NMS Plan, supra note 5, 
at Appendix C, Section B.7(b)(iv)(B).
    \3516\ FIF Letter at 65.
---------------------------------------------------------------------------

    The Quote Sent Time cost estimate was not included in the cost 
estimates in the Notice, therefore the Commission is now adding this 
cost to its estimates for Options Market Maker data collection and 
reporting.\3517\ The Commission is using the maximum 5-year cost 
estimate to Options Market Makers provided by the commenter ($76.8 
million) and has divided it into $17,400,000 in aggregate 
implementation external costs, and $11,880,000 in aggregate ongoing 
external costs,\3518\ as provided in the burden hours and external cost 
estimates discussion for Options Market Makers in Section 
VI.D.2.a.(3)A.i.(b), below.
---------------------------------------------------------------------------

    \3517\ See Section V.F.1.c(2)B, supra.
    \3518\ The Commission assumes that the ratio of ongoing to 
implementation costs for Quote Sent Time would be the same as the 
ratio of ongoing to implementation costs for the other costs 
incurred by broker-dealers for data collection and reporting to CAT. 
See supra note 2526; see also Section V.F.3.a(6), supra.
---------------------------------------------------------------------------

(3) Order Estimates
A. Insourcers
i. Large Non-OATS Reporting Broker-Dealers
    The Commission notes that, in this Order Paperwork Reduction Act 
analysis, the Commission has divided the discussion of the burden hours 
and cost estimates associated with large non-OATS-reporting broker-
dealers into two separate categories: ELPs and Options Market Makers. 
The Commission believes that it is necessary to discuss these 
categories separately to account for the addition of the Quote Sent 
Time cost to the external costs to be incurred solely by Options Market 
Makers.
(a) Electronic Liquidity Providers
    As noted above,\3519\ in the CAT NMS Plan, the Participants, based 
on the Reporters Study's large broker-dealer cost estimates, estimated 
the following average initial external cost and FTE count figures that 
a large non-OATS reporting broker-dealer would expect to incur to adopt 
the systems changes needed to comply with the data reporting 
requirements of Rule 613 under Approach 1: $450,000 in external 
hardware and software costs; 8.05 internal FTEs; \3520\ and $9,500 in 
external third party/outsourcing costs.\3521\ The Participants also 
estimated the following average ongoing external cost and internal FTE 
count figures that a large non-OATS reporting broker-dealer would 
expect to incur to maintain data reporting systems to be in compliance 
with Rule 613: $80,000 in external hardware and software costs; 7.41 
internal FTEs; \3522\ and $1,300 in external third party/outsourcing 
costs.\3523\ The Participants also estimated the following average 
ongoing external cost and internal FTE count figures that a large non-
OATS reporting broker-dealer would expect to incur to maintain data 
reporting systems to be in compliance with Rule 613: $80,000 in 
external hardware and software costs; 7.41 internal FTEs; \3524\ and 
$1,300 in external third party/outsourcing costs.\3525\
---------------------------------------------------------------------------

    \3519\ See Section VI.D.2.a.(1)A.i., supra.
    \3520\ Approach 1 also provided $3,200,000 in initial internal 
FTE costs. The Commission believed the $3,200,000 in internal FTE 
costs is the Participants' estimated cost of the 8.05 FTEs. (8.05 
FTEs) x ($401,440 Participants' assumed annual cost per FTE provided 
in the CAT NMS Plan) = $3,231,592. See CAT NMS Plan, supra note 5, 
at n. 192. See also supra note 3320.
    \3521\ See CAT NMS Plan, supra note 5, at Section 
B.7(b)(iii)(c)(2)(a). The Commission believed that the third party/
outsourcing costs may be attributed to the use of service bureaus 
(potentially), technology consulting, and legal services.
    \3522\ Approach 1 also provided $3,000,000 in internal FTE costs 
related to maintenance. The Commission believes the $3,000,000 in 
ongoing internal FTE costs is the Participants' estimated cost of 
the 7.41 FTEs. (7.41 FTEs) x ($401,440 Participants' assumed annual 
cost per FTE provided in the CAT NMS Plan) = $2,974,670. See CAT NMS 
Plan, supra note 5, at n.192. See also supra note 3320 .
    \3523\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not break down these 
third party costs into categories.
    \3524\ Approach 1 also provided $3,000,000 in internal FTE costs 
related to maintenance. The Commission believes the $3,000,000 in 
ongoing internal FTE costs is the Participants' estimated cost of 
the 7.41 FTEs. (7.41 FTEs) x ($401,440 Participants' assumed annual 
cost per FTE provided in the CAT NMS Plan) = $2,974,670. See CAT NMS 
Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(C), n.192; see 
also supra note 3320.
    \3525\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not break down these 
third party costs into categories.
---------------------------------------------------------------------------

    As it did in the Notice, the Commission relies on the Reporters 
Study's large broker-dealer cost estimates in estimating costs for 
large broker-dealers that can practicably decide between insourcing or 
outsourcing their regulatory data reporting functions. The Commission 
estimates that there are 14 large broker-dealers that are not OATS 
reporters currently in the business of electronic liquidity provision 
that would be classified as Insourcers.\3526\ The Commission assumes 
the 14 ELPs would be typical of the Reporters Study's large, non-OATS 
reporting firms; for these firms, the Commission relies on the cost 
estimates provided under Approach 1\3527\ for large, non-

[[Page 84933]]

OATS reporting firms in the CAT NMS Plan.
---------------------------------------------------------------------------

    \3526\ These broker-dealers are not FINRA members and thus have 
no regular OATS reporting obligations. See supra note 2560.
    \3527\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(i)(A)(2). The Reporters Study requested broker-dealer 
respondents to provide estimates to report to the Central Repository 
under two approaches. Approach 1 assumes CAT Reporters would submit 
CAT Data using their choice of industry protocols. Approach 2 
assumes CAT Reporters would submit data using a pre-specified 
format. Approach 1's aggregate costs are higher than those for 
Approach 2 for all market participants except in one case where 
service bureaus have lower Approach 1 costs. Id. at Section 
B.7(b)(iii)(C)(2). For purposes of this Paperwork Reduction Act 
analysis, the Commission is not relying on the cost estimates for 
Approach 2 because overall the Approach 1 aggregate estimates 
represent the higher of the proposed approaches. The Commission 
believes it would be more comprehensive to use the higher of the two 
estimates for its Paperwork Reduction Act analysis estimates.
---------------------------------------------------------------------------

    Once an ELP has established the appropriate systems and processes 
required for collection and transmission of the required information to 
the Central Repository, such broker-dealers would be subject to ongoing 
annual burdens associated with, among other things, personnel time to 
monitor each ELP's reporting of the required data and the maintenance 
of the systems to report the required data; and implementing changes to 
trading systems that might result in additional reports to the Central 
Repository.
(i) Electronic Liquidity Providers--Initial Burden and Costs
    Based on the comment that provided estimates for a modified 
allocation timestamp requirement, with a one second timestamp 
granularity and a one second clock offset,\3528\ the Commission now 
estimates that the initial cost to an ELP to implement the modified 
allocation timestamp requirement would be $250,000.\3529\ The 
Commission believes that this cost would be an external hardware and 
software cost related to adding this functionality to servers. The 
Commission is adding the cost of the modified allocation timestamp 
requirement to the external costs to be incurred by ELPs.
---------------------------------------------------------------------------

    \3528\ FIF Letter at 88, Table 6. The commenter based its 
implementation and ongoing estimates on a survey it conducted of 
broker-dealers to estimate the costs associated with the allocation 
report timestamp requirement. The commenter noted that the estimates 
do not account for all Insourcers (the cost estimates cover the 126 
large OATS-reporting broker-dealer Insourcers, but not the 14 ELPs 
or 31 Options Market Makers), nor do they cover Outsourcing broker-
dealers. The Commission believes those categories may not have been 
included in the estimates due to a lack of participation by such 
broker-dealers in the survey. The Commission is assuming, for its 
Paperwork Reduction Act cost estimates, that the portion of the 
estimates attributed by the commenter to service bureaus will be 
passed-through to their Outsourcing broker-dealer clients that rely 
on service bureaus to perform their regulatory data reporting. The 
Commission is thus applying the portion of the commenter's cost 
estimates attributed to the 126 Insourcers to all 171 Insourcers, as 
well as the portion of the cost estimates attributed to the 13 
service bureaus across the 1,629 broker-dealers that are categorized 
as Outsourcing broker-dealers.
    \3529\ The commenter stated that this requirement would cost the 
industry $44,050,000 in initial implementation costs. The commenter 
attributed $42,750,000 of the implementation cost estimate to 126 
Insourcers. For purposes of this Paperwork Reduction Act analysis, 
the Commission is applying the portion of the cost estimates 
attributed to the 126 Insourcers to all 171 Insourcers. $42,750,000/
171 Insourcers = $250,000 in initial costs to implement the modified 
allocation timestamp requirement per Insourcer.
---------------------------------------------------------------------------

    Based on this information, the Commission estimates that the 
average initial burden associated with implementing regulatory data 
reporting to capture the required information and transmit it to the 
Central Repository in compliance with the Rule for each ELP would be 
approximately 14,490 initial burden hours.\3530\
---------------------------------------------------------------------------

    \3530\ 14,490 initial burden hours = (8.05 FTEs for implementing 
CAT Data reporting systems) x (1,800 working hours per year).
---------------------------------------------------------------------------

    The Commission also now estimates that these broker-dealers would, 
on average, incur approximately $700,000 in initial costs for hardware 
and software to implement the systems changes needed to capture the 
required information and transmit it to the Central Repository,\3531\ 
and an additional $9,500 in initial third party/outsourcing 
costs.\3532\ Therefore, the Commission now estimates that the average 
one-time initial burden per ELP would be 14,490 internal burden hours, 
and the initial external cost per ELP would be $709,500,\3533\ for an 
estimated aggregate initial burden of 202,860 hours \3534\ and an 
estimated aggregate initial external cost of $9,933,000.\3535\
---------------------------------------------------------------------------

    \3531\ $700,000 = ($450,000 in initial hardware and software 
costs) + ($250,000 in initial hardware and software costs to 
implement the modified allocation timestamp requirement).
    \3532\ See supra note 3436.
    \3533\ ($700,000 in initial hardware and software costs) + 
($9,500 initial third party/outsourcing costs) = $709,500 in initial 
external costs to implement data reporting systems.
    \3534\ The Commission estimates that 14 ELPs would be impacted 
by this information collection. (14 ELPs) x (14,490 burden hours) = 
202,860 initial burden hours to implement data reporting systems.
    \3535\ ($709,500 in initial hardware and software costs) + 
($9,500 initial third party/outsourcing costs) x 14 ELPs = 
$9,933,000 in initial external costs to implement data reporting 
systems.
---------------------------------------------------------------------------

(ii) Electronic Liquidity Providers--Ongoing Burden and Costs
    Based on the comment that provided estimates for a modified 
allocation timestamp requirement, with a one second timestamp 
granularity and a one second clock offset,\3536\ the Commission now 
estimates that the ongoing cost to an ELP to maintain the modified 
allocation timestamp requirement would be $29,166.67.\3537\ The 
Commission believes that this cost would be an external hardware and 
software cost related to maintenance of the modified allocation 
timestamp. The Commission is adding the cost of the modified allocation 
timestamp requirement to the external costs to be incurred by ELPs.
---------------------------------------------------------------------------

    \3536\ See supra note 3528.
    \3537\ The commenter stated that this requirement would cost the 
industry $5,035,833 in ongoing costs. The commenter attributed 
$4,987,500 of the ongoing cost estimate to 126 Insourcers. For 
purposes of this Paperwork Reduction Act analysis, the Commission is 
applying the portion of the cost estimates attributed to the 126 
Insourcers to all 171 Insourcers. $4,987,500/171 Insourcers = 
$29,166.67 in ongoing costs to maintain the modified allocation 
timestamp requirement per Insourcer.
---------------------------------------------------------------------------

    Based on this information, the Commission believes that it would 
take an ELP 13,338 burden hours per year \3538\ to continue to comply 
with the Rule. The Commission also now estimates that it would cost, on 
average, approximately $109,166.67 per year per ELP to maintain systems 
connectivity to the Central Repository and purchase any necessary 
hardware, software, and other materials,\3539\ and an additional $1,300 
in third party/outsourcing costs.\3540\
---------------------------------------------------------------------------

    \3538\ 13,338 ongoing burden hours = (7.41 ongoing FTEs to 
maintain CAT data reporting systems) x (1,800 working hours per 
year).
    \3539\ $109,166.67 = ($80,000 in ongoing external hardware and 
software costs) + ($29,166.67 to maintain the modified allocation 
timestamp requirement).
    \3540\ See supra note 3421.
---------------------------------------------------------------------------

    Therefore, the Commission now estimates that the average ongoing 
annual burden per ELP would be approximately 13,338 hours, and the 
ongoing external cost per ELP would be $110,466.67 \3541\ to maintain 
the systems necessary to collect and transmit information to the 
Central Repository, for an estimated aggregate ongoing burden of 
186,732 hours \3542\ and an estimated aggregate ongoing external cost 
for the ELPs of $1,546,533.38.\3543\
---------------------------------------------------------------------------

    \3541\ ($109,166.67 in ongoing external hardware and software 
costs) + ($1,300 ongoing external third party/outsourcing costs) = 
$110,466.6769 in ongoing external costs per ELP.
    \3542\ The Commission estimates that 14 ELPs would be impacted 
by this information collection. (14 ELPs) x (13,338 burden hours) = 
186,732 aggregate ongoing burden hours.
    \3543\ ($109,166.67 in ongoing external hardware and software 
costs) + ($1,300 ongoing external third party/outsourcing costs) x 
(14 ELPs) = $1,546,533.38 in aggregate ongoing external costs.
---------------------------------------------------------------------------

(b) Options Market Makers
    As noted above,\3544\ in the CAT NMS Plan, the Participants, based 
on the Reporters Study's large broker-dealer cost estimates, estimated 
the following average initial external cost and FTE count figures that 
a large non-OATS reporting broker-dealer would expect to incur to adopt 
the systems changes needed to comply with the data reporting 
requirements of Rule 613 under Approach 1: $450,000 in external 
hardware and software costs; 8.05 internal FTEs; \3545\ and $9,500 in 
external third party/outsourcing

[[Page 84934]]

costs.\3546\ The Participants also estimated the following average 
ongoing external cost and internal FTE count figures that a large non-
OATS reporting broker-dealer would expect to incur to maintain data 
reporting systems to be in compliance with Rule 613: $80,000 in 
external hardware and software costs; 7.41 internal FTEs; \3547\ and 
$1,300 in external third party/outsourcing costs.\3548\ The 
Participants also estimated the following average ongoing external cost 
and internal FTE count figures that a large non-OATS reporting broker-
dealer would expect to incur to maintain data reporting systems to be 
in compliance with Rule 613: $80,000 in external hardware and software 
costs; 7.41 internal FTEs; \3549\ and $1,300 in external third party/
outsourcing costs.\3550\ As it did in the Notice, the Commission relies 
on the Reporters Study's large broker-dealer cost estimates in 
estimating costs for large broker-dealers that can practicably decide 
between insourcing or outsourcing their regulatory data reporting 
functions.\3551\ The Commission estimates that there are 31 broker-
dealers that may transact in options but not in equities that can be 
classified as Insourcers.\3552\ Although the exemptive relief may 
relieve these firms of the obligation to report their options quoting 
activity to the Central Repository, these firms may have customer 
orders and other activity off-exchange that would cause them to incur a 
CAT reporting obligation. The Commission assumes the 31 Options Market 
Makers would be typical of the Reporters Study's large, non-OATS 
reporting firms; for these firms, the Commission relies on the cost 
estimates provided under Approach 1 \3553\ for large, non-OATS 
reporting firms in the CAT NMS Plan.
---------------------------------------------------------------------------

    \3544\ See Section VI.D.2.a.(1)A.i., supra.
    \3545\ Approach 1 also provided $3,200,000 in initial internal 
FTE costs. The Commission believed the $3,200,000 in internal FTE 
costs is the Participants' estimated cost of the 8.05 FTEs. (8.05 
FTEs) x ($401,440 Participants' assumed annual cost per FTE provided 
in the CAT NMS Plan) = $3,231,592. See CAT NMS Plan, supra note 5, 
at n. 192. See also supra note 3320.
    \3546\ See CAT NMS Plan, supra note 5, at Section 
B.7(b)(iii)(c)(2)(a). The Commission believed that the third party/
outsourcing costs may be attributed to the use of service bureaus 
(potentially), technology consulting, and legal services.
    \3547\ Approach 1 also provided $3,000,000 in internal FTE costs 
related to maintenance. The Commission believes the $3,000,000 in 
ongoing internal FTE costs is the Participants' estimated cost of 
the 7.41 FTEs. (7.41 FTEs) x ($401,440 Participants' assumed annual 
cost per FTE provided in the CAT NMS Plan) = $2,974,670. See CAT NMS 
Plan, supra note 5, at n.192. See also supra note 3320.
    \3548\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not break down these 
third party costs into categories.
    \3549\ Approach 1 also provided $3,000,000 in internal FTE costs 
related to maintenance. The Commission believes the $3,000,000 in 
ongoing internal FTE costs is the Participants' estimated cost of 
the 7.41 FTEs. (7.41 FTEs) x ($401,440 Participants' assumed annual 
cost per FTE provided in the CAT NMS Plan) = $2,974,670. See CAT NMS 
Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(C), n.192; see 
also supra note 3320.
    \3550\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not break down these 
third party costs into categories.
    \3551\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
A.6(c).
    \3552\ See supra note 2562.
    \3553\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(i)(A)(2). The Reporters Study requested broker-dealer 
respondents to provide estimates to report to the Central Repository 
under two approaches. Approach 1 assumes CAT Reporters would submit 
CAT Data using their choice of industry protocols. Approach 2 
assumes CAT Reporters would submit data using a pre-specified 
format. Approach 1's aggregate costs are higher than those for 
Approach 2 for all market participants except in one case where 
service bureaus have lower Approach 1 costs. Id. at Section 
B.7(b)(iii)(C)(2). For purposes of this Paperwork Reduction Act 
analysis, the Commission is not relying on the cost estimates for 
Approach 2 because overall the Approach 1 aggregate estimates 
represent the higher of the proposed approaches. The Commission 
believes it would be more comprehensive to use the higher of the two 
estimates for its Paperwork Reduction Act analysis estimates.
---------------------------------------------------------------------------

    Once an Options Market Maker has established the appropriate 
systems and processes required for collection and transmission of the 
required information to the Central Repository, such broker-dealers 
would be subject to ongoing annual burdens associated with, among other 
things, personnel time to monitor each Options Market Maker's reporting 
of the required data and the maintenance of the systems to report the 
required data; and implementing changes to trading systems that might 
result in additional reports to the Central Repository.
(i) Options Market Makers--Initial Burden and Costs
    Based on this information, the Commission estimates that the 
average initial burden associated with implementing regulatory data 
reporting to capture the required information and transmit it to the 
Central Repository in compliance with the Rule for each Options Market 
Maker would be approximately 14,490 initial burden hours.\3554\
---------------------------------------------------------------------------

    \3554\ 14,490 initial burden hours = (8.05 FTEs for implementing 
CAT Data reporting systems) x (1,800 working hours per year).
---------------------------------------------------------------------------

    The Commission also estimates that these options firm would, on 
average, incur approximately $450,000 in initial costs for hardware and 
software to implement the systems changes needed to capture the 
required information and transmit it to the Central Repository, and an 
additional $9,500 in initial third party/outsourcing costs.\3555\ 
Additionally, based on the comment that provided estimates for a 
modified allocation timestamp requirement, with a one second timestamp 
granularity and a one second clock offset,\3556\ the Commission now 
estimates that the initial cost to an Options Market Maker to implement 
the modified allocation timestamp requirement would be $250,000.\3557\ 
The Commission believes that this cost would be an external hardware 
and software cost related to adding this functionality to servers. The 
Commission is adding the cost of the modified allocation timestamp 
requirement to the external costs to be incurred by Options Market 
Makers.
---------------------------------------------------------------------------

    \3555\ See supra note 3436.
    \3556\ See supra note 3528.
    \3557\ The commenter stated that this requirement would cost the 
industry $44,050,000 in initial implementation costs. The commenter 
attributed $42,750,000 of the implementation cost estimate to 126 
Insourcers. For purposes of this Paperwork Reduction Act analysis, 
the Commission is applying the portion of the cost estimates 
attributed to the 126 Insourcers to all 171 Insourcers. $42,750,000/
171 Insourcers = $250,000 in initial costs to implement the modified 
allocation timestamp requirement per Insourcer.
---------------------------------------------------------------------------

    The Commission also is adding a cost estimate for the requirement 
that an Options Market Maker submit a Quote Sent Time to an 
exchange.\3558\ The Commission is using the maximum 5-year cost 
estimate to Options Market Makers provided by a commenter ($76.8 
million) \3559\ and has divided it into $17,400,000 in aggregate 
implementation external costs, and $11,880,000 in aggregate ongoing 
external costs.\3560\
---------------------------------------------------------------------------

    \3558\ See Section VI.D.2.a.(1)E., supra; see also supra note 
2526; Section V.F.3.a(6), supra; Section V.F.1.c(2)B., supra.
    \3559\ FIF Letter at 65.
    \3560\ See supra note 2526.
---------------------------------------------------------------------------

    The Commission estimates that that this requirement will impose an 
additional initial hardware and software cost per Options Market Maker 
of $561,290.32.\3561\ Based on this information, the Commission now 
estimates that Options Market Makers would, on average, incur 
approximately $1,261,290.32 in initial costs for hardware and software 
to implement the systems changes needed to capture the required 
information and transmit it to the Central Repository,\3562\ and an 
additional $9,500 in initial third party/outsourcing costs. Therefore, 
the

[[Page 84935]]

Commission now estimates that the average one-time initial burden per 
options firm would be 14,490 internal burden hours, and the initial 
external cost per Options Market Maker would be $1,270,790.32,\3563\ 
for an estimated aggregate initial burden of 449,190 hours \3564\ and 
an estimated aggregate initial external cost of $39,394,499.92.\3565\
---------------------------------------------------------------------------

    \3561\ The Commission estimates that the implementation cost of 
the Quote Sent Time requirement is approximately $17,400,000. See 
Section V.F.1.c(2)B., supra. ($17,400,000 in implementation costs)/
(31 Options Market Makers) = $561,290.21 in initial external costs 
to implement the Quote Sent Time requirement per Options Market 
Maker.
    \3562\ $1,261,290.32 = ($450,000 in initial hardware and 
software costs) + ($250,000 in initial hardware and software costs 
to implement the modified allocation timestamp requirement) + 
($561,290.32 in initial hardware and software costs to implement the 
requirement that an Options Market Maker submit a Quote Sent Time).
    \3563\ ($1,261,290.32 in initial hardware and software costs) + 
($9,500 initial third party/outsourcing costs) = $1,270,790.32 in 
initial external costs to implement data reporting systems.
    \3564\ The Commission estimates that 31 Options Market Makers 
would be impacted by this information collection. (31 Options Market 
Makers) x (14,490 burden hours) = 449,190 initial burden hours to 
implement data reporting systems.
    \3565\ ($1,270,790.32 in initial hardware and software costs) + 
($9,500 initial third party/outsourcing costs) x (31 Options Market 
Makers) = $39,394,499.92 in initial external costs to implement data 
reporting systems.
---------------------------------------------------------------------------

(ii) Options Market Makers--Ongoing Burden and Costs
    Based on the comment that provided estimates for a modified 
allocation timestamp requirement, with a one second timestamp 
granularity and a one second clock offset,\3566\ the Commission 
estimates that the ongoing cost to an Options Market Maker to maintain 
the modified allocation timestamp requirement would be 
$29,166.67.\3567\ The Commission believes that this cost would be an 
external hardware and software cost related to maintenance of the 
modified allocation timestamp. The Commission is adding the cost of the 
modified allocation timestamp requirement to the external costs to be 
incurred by Options Market Makers.
---------------------------------------------------------------------------

    \3566\ See supra note 3528.
    \3567\ The commenter stated that this requirement would cost the 
industry $5,035,833 in ongoing costs. The commenter attributed 
$4,987,500 of the ongoing cost estimate to 126 Insourcers. For 
purposes of this Paperwork Reduction Act analysis, the Commission is 
applying the portion of the cost estimates attributed to the 126 
Insourcers to all 171 Insourcers. $4,987,500/171 Insourcers = 
$29,166.67 in ongoing costs to maintain the modified allocation 
timestamp requirement per Insourcer.
---------------------------------------------------------------------------

    The Commission also is adding a cost estimate for the requirement 
that an Options Market Maker submit a Quote Sent Time to an 
exchange.\3568\ The Commission is using the maximum 5-year cost 
estimate to Options Market Makers provided by a commenter ($76.8 
million) \3569\ and has divided it into $17,400,000 in aggregate 
implementation external costs, and $11,880,000 in aggregate ongoing 
external costs.\3570\ The Commission estimates that this requirement 
will impose an additional ongoing hardware and software cost per 
Options Market Maker of $383,255.81.\3571\ Based on this information, 
the Commission now believes that it would take an Options Market Maker 
13,338 burden hours per year \3572\ to continue to comply with the 
Rule. The Commission also now estimates that it would cost, on average, 
approximately $492,422.48 per year per Options Market Maker to maintain 
systems connectivity to the Central Repository and purchase any 
necessary hardware, software, and other materials,\3573\ and an 
additional $1,300 in third party/outsourcing costs.\3574\
---------------------------------------------------------------------------

    \3568\ See Section VI.D.2.a.(1)E., supra; see also supra note 
2526; Section V.F.3.a(6), supra; Section V.F.1.c(2)B., supra.
    \3569\ FIF Letter at 65.
    \3570\ See supra note 2526.
    \3571\ The Commission estimates that the ongoing cost of the 
Quote Sent Time requirement is approximately $11,880,000. See 
Section V.F.1.c(2)B., supra. ($11,880,000 in ongoing costs)/(31 
Options Market Maker) = $383,255.81 in ongoing external costs to 
maintain the Quote Sent Time requirement per Options Market Maker.
    \3572\ 13,338 ongoing burden hours = (7.41 ongoing FTEs to 
maintain CAT data reporting systems) x (1,800 working hours per 
year).
    \3573\ $492,422.48 = ($80,000 in ongoing external hardware and 
software costs) + ($29,166.67 to maintain the modified allocation 
timestamp requirement) + ($383,255.81 in ongoing external costs to 
maintain the Quote Sent Time requirement per options firm).
    \3574\ See supra note 3548.
---------------------------------------------------------------------------

    Therefore, the Commission now estimates that the average ongoing 
annual burden per Options Market Maker would be approximately 13,338 
hours, and the ongoing external cost per Options Market Maker would be 
$493,722.48 \3575\ to maintain the systems necessary to collect and 
transmit information to the Central Repository, for an estimated 
aggregate ongoing burden of 413,478 hours \3576\ and an estimated 
aggregate ongoing external cost to Options Market Makers of 
$15,305,396.88.\3577\
---------------------------------------------------------------------------

    \3575\ ($492,422.48 in ongoing external hardware and software 
costs) + ($1,300 ongoing external third party/outsourcing costs) = 
$493,722.48 in ongoing external costs per options firm.
    \3576\ The Commission estimates that 31 options firms would be 
impacted by this information collection. (31 options firms) x 
(13,338 burden hours) = 413,478 aggregate ongoing burden hours.
    \3577\ ($492,422.48 in ongoing external hardware and software 
costs) + ($1,300 ongoing external third party/outsourcing costs) x 
(31 options firms) = $15,305,396.88 in aggregate ongoing external 
costs.
---------------------------------------------------------------------------

ii. Large OATS-Reporting Broker-Dealers
    As noted above,\3578\ in the CAT NMS Plan, the Participants, based 
on the Reporters Study's large broker-dealer cost estimates, estimated 
the following average initial external cost and internal FTE count 
figures that a large OATS-reporting broker-dealer would expect to incur 
as a result of the implementation of the consolidated audit trail under 
Approach 1: $750,000 in hardware and software costs; 14.92 internal 
FTEs; \3579\ and $150,000 in external third party/outsourcing 
costs.\3580\ The Participants also estimated the following average 
ongoing external cost and internal FTE count figures that a large OATS-
reporting broker-dealer would expect to incur to maintain data 
reporting systems to be in compliance with Rule 613: $380,000 in 
ongoing external hardware and software costs; 10.03 internal FTEs; 
\3581\ and $120,000 in ongoing external third party/outsourcing 
costs.\3582\
---------------------------------------------------------------------------

    \3578\ See Section VI.D.2.a.(1)(A)ii., supra.
    \3579\ Approach 1 also provided $6,000,000 in initial internal 
FTE costs. The Commission believes the $6,000,000 in initial 
internal FTE costs is the Participants' estimated cost of the 14.92 
FTEs. (14.92 FTEs) x ($401,440 Participants' assumed annual cost per 
FTE provided in the CAT NMS Plan) = $5,989,485. See CAT NMS Plan, 
supra note 5, at Appendix C, Section B.7(b)(ii)(C), n.192; see also 
supra note 3320.
    \3580\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(C)(2)(a). The CAT NMS Plan did not break down these 
third party costs into categories. The Commission believes that 
these costs may be attributed to the use of service bureaus, 
technology consulting, and legal services.
    \3581\ Approach 1 also provided $4,000,000 in internal FTE costs 
related to maintenance. The Commission believes the $4,000,000 in 
ongoing internal FTE costs is the Participants' estimated cost of 
the 10.03 FTEs. (10.03 FTEs) x ($401,440 Participants' assumed 
annual cost per FTE provided in the CAT NMS Plan) = $4,026,443. See 
CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(C), 
n.192; see also supra note 3320.
    \3582\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not categorize these 
third party costs. The Commission believes that these costs may be 
attributed to the use of service bureaus, technology consulting, and 
legal services.
---------------------------------------------------------------------------

    As it did in the Notice, based on the Commission's analysis of data 
provided by FINRA and discussions with market participants, the 
Commission estimates that 126 broker-dealers, which reported more than 
350,000 OATS ROEs between June 15 and July 10, 2015, would 
strategically decide to either self-report CAT Data or outsource their 
CAT data reporting functions.\3583\ To conduct its Paperwork Burden 
Analysis for the 126 broker-dealers, the Commission is relying on the 
Reporters Study estimates used by the CAT NMS Plan of expected costs 
that a large OATS-reporting broker-dealer would incur as a result of 
the implementation of the consolidated audit trail under Approach 1.
---------------------------------------------------------------------------

    \3583\ See Notice, supra note 5, at 30718; see also id., at 
n.901 (stating that the Commission believes that broker-dealers that 
report fewer than 350,000 OATS ROEs per month are unlikely to be 
large enough to support the infrastructure required for insourcing 
data reporting activities).
---------------------------------------------------------------------------

    Once a large OATS-reporting broker-dealer has established the 
appropriate systems and processes required for collection and 
transmission of the required information to the Central Repository, 
such broker-dealers would

[[Page 84936]]

be subject to ongoing annual burdens and costs associated with, among 
other things, personnel time to monitor each broker-dealer's reporting 
of the required data and the maintenance of the systems to report the 
required data; and implementing changes to trading systems which might 
result in additional reports to the Central Repository.
(a) Large OATS-Reporting Broker-Dealers--Initial Burden and Costs
    In this Order, based on the comment that provided estimates for a 
modified allocation timestamp requirement, with a one second timestamp 
granularity and a one second clock offset,\3584\ the Commission is 
estimating that the initial cost to a large OATS-reporting broker-
dealer to implement the modified allocation timestamp requirement would 
be $250,000.\3585\ The Commission believes that this cost would be an 
external hardware and software cost related to adding this 
functionality to servers. The Commission is adding the cost of the 
modified allocation timestamp requirement to the external costs to be 
incurred by large-OATS-reporting broker-dealers.
---------------------------------------------------------------------------

    \3584\ See supra note 3528.
    \3585\ The commenter stated that this requirement would cost the 
industry $44,050,000 in initial implementation costs. The commenter 
attributed $42,750,000 of the implementation cost estimate to 126 
Insourcers. For purposes of this Paperwork Reduction Act analysis, 
the Commission is applying the portion of the cost estimates 
attributed to the 126 Insourcers to all 171 Insourcers. $42,750,000/
171 Insourcers = $250,000 in initial costs to implement the modified 
allocation timestamp requirement per Insourcer.
---------------------------------------------------------------------------

    Based on this information the Commission now estimates that these 
large OATS-reporting broker-dealers would, on average, incur 
approximately $1,000,000 in initial external costs for hardware and 
software to implement the systems changes needed to capture the 
required information and transmit it to the Central Repository,\3586\ 
and an additional $150,000 in initial external third party/outsourcing 
costs.\3587\ Therefore, the Commission now estimates that the average 
one-time initial burden per large OATS-reporting broker-dealer would be 
26,856 burden hours and external costs of $1,150,000 to implement CAT 
data reporting systems,\3588\ for an estimated aggregate initial burden 
of 3,383,856 hours \3589\ and an estimated aggregate initial external 
cost of $189,000,000.\3590\
---------------------------------------------------------------------------

    \3586\ $1,000,000 = ($750,000 in initial external hardware and 
software costs) + ($250,000 to implement the modified allocation 
timestamp).
    \3587\ See supra note 3421.
    \3588\ ($1,000,000 in initial external hardware and software 
costs) + ($150,000 initial external third party/outsourcing costs) = 
$1,150,000 in initial external costs per large OATS-reporting 
broker-dealer to implement CAT data reporting systems.
    \3589\ The Commission estimates that 126 large OATS-reporting 
broker-dealers would be impacted by this information collection. 
(126 large OATS-reporting broker-dealers) x (26,856 initial burden 
hours) = 3,383,856 initial burden hours to implement data reporting 
systems.
    \3590\ ($1,000,000 in initial external hardware and software 
costs) + ($150,000 initial external third party/outsourcing costs) x 
(126 large OATS-reporting broker-dealers) = $189,000,000 in initial 
external costs to implement data reporting systems.
---------------------------------------------------------------------------

(b) Large OATS-Reporting Broker-Dealers--Ongoing Burden and Costs
    In this Order, additionally, based on the comment that provided 
estimates for a modified allocation timestamp requirement, with a one 
second timestamp granularity and a one second clock offset,\3591\ the 
Commission estimates that the ongoing cost to a large OATS-reporting 
broker-dealer to maintain the modified allocation timestamp requirement 
would be $29,166.67.\3592\ The Commission believes that this cost would 
be an external hardware and software cost related to maintenance of the 
modified allocation timestamp. The Commission is adding the cost of the 
modified allocation timestamp requirement to the external costs to be 
incurred by large OATS-reporting broker-dealers.
---------------------------------------------------------------------------

    \3591\ See supra note 3528.
    \3592\ The commenter stated that this requirement would cost the 
industry $5,035,833 in ongoing costs. The commenter attributed 
$4,987,500 of the ongoing cost estimate to 126 Insourcers. For 
purposes of this Paperwork Reduction Act analysis, the Commission is 
applying the portion of the cost estimates attributed to the 126 
Insourcers to all 171 Insourcers. $4,987,500/171 Insourcers = 
$29,166.67 in ongoing costs to maintain the modified allocation 
timestamp requirement per Insourcer.
---------------------------------------------------------------------------

    Based on this information the Commission believes that it would 
take a large OATS-reporting broker-dealer 18,054 ongoing burden hours 
per year \3593\ to continue compliance with the Rule. The Commission 
now estimates that it would cost, on average, approximately $409,166.67 
per year per large OATS-reporting broker-dealer to maintain systems 
connectivity to the Central Repository and purchase any necessary 
hardware, software, and other materials,\3594\ and an additional 
$120,000 in external ongoing third party/outsourcing costs.\3595\
---------------------------------------------------------------------------

    \3593\ 18,054 ongoing burden hours = (10.03 ongoing FTEs for 
maintenance of CAT data reporting systems) x (1,800 working hours 
per year).
    \3594\ $409,166.67 = ($380,000 in ongoing external hardware and 
software costs) + ($29,166.67 to maintain the modified allocation 
timestamp requirement).
    \3595\ See CAT NMS Plan, supra note 5, at Appendix C, Section 
B.7(b)(iii)(C)(2)(b).
---------------------------------------------------------------------------

    Therefore, the Commission now estimates that the average ongoing 
annual burden per large OATS-reporting broker-dealer would be 
approximately 18,054 burden hours, plus $529,166.67 \3596\ to maintain 
the systems necessary to collect and transmit information to the 
Central Repository, for an estimated aggregate burden of 2,274,804 
hours \3597\ and an estimated aggregate ongoing external cost of 
$66,675,000.42.\3598\
---------------------------------------------------------------------------

    \3596\ ($409,166.67 in ongoing external hardware and software 
costs) + ($120,000 in ongoing external third party/outsourcing 
costs) = $529,166.67 in ongoing external costs per large OATS-
reporting broker-dealer.
    \3597\ The Commission estimates that 126 large OATS-reporting 
broker-dealers would be impacted by this information collection. 
(126 large OATS-reporting broker-dealers) x (18,054 burden hours) = 
2,274,804 aggregate ongoing burden hours.
    \3598\ ($409,166.67 in ongoing external hardware and software 
costs) + ($120,000 in ongoing external third party/outsourcing 
costs) x (126 large OATS-reporting broker-dealers) = $66,675,000.42 
in aggregate ongoing external costs.
---------------------------------------------------------------------------

B. Outsourcers
i. Small OATS-Reporting Broker-Dealers
    As it did in the Notice, based on data provided by FINRA, the 
Commission estimates that there are 806 broker-dealers that report 
fewer than 350,000 OATS ROEs monthly. The Commission believes that 
these broker-dealers generally outsource their regulatory reporting 
obligations because during the period June 15-July 10, 2015, 
approximately 88.9% of their 350,000 OATS ROEs were reported through 
service bureaus, with 730 of these broker-dealers reporting more than 
99% of their OATS ROEs through one or more service bureaus.\3599\ The 
Commission estimates that these firms currently spend an aggregate of 
$100.1 million on annual outsourcing costs.\3600\ The Commission 
estimates these 806 broker-dealers would spend $100.2 million in 
aggregate to outsource their regulatory data reporting to service 
bureaus to report in accordance with Rule 613,\3601\ or $124,373 per 
broker-dealer.\3602\ These external outsourcing cost estimates are 
calculated using the information from staff discussions with service 
bureaus and other market

[[Page 84937]]

participants, as applied to data provided by FINRA.\3603\
---------------------------------------------------------------------------

    \3599\ See Notice, supra note 5, at 30718. Because of the 
extensive use of service bureaus in these categories of broker-
dealers, the Commission assumes that these broker-dealers are likely 
to use service bureaus to accomplish their CAT data reporting.
    \3600\ The average broker-dealer in this category reported 
15,185 OATS ROEs from June 15-July 10, 2015; the median reported 
1,251 OATS ROEs. Of these broker-dealers, 39 reported more than 
100,000 OATS ROEs during the sample period. See Section 
V.F.1.c.(2)B., supra.
    \3601\ Id.
    \3602\ $124,373 = $100,200,000/806 broker-dealers. This amount 
is the average estimated annual outsourcing cost to firms that 
currently report fewer than 350,000 OATS ROEs per month. Id.
    \3603\ See Section V.F.1.c.(2)B., supra.
---------------------------------------------------------------------------

    Firms that outsource their regulatory data reporting still face 
internal staffing burdens associated with this activity. These 
employees perform activities such as answering inquiries from their 
service bureaus, and investigating reporting exceptions. Based on 
conversations with market participants, the Commission estimates that 
these firms currently have 0.5 full-time employees devoted to these 
activities.\3604\ The Commission estimates that these firms would need 
to hire one additional full-time employee for one year to implement CAT 
reporting requirements.\3605\
---------------------------------------------------------------------------

    \3604\ Id.
    \3605\ Id.
---------------------------------------------------------------------------

    Small OATS-reporting broker-dealers that outsource their regulatory 
data reporting would likely face internal staffing burdens and external 
costs associated with ongoing activity, such as maintaining any systems 
that transmit data to their service providers. Based on conversations 
with market participants, the Commission estimates these firms would 
need 0.75 FTEs on an ongoing basis to perform or monitor CAT 
reporting.\3606\
---------------------------------------------------------------------------

    \3606\ See Section IV.F.1.c.(2)B., supra.
---------------------------------------------------------------------------

(a) Small OATS-Reporting Broker-Dealers--Initial Burden and Costs
    In this Order, additionally, based on the comment that provided 
estimates for a modified allocation timestamp requirement, with a one 
second timestamp granularity and a one second clock offset,\3607\ the 
Commission estimates that the initial cost to a small OATS-reporting 
broker-dealer to implement this requirement would be $798.04.\3608\ The 
Commission believes that this cost would be an external hardware and 
software cost related to adding this functionality to servers. The 
Commission is adding the cost of the modified allocation timestamp 
requirement to the external costs to be incurred by small OATS-
reporting broker-dealers.
---------------------------------------------------------------------------

    \3607\ See supra note 3528.
    \3608\ The commenter stated that this requirement would cost the 
industry $44,050,000 in initial implementation costs. The commenter 
attributed $1,300,000 of the implementation cost estimate to 13 
service bureaus. For purposes of this Paperwork Reduction Act 
analysis, the Commission is assuming that the portion of the 
estimates attributed by the commenter to service bureaus will be 
passed-through to their Outsourcing broker-dealer clients that rely 
on service bureaus to perform their regulatory data reporting. The 
Commission is thus applying the portion of the commenter's cost 
estimates attributed to the 13 service bureaus across the 1,629 
broker-dealers that are categorized as Outsourcing broker-dealers. 
$1,300,000/1,629 Outsourcing broker-dealers = $798.04 in initial 
costs to implement the modified allocation timestamp requirement per 
Outsourcing broker-dealer.
---------------------------------------------------------------------------

    Based on this information, the Commission estimates that the 
average initial burden to implement the needed systems changes to 
capture the required information and transmit it to the Central 
Repository in compliance with the CAT NMS Plan for small OATS-reporting 
broker-dealers would be approximately 1,800 burden hours.\3609\ The 
Commission believes the burden hours would be associated with work 
performed by internal technology, compliance and legal staff in 
connection with the implementation of CAT data reporting. The 
Commission also now estimates that each small OATS-reporting broker-
dealer would incur approximately $125,171.04 in initial external 
costs.\3610\ Therefore, the Commission now estimates that the average 
one-time initial burden per small OATS-reporting broker-dealer would be 
1,800 burden hours and external costs of $125,171.04, for an estimated 
aggregate initial burden of 1,450,800 hours \3611\ and an estimated 
aggregate initial external cost of $100,887,858.24.\3612\
---------------------------------------------------------------------------

    \3609\ This estimate assumes that, based on the expected FTE 
count provided, a small OATS-reporting broker-dealer would have to 
hire 1 new FTE for implementation. The salary attributed to the 1 
FTE would be (1 FTE) x ($424,350 FTE cost) = $424,350 per year. To 
determine the number of burden hours to be incurred by the current 
0.5 FTE for implementation, multiply 0.5 FTE by 1,800 hours per year 
= 900 initial burden hours.
    \3610\ $125,171.04 = ($124,373 in initial outsourcing costs) + 
($798.04 to implement the allocation timestamp).
    \3611\ The Commission estimates that 806 small OATS-reporting 
broker-dealers would be impacted by this information collection. 
(806 small OATS-reporting broker-dealers) x (1,800 burden hours) = 
1,450,800 aggregate initial burden hours.
    \3612\ ($124,373 in initial outsourcing costs) + ($798.04 to 
implement the allocation timestamp) x (806 small OATS-reporting 
broker-dealers) = $100,887,858.24 in aggregate initial external 
costs.
---------------------------------------------------------------------------

(b) Small OATS-Reporting Broker-Dealers--Ongoing Burden and Costs
    In this Order, the Commission estimates that it would cost, on 
average, approximately $124,373 in ongoing external outsourcing costs 
\3613\ to ensure ongoing compliance with Rule 613. Additionally, based 
on the comment that provided estimates for a modified allocation 
timestamp requirement, with a one second timestamp granularity and a 
one second clock offset,\3614\ the Commission estimates that the 
ongoing cost to a small OATS-reporting broker-dealer to maintain the 
modified allocation timestamp requirement would be $66.50.\3615\ The 
Commission believes that this cost would be an external hardware and 
software cost related to maintenance of the modified allocation 
timestamp. The Commission is adding the cost of the modified allocation 
timestamp requirement to the external costs to be incurred by small 
OATS-reporting broker-dealers
---------------------------------------------------------------------------

    \3613\ See supra note 3610.
    \3614\ See supra note 3528.
    \3615\ The commenter stated that this requirement would cost the 
industry $5,035,833 in ongoing costs. The commenter attributed 
$108,333 of the ongoing cost estimate to 13 service bureaus. For 
purposes of this Paperwork Reduction Act analysis, the Commission is 
assuming that the portion of the estimates attributed by the 
commenter to service bureaus will be passed-through to their 
Outsourcing broker-dealer clients that rely on service bureaus to 
perform their regulatory data reporting. The Commission is thus 
applying the portion of the commenter's cost estimates attributed to 
the 13 service bureaus across the 1,629 broker-dealers that are 
categorized as Outsourcing broker-dealers. $108,333/1,629 
Outsourcing broker-dealers = $66.50 in ongoing costs to maintain the 
modified allocation timestamp requirement per Outsourcing broker-
dealer.
---------------------------------------------------------------------------

    Therefore, the Commission now estimverage ongoing annual burden per 
small OATS-reporting broker-dealer would be approximately 1,350 hours, 
plus $124,439.50,\3616\ in external costs, for an estimated aggregate 
ongoing burden of 1,088,100 hours \3617\ and an estimated aggregate 
ongoinates that the ag external cost of $100,298,237.\3618\
---------------------------------------------------------------------------

    \3616\ $124,439.50 = ($124,373 in ongoing outsourcing costs) + 
($66.50 to maintain the allocation timestamp)
    \3617\ The Commission estimates that 806 small OATS-reporting 
broker-dealers would be impacted by this information collection. 
(806 small OATS-reporting broker-dealers) x (1,350 burden hours) = 
1,088,100 aggregate ongoing burden hours to ensure ongoing 
compliance with Rule 613.
    \3618\ $100,298,237 = ($124,373 in ongoing outsourcing costs) + 
($66.50 to maintain the allocation timestamp) x (806 broker-
dealers).
---------------------------------------------------------------------------

ii. Small Non-OATS-Reporting Broker-Dealers
    In addition to firms that currently report to OATS, as it did in 
the Notice, the Commission estimates there are 799 broker-dealers that 
are currently exempt from OATS reporting rules due to firm size, or 
excluded because all of their order flow is routed to a single OATS 
reporter, such as a clearing firm, that would incur CAT reporting 
obligations.\3619\ A further 24 broker-dealers have SRO memberships 
only with one Participant; \3620\ the Commission believes this group is 
comprised mostly of floor brokers and further believes these firms 
would experience CAT implementation and

[[Page 84938]]

ongoing reporting costs similar in magnitude to small equity broker-
dealers that currently have no OATS reporting responsibilities.\3621\
---------------------------------------------------------------------------

    \3619\ See Section V.F.1.c.(2)B., supra. Rule 613 does not 
exclude from data reporting obligations SRO members that quote or 
execute transactions in NMS Securities and Listed Options that route 
to a single market participant; see also CAT NMS Plan, supra note 5, 
at Appendix C, Section B.7(b)(ii)(B)(2).
    \3620\ See Section V.F.1.c.(2)B., supra.
    \3621\ Id.
---------------------------------------------------------------------------

    The Commission assumes these broker-dealers would have very low 
levels of CAT reporting, similar to those of the lowest activity firms 
that currently report to OATS. For these firms, the Commission assumes 
that under CAT they would incur the average estimated service bureau 
cost of broker-dealers that currently report fewer than 350,000 OATS 
ROEs per month, which is $124,373 annually.\3622\ Furthermore, because 
these firms have more limited data reporting requirements than other 
firms, the Commission assumes these firms currently have only 0.1 full-
time employees currently dedicated to regulatory data reporting 
activities.\3623\ The Commission assumes these firms would require 2 
full-time employees for one year to implement CAT.\3624\
---------------------------------------------------------------------------

    \3622\ Id.
    \3623\ Id.
    \3624\ Id.
---------------------------------------------------------------------------

    Small non-OATS-reporting broker-dealers that outsource their 
regulatory data reporting would likely face internal staffing burdens 
and costs associated with ongoing activity, such as maintaining any 
systems that transmit data to their service providers. Based on 
conversations with market participants, the Commission estimates these 
firms would need 0.75 full-time employees annually to perform or 
monitor CAT reporting.
(a) Small Non-OATS Reporting Broker-Dealers--Initial Burden and Costs
    In this Order, additionally, based on the comment that provided 
estimates for a modified allocation timestamp requirement, with a one 
second timestamp granularity and a one second clock offset,\3625\ the 
Commission estimates that the initial cost to a small non-OATS-
reporting broker-dealer would be $798.04.\3626\ The Commission believes 
that this cost would be an external hardware and software cost related 
to adding this functionality to servers. The Commission is adding the 
cost of the modified allocation timestamp requirement to the external 
costs to be incurred by small non-OATS-reporting broker-dealers.
---------------------------------------------------------------------------

    \3625\ See supra note 3528.
    \3626\ The commenter stated that this requirement would cost the 
industry $44,050,000 in initial implementation costs. The commenter 
attributed $1,300,000 of the implementation cost estimate to 13 
service bureaus. For purposes of this Paperwork Reduction Act 
analysis, the Commission is assuming that the portion of the 
estimates attributed by the commenter to service bureaus will be 
passed-through to their Outsourcing broker-dealer clients that rely 
on service bureaus to perform their regulatory data reporting. The 
Commission is thus applying the portion of the commenter's cost 
estimates attributed to the 13 service bureaus across the 1,629 
broker-dealers that are categorized as Outsourcing broker-dealers. 
$1,300,000/1,629 Outsourcing broker-dealers = $798.04 in initial 
costs to implement the modified allocation timestamp requirement per 
Outsourcing broker-dealer.
---------------------------------------------------------------------------

    Based on this information, the Commission now estimates that the 
average initial burden to develop and implement the needed systems 
changes to capture the required information and transmit it to the 
Central Repository in compliance with the Rule for small, non-OATS-
reporting broker-dealers would be approximately 3,600 initial burden 
hours.\3627\ The Commission believes the burden hours would be 
associated with work performed by internal technology, compliance and 
legal staff in connection with the implementation of CAT Data 
reporting. The Commission also now estimates that each small non-OATS-
reporting broker-dealer would incur approximately $125,171.04 in 
initial external outsourcing costs.\3628\ Therefore, the Commission now 
estimates that the average one-time initial burden per small non-OATS-
reporting broker-dealer would be 3,600 burden hours and external costs 
of $125,171.04 for an estimated aggregate initial burden of 2,962,800 
hours \3629\ and an estimated aggregate initial external cost of 
$103,015,765.92.\3630\
---------------------------------------------------------------------------

    \3627\ 3,600 initial burden hours = (2 FTEs for implementation 
of CAT Data reporting systems) x (1,800 working hours per year).
    \3628\ $125,171.04 = ($124,373 in initial outsourcing costs) + 
($798.04 to implement the allocation timestamp).
    \3629\ The Commission estimates that 823 small non-OATS-
reporting broker-dealers would be impacted by this information 
collection. (823 small non-OATS-reporting broker-dealers) x (3,600 
burden hours) = 2,962,800 aggregate initial burden hours.
    \3630\ $103,015,765.92 = ($124,373 in initial outsourcing costs) 
+ ($798.04 to implement the allocation timestamp) x (823 small non-
OATS-reporting broker-dealers).
---------------------------------------------------------------------------

(b) Small Non-OATS-Reporting Broker-Dealers--Ongoing Burden and Costs
    In this Order, additionally, based on the comment that provided 
estimates for a modified allocation timestamp requirement, with a one 
second timestamp granularity and a one second clock offset,\3631\ the 
Commission estimates that the ongoing cost to a small non-OATS-
reporting broker-dealer to maintain the modified allocation timestamp 
requirement would be $66.50.\3632\ The Commission believes that this 
cost would be an external hardware and software cost related to 
maintenance of the modified allocation timestamp. The Commission is 
adding the cost of the modified allocation timestamp requirement to the 
external costs to be incurred by small non-OATS-reporting broker-
dealers
---------------------------------------------------------------------------

    \3631\ See supra note 3528.
    \3632\ The commenter stated that this requirement would cost the 
industry $5,035,833 in ongoing costs. The commenter attributed 
$108,333 of the ongoing cost estimate to 13 service bureaus. For 
purposes of this Paperwork Reduction Act analysis, the Commission is 
assuming that the portion of the estimates attributed by the 
commenter to service bureaus will be passed-through to their 
Outsourcing broker-dealer clients that rely on service bureaus to 
perform their regulatory data reporting. The Commission is thus 
applying the portion of the commenter's cost estimates attributed to 
the 13 service bureaus across the 1,629 broker-dealers that are 
categorized as Outsourcing broker-dealers. $108,333/1,629 
Outsourcing broker-dealers = $66.50 in ongoing costs to maintain the 
modified allocation timestamp requirement per Outsourcing broker-
dealer.
---------------------------------------------------------------------------

    Therefore, the Commission now estimates that the average ongoing 
annual burden per small non-OATS-reporting broker-dealer would be 
approximately 1,350 hours, plus $124,439.50 \3633\ in external costs, 
for an estimated aggregate ongoing burden of 1,111,050 hours \3634\ and 
an estimated aggregate ongoing external cost of $102,413,708.50.\3635\
---------------------------------------------------------------------------

    \3633\ $124,439.50 = ($124,373 in ongoing outsourcing costs) + 
($66.50 to maintain the allocation timestamp)
    \3634\ The Commission estimates that 823 small non-OATS-
reporting broker-dealers would be impacted by this information 
collection. (823 small non-OATS-reporting broker-dealers x 1,350 
burden hours) = 1,111,050 aggregate ongoing burden hours to ensure 
ongoing compliance with Rule 613.
    \3635\ $102,413,708.50 = ($124,373 in ongoing outsourcing costs) 
+ ($66.50 to maintain the allocation timestamp) x (823 small non-
OATS reporting broker-dealers).
---------------------------------------------------------------------------

E. Summary of Collection of Information Under the CAT NMS Plan, as 
Amended by the Commission

    As noted above,\3636\ the Commission is amending the CAT NMS Plan, 
resulting in a new information collection requirement, ``CAT NMS Plan 
Reporting and Disclosure Requirements.'' The Commission is requesting 
public comment on the new collection of information requirement in this 
Order. The Commission is applying for an OMB control number for the 
proposed new collection of information in accordance with 44 U.S.C. 
3507(j) and 5 CFR 1320.13, and OMB has not yet assigned a control 
number to the new collection. Responses to the new collection of 
information would be mandatory. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of

[[Page 84939]]

information unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \3636\ See Section VI.
---------------------------------------------------------------------------

1. One-Time Reports
a. Independent Audit of Expenses Incurred Prior to the Effective Date
    Section 6.6(a)(i) of the CAT NMS Plan requires the Participants to 
provide to the Commission, and make public, an independent audit of 
fees, costs and expenses incurred by the Participants on behalf of the 
Company, prior to the Effective Date, in connection with the creation 
and implementation of the CAT, at least one month prior to submitting 
any rule filing to establish initial fees to the Commission.
b. Review of Clock Synchronization Standards
    Section 6.6(a)(ii) of the CAT NMS Plan now requires a written 
assessment of clock synchronization standards, including consideration 
of industry standards based on the type of CAT Reporter, Industry 
Member and type of system, within six months of effectiveness of the 
Plan.
c. Coordinated Surveillance Report
    Section 6.6(a)(iii) of the CAT NMS Plan requires the Participants 
to submit a written report detailing the Participants' consideration of 
coordinated surveillance (e.g., entering into a Rule 17d-2 agreements 
or regulatory services agreements), within 12 months of effectiveness 
of the Plan.
d. Assessment of Industry Member Bulk Access to Reported Data
    Section 6.6(a)(iv) of the CAT NMS Plan requires the Participants to 
provide a written report discussing the feasibility, benefits, and 
risks of allowing an Industry Member to bulk download the Raw Data it 
submitted to the Central Repository, within 24 months of effectiveness 
of the Plan.
e. Assessment of Errors in Customer Information Fields
    Section 6.6(a)(v) of the CAT NMS Plan requires the Participants to 
submit a written assessment of the nature and extent of errors in the 
Customer information submitted to the Central Repository and whether to 
prioritize the correction of certain data fields over others, within 36 
months of effectiveness of the Plan.
f. Report on Impact of Tiered Fees on Market Liquidity
    Section 6.6(a)(vi) of the CAT NMS Plan now requires the 
Participants to submit a written report to study the impact of tiered-
fees on market liquidity, including an analysis of the impact of the 
tiered-fee structure on Industry Members' provision of liquidity, 
within 36 months of effectiveness of the Plan.
g. Assessment of Material Systems Change on Error Rate
    Section 6.6(a)(vii) of the CAT NMS Plan requires a written 
assessment of the projected impact of any Material Systems Change on 
the Maximum Error Rate, prior to the implementation of any Material 
Systems Change.
2. Non-Report Commission-Created Information Collections
a. Financial Statements
    Section 9.2 of the CAT NMS Plan now requires that the CAT LLC 
financials be (i) in compliance with GAAP, (ii) be audited by an 
independent public accounting firm, and (iii) be made publicly 
available.
b. Background Checks
    Section 6.1(g) of the CAT NMS Plan now requires each Participant to 
conduct background checks of its employees and contractors that will 
use the CAT System.

F. Proposed Use of Information Under the CAT NMS Plan, as Amended by 
the Commission

1. Independent Audit of Expenses Incurred Prior to the Effective Date
    Section 6.6(a)(i) of the CAT NMS Plan requires the Participants to 
provide to the Commission, and make public, an independent audit of 
fees, costs and expenses incurred by the Participants on behalf of the 
Company, prior to the Effective Date, in connection with the creation 
and implementation of the CAT, at least one month prior to submitting 
any rule filing to establish initial fees to the Commission. The 
Commission notes that any such filing will be published for notice and 
comment, and that such an audit would facilitate public comment and the 
Commission's review of these filings to ensure the fees imposed on 
Industry Members are reasonable, equitable and not unfairly 
discriminatory.
2. Review of Clock Synchronization Standards
    Section 6.6(a)(ii) of the CAT NMS Plan now requires a written 
assessment of clock synchronization standards, including consideration 
of industry standards based on the type of CAT Reporter, Industry 
Member and type of system. The Commission believes that the 
Participants should consider the Plan's clock synchronization standards 
based on the diversity of the CAT Reporter, Industry Member, and type 
of system promptly and propose any appropriate amendments for 
Commission consideration, within six months of effectiveness of the 
Plan.
3. Coordinated Surveillance Report
    Section 6.6(a)(iii) of the CAT NMS Plan now requires the 
Participants to submit a written report detailing the Participants' 
consideration of coordinated surveillance (e.g., entering into a Rule 
17d-2 agreements or regulatory services agreements), within 12 months 
of effectiveness of the Plan. The Commission notes that the CAT will 
allow regulators to conduct cross-market surveillances and to review 
conduct that occurs across the markets. As a result, the Commission 
believes that it may be efficient for the Participants to coordinate to 
conduct cross market surveillances.
4. Assessment of Industry Member Bulk Access to Reported Data
    Section 6.6(a)(iv) of the CAT NMS Plan now requires the 
Participants to provide a written report discussing the feasibility, 
benefits and risks of allowing an Industry Member to bulk download the 
Raw Data it submitted to the Central Repository, within 24 months of 
effectiveness of the Plan. Commenters expressed a desire for bulk 
access to their own data for surveillance and internal compliance 
purposes, as well as possible error correction purposes. While the 
Participants did not permit such access in the Plan citing security and 
cost concerns, they did represent that they would consider allowing 
bulk access to the audit trail data reported by Industry Members once 
CAT is operational. The Commission believes a report discussing the 
feasibility of this type of access will ensure the Participants 
consider the issue and are responsive to Industry requests.
5. Assessment of Errors in Customer Information Fields
    Section 6.6(a)(v) of the CAT NMS Plan requires the Participants to 
submit a written assessment of the nature and extent of errors in the 
Customer information submitted to the Central Repository and whether 
the correction of certain data fields should be prioritized. The 
Commission believes that requiring such an assessment of errors could 
help ensure that the accuracy of CAT Data is achieved in the most 
prompt and efficient manner.
6. Report on Impact of Tiered Fees on Market Liquidity
    Section 6.6(a)(vi) of the CAT NMS Plan now requires the 
Participants to

[[Page 84940]]

submit a written report to study the impact of tiered-fees on market 
liquidity, including an analysis of the impact of the tiered-fee 
structure on Industry Members' provision of liquidity, within 36 months 
of effectiveness of the Plan. One commenter expressed concern that use 
of a tiered-fees structure could discourage the display of quotes. In 
response the Participants explained that one of the reasons they chose 
to use a tiered-fee funding model was to limit disincentives to 
providing liquidity. To help determine whether the Plan's funding model 
actually achieves the Participants' stated objective, the Commission 
believes it is appropriate to require them to provide this assessment. 
The Commission believes that a report that explains the observed impact 
on liquidity after reporting begins will allow the Commission and the 
Participants to determine whether or not the tier-fee structure 
discourages Industry Member from providing liquidity.
7. Assessment of Material Systems Change on Error Rate
    The Commission is amending the Plan to require Participants to 
provide the Commission a written assessment of the projected impact of 
any Material Systems Change on the Maximum Error Rate, prior to the 
implementation of any Material Systems Change. The Commission believes 
that Material Systems Changes either could result in new challenges for 
CAT Reporters or simplify the means for reporting data. In either case, 
the appropriateness of the Maximum Error Rate could be impacted, and 
thus warrant a change. Accordingly, the Commission believes it 
appropriate to require the Participants to provide the Commission an 
assessment of the projected impact on the Maximum Error Rate, including 
any recommended changes thereto, prior to the implementation of any 
Material Systems Change.
8. Financial Statements
    Section 9.2 of the CAT NMS Plan now requires that the CAT LLC 
financials be (i) in compliance with GAAP, (ii) be audited by an 
independent public accounting firm, and (iii) be made publicly 
available. The Commission believes that this requirement will promote 
greater transparency with respect to the Company's financial 
accounting.
9. Background Checks
    Section 6.1(g) of the CAT NMS Plan now requires each Participant to 
conduct background checks of its employees and contractors that will 
use the CAT System. The Commission believes that such a requirement 
generally should extend to Participants with respect to all of their 
users that have access to CAT Data and therefore has amended the Plan 
to require that each Participant conduct background checks for its 
employees and contractors that will use the CAT System. The Commission 
believes that this amendment to the Plan is appropriate in order to 
better manage the risk of bad actors accessing to the CAT System.

G. Total Initial and Annual Reporting and Recordkeeping Burden of 
Information Collection Under the CAT NMS Plan, as Amended by the 
Commission

1. Burden on National Securities Exchanges and National Securities 
Associations
a. Independent Audit of Expenses Incurred Prior to the Effective Date
    Section 6.6(a)(i) of the CAT NMS Plan now requires the Participants 
to provide to the Commission an independent audit of fees, costs and 
expenses incurred by the Participants on behalf of the Company, prior 
to the Effective Date, in connection with the creation and 
implementation of the CAT, at least one month prior to submitting any 
rule filing to establish initial fees to the Commission.
    The Commission preliminarily estimates that each Participant would 
incur an initial, one-time external cost of the audit of $238.09.\3637\ 
The Commission preliminarily estimates that the aggregate initial, one-
time external cost of the audit is $5,000.\3638\
---------------------------------------------------------------------------

    \3637\ The Commission estimates that the cost of the audit would 
be an aggregate, external cost of $5,000. $5,000/21 Participants = 
$238.09 per Participant. See Section V.F.1.b., supra.
    \3638\ Id.
---------------------------------------------------------------------------

b. Review of Clock Synchronization Standards
    Section 6.6(a)(ii) of the CAT NMS Plan now requires a written 
assessment of clock synchronization standards, including consideration 
of industry standards based on the type of CAT Reporter, Industry 
Member and type of system, within six months of effectiveness of the 
Plan.
    The Commission preliminarily estimates that it would take each 
Participant approximately 19 initial, one-time burden hours of internal 
legal and information technology staff time to prepare and submit the 
assessment of clock synchronization standards.\3639\ The Commission 
believes that this burden would mostly be comprised of information 
technology staff time to conduct the assessment, with less time 
allocated to internal legal staff for review of the assessment. 
Additionally, the Commission now preliminarily estimates that on 
average, each Participant would outsource 0.5 hours of legal time to 
assist in the review of the assessment, for an initial, one-time 
external cost of approximately $200.\3640\ Therefore, the Commission 
preliminarily estimates that the initial, one-time burden of preparing 
and submitting the assessment would be 19 initial, one-time burden 
hours per Participant plus $200 of external costs for outsourced legal 
counsel per Participant, for an estimated aggregate initial, one-time 
burden of approximately 399 hours \3641\ and an estimated aggregate 
initial, one-time external cost of $4,200.\3642\
---------------------------------------------------------------------------

    \3639\ The Commission estimates that 19 internal burden hours = 
(Computer Operations Department Manager at 5 hours) + (Senior 
Systems Analyst at 5 hours) + (Systems Analyst at 5 hours) + 
(Attorney at 2 hours) + (Assistant General Counsel at 2 hours).
    \3640\ $200 = ($400 per hour rate for outside legal services) x 
(0.5 hours). The Commission based this estimate on the assumption 
that the assessment would require approximately one-fifth the effort 
of review by outside counsel as the document required by Rule 613(i) 
regarding the expansion of the CAT to other securities because the 
Commission believes the assessment is not as comprehensive as the 
expansion document since it is limited to clock synchronization 
standards. See Section VI.D.1.e., supra.
    \3641\ 399 initial internal burden hours = (19 initial, one-time 
burden hours) x (21 Participants).
    \3642\ $4,200 = (21 Participants) x ($400 per hour rate for 
outside legal services) x (0.5 hours).
---------------------------------------------------------------------------

c. Coordinated Surveillance Report
    Section 6.6(a)(iii) of the CAT NMS Plan now requires the 
Participants to submit a written report detailing the Participants' 
consideration of coordinated surveillance (e.g., entering into Rule 
17d-2 agreements or regulatory services agreements), within 12 months 
of effectiveness of the Plan.
    The Commission preliminarily estimates that it would take each 
Participant approximately 85.71 initial burden hours of internal legal, 
compliance, business operations, and information technology staff time 
to prepare and submit the report.\3643\ The

[[Page 84941]]

Commission preliminarily estimates that on average, each Participant 
would outsource 2.5 hours of legal time to assist in the drafting and 
review of the report, for an initial, one-time external cost of 
approximately $1,000.\3644\ Therefore, the Commission preliminarily 
estimates that the initial, one-time burden of preparing and submitting 
the report would be 85.71 initial, one-time burden hours per 
Participant plus $1,000 of external costs for outsourced legal counsel 
per Participant, for an estimated aggregate initial, one-time burden of 
1,799.91 hours \3645\ and an estimated aggregate initial, one-time 
external cost of $21,000.\3646\
---------------------------------------------------------------------------

    \3643\ The Commission calculates the total estimated burden 
hours based on a similar formulation used for calculating the total 
estimated burden hours of Rule 613(i)'s requirement for a document 
addressing expansion of the CAT to other securities. See Section 
VI.D.1.e., supra. The Commission assumes that the preparation of the 
report would be approximately one-half as burdensome as the document 
required by Rule 613(i). Because the Commission believes that the 
report would be half as burdensome as the document required by Rule 
613(i), the Commission believes that all of the Participants would 
need 1 FTE for the report. (1 FTE) x (1,800 working hours per year) 
= 1,800 initial, one-time burden hours per year for all of the 
Participants. (1,800 burden hours per year)/(21 Participants) = 
85.71 initial, one-time burden hours per Participant for preparation 
and submission of the report.
    \3644\ $1,000 = ($400 per hour rate for outside legal services) 
x (2.5 hours). The Commission based this estimate on the assumption 
that the report would require approximately one-tenth the effort of 
drafting by outside counsel as the document required by Rule 613(i) 
regarding the expansion of the CAT to other securities. See Section 
VI.D.1.e., supra.
    \3645\ 1,799.91 initial, one-time burden hours = (85.71 initial, 
one-time burden hours) x (21 Participants).
    \3646\ $21,000 = (21 Participants) x ($400 per hour rate for 
outside legal services) x (2.5 hours).
---------------------------------------------------------------------------

d. Assessment of Industry Member Bulk Access to Reported Data
    Section 6.6(a)(iv) of the CAT NMS Plan requires the Participants to 
provide a written report discussing the feasibility, benefits, and 
risks of allowing an Industry Member to bulk download the Raw Data it 
submitted to the Central Repository, within 24 months of effectiveness 
of the Plan.
    The Commission preliminarily estimates that it would take each 
Participant approximately 15 initial, one-time burden hours of internal 
legal, compliance, business operations, and information technology 
staff time to prepare and submit the assessment.\3647\ The Commission 
preliminarily estimates that on average, each Participant would 
outsource five hours of legal time to assist in the preparation and 
review of the assessment, for an initial, one-time external cost of 
approximately $2,000.\3648\ Therefore, the Commission preliminarily 
estimates that the initial one-time burden of submitting a written 
assessment would be 15 initial burden hours per SRO plus $2,000 of 
external costs for outsourced legal counsel per Participant, for an 
estimated aggregate initial burden of approximately 315 hours \3649\ 
and an estimated aggregate initial external cost of $42,000.\3650\
---------------------------------------------------------------------------

    \3647\ The Commission estimates that 15 internal burden hours = 
(Computer Operations Department Manager at 2 hours) + (Senior 
Database Administrator at 5 hours) + (Senior Systems Analyst at 2 
hours) + (Systems Analyst at 2 hours) + (Attorney at 2 hours) + 
(Assistant General Counsel at 2 hours).
    \3648\ $2,000 = ($400 per hour rate for outside legal services) 
x (5 hours). The Commission is basing this estimate on the 
assumption that the assessment would require approximately twice the 
effort of drafting by outside counsel as the document required by 
Rule 613(i) regarding the expansion of the CAT to other securities. 
The Commission attributes this difference to ensuring that any 
potential security issues regarding industry bulk access of data are 
sufficiently reviewed and addressed. See Section VI.D.1.e., supra.
    \3649\ 315 initial one-time internal burden hours = (15 initial, 
one-time burden hours per Participant) x (21 Participants).
    \3650\ $42,000 = (21 Participants) x ($400 per hour rate for 
outside legal services) x (5 hours).
---------------------------------------------------------------------------

e. Assessment of Errors in Customer Information Fields
    Section 6.6(a)(v) of the CAT NMS Plan requires the Participants to 
submit a written assessment of errors in the customer information 
submitted to the Central Repository and whether to prioritize the 
correction of certain data fields over others, within 36 months of 
effectiveness of the Plan.
    The Commission preliminarily estimates that it would take each 
Participant approximately 24 initial, one-time burden hours of internal 
legal, compliance, and information technology staff time to prepare and 
submit the assessment of errors.\3651\ The Commission estimates that on 
average, each Participant would outsource 1.25 hours of legal time to 
assist in the review of the assessment, for an initial, one-time 
external cost of approximately $500.\3652\ Therefore, the Commission 
now preliminarily estimates that the initial, one-time burden of 
preparing and submitting a written assessment would be 24 initial, one-
time burden hours per SRO plus $500 of external costs for outsourced 
legal counsel per Participant, for an estimated aggregate initial, one-
time burden of approximately 504 hours \3653\ and an estimated 
aggregate initial, one-time external cost of $10,500.\3654\
---------------------------------------------------------------------------

    \3651\ The Commission estimates that 24 internal burden hours = 
(Computer Operations Department Manager at 3 hours) + (Senior 
Database Administrator at 4 hours) + (Senior Systems Analyst at 2 
hours) + (Systems Analyst at 2 hours) + (Compliance Attorney at 5 
hours) + (Attorney at 4 hours) + (Assistant General Counsel at 4 
hours).
    \3652\ The Commission calculated the total estimated external 
cost based on the revised burden hour estimate for the written 
assessment of the operation of the CAT. See Section VI.D.1.f.b, 
supra. The Commission assumes that the preparation and submission of 
the error assessment would cost approximately half as much as the 
revised written assessment. The revised written assessment estimate 
provides that each Participant would outsource 2.5 hours of legal 
time to assist in the review of the assessment, for an external cost 
of approximately $1,000. The Commission estimates that each 
Participant would outsource approximately 1.25 hours of legal time, 
for an initial, one-time external cost of $500 (1.25 hours x $400 
per hour rate for outside legal services) to assist in drafting the 
error assessment.
    \3653\ 504 initial, one-time burden hours = (24 initial, one-
time burden hours per Participant) x (21 Participants).
    \3654\ $10,500 = (21 Participants) x ($400 per hour rate for 
outside legal services) x (1.25 hours).
---------------------------------------------------------------------------

f. Report on Impact of Tiered Fees on Market Liquidity
    Section 6.6(a)(vi) of the CAT NMS Plan now requires the 
Participants to submit a written report to study the impact of tiered-
fees on market liquidity, including an analysis of the impact of the 
tiered-fee structure on Industry Members' provision of liquidity, 
within 36 months of effectiveness of the Plan.
    The Commission preliminarily estimates that it would take each 
Participant approximately 21.43 initial, one-time burden hours of 
internal legal and business operations staff time to prepare and submit 
the report studying the impact of tiered fees on market 
liquidity.\3655\ The Commission also preliminarily estimates that on 
average, each Participant would outsource 0.5 hours of legal time to 
assist in drafting the report, for an initial, one-time external cost 
of approximately $200.\3656\ Therefore, the Commission now 
preliminarily estimates that the initial, one-time burden of preparing 
and submitting the report studying the impact of tiered fees on market 
liquidity would be 21.43 initial, one-time burden hours per Participant 
plus $200 of external costs for outsourced legal counsel per 
Participant, for an estimated

[[Page 84942]]

aggregate initial, one-time burden of approximately 450 hours \3657\ 
and an estimated aggregate initial, one-time external cost of 
$4,200.\3658\
---------------------------------------------------------------------------

    \3655\ The Commission calculated the total estimated burden 
hours based on a similar formulation used for calculating the total 
estimated burden hours of Rule 613(i)'s requirement for a document 
addressing expansion of the CAT to other securities. See Section 
VI.D.1.e., supra. The Commission assumes that the preparation of the 
assessment would be approximately one-eighth as burdensome as the 
document required by Rule 613(i). As noted in note 3394, to estimate 
the Rule 613(i) burden, the Commission is applying the internal 
burden estimate provided in the CAT NMS Plan for Plan development 
over a 6-month period, and dividing the result in half. See CAT NMS 
Plan, supra note 5, at Appendix C, Section B.7(b)(iii). 0.667 FTEs 
required for all Participants per month to develop the CAT NMS Plan 
= (20 FTEs/30 months). 0.667 FTEs x 6 months = 4 FTEs. 4 FTEs/2 = 2 
FTEs needed for all of the Participants to create and submit the 
Rule 613(i) document. (2 FTEs) x (\1/8\) = 0.25 FTE to prepare and 
submit the report studying the impact of tiered fees on market 
liquidity. (0.25 FTE x 1,800 working hours per year) = 450 initial, 
one-time burden hours for all of the Participants to review and 
comment on the written assessment. (450 burden hours/21 
Participants) = 21.43 initial, one-time burden hours per Participant 
to prepare and submit the report.
    \3656\ $200 = ($400 per hour rate for outside legal services) x 
(0. 5 hours).
    \3657\ 450 initial, one-time burden hours = (21.43 initial, one-
time burden hours) x (21 Participants).
    \3658\ $4,200 = (21 Participants) x ($400 per hour rate for 
outside legal services) x (0.5 hours).
---------------------------------------------------------------------------

g. Assessment of Material Systems Change on Error Rate
    Section 6.6(a)(vii) of the CAT NMS Plan requires a written 
assessment of the projected impact of any Material Systems Change on 
the Maximum Error Rate, prior to the implementation of any Material 
Systems Change.
    The Commission preliminarily estimates that the CAT may have four 
Material Systems Changes per year. Based on this estimate, the 
Commission preliminarily estimates that each Participant would incur 
5.95 \3659\ burden hours to prepare and submit each assessment, or 23.8 
annual burden hours per year,\3660\ for an aggregate, ongoing estimate 
of 125 burden hours per report,\3661\ or an aggregate ongoing estimate 
of 500 burden hours per year.\3662\
---------------------------------------------------------------------------

    \3659\ This estimate is based on the quarterly material system 
change reports required under Rule 1003(a)(1) of Regulation SCI. The 
Commission estimated that each SCI entity would incur a burden of 
125 hours to comply with the quarterly report on material changes to 
SCI systems required under Rule 1003(a)(1) (7.5 hours by an 
Attorney, 7.5 hours by a Compliance Manager, 5 hours by a Chief 
Compliance Officer, 30 hours by a Senior Business Analyst, and 75 
hours by a Senior Systems Analyst). See Regulation Systems 
Compliance and Integrity, Securities Exchange Act Release No. 73639 
(December 5, 2014), 79 FR 72251, at 72390, n.1656. Because the CAT 
is an SCI System of the Participants, the Commission is assuming for 
its estimates that each Participant would incur an equal portion of 
the 125 burden hours per report.
    \3660\ The Commission estimates that there would be four 
Material System Changes per year. 5.95 burden hours per report x 4 
reports per year = 23.8 annual burden hours per year.
    \3661\ (5.95 burden hours per report) x 21 Participants = 125 
burden hours per report.
    \3662\ (125 burden hours) x (4 reports per year) = 500 annual 
burden hours.
---------------------------------------------------------------------------

h. Financial Statements
    Section 9.2 of the CAT NMS Plan now requires that the CAT LLC 
financials be (i) in compliance with GAAP, (ii) be audited by an 
independent public accounting firm, and (iii) be made publicly 
available. The Commission preliminarily estimates that each Participant 
would incur an annual external cost of $3,095.24 \3663\ associated with 
this requirement, for an aggregate annual, ongoing external cost of 
$65,000 to the Participants.\3664\
---------------------------------------------------------------------------

    \3663\ ($65,000 annual, external cost)/( 21 Participants) = 
$3,095.24 per Participant. See supra note 2503 (explaining the 
source of the $65,000 estimate, stating that the Commission drew 
this estimate from a recent Commission adopting release and an 
industry report); see also Section V.F.1.b., supra.
    \3664\ See supra note 2503 (explaining the source of the $65,000 
estimate); see also Section V.F.1.b., supra.
---------------------------------------------------------------------------

i. Background Checks
    Section 6.1(g) of the CAT NMS Plan now requires each Participant to 
conduct background checks of its employees and contractors that will 
use the CAT System.\3665\ The Commission preliminarily estimates that 
this requirement will impact approximately 1,500 users.\3666\ The 
Commission preliminarily estimates that each Participant would need to 
have background checks of approximately 71 users.\3667\ For its 
estimates, the Commission is assuming that these would be background 
checks using fingerprints submitted to the Attorney General of the 
United States for identification and processing.\3668\ The Commission 
preliminarily estimates that it would take approximately 15 minutes 
\3669\ to create and submit each fingerprint card.\3670\ The total 
reporting burden per Participant is therefore preliminarily estimated 
to be 17.75 initial, one-time burden hours,\3671\ for an aggregate, 
initial burden of 374.01 hours.\3672\ The Commission preliminarily 
estimates that the total initial external cost per Participant would be 
$2,603.04,\3673\ for an aggregate, initial external cost of 
$54,987.45.\3674\
---------------------------------------------------------------------------

    \3665\ The Commission notes that Section 17(f)(2) of the 
Exchange Act already mandates that each national securities exchange 
and national securities association require each of its partners, 
directors, officers and employees be fingerprinted and such 
fingerprints to be submitted to the Attorney General of the United 
States for identification and appropriate processing. 15 U.S.C. 
78q(f)(2).
    \3666\ This number is based on conversations with Participants.
    \3667\ 71.42 users per Participant = (1,500 users)/(21 
Participants).
    \3668\ The Commission is basing this assumption on the 
requirements of Section 17(f)(2). 15 U.S.C. 78q(f)(2).
    \3669\ This is based on the per respondent burden in Extension 
of Rule 17f-2, SEC File No. 270-35, OMB Control No. 3235-0029, 79 FR 
42563 (July 22, 2014).
    \3670\ The Commission is assuming that this would be a burden of 
15 minutes for a Compliance Manager per fingerprint card.
    \3671\ 17.81 burden hours = (Compliance Manager at 15 minutes) x 
(71.42 users).
    \3672\ 374.01 = (17.75 initial one-time burden hours) x (21 
Participants).
    \3673\ 71.42 x 45% hard copy fingerprinting = 32.14 users. 71 x 
55% electronic fingerprinting = 39.28 users. (32.14 hard copy 
fingerprinting users) x ($44.50 per hard copy fingerprint) = 
$1,430.23 for hard copy fingerprinting users per Participant. (39.28 
electronic fingerprinting users) x ($30.25 per electronic 
fingerprint) = $1,188.22 for electronic fingerprint users per 
Participant. $1,430.23 + $1,188.22 = $2,618.45 per Participant in 
initial external costs for fingerprinting.
    \3674\ $54,987.45 = ($2,618.45 per Participant) x (21 
Participants).
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the ongoing internal 
burden hours for each Participant would be approximately 4.26 annual 
burden hours,\3675\ for an aggregate annual burden hour amount of 89.51 
burden hours.\3676\ The Commission also preliminarily estimates that 
the ongoing external cost to be incurred by each Participant would be 
approximately $625.07,\3677\ for an aggregate annual external cost of 
$13,126.37.\3678\
---------------------------------------------------------------------------

    \3675\ The Commission assumes that the finance industry has a 
rate of 23.87% turnover per year, based on a monthly rate for both 
employment separations and hires of 1.8% for the finance and 
insurance industry in September 2016. See http://www.bls.gov/news.release/pdf/jolts.pdf (news release from the Bureau of Labor 
Statistics, dated November 8, 2016). The Commission preliminarily 
estimates that the Participants will have to annually conduct 
background checks of 23.87% of the 1,500 users, or 358.05 users per 
year. (358.05 users)/(21 Participants) = 17.05 users that will need 
to be subject to background checks on an annual basis. Based on this 
estimate, the Commission estimates that each Participant would incur 
a burden of 4.26 ongoing annual burden hours = (Compliance Manager 
at 15 minutes) x (17.05 users).
    \3676\ 89.51 annual ongoing burden hours = (4.26 ongoing annual 
burden hours per Participant) x (21 Participants).
    \3677\ See supra note 3675. Based on the Commission's estimate 
that 17.05 users will need to be subject to background checks 
annually, the Commission estimates that 45% of the 17.05 users would 
submit hard copy fingerprints and 55% of the 17.05 users would 
submit electronic fingerprints to conduct their background checks. 
45% of 17.05 = 7.67 users that would submit hard copy fingerprints. 
55% of 17.05 = 9.38 users that would submit electronic fingerprints. 
(7.67 hard copy fingerprinting users) x ($44.50 per hard copy 
fingerprint) = $341.32 for hard copy fingerprinting users per 
Participant. (9.38 electronic fingerprinting users) x ($30.25 per 
electronic fingerprint) = $283.75 for electronic fingerprint users 
per Participant. $341.32 + $283.75 = $625.07 per Participant in 
initial external costs for fingerprinting.
    \3678\ ($625.07 per Participant in annual, ongoing external 
costs) x (21 Participants) = $13,126.37 to conduct a fingerprint-
based background check of the users.
---------------------------------------------------------------------------

2. Request for Comment
    Pursuant to 44 U.S.C. 3506(c)(2)(A), the Commission solicits 
comments on the ``CAT NMS Plan Reporting and Disclosure Requirements'' 
collection of information to:
    (1) Evaluate whether the proposed collection is necessary for the 
proper performance of our functions, including whether the information 
shall have practical utility;
    (2) Evaluate the accuracy of our estimate of the burden of the 
collection of information;
    (3) Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected; and

[[Page 84943]]

    (4) Evaluate whether there are ways to minimize the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Persons submitting comments on the collection of information 
requirement should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090, with reference to File No. S7-11-10. 
Requests for materials submitted to OMB by the Commission with regard 
to the collection of information should be in writing, with reference 
to File No. S7-11-10, and be submitted to the Securities and Exchange 
Commission, Office of FOIA/PA Services, 100 F Street NE., Washington, 
DC 20549-2736. As OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication in 
the Federal Register, a comment to OMB is best assured of having its 
full effect if OMB receives it within 30 days of publication.

H. Collection of Information Is Mandatory

    Each collection of information discussed above would be a mandatory 
collection of information.

I. Confidentiality

    Rule 613 requires that the information to be collected and 
electronically provided to the Central Repository would only be 
available to the national securities exchanges, national securities 
association, and the Commission for the purpose of performing their 
respective regulatory and oversight responsibilities pursuant to the 
federal securities laws, rules and regulations. Further, the CAT NMS 
Plan is required to include policies and procedures to ensure the 
security and confidentiality of all information submitted to the 
Central Repository, and to ensure that all SROs and their employees, as 
well as all employees of the Central Repository, shall use appropriate 
safeguards to ensure the confidentiality of such data. The Commission 
will receive confidential information. To the extent that the 
Commission does receive confidential information pursuant to this 
collection of information, such information will be kept confidential, 
subject to the provisions of applicable law.

J. Recordkeeping Requirements

    National securities exchanges and national securities associations 
would be required to retain records and information pursuant to Rule 
17a-1 under the Exchange Act.\3679\ Broker-dealers would be required to 
retain records and information in accordance with Rule 17a-4 under the 
Exchange Act.\3680\ The Plan Processor would be required to retain the 
information reported to Rule 613(c)(7) and (e)(6) for a period of not 
less than five years.\3681\
---------------------------------------------------------------------------

    \3679\ 17 CFR 240.17a-1.
    \3680\ 17 CFR 240.17a-4.
    \3681\ 17 CFR 242.613(c)(7) and (e)(6).
---------------------------------------------------------------------------

VII. Conclusion

    For the reasons discussed above, the Commission finds that the CAT 
NMS Plan as amended is necessary or 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 otherwise in furtherance of the purposes of 
the Act.
    It is Therefore Ordered, that pursuant to Section 11A of the Act, 
and the rules and regulations thereunder, that the CAT NMS Plan (File 
No. 4-698), as modified, be and it hereby is approved and declared 
effective, and the Participants are authorized to act jointly to 
implement the CAT NMS Plan as a means of facilitating a national market 
system.

    By the Commission.
Brent J. Fields,
Secretary.

EXHIBIT A

CAT NMS PLAN

LIMITED LIABILITY COMPANY AGREEMENT OF CAT NMS, LLC a Delaware Limited 
Liability Company

(As modified by the Commission; additions are italicized; deletions are 
[bracketed])

Table of Contents

     Page
ARTICLE I DEFINITIONS
    Section 1.1. Definitions
    Section 1.2. Principles of Interpretation
ARTICLE II EFFECTIVENESS OF AGREEMENT; ORGANIZATION
    Section 2.1. Effectiveness
    Section 2.2. Formation
    Section 2.3. Name
    Section 2.4. Registered Office; Registered Agent; Principal 
Office; Other Offices
    Section 2.5. Certain Filings
    Section 2.6. Purposes and Powers
    Section 2.7. Term
ARTICLE III PARTICIPATION
    Section 3.1. Participants
    Section 3.2. Company Interests Generally
    Section 3.3. New Participants
    Section 3.4. Transfer of Company Interest
    Section 3.5. Admission of New Participants
    Section 3.6. Voluntary Resignation from Participation
    Section 3.7. Termination of Participation
    Section 3.8. Obligations and Liability of Participants
    Section 3.9. Loans
    Section 3.10. No Partnership
    Section 3.11. Compliance Undertaking
ARTICLE IV MANAGEMENT OF THE COMPANY
    Section 4.1. Operating Committee
    Section 4.2. Composition and Selection of Operating Committee; 
Chair
    Section 4.3. Action of Operating Committee
    Section 4.4. Meetings of the Operating Committee
    Section 4.5. Interpretation of Other Regulations
    Section 4.6. Officers of the Company
    Section 4.7. Interpretation of Certain Rights and Duties of 
Participants, Members of the Operating Committee and Officers
    Section 4.8. Exculpation and Indemnification
    Section 4.9. Freedom of Action
    Section 4.10. Arrangements with Participants and Members of the 
Operating Committee
    Section 4.11. Participant Action Without a Meeting
    Section 4.12. Subcommittees
    Section 4.13. Advisory Committee
ARTICLE V INITIAL PLAN PROCESSOR SELECTION
    Section 5.1. Selection Committee
    Section 5.2. Bid Evaluation and Initial Plan Processor Selection
ARTICLE VI FUNCTIONS AND ACTIVITIES OF CAT SYSTEM
    Section 6.1. Plan Processor
    Section 6.2. Chief Compliance Officer and Chief Information 
Security Officer
    Section 6.3. Data Recording and Reporting by Participants
    Section 6.4. Data Reporting and Recording by Industry Members
    Section 6.5. Central Repository
    Section 6.6. Regular Written Assessment
    Section 6.7. Implementation
    Section 6.8. Timestamps and Synchronization of Business Clocks
    Section 6.9. Technical Specifications
    Section 6.10. Surveillance
    Section 6.11. Debt Securities and Primary Market Transactions
    Section 6.12. Information Security Program
ARTICLE VII CAPITAL ACCOUNTS
    Section 7.1. Capital Accounts
    Section 7.2. Interest
ARTICLE VIII ALLOCATIONS OF INCOME AND LOSS; DISTRIBUTIONS
    Section 8.1. Periodic Allocations
    Section 8.2. Special Allocations
    Section 8.3. Allocations Pursuant to Sec.  704(c) of the Code
    Section 8.4. Changes in Participants' Interests
    Section 8.5. Distributions
    Section 8.6. Tax Status
ARTICLE IX RECORDS AND ACCOUNTING; REPORTS
    Section 9.1. Books and Records
    Section 9.2. Accounting

[[Page 84944]]

    Section 9.3. Tax Returns
    Section 9.4. Company Funds
    Section 9.5. Tax Matters Partner
    Section 9.6. Confidentiality
ARTICLE X DISSOLUTION AND TERMINATION
    Section 10.1. Dissolution of Company
    Section 10.2. Liquidation and Distribution
    Section 10.3. Termination
ARTICLE XI FUNDING OF THE COMPANY
    Section 11.1. Funding Authority
    Section 11.2. Funding Principles
    Section 11.3. Recovery
    Section 11.4. Collection of Fees
    Section 11.5. Fee Disputes
ARTICLE XII MISCELLANEOUS
    Section 12.1. Notices and Addresses
    Section 12.2. Governing Law; Submission to Jurisdiction
    Section 12.3. Amendments
    Section 12.4. Successors and Assigns
    Section 12.5. Counterparts
    Section 12.6. Modifications to be in Writing; Waivers
    Section 12.7. Captions
    Section 12.8. Validity and Severability
    Section 12.9. Third Party Beneficiaries
    Section 12.10. Expenses
    Section 12.11. Specific Performance
    Section 12.12. Waiver of Partition
    Section 12.13. Construction
    Section 12.14. Incorporation of Exhibits, Appendices, 
Attachments, Recitals and Schedules
EXHIBIT A
APPENDIX A
    Consolidated Audit Trail National Market System Plan Request for 
Proposal, issued February 26, 2013, version 3.0 updated March 3, 
2014
APPENDIX B
    [Reserved]
APPENDIX C
    DISCUSSION OF CONSIDERATIONS
    A. Features and Details of the CAT NMS Plan
    1. Reporting Data to the CAT
    2. Time and Method by which CAT Data will be Available to 
Regulators (SEC Rule 613(a)(1)(ii))
    3. The Reliability and Accuracy of the Data (SEC Rule 
613(a)(1)(iii))
    4. The Security and Confidentiality of the Information Reported 
to the Central Repository (SEC Rule 613(a)(1)(iv))
    5. The Flexibility and Scalability of the CAT (SEC Rule 
613(a)(1)(v))
    6. The Feasibility, Benefits, and Costs for Broker-Dealers 
Reporting Allocations in Primary Market Transactions to the 
Consolidated Audit Trail (SEC Rule 613(a)(1)(vi))
    B. Analysis of the CAT NMS Plan: These considerations are 
intended to help inform the Commission about the cost for 
development, implementation and maintenance of the CAT and to help 
determine if such plan is in the public interest.
    7. Analysis of Expected Benefits and Estimated Costs for 
Creating, Implementing, and Maintaining the Consolidated Audit Trail 
(SEC Rule 613(a)(1)(vii))
    8. An Analysis of the Impact on Competition, Efficiency, and 
Capital Formation (SEC Rule 613(a)(1)(viii))
    C. Implementation and Milestones of the CAT
    9. A Plan to Eliminate Existing Rules and Systems (SEC Rule 
613(a)(1)(ix))
    10. Objective Milestones to Assess Progress (SEC Rule 
613(a)(1)(x))
    D. Process Followed to Develop the NMS Plan: These 
considerations require the CAT NMS Plan to discuss: (i) the views of 
the Participants' Industry Members and other appropriate parties 
regarding the creation, implementation, and maintenance of the CAT; 
and (ii) the alternative approaches to creating, implementing, and 
maintaining the CAT considered and rejected by the Participants.
    11. Process by Which Participants Solicited Views of Members and 
Other Appropriate Parties Regarding Creation, Implementation, and 
Maintenance of CAT; Summary of Views; and How Sponsors Took Views 
Into Account in Preparing NMS Plan (SEC Rule 613(a)(1)(xi))
    12. Discuss Reasonable Alternative Approaches that the 
Participants Considered to Create, Implement, and Maintain the CAT 
(SEC Rule 613(a)(1)(xii))
APPENDIX D
    CAT NMS Plan Processor Requirements
    1. Central Repository Requirements
    1.1 Technical Architecture Requirements
    1.2 Technical Environments
    1.3 Capacity Requirements
    1.4 Data Retention Requirements
    2. Data Management
    2.1 Data Types and Sources
    2.2 Data Feed Management
    3. Reporting and Linkage Requirements
    3.1 Timelines for Reporting
    3.2 Other Items
    3.3 Required Data Attributes for Order Records Submitted by CAT 
Reporters
    4. Data Security
    4.1 Overview
    4.2 Industry Standards
    5. BCP/DR Process
    5.1 Overview
    5.2 Industry Standards
    5.3 Business Continuity Planning
    5.4 Disaster Recovery Requirements
    6. Data Availability
    6.1 Data Processing
    6.2 Data Availability Requirements
    7. Receipt of Data from Reporters
    7.1 Receipt of Data Transmission
    7.2 Data Validation
    7.3 Exception Management
    7.4 Error Corrections
    7.5 Data Ingestion
    8. Functionality of the CAT System
    8.1 Regulator Access
    8.2 User-Defined Direct Queries and Bulk Extraction of Data
    8.3 Identifying Latency and Communicating Latency Warnings to 
CAT Reporters
    8.4 Technical Operations
    8.5 System SLAs
    9. CAT Customer and Customer Account Information
    9.1 Customer and Customer Account Information Storage
    9.2 Required Data Attributes for Customer Information Data 
Submitted by Industry Members
    9.3 Customer-ID Tracking
    9.4 Error Resolution for Customer Data
    10. User Support
    10.1 CAT Reporter Support
    10.2 CAT User Support
    10.3 CAT Help Desk
    10.4 CAT Reporter Compliance
    11. Upgrade Process and Development of New Functionality
    11.1 CAT Functional Changes
    11.2 CAT Infrastructure Changes
    11.3 Testing of New Changes

LIMITED LIABILITY COMPANY AGREEMENT OF CAT NMS, LLC a Delaware Limited 
Liability Company

    This Limited Liability Company Agreement (including its Recitals 
and the Exhibits, Appendices, Attachments, and Schedules identified 
herein, this ``Agreement'') of CAT NMS, LLC, a Delaware limited 
liability company (the ``Company''), dated as of the_day of___, __, 
is made and entered into by and among the Participants.

RECITALS

    A. Prior to the formation of the Company, in response to SEC 
Rule 613 requiring national securities exchanges and national 
securities associations to submit a national market system plan to 
the Securities and Exchange Commission (``Commission'' or ``SEC'') 
to create, implement and maintain a consolidated audit trail, such 
national securities exchanges and national securities associations, 
pursuant to SEC Rule 608(a)(3), which authorizes them to act jointly 
in preparing, filing and implementing national market system plans, 
developed the National Market System Plan Governing the Process for 
Selecting a Plan Processor and Developing a Plan for the 
Consolidated Audit Trail (the ``Selection Plan''). The Selection 
Plan was approved by the Commission on February 21, 2014, amended on 
June 17, 2015 and September 24, 2015, and, by its terms, shall 
automatically terminate upon the Commission's approval of this 
Agreement.
    B. The Participants have now determined that it is advantageous 
and desirable to conduct in a limited liability company the 
activities they have heretofore conducted as parties to the 
Selection Plan, and have formed the Company for this purpose. This 
Agreement, which takes the place of the Selection Plan, is a 
National Market System Plan as defined in SEC Rule 600(b)(43), and 
serves as the National Market System Plan required by SEC Rule 613. 
The Participants shall jointly own the Company, which shall create, 
implement, and maintain the CAT and the Central Repository pursuant 
to SEC Rule 608 and SEC Rule 613.
    C. This Agreement incorporates the exemptive relief from certain 
provisions of SEC Rule 613 requested in the original and 
supplemental request letters submitted by the Participants to the 
Commission, as described further in Appendix C (``Exemptive Request 
Letters'').

[[Page 84945]]

ARTICLE I

DEFINITIONS

    Section 1.1. Definitions. As used throughout this Agreement 
(including, for the avoidance of doubt, the Exhibits, Appendices, 
Attachments, Recitals and Schedules identified in this Agreement):
    ``Account Effective Date'' means: (a) with regard to those 
circumstances in which an Industry Member has established a trading 
relationship with an institution but has not established an account 
with that institution, (i) when the trading relationship was 
established prior to the implementation date of the CAT NMS Plan 
applicable to the relevant CAT Reporter (as set forth in Rule 
613(a)(3)(v) and (vi)), either (A) the date the relationship 
identifier was established within the Industry Member, (B) the date 
when trading began (i.e., the date the first order was received) 
using the relevant relationship identifier, or (C) if both dates are 
available, the earlier date will be used to the extent that the 
dates differ; or (ii) when the trading relationship was established 
on or after the implementation date of the CAT NMS Plan applicable 
to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and 
(vi)), the date the Industry Member established the relationship 
identifier, which would be no later than the date the first order 
was received; (b) where an Industry Member changes back office 
providers or clearing firms prior to the implementation date of the 
CAT NMS Plan applicable to the relevant CAT Reporter (as set forth 
in Rule 613(a)(3)(v) and (vi)), the date an account was established 
at the relevant Industry Member, either directly or via transfer; 
(c) where an Industry Member acquires another Industry Member prior 
to the implementation date of the CAT NMS Plan applicable to the 
relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), 
the date an account was established at the relevant Industry Member, 
either directly or via transfer; (d) where there are multiple dates 
associated with an account established prior to the implementation 
date of the CAT NMS Plan applicable to the relevant CAT Reporter (as 
set forth in Rule 613(a)(3)(v) and (vi)), the earliest available 
date; (e) with regard to Industry Member proprietary accounts 
established prior to the implementation date of the CAT NMS Plan 
applicable to the relevant CAT Reporter (as set forth in Rule 
613(a)(3)(v) and (vi)), (i) the date established for the account in 
the Industry Member or in a system of the Industry Member or (ii) 
the date when proprietary trading began in the account (i.e., the 
date on which the first orders were submitted from the account). 
With regard to paragraphs (b)-(e), the Account Effective Date will 
be no later than the date trading occurs at the Industry Member or 
in the Industry Member's system.
    ``Active Accounts'' means an account that has had activity in 
Eligible Securities within the last six months.
    ``Advisory Committee'' has the meaning set forth in Section 
4.13(a).
    ``Affiliate'' of a Person means any Person controlling, 
controlled by, or under common control with such Person.
    ``Affiliated Participant'' means any Participant controlling, 
controlled by, or under common control with another Participant.
    ``Agreement'' has the meaning set forth in the preamble to this 
Agreement.
    ``Allocation Report'' means a report made to the Central 
Repository by an Industry Member that identifies the Firm Designated 
ID for any account(s), including subaccount(s), to which executed 
shares are allocated and provides the security that has been 
allocated, the identifier of the firm reporting the allocation, the 
price per share of shares allocated, the side of shares allocated, 
the number of shares allocated to each account, and the time of the 
allocation; provided, for the avoidance of doubt, any such 
Allocation Report shall not be required to be linked to particular 
orders or executions.
    ``Bid'' means a proposal submitted by a Bidder in response to 
the RFP or subsequent request for proposal (or similar request).
    ``Bidder'' means any entity, or any combination of separate 
entities, submitting a Bid.
    ``Bidding Participant'' means a Participant that: (a) submits a 
Bid; (b) is an Affiliate of an entity that submits a Bid; or (c) is 
included, or is an Affiliate of an entity that is included, as a 
Material Subcontractor as part of a Bid.
    ``Business Clock'' means a clock used to record the date and 
time of any Reportable Event required to be reported under SEC Rule 
613.
    [``Capital Account'' has the meaning set forth in Section 
7.1(a).]
    ``CAT'' means the consolidated audit trail contemplated by SEC 
Rule 613.
    ``CAT Data'' means data derived from Participant Data, Industry 
Member Data, SIP Data, and such other data as the Operating 
Committee may designate as ``CAT Data'' from time to time.
    ``CAT NMS Plan'' means the plan set forth in this Agreement, as 
amended from time to time.
    ``CAT-Order-ID'' has the same meaning provided in SEC Rule 
613(j)(1).
    ``CAT Reporter'' means each national securities exchange, 
national securities association and Industry Member that is required 
to record and report information to the Central Repository pursuant 
to SEC Rule 613(c).
    ``CAT-Reporter-ID'' has the same meaning provided in SEC Rule 
613(j)(2).
    ``CAT System'' means all data processing equipment, 
communications facilities, and other facilities, including 
equipment, utilized by the Company or any third parties acting on 
the Company's behalf in connection with operation of the CAT and any 
related information or relevant systems pursuant to this Agreement.
    ``Central Repository'' means the repository responsible for the 
receipt, consolidation, and retention of all information reported to 
the CAT pursuant to SEC Rule 613 and this Agreement.
    ``Certificate'' has the meaning set forth in Section 2.2.
    ``Chair'' has the meaning set forth in Section 4.2(b).
    ``Chief Compliance Officer'' means the individual then serving 
(even on a temporary basis) as the Chief Compliance Officer pursuant 
to Section 4.6, Section 6.1(b), and Section 6.2(a).
    ``Chief Information Security Officer'' means the individual then 
serving (even on a temporary basis) as the Chief Information 
Security Officer pursuant to Section 4.6, Section 6.1(b), and 
Section 6.2(b).
    ``Code'' means the Internal Revenue Code of 1986.
    ``Company'' has the meaning set forth in the preamble to this 
Agreement.
    ``Company Interest'' means any membership interest in the 
Company at any particular time, including the right to any and all 
benefits to which a Participant may be entitled under this Agreement 
and the Delaware Act, together with the obligations of such 
Participant to comply with this Agreement.
    ``Commission'' or ``SEC'' means the United States Securities and 
Exchange Commission.
    ``Compliance Rule'' means, with respect to a Participant, the 
rule(s) promulgated by such Participant as contemplated by Section 
3.11.
    ``Compliance Subcommittee'' has the meaning set forth in Section 
4.12(b).
    ``Compliance Threshold'' has the meaning set forth in Appendix 
C.
    ``Conflict of Interest'' means that the interest of a 
Participant (e.g., commercial, reputational, regulatory or 
otherwise) in the matter that is subject to a vote: (a) interferes, 
or would be reasonably likely to interfere, with that Participant's 
objective consideration of the matter; or (b) is, or would be 
reasonably likely to be, inconsistent with the purpose and 
objectives of the Company and the CAT, taking into account all 
relevant considerations including whether a Participant that may 
otherwise have a conflict of interest has established appropriate 
safeguards to eliminate such conflict of interest and taking into 
account the other guiding principles set forth in this Agreement. If 
a Participant has a ``Conflict of Interest'' in a particular matter, 
then each of its Affiliated Participants shall be deemed to have a 
``Conflict of Interest'' in such matter. A ``Conflict of Interest'' 
with respect to a Participant includes the situations set forth in 
Sections 4.3(b)(iv), 4.3(d)(i) and 4.3(d)(ii).
    ``Customer'' has the same meaning provided in SEC Rule 
613(j)(3).
    ``Customer Account Information'' shall include, but not be 
limited to, account number, account type, customer type, date 
account opened, and large trader identifier (if applicable); except, 
however, that (a) in those circumstances in which an Industry Member 
has established a trading relationship with an institution but has 
not established an account with that institution, the Industry 
Member will (i) provide the Account Effective Date in lieu of the 
``date account opened''; (ii) provide the relationship identifier in 
lieu of the ``account number''; and (iii) identify the ``account 
type'' as a ``relationship''; (b) in those circumstances in which 
the relevant account was established prior to the implementation 
date of the CAT NMS Plan applicable to the relevant CAT Reporter (as 
set forth in Rule 613(a)(3)(v) and (vi)), and no ``date account 
opened'' is available for the account, the Industry Member will 
provide the Account Effective Date in the following

[[Page 84946]]

circumstances: (i) where an Industry Member changes back office 
providers or clearing firms and the date account opened is changed 
to the date the account was opened on the new back office/clearing 
firm system; (ii) where an Industry Member acquires another Industry 
Member and the date account opened is changed to the date the 
account was opened on the post-merger back office/clearing firm 
system; (iii) where there are multiple dates associated with an 
account in an Industry Member's system, and the parameters of each 
date are determined by the individual Industry Member; and (iv) 
where the relevant account is an Industry Member proprietary 
account.
    ``Customer-ID'' has the same meaning provided in SEC Rule 
613(j)(5).
    ``Customer Identifying Information'' means information of 
sufficient detail to identify a Customer, including, but not limited 
to, (a) with respect to individuals: name, address, date of birth, 
individual tax payer identification number (``ITIN'')/social 
security number (``SSN''), individual's role in the account (e.g., 
primary holder, joint holder, guardian, trustee, person with the 
power of attorney); and (b) with respect to legal entities: name, 
address, Employer Identification Number (``EIN'')/Legal Entity 
Identifier (``LEI'') or other comparable common entity identifier, 
if applicable; provided, however, that an Industry Member that has 
an LEI for a Customer must submit the Customer's LEI in addition to 
other information of sufficient detail to identify a Customer.
    ``Delaware Act'' means the Delaware Limited Liability Company 
Act.
    ``Disclosing Party'' has the meaning set forth in Section 
9.6(a).
    ``Effective Date'' means the date of approval of this Agreement 
by the Commission.
    ``Eligible Security'' includes (a) all NMS Securities and (b) 
all OTC Equity Securities.
    ``Error Rate'' has the meaning provided in SEC Rule 613(j)(6).
    ``Exchange Act'' means the Securities Exchange Act of 1934.
    ``Execution Venue'' means a Participant or an alternative 
trading system (``ATS'') (as defined in Rule 300 of Regulation ATS) 
that operates pursuant to Rule 301 of Regulation ATS (excluding any 
such ATS that does not execute orders).
    ``Exemptive Request Letters'' has the meaning set forth in 
Recital C.
    ``FINRA'' means Financial Industry Regulatory Authority, Inc.
    ``Firm Designated ID'' means a unique identifier for each 
trading account designated by Industry Members for purposes of 
providing data to the Central Repository, where each such identifier 
is unique among all identifiers from any given Industry Member for 
each business date.
    ``Fiscal Year'' means the fiscal year of the Company determined 
pursuant to Section 9.2(a).
    ``FS-ISAC'' has the meaning set forth in Section 6.2(b)(vi).
    ``GAAP'' means United States generally accepted accounting 
principles.
    ``Independent Auditor'' has the meaning set forth in Section 
6.2(a)(v)(B).
    ``Industry Member'' means a member of a national securities 
exchange or a member of a national securities association.
    ``Industry Member Data'' has the meaning set forth in Section 
6.4(d)(ii).
    ``Information'' has the meaning set forth in Section 9.6(a).
    ``Initial Plan Processor'' means the first Plan Processor 
selected by the Operating Committee in accordance with SEC Rule 613, 
Section 6.1 and the Selection Plan.
    ``Last Sale Report'' means any last sale report reported 
pursuant to the Plan for Reporting of Consolidated Options Last Sale 
Reports and Quotation Information filed with the SEC pursuant to, 
and meeting the requirements of, SEC Rule 608.
    ``Latency'' means the delay between input into a system and the 
outcome based upon that input. In computer networks, latency refers 
to the delay between a source system sending a packet or message, 
and the destination system receiving such packet or message.
    ``Listed Option'' or ``Option'' have the meaning set forth in 
Rule 600(b)(35) of Regulation NMS.
    ``Majority Vote'' means the affirmative vote of at least a 
majority of all of the members of the Operating Committee or any 
Subcommittee, as applicable, authorized to cast a vote with respect 
to a matter presented for a vote (whether or not such a member is 
present at any meeting at which a vote is taken) by the Operating 
Committee or any Subcommittee, as applicable (excluding, for the 
avoidance of doubt, any member of the Operating Committee or any 
Subcommittee, as applicable, that is recused or subject to a vote to 
recuse from such matter pursuant to Section 4.3(d)).
    ``Manual Order Event'' means a non-electronic communication of 
order-related information for which CAT Reporters must record and 
report the time of the event.
    ``Material Amendment'' has the meaning set forth in Section 
6.9(c).
    ``Material Contract'' means any: (a) contract between the 
Company and the Plan Processor; (b) contract between the Company and 
any Officer; (c) contract, or group of related contracts, resulting 
in a total cost or liability to the Company of more than $900,000; 
(d) contract between the Company, on the one hand, and a Participant 
or an Affiliate of a Participant, on the other; (e) contract 
containing other than reasonable arms-length terms; (f) contract 
imposing, or purporting to impose, non-customary restrictions 
(including non-competition, non-solicitation or confidentiality 
(other than customary confidentiality agreements entered into in the 
ordinary course of business that do not restrict, or purport to 
restrict, any Participant or any Affiliate of any Participant)) or 
obligations (including indemnity, most-favored nation requirements, 
exclusivity, or guaranteed minimum purchase commitments) on the 
Company or any Participant or any Affiliate of a Participant; (g) 
contract containing terms that would reasonably be expected to 
unduly interfere with or negatively impact the ability of the 
Company, any Participant or any Affiliate of any Participant to 
perform its regulatory functions (including disciplinary matters), 
to carry out its responsibilities under the Exchange Act or to 
perform its obligations under this Agreement; (h) contract providing 
for a term longer than twelve (12) months or the termination of 
which would reasonably be expected to materially and adversely 
affect the Company, any Participant or any Affiliate of a 
Participant; (i) contract for indebtedness, the disposition or 
acquisition of assets or equity, or the lease or license of assets 
or properties; or (j) joint venture or similar contract for cost or 
profit sharing.
    ``Material Subcontractor'' means any entity that is known to the 
Participant to be included as part of a Bid as a vendor, 
subcontractor, service provider, or in any other similar capacity 
and, excluding products or services offered by the Participant to 
one or more Bidders on terms subject to a fee filing approved by the 
SEC: (a) is anticipated to derive 5% or more of its annual revenue 
in any given year from services provided in such capacity; or (b) 
accounts for 5% or more of the total estimated annual cost of the 
Bid for any given year. An entity shall not be considered a 
``Material Subcontractor'' solely due to the entity providing 
services associated with any of the entity's regulatory functions as 
a self-regulatory organization registered with the SEC.
    ``Material Systems Change'' means any change or update to the 
CAT System made by the Plan Processor which will cause a significant 
change to the functionality of the Central Repository.
    ``Material Terms of the Order'' includes: the NMS Security or 
OTC Equity Security symbol; security type; price (if applicable); 
size (displayed and non-displayed); side (buy/sell); order type; if 
a sell order, whether the order is long, short, short exempt; open/
close indicator (except on transactions in equities); time in force 
(if applicable); if the order is for a Listed Option, option type 
(put/call), option symbol or root symbol, underlying symbol, strike 
price, expiration date, and open/close (except on market maker 
quotations); and any special handling instructions.
    ``National Best Bid'' and ``National Best Offer'' have the same 
meaning provided in SEC Rule 600(b)(42).
    ``NMS Plan'' has the same meaning as ``National Market System 
Plan'' provided in SEC Rule 613(a)(1) and SEC Rule 600(b)(43).
    ``NMS Security'' means any security or class of securities for 
which transaction reports are collected, processed, and made 
available pursuant to an effective transaction reporting plan, or an 
effective national market system plan for reporting transactions in 
Listed Options.
    ``Non-SRO Bid'' means a Bid that does not include a Bidding 
Participant.
    ``Officer'' means an officer of the Company, in his or her 
capacity as such, as set forth in Section 4.6.
    ``Operating Committee'' means the governing body of the Company 
designated as such and described in Article IV.
    ``Options Exchange'' means a registered national securities 
exchange or automated trading facility of a registered securities 
association that trades Listed Options.

[[Page 84947]]

    ``Options Market Maker'' means a broker-dealer registered with 
an exchange for the purpose of making markets in options contracts 
traded on the exchange.
    ``Order'' or ``order'' has, with respect to Eligible Securities, 
the meaning set forth in SEC Rule 613(j)(8).
    ``OTC Equity Security'' means any equity security, other than an 
NMS Security, subject to prompt last sale reporting rules of a 
registered national securities association and reported to one of 
such association's equity trade reporting facilities.
    ``Other SLAs'' has the meaning set forth in Section 6.1(h).
    ``Participant'' means each Person identified as such on Exhibit 
A hereto, and any Person that becomes a Participant as permitted by 
this Agreement, in such Person's capacity as a Participant in the 
Company (it being understood that the Participants shall comprise 
the ``members'' of the Company (as the term ``member'' is defined in 
Section 18-101(11) of the Delaware Act)).
    ``Participant Data'' has the meaning set forth in Section 
6.3(d).
    ``Participation Fee'' has the meaning set forth in Section 
3.3(a).
    ``Payment Date'' has the meaning set forth in Section 3.7(b).
    ``Permitted Legal Basis'' means the Participant has become 
exempt from, or otherwise has ceased to be subject to, SEC Rule 613 
or has arranged to comply with SEC Rule 613 in some manner other 
than through participation in this Agreement, in each instance 
subject to the approval of the Commission.
    ``Permitted Person'' has the meaning set forth in Section 4.9.
    ``Permitted Transferee'' has the meaning set forth in Section 
3.4(c).
    ``Person'' means any individual, partnership, limited liability 
company, corporation, joint venture, trust, business trust, 
cooperative or association and any heirs, executors, administrators, 
legal representatives, successors and assigns of such Person where 
the context so permits.
    ``PII'' means personally identifiable information, including a 
social security number or tax identifier number or similar 
information; Customer Identifying Information and Customer Account 
Information.
    ``Plan Processor'' means the Initial Plan Processor or any other 
Person selected by the Operating Committee pursuant to SEC Rule 613 
and Sections 4.3(b)(i) and 6.1, and with regard to the Initial Plan 
Processor, the Selection Plan, to perform the CAT processing 
functions required by SEC Rule 613 and set forth in this Agreement.
    ``Pledge'' and any grammatical variation thereof means, with 
respect to an interest, asset, or right, any pledge, security 
interest, hypothecation, deed of trust, lien or other similar 
encumbrance granted with respect to the affected interest, asset or 
right to secure payment or performance of an obligation.
    ``Primary Market Transaction'' means any transaction other than 
a secondary market transaction and refers to any transaction where a 
Person purchases securities in an offering.
    ``Prime Rate'' means the prime rate published in The Wall Street 
Journal (or any successor publication) on the last day of each month 
(or, if not a publication day, the prime rate last published prior 
to such last day).
    ``Proceeding'' has the meaning set forth in Section 4.8(b).
    ``Qualified Bid'' means a Bid that is deemed by the Selection 
Committee to include sufficient information regarding the Bidder's 
ability to provide the necessary capabilities to create, implement, 
and maintain the CAT so that such Bid can be effectively evaluated 
by the Selection Committee. When evaluating whether a Bid is a 
Qualified Bid, each member of the Selection Committee shall consider 
whether the Bid adequately addresses the evaluation factors set 
forth in the RFP, and apply such weighting and priority to the 
factors as such member of the Selection Committee deems appropriate 
in his or her professional judgment. The determination of whether a 
Bid is a Qualified Bid shall be determined pursuant to the process 
set forth in Section 5.2.
    ``Qualified Bidder'' means a Bidder that has submitted a 
Qualified Bid.
    ``Quotation Information'' means all bids (as defined under SEC 
Rule 600(b)(8)), offers (as defined under SEC Rule 600(b)(8)), all 
bids and offers of OTC Equity Securities, displayed quotation sizes 
in Eligible Securities, market center identifiers (including, in the 
case of FINRA, the FINRA member that is registered as a market maker 
or electronic communications network or otherwise utilizes the 
facilities of FINRA pursuant to applicable FINRA rules, that entered 
the quotation), withdrawals and other information pertaining to 
quotations in Eligible Securities required to be reported to the 
Plan Processor pursuant to this Agreement and SEC Rule 613.
    ``Raw Data'' means Participant Data and Industry Member Data 
that has not been through any validation or otherwise checked by the 
CAT System.
    ``Received Industry Member Data'' has the meaning set forth in 
Section 6.4(d)(ii).
    ``Receiving Party'' has the meaning set forth in Section 9.6(a).
    ``Recorded Industry Member Data'' has the meaning set forth in 
Section 6.4(d)(i).
    ``Registered Person'' means any member, principal, executive, 
registered representative, or other person registered or required to 
be registered under a Participant's rules.
    ``Reportable Event'' includes, but is not limited to, the 
original receipt or origination, modification, cancellation, 
routing, execution (in whole or in part) and allocation of an order, 
and receipt of a routed order.
    ``Representatives'' has the meaning set forth in Section 9.6(a).
    ``RFP'' means the ``Consolidated Audit Trail National Market 
System Plan Request for Proposal'' published by the Participants on 
February 26, 2013 attached as Appendix A, as amended from time to 
time.
    ``Securities Information Processor'' or ``SIP'' has the same 
meaning provided in Section 3(a)(22)(A) of the Exchange Act.
    ``Selection Committee'' means the committee formed pursuant to 
Section 5.1.
    ``Selection Plan'' has the meaning set forth in Recital A.
    ``Shortlisted Bid'' means a Bid submitted by a Qualified Bidder 
and selected as a Shortlisted Bid by the Selection Committee 
pursuant to Section 5.2(b) and, if applicable, pursuant to Section 
5.2(c)(iii).
    ``Shortlisted Bidder'' means a Qualified Bidder that has 
submitted a Bid selected as a Shortlisted Bid.
    ``SIP Data'' has the meaning set forth in Section 6.5(a)(ii).
    ``SLA'' has the meaning set forth in Section 6.1(h).
    ``Small Industry Member'' means an Industry Member that 
qualifies as a small broker-dealer as defined in SEC Rule 613.
    ``SRO'' means any self-regulatory organization within the 
meaning of Section 3(a)(26) of the Exchange Act.
    ``SRO-Assigned Market Participant Identifier'' means an 
identifier assigned to an Industry Member by an SRO or an identifier 
used by a Participant.
    ``Subcommittee'' has the meaning set forth in Section 4.12(a).
    ``Supermajority Vote'' means the affirmative vote of at least 
two-thirds of all of the members of the Operating Committee or any 
Subcommittee, as applicable, authorized to cast a vote with respect 
to a matter presented for a vote (whether or not such a member is 
present at any meeting at which a vote is taken) by the Operating 
Committee or any Subcommittee, as applicable (excluding, for the 
avoidance of doubt, any member of the Operating Committee or any 
Subcommittee, as applicable, that is recused or subject to a vote to 
recuse from such matter pursuant to Section 4.3(d)); provided that 
if two-thirds of all of such members authorized to cast a vote is 
not a whole number then that number shall be rounded up to the 
nearest whole number.
    ``Tax Matters Partner'' has the meaning set forth in Section 
9.5(a).
    ``Transfer'' and any grammatical variation thereof means any 
sale, exchange, issuance, redemption, assignment, distribution or 
other transfer, disposition or alienation in any way (whether 
voluntarily, involuntarily or by operation of law). Transfer shall 
specifically include any: (a) assignment or distribution resulting 
from bankruptcy, liquidation, or dissolution; or (b) Pledge.
    ``Technical Specifications'' has the meaning set forth in 
Section 6.9(a).
    ``Trading Day'' shall have such meaning as is determined by the 
Operating Committee. For the avoidance of doubt, the Operating 
Committee may establish different Trading Days for NMS Stocks (as 
defined in SEC Rule 600(b)(47), Listed Options, OTC Equity 
Securities, and any other securities that are included as Eligible 
Securities from time to time.
    ``Voting Senior Officer'' has the meaning set forth in Section 
5.1(a).
    Section 1.2. Principles of Interpretation. In this Agreement 
(including, for the avoidance of doubt, the Exhibits, Appendices, 
Attachments, Recitals and Schedules identified in this Agreement), 
unless the context otherwise requires:
    (a) words denoting the singular include the plural and vice 
versa;
    (b) words denoting a gender include all genders;

[[Page 84948]]

    (c) all exhibits, appendices, attachments, recitals, and 
schedules to the document in which the reference thereto is 
contained shall, unless the context otherwise requires, constitute 
an integral part of such document for all purposes;
    (d) a reference to a particular clause, section, article, 
exhibit, appendix, attachment, recital, or schedule shall be a 
reference to a clause, section or article of, or an exhibit, 
appendix, attachment, recital, or schedule to, this Agreement;
    (e) a reference to any statute, regulation, amendment, ordinance 
or law includes all statutes, regulations, proclamations, amendments 
or laws varying, consolidating or replacing the same from time to 
time, and a reference to a statute includes all regulations, 
policies, protocols, codes, proclamations, interpretations and 
ordinances issued or otherwise applicable under that statute unless, 
in any such case, otherwise expressly provided in any such statute 
or in the document in which the reference is contained;
    (f) a reference to a ``SEC Rule'' refers to the correspondingly 
numbered Rule promulgated under the Exchange Act;
    (g) a definition of or reference to any document, instrument or 
agreement includes an amendment or supplement to, or restatement, 
replacement, modification or novation of, any such document, 
instrument or agreement unless otherwise specified in such 
definition or in the context in which such reference is used;
    (h) a reference to any Person includes such Person's permitted 
successors and assigns in that designated capacity;
    (i) a reference to ``$'', ``Dollars'' or ``US $'' refers to 
currency of the United States of America;
    (j) unless otherwise expressly provided in this Agreement, 
wherever the consent of any Person is required or permitted herein, 
such consent may be withheld in such Person's sole and absolute 
discretion;
    (k) words such as ``hereunder'', ``hereto'', ``hereof'' and 
``herein'' and other words of similar import shall refer to the 
whole of the applicable document and not to any particular article, 
section, subsection or clause thereof; and
    (l) a reference to ``including'' (and grammatical variations 
thereof) means ``including without limitation'' (and grammatical 
variations thereof).

ARTICLE II

EFFECTIVENESS OF AGREEMENT; ORGANIZATION

    Section 2.1. Effectiveness. This Agreement shall become 
effective upon approval by the Commission and execution by all 
Participants identified on Exhibit A and shall continue until 
terminated. Notwithstanding any provision in this Agreement to the 
contrary and without the consent of any Person being required, the 
Company's execution, delivery and performance of this Agreement are 
hereby authorized, approved and ratified in all respects.
    Section 2.2. Formation. The Company was formed as a limited 
liability company under the Delaware Act by filing a certificate of 
formation (the ``Certificate'') with the Delaware Secretary of 
State.
    Section 2.3. Name. The name of the Company is ``CAT NMS, LLC.'' 
The name of the Company may be changed at any time or from time to 
time with the approval of the Operating Committee. All Company 
business shall be conducted in that name or such other names that 
comply with applicable law as the Operating Committee may select 
from time to time.
    Section 2.4. Registered Office; Registered Agent; Principal 
Office; Other Offices. The registered office of the Company required 
by the Delaware Act to be maintained in the State of Delaware shall 
be the office of the initial registered agent named in the 
Certificate or such other office (which need not be a place of 
business of the Company) as the Operating Committee may designate 
from time to time in the manner provided by law. The registered 
agent of the Company in the State of Delaware shall be the initial 
registered agent named in the Certificate or such other Person or 
Persons as the Operating Committee may designate from time to time 
in the manner provided by law. The principal office of the Company 
shall be at such place as the Operating Committee may designate from 
time to time, which need not be in the State of Delaware. The 
Company may have such other offices as the Operating Committee may 
designate from time to time.
    Section 2.5. Certain Filings. The Company shall cause to be 
filed such certificates and documents as may be necessary or 
appropriate to comply with the Delaware Act and any other applicable 
requirements for the organization, continuation and operation of a 
limited liability company in accordance with the laws of the State 
of Delaware and any other jurisdiction in which the Company shall 
conduct business, and shall continue to do so for so long as the 
Company conducts business therein. Each member of the Operating 
Committee is hereby designated as an ``authorized person'' within 
the meaning of the Delaware Act.
    Section 2.6. Purposes and Powers. The Company may engage in: (a) 
the creation, implementation, and maintenance of the CAT pursuant to 
SEC Rule 608 and SEC Rule 613; and (b) any other business or 
activity that now or hereafter may be necessary, incidental, proper, 
advisable or convenient to accomplish the foregoing purpose and that 
is not prohibited by the Delaware Act, the Exchange Act or other 
applicable law and is consistent with tax exempt status under 
Section 501(c)(6) of the Code. The Company shall have and may 
exercise all of the powers and rights conferred upon limited 
liability companies formed pursuant to the Delaware Act.
    Section 2.7. Term. The term of the Company commenced on the date 
the Certificate was filed with the office of the Secretary of State 
of Delaware, and shall be perpetual unless dissolved as provided in 
this Agreement.

ARTICLE III

PARTICIPATION

    Section 3.1. Participants. The name and address of each 
Participant are set forth on Exhibit A. New Participants may only be 
admitted to the Company in accordance with Section 3.5. No 
Participant shall have the right or power to resign or withdraw from 
the Company, except: (a) upon a Transfer of record ownership of all 
of such Participant's Company Interest in compliance with, and 
subject to, the provisions of Section 3.4; or (b) as permitted by 
Section 3.6. No Participant may be expelled or required to resign or 
withdraw from the Company except upon a Transfer of record ownership 
of all of such Participant's Company Interest in compliance with, 
and subject to, the provisions of Section 3.4, or as provided by 
Section 3.7(a)(ii) or Section 3.7(a)(iii).
    Section 3.2. Company Interests Generally.
    (a) All Company Interests shall have the same rights, powers, 
preferences and privileges, and shall be subject to the same 
restrictions, qualifications and limitations. Additional Company 
Interests may be issued only as permitted by Section 3.3.
    (b) Without limiting Section 3.2(a), each Participant shall be 
entitled to[: (i)] one vote on any matter presented to the 
Participants for their consideration at any meeting of the 
Participants (or by written action of the Participants in lieu of a 
meeting)[; and (ii) participate equally in any distribution made by 
the Company (other than a distribution made pursuant to Section 
10.2, which shall be distributed as provided therein)].
    (c) Company Interests shall not be evidenced by certificates.
    (d) Each Participant shall have an equal Company Interest as 
each other Participant.
    Section 3.3. New Participants.
    (a) Any Person approved by the Commission as a national 
securities exchange or national securities association under the 
Exchange Act after the Effective Date may become a Participant by 
submitting to the Company a completed application in the form 
provided by the Company. As a condition to admission as a 
Participant, said Person shall: (i) execute a counterpart of this 
Agreement, at which time Exhibit A shall be amended to reflect the 
status of said Person as a Participant (including said Person's 
address for purposes of notices delivered pursuant to this 
Agreement); and (ii) pay a fee to the Company in an amount 
determined by a Majority Vote of the Operating Committee as fairly 
and reasonably compensating the Company and the Participants for 
costs incurred in creating, implementing, and maintaining the CAT, 
including such costs incurred in evaluating and selecting the 
Initial Plan Processor and any subsequent Plan Processor and for 
costs the Company incurs in providing for the prospective 
Participant's participation in the Company, including after 
consideration of the factors identified in Section 3.3(b) (the 
``Participation Fee''). The amendment to this Agreement reflecting 
the admission of a new Participant shall be effective only when: (x) 
it is approved by the Commission in accordance with SEC Rule 608 or 
otherwise becomes effective pursuant to SEC Rule 608; and (y) the 
prospective Participant pays the Participation Fee. Neither a 
prospective Participant nor any Affiliate of such prospective 
Participant that is already a

[[Page 84949]]

Participant shall vote on the determination of the amount of the 
Participation Fee to be paid by such prospective Participant. 
Participation Fees paid to the Company shall be added to the general 
revenues of the Company[ and shall be allocated as provided in 
Article VIII].
    (b) In determining the amount of the Participation Fee to be 
paid by any prospective Participant, the Operating Committee shall 
consider the following factors:
    (i) the portion of costs previously paid by the Company for the 
development, expansion and maintenance of the CAT which, under GAAP, 
would have been treated as capital expenditures and would have been 
amortized over the five (5) years preceding the admission of the 
prospective Participant;
    (ii) an assessment of costs incurred and to be incurred by the 
Company for modifying the CAT or any part thereof to accommodate the 
prospective Participant, which are not otherwise required to be paid 
or reimbursed by the prospective Participant;
    (iii) Participation Fees paid by other Participants admitted as 
such after the Effective Date;
    (iv) elapsed time from the Effective Date to the anticipated 
date of admittance of the prospective Participant; and
    (v) such other reasonable, equitable and not unfairly 
discriminatory factors, if any, as may be determined to be 
appropriate by the Operating Committee and approved by the 
Commission.
    In the event the Company (following the vote of the Operating 
Committee contemplated by Section 3.3(a)) and a prospective 
Participant do not agree on the amount of the Participation Fee, 
such amount shall be subject to review by the Commission pursuant to 
Rule 608 [Sec.  11A(b)(5)] of the Exchange Act.
    (c) An applicant for participation in the Company may apply for 
limited access to the CAT System for planning and testing purposes 
pending its admission as a Participant by submitting to the Company 
a completed Application for Limited Access to the CAT System in a 
form provided by the Company, accompanied by payment of a deposit in 
the amount established by the Company, which shall be applied or 
refunded as described in such application. To be eligible to apply 
for such limited access, the applicant must have been approved by 
the SEC as a national securities exchange or national securities 
association under the Exchange Act but the applicant has not yet 
become a Participant, or the SEC must have published such 
applicant's Form 1 application or Form X-15AA-1 application to 
become a national securities exchange or a national securities 
association, respectively.
    Section 3.4. Transfer of Company Interest.
    (a) No Participant may Transfer any Company Interest except in 
compliance with this Section 3.4. Any Transfer or attempted Transfer 
in contravention of the foregoing sentence or any other provision of 
this Agreement shall be null and void ab initio and ineffective to 
Transfer any Company Interest and shall not bind or be recognized by 
or on the books of the Company, and any transferee in such 
transaction shall not, to the maximum extent permitted by applicable 
law, be or be treated as or deemed to be a Participant (or an 
assignee within the meaning of Sec.  18-702 of the Delaware Act) for 
any purpose.
    (b) No Participant may Transfer any Company Interest except to a 
national securities exchange or national securities association that 
succeeds to the business of such Participant as a result of a merger 
or consolidation with such Participant or the Transfer of all or 
substantially all of the assets or equity of such Participant.
    (c) Notwithstanding anything to the contrary contained in this 
Agreement, no Participant may Transfer any Company Interest to any 
transferee as permitted by Section 3.4(b) (a ``Permitted 
Transferee'') unless: (i) such Permitted Transferee executes a 
counterpart of this Agreement, at which time Exhibit A shall be 
amended to reflect the status of said Permitted Transferee as a 
Participant (including said Permitted Transferee's address for 
purposes of notices delivered pursuant to this Agreement); and (ii) 
the amendment to this Agreement reflecting the Transfer of a Company 
Interest to a Permitted Transferee is approved by the Commission in 
accordance with SEC Rule 608 or otherwise becomes effective pursuant 
to SEC Rule 608. Subject to compliance with this Section 3.4, such 
amendment and such Transfer shall be effective only when it is 
approved by the SEC in accordance with SEC Rule 608 or otherwise 
becomes effective pursuant to SEC Rule 608, as applicable.
    (d) The Company shall not be required to recognize any Transfer 
of any Company Interest until the instrument conveying such Company 
Interest, in form and substance satisfactory to the Company, has 
been delivered to the Company at its principal office for 
recordation on the books of the Company and the transferring 
Participant or Permitted Transferee has paid all costs and expenses 
of the Company in connection with such Transfer. The Company shall 
be entitled to treat the record owner of any Company Interest as the 
absolute owner thereof in all respects, and neither the Company nor 
any Participant shall incur liability for distributions of cash or 
other property made in good faith to such owner until such time as 
the instrument conveying such Company Interest, in form and 
substance satisfactory to the Company, has been received and 
accepted by the Company and recorded on the books of the Company.
    (e) Notwithstanding anything to the contrary contained in this 
Agreement, without prior approval thereof by the Operating 
Committee, no Transfer of any Company Interest shall be made if the 
Company is advised by its counsel that such Transfer: (i) may not be 
effected without registration under the Securities Act of 1933; (ii) 
would result in the violation of any applicable state securities 
laws; (iii) would require the Company to register as an investment 
company under the Investment Company Act of 1940 or modify the 
exemption from such registration upon which the Company has chosen 
to rely; or (iv) would require the Company to register as an 
investment adviser under state or federal securities laws[; or (v) 
if the Company is taxed as a partnership for U.S. federal income tax 
purposes, (A) would result in a termination of the Company under 
Sec.  708 of the Code, or (B) would result in the treatment of the 
Company as an association taxable as a corporation or as a 
``publicly-traded limited partnership'' for tax purposes].
    Section 3.5. Admission of New Participants. Any Person acquiring 
a Company Interest pursuant to Section 3.3, or any Permitted 
Transferee acquiring a Participant's Company Interest pursuant to 
Section 3.4, shall, unless such acquiring Permitted Transferee is a 
Participant as of immediately prior to such acquisition, be deemed 
to have been admitted to the Company as a Participant, automatically 
and with no further action being necessary by the Operating 
Committee, the Participants or any other Person, by virtue of, and 
upon the consummation of, such acquisition of a Company Interest and 
compliance with Section 3.3 or Section 3.4, as applicable.
    Section 3.6. Voluntary Resignation from Participation. Any 
Participant may voluntarily resign from the Company, and thereby 
withdraw from and terminate its right to any Company Interest, only 
if (a) a Permitted Legal Basis for such action exists and (b) such 
Participant provides to the Company and each other Participant no 
less than thirty (30) days prior to the effective date of such 
action written notice specifying such Permitted Legal Basis, 
including appropriate documentation evidencing the existence of such 
Permitted Legal Basis, and, to the extent applicable, evidence 
reasonably satisfactory to the Company and other Participants that 
any orders or approvals required from the Commission in connection 
with such action have been obtained. A validly withdrawing 
Participant shall have the rights and obligations provided in 
Section 3.7.
    Section 3.7. Termination of Participation.
    (a) The participation in the Company of a Participant, and its 
right to any Company Interest, shall terminate as of the earliest 
of: (i) the effective date specified in a valid notice delivered 
pursuant to Section 3.6 (which date, for the avoidance of doubt, 
shall be no earlier than the date that is thirty (30) days after the 
delivery of such notice); (ii) such time as such Participant is no 
longer registered as a national securities exchange or national 
securities association; or (iii) the date of termination pursuant to 
Section 3.7(b).
    (b) Each Participant shall pay all fees or other amounts 
required to be paid under this Agreement within thirty (30) days 
after receipt of an invoice or other notice indicating payment is 
due (unless a longer payment period is otherwise indicated) (the 
``Payment Date''). [If a Participant fails to make such a required 
payment by the Payment Date, any balance in the Participant's 
Capital Account shall be applied to the outstanding balance. If a 
balance still remains with respect to any such required payment, 
the] The Participant shall pay interest on the outstanding balance 
from the Payment Date until such fee or amount is paid at a per 
annum rate equal to the lesser

[[Page 84950]]

of: (i) the Prime Rate plus 300 basis points; or (ii) the maximum 
rate permitted by applicable law. If any such remaining outstanding 
balance is not paid within thirty (30) days after the Payment Date, 
the Participants shall file an amendment to this Agreement 
requesting the termination of the participation in the Company of 
such Participant, and its right to any Company Interest, with the 
SEC. Such amendment shall be effective only when it is approved by 
the SEC in accordance with SEC Rule 608 or otherwise becomes 
effective pursuant to SEC Rule 608.
    (c) In the event a Participant becomes subject to one or more of 
the events of bankruptcy enumerated in Sec.  18-304 of the Delaware 
Act, that event by itself shall not cause the termination of the 
participation in the Company of the Participant so long as the 
Participant continues to be registered as a national securities 
exchange or national securities association. [From and after the 
effective date of termination of a Participant's participation in 
the Company, profits and losses of the Company shall cease to be 
allocated to the Capital Account of the Participant in accordance 
with Article VIII below.] A terminated Participant shall [be 
entitled to receive the balance in its Capital Account as of the 
effective date of termination adjusted for profits and losses 
through that date, payable within ninety (90) days of the effective 
date of termination, and shall] remain liable for its proportionate 
share of costs and expenses allocated to it [pursuant to Article 
VIII] for the period during which it was a Participant, for 
obligations under Section 3.8(c), for its indemnification 
obligations pursuant to Section 4.1, and for obligations under 
Section 9.6, but it shall have no other obligations under this 
Agreement following the effective date of termination. This 
Agreement shall be amended to reflect any termination of 
participation in the Company of a Participant pursuant to this 
Section 3.7; provided that such amendment shall be effective only 
when it is approved by the Commission in accordance with SEC Rule 
608 or otherwise becomes effective pursuant to SEC Rule 608.
    Section 3.8. Obligations and Liability of Participants.
    (a) Except as may be determined by the unanimous vote of all the 
Participants or as may be required by applicable law, no Participant 
shall be obligated to contribute capital or make loans to the 
Company[, and the opening balance in the Capital Account of each 
Participant that is established in accordance with Section 7.1(a) 
shall be zero]. No Participant shall have the right to withdraw or 
to be repaid any capital contributed by it or to receive any other 
payment in respect of any Company Interest, including as a result of 
the withdrawal or resignation of such Participant from the Company, 
except as specifically provided in this Agreement.
    (b) Except as provided in this Agreement and except as otherwise 
required by applicable law, no Participant shall have any personal 
liability whatsoever in its capacity as a Participant, whether to 
the Company, to any Participant or any Affiliate of any Participant, 
to the creditors of the Company or to any other Person, for the 
debts, liabilities, commitments or any other obligations of the 
Company or for any losses of the Company. Without limiting the 
foregoing, the failure of the Company to observe any formalities or 
requirements relating to exercise of its powers or management of its 
business or affairs under this Agreement or the Delaware Act shall 
not be grounds for imposing personal liability on any Participant or 
any Affiliate of a Participant for any liability of the Company.
    (c) In accordance with the Delaware Act, a member of a limited 
liability company may, under certain circumstances, be required to 
return amounts previously distributed to such member. It is the 
intent of the Participants that no distribution to any Participant 
[pursuant to Article VIII] shall be deemed a return of money or 
other property paid or distributed in violation of the Delaware Act. 
The payment of any such money or distribution of any such property 
to a Participant shall be deemed to be a compromise within the 
meaning of the Delaware Act, and the Participant receiving any such 
money or property shall not be required to return any such money or 
property to any Person. However, if any court of competent 
jurisdiction holds that, notwithstanding the provisions of this 
Agreement, any Participant is obligated to make any such payment, 
such obligation shall be the obligation of such Participant and not 
of the Operating Committee, the Company or any other Participant.
    [(d) A negative balance in a Participant's Capital Account, in 
and of itself, shall not require such Participant to make any 
payment to the Company or any other Participant.]
    Section 3.9. Loans. If the Company requires additional funds to 
carry out its purposes, to conduct its business, to meet its 
obligations, or to make any expenditure authorized by this 
Agreement, the Company may borrow funds from such one or more of the 
Participants, or from such third party lender(s), and on such terms 
and conditions, as may be approved by a Supermajority Vote of the 
Operating Committee.
    Section 3.10. No Partnership. The Company is not intended to be 
a general partnership, limited partnership or joint venture for any 
purpose, and no Participant shall be considered to be a partner or 
joint venturer of any other Participant, for any purpose, and this 
Agreement shall not be construed to suggest otherwise.
    Section 3.11. Compliance Undertaking. Each Participant shall 
comply with and enforce compliance, as required by SEC Rule 608(c), 
by its Industry Members with the provisions of SEC Rule 613 and of 
this Agreement, as applicable, to the Participant and its Industry 
Members. The Participants shall endeavor to promulgate consistent 
rules (after taking into account circumstances and considerations 
that may impact Participants differently) requiring compliance by 
their respective Industry Members with the provisions of SEC Rule 
613 and this Agreement.

ARTICLE IV

MANAGEMENT OF THE COMPANY

    Section 4.1. Operating Committee. Except for situations in which 
the approval of the Participants is required by this Agreement or by 
non-waivable provisions of applicable law, the Company shall be 
managed by the Operating Committee, which shall have general charge 
and supervision of the business of the Company and shall be 
constituted as provided in Section 4.2. The Operating Committee: (a) 
acting collectively in accordance with this Agreement, shall be the 
sole ``manager'' of the Company within the meaning of Sec.  18-
101(10) of the Delaware Act (and no individual member of the 
Operating Committee shall (i) be a ``manager'' of the Company within 
the meaning of Section 18-101(10) of the Delaware Act or (ii) have 
any right, power or authority to act for or on behalf of the 
Company, to do any act that would be binding on the Company, or to 
incur any expenditures on behalf of the Company); (b) shall have the 
right, power and authority to exercise all of the powers of the 
Company except as otherwise provided by applicable law or this 
Agreement; and (c) except as otherwise expressly provided herein, 
shall make all decisions and authorize or otherwise approve all 
actions taken or to be taken by the Company. Decisions or actions 
relating to the Company that are made or approved by the Operating 
Committee, or by any Subcommittee within the scope of authority 
granted to such Subcommittee in accordance with this Agreement (or, 
with respect to matters requiring a vote, approval, consent or other 
action of the Participants hereunder or pursuant to non-waivable 
provisions of applicable law, by the Participants) in accordance 
with this Agreement shall constitute decisions or actions by the 
Company and shall be binding on the Company and each Participant. 
Except to the extent otherwise expressly provided to the contrary in 
this Agreement, no Participant shall have authority to act for, or 
to assume any obligation or responsibility on behalf of, the 
Company, without the prior approval of the Operating Committee, and 
each Participant shall indemnify and hold harmless the Company and 
each other Participant for any breach of the provisions of this 
sentence by such breaching Participant. Without limiting the 
generality of the foregoing, except as otherwise expressly provided 
in this Agreement, the Operating Committee shall make all policy 
decisions on behalf of the Company in furtherance of the functions 
and objectives of the Company under the Exchange Act, any rules 
thereunder, including SEC Rule 613, and under this Agreement. 
Notwithstanding anything to the contrary, the Operating Committee 
may delegate all or part of its administrative functions under this 
Agreement, but not its policy making (except to the extent 
determinations are delegated as specifically set forth in this 
Agreement) authority, to one or more Subcommittees, and any other 
Person. A Person to which administrative functions are so delegated 
shall perform the same as agent for the Company, in the name of the 
Company. Each

[[Page 84951]]

Person who performs administrative functions on behalf of the 
Company (including the Plan Processor) shall be required to: (i) 
agree to be bound by the confidentiality obligations in Section 
9.6(a) as a ``Receiving Party''; and (ii) agree that any nonpublic 
business information pertaining to any Participant or any Affiliate 
of such Participant that becomes known to such Person shall be held 
in confidence and not shared with the other Participants or any 
other Person, except for information that may be shared in 
connection with joint activities permitted under this Agreement.
    Section 4.2. Composition and Selection of Operating Committee; 
Chair.
    (a) The Operating Committee shall consist of one voting member 
representing each Participant and one alternate voting member 
representing each Participant who shall have a right to vote only in 
the absence of that Participant's voting member of the Operating 
Committee. Each of the voting and alternate voting members of the 
Operating Committee shall be appointed by the Participant that he or 
she represents, shall serve at the will of the Participant 
appointing such member and shall be subject to the confidentiality 
obligations of the Participant that he or she represents as set 
forth in Section 9.6. One individual may serve as the voting member 
of the Operating Committee for multiple Affiliated Participants, and 
such individual shall have the right to vote on behalf of each such 
Affiliated Participant.
    (b) No later than the date the CAT System commences operations, 
the Operating Committee shall elect, by Majority Vote, one member 
thereof to act as the initial chair of the Operating Committee (the 
``Chair''). Such initial Chair, and each successor thereto, shall 
serve in such capacity for a two (2)-year term or until the earliest 
of his death, resignation or removal in accordance with the 
provisions of this Agreement. The Operating Committee shall elect, 
from the members thereof, a successor to the then serving Chair 
(which successor, subject to the last sentence of this Section 
4.2(b), may be the Person then serving in such capacity) no later 
than three (3) months prior to the expiration of the then current 
term of the Person then serving as Chair. The Operating Committee, 
by Supermajority Vote, may remove the Chair from such position. In 
the case of any death, removal, resignation, or other vacancy of the 
Chair, a successor Chair shall be promptly elected by the Operating 
Committee, by Majority Vote, from among the members thereof who 
shall serve until the end of the then current term. The Chair shall 
preside at all meetings of the Operating Committee, shall designate 
a Person to act as Secretary to record the minutes of each such 
meeting, and shall perform such other duties and possess such other 
powers as the Operating Committee may from time to time prescribe. 
The Chair shall not be entitled to a tie-breaking vote at any 
meeting of the Operating Committee. Notwithstanding anything in this 
Agreement to the contrary: (i) no Person shall serve as Chair for 
more than two successive full terms; and (ii) no Person then 
appointed to the Operating Committee by a Participant that then 
serves, or whose Affiliate then serves, as the Plan Processor shall 
be eligible to serve as the Chair.
    Section 4.3. Action of Operating Committee.
    (a) Except as otherwise provided herein, each of the members of 
the Operating Committee, including the Chair, shall be authorized to 
cast one (1) vote for each Participant that he or she represents on 
all matters voted upon by the Operating Committee, and action of the 
Operating Committee shall be authorized by Majority Vote, subject to 
the approval of the SEC whenever such approval is required under 
applicable provisions of the Exchange Act and the rules of the SEC 
adopted thereunder. Action of the Operating Committee authorized in 
accordance with this Agreement shall be without prejudice to the 
rights of any Participant to present contrary views to any 
regulatory body or in any other appropriate forum. Without limiting 
the generality of the foregoing, the Company shall not take any of 
the following actions unless the Operating Committee, by Majority 
Vote, authorizes such action:
    (i) select the Chair pursuant to Section 4.2(b);
    (ii) select the members of the Advisory Committee pursuant to 
Section 4.13;
    (iii) interpret this Agreement (unless otherwise noted herein);
    (iv) approve any recommendation by the Chief Compliance Officer 
pursuant to Section 6.2(a)(v)(A);
    (v) determine to hold an Executive Session of the Operating 
Committee pursuant to Section 4.4(a);
    (vi) determine the appropriate funding-related policies, 
procedures and practices consistent with Article XI; or
    (vii) any other matter specified elsewhere in this Agreement 
(which includes, as stated in the definition of ``Agreement,'' the 
Appendices to this Agreement) as requiring a vote, approval or other 
action of the Operating Committee (other than those matters 
expressly requiring a Supermajority Vote or a different vote of the 
Operating Committee).
    (b) Notwithstanding Section 4.3(a) or anything else to the 
contrary in this Agreement, the Company shall not take any of the 
following actions unless such action shall have been authorized by 
the Supermajority Vote of the Operating Committee, subject to the 
approval of the SEC whenever such approval is required under 
applicable provisions of the Exchange Act and the rules of the SEC 
adopted thereunder:
    (i) select a Plan Processor, other than the Initial Plan 
Processor selected in accordance with Article V;
    (ii) terminate a Plan Processor without cause in accordance with 
Section 6.1(q);
    (iii) approve the Plan Processor's appointment or removal of the 
Chief Information Security Officer, the Chief Compliance Officer, or 
any Independent Auditor in accordance with Section 6.1(b);
    (iv) enter into, modify or terminate any Material Contract (if 
the Material Contract is with a Participant or an Affiliate of a 
Participant, such Participant and Affiliated Participant shall be 
recused from any vote under this Section 4.3(b)(iv));
    (v) make any Material Systems Change;
    (vi) approve the initial Technical Specifications pursuant to 
Section 6.9 or any Material Amendment to the Technical 
Specifications proposed by the Plan Processor in accordance with 
Section 6.9;
    (vii) amend the Technical Specifications on its own motion; or
    (viii) any other matter specified elsewhere in this Agreement 
(which includes, as stated in the definition of ``Agreement,'' the 
Appendices to this Agreement) as requiring a vote, approval or other 
action of the Operating Committee by a Supermajority Vote.
    (c) Any action required or permitted to be taken at any meeting 
of the Operating Committee or any Subcommittee may be taken without 
a meeting, if all of the members of the Operating Committee or 
Subcommittee, as the case may be, then serving consent to the action 
in writing or by electronic transmission. Such written consents and 
hard copies of the electronic transmissions shall be filed with the 
minutes of proceedings of the Operating Committee or Subcommittee, 
as applicable.
    (d) If a member of the Operating Committee or any Subcommittee 
determines that voting on a matter under consideration by the 
Operating Committee or such Subcommittee raises a Conflict of 
Interest, such member shall recuse himself or herself from voting on 
such matter. If the members of the Operating Committee or any 
Subcommittee (excluding the member thereof proposed to be recused) 
determine by Supermajority Vote that any member voting on a matter 
under consideration by the Operating Committee or such Subcommittee 
raises a Conflict of Interest, such member shall be recused from 
voting on such matter. No member of the Operating Committee or any 
Subcommittee shall be automatically recused from voting on any 
matter, except as provided in Section 4.3(b)(iv) or as otherwise 
specified elsewhere in this Agreement, and except as provided below:
    (i) if a Participant is a Bidding Participant whose Bid remains 
under consideration, members appointed to the Operating Committee or 
any Subcommittee by such Participant or any of its Affiliated 
Participants shall be recused from any vote concerning: (A) whether 
another Bidder may revise its Bid; (B) the selection of a Bidder; or 
(C) any contract to which such Participant or any of its Affiliates 
would be a party in its capacity as Plan Processor; and
    (ii) if a Participant is (A) then serving as Plan Processor, (B) 
is an Affiliate of the Person then serving as Plan Processor, or (C) 
is an Affiliate of an entity that is a Material Subcontractor to the 
Plan Processor, then in each case members appointed to the Operating 
Committee or any Subcommittee by such Participant or any of its 
Affiliated Participants shall be recused from any vote concerning: 
(1) the proposed removal of such Plan Processor; or (2) any contract 
between the Company and such Plan Processor.
    Section 4.4. Meetings of the Operating Committee.
    (a) Meetings of the Operating Committee may be attended by each 
Participant's voting Representative and its alternate voting

[[Page 84952]]

Representative and by a maximum of two (2) nonvoting Representatives 
of each Participant, by members of the Advisory Committee, by the 
Chief Compliance Officer, by other Representatives of the Company 
and the Plan Processor, by Representatives of the SEC, and by such 
other Persons that the Operating Committee may invite to attend; 
provided that the Operating Committee may, where appropriate, 
determine to meet in an Executive Session, during which only voting 
members of the Operating Committee and Representatives of the SEC 
shall be present; provided, that the Operating Committee may invite 
other Representatives of the Participants, of the Company, of the 
Plan Processor (including the Chief Compliance Officer and the Chief 
Information Security Officer), [or the SEC,] or such other Persons 
that the Operating Committee may invite to attend, to be present 
during an Executive Session. Any determination of the Operating 
Committee to meet in an Executive Session shall be made upon a 
Majority Vote and shall be reflected in the minutes of the meeting. 
Regular meetings of the Operating Committee shall be held not less 
than once each calendar quarter at such times as shall from time to 
time be determined by the Operating Committee, on not less than ten 
(10) days' notice. Special meetings of the Operating Committee may 
be called upon the request of two or more Participants on not less 
than two (2) days' notice; provided that each Participant, 
collectively with all of such Participant's Affiliated Participants, 
shall be deemed a single Participant for purposes of this sentence. 
Emergency meetings of the Operating Committee may be called upon the 
request of two (2) or more Participants and may occur as soon as 
practical after calling for such meeting; provided that each 
Participant, collectively with all of such Participant's Affiliated 
Participants, shall be deemed a single Participant for purposes of 
this sentence. In the case of an emergency meeting of the Operating 
Committee, in addition to those Persons otherwise entitled to attend 
such meeting: (i) each Participant shall have the right to designate 
a reasonable number of its employees or other Representatives with 
substantial knowledge or expertise relevant to the subject matter of 
such meeting to attend such meeting; and (ii) each Participant shall 
use commercially reasonable efforts to designate an employee or 
other Representative of such Participant with substantial knowledge 
or expertise relevant to the subject matter of such meeting to 
attend such meeting; provided, for the avoidance of doubt, that no 
Person attending any such meeting solely by virtue of this sentence 
shall have the right to vote on any matter submitted for a vote at 
any such meeting. The Chair, or in his or her absence, a member of 
the Operating Committee designated by the Chair or by members of the 
Operating Committee in attendance, shall preside at each meeting of 
the Operating Committee, and a Person in attendance designated by 
the Chair (or the member of the Operating Committee presiding in the 
Chair's absence) shall act as Secretary to record the minutes 
thereof. The location of the regular and special meetings of the 
Operating Committee shall be fixed by the Operating Committee, 
provided that in general the location of meetings shall be rotated 
among the locations of the principal offices of the Participants. 
Members of the Operating Committee may be present at a meeting by 
conference telephone or other electronic means that enables each of 
them to hear and be heard by all others present at the meeting. 
Whenever notice of any meeting of the Operating Committee is 
required to be given by law or this Agreement, a written waiver, 
signed by the Person entitled to notice, or a waiver by electronic 
transmission by the Person entitled to notice, whether before, at or 
after the time stated in such notice, shall be deemed equivalent to 
notice. Attendance at a meeting of the Operating Committee by a 
member thereof shall constitute a waiver of notice of such meeting, 
except when such member of the Operating Committee attends any such 
meeting for the express purpose of objecting, at the beginning of 
the meeting, to the transaction of any business because the meeting 
is not lawfully called or convened.
    (b) Any Person that is not a Participant, but for which the SEC 
has published a Form 1 Application or Form X-15AA-1 Application to 
become a national securities exchange or a national securities 
association, respectively, shall be permitted to appoint one primary 
Representative and one alternate Representative to attend regularly 
scheduled Operating Committee meetings in the capacity of a non-
voting observer but shall not be permitted to have any 
Representative attend a special meeting, emergency meeting or 
meeting held in Executive Session of the Operating Committee. If 
such Person's Form 1 Application or Form X-15AA-1 Application is 
withdrawn or returned for any reason, then such Person shall no 
longer be eligible to be represented in regularly scheduled 
Operating Committee meetings. The Operating Committee shall have the 
discretion, in limited instances, to deviate from this policy if it 
determines, by Majority Vote, that circumstances so warrant; 
provided, however, that the exercise of such discretion is 
reasonable and does not impose any unnecessary or inappropriate 
burden on competition.
    Section 4.5. Interpretation of Other Regulations. Interpretive 
questions arising during the operation or maintenance of the Central 
Repository with respect to applicable laws, rules or regulations 
shall be presented to the Operating Committee, which shall determine 
whether to seek interpretive guidance from the SEC or other 
appropriate regulatory body and, if so, in what form.
    Section 4.6. Officers of the Company.
    (a) Each of the Chief Compliance Officer and the Chief 
Information Security Officer (each of whom shall be employed solely 
by the Plan Processor and neither of whom shall be deemed or 
construed in any way to be an employee of the Company) shall be an 
Officer with the same respective title, as applicable, as the Chief 
Compliance Officer of the Company and the Chief Information Security 
Officer of the Company. Neither such Officer shall receive or be 
entitled to any compensation from the Company or any Participant by 
virtue of his or her service in such capacity (other than, if a 
Participant is then serving as the Plan Processor, compensation paid 
to such Officer as an employee of such Participant). Each such 
Officer shall report directly to the Operating Committee. The Chief 
Compliance Officer shall work on a regular and frequent basis with 
the Compliance Subcommittee and/or other Subcommittees as may be 
determined by the Operating Committee. Except to the extent 
otherwise provided herein, including Section 6.2, each such Officer 
shall have such fiduciary and other duties with regard to the Plan 
Processor as imposed by the Plan Processor on such individual by 
virtue of his or her employment by the Plan Processor. 
Notwithstanding the foregoing, the Company shall require the Plan 
Processor, in a written agreement with the Company, to acknowledge 
that the Officers of the Company owe fiduciary duties to the Company 
(set forth in Section 4.7(c) of this Agreement), and that, to the 
extent that the duties owed to the Company by the Officers of the 
Company, including the Chief Compliance Officer or Chief Information 
Security Officer, conflict with any duties owed to the Plan 
Processor, the duties to the Company will control.
    (b) The Plan Processor shall inform the Operating Committee of 
the individual who has direct management responsibility for the Plan 
Processor's performance of its obligations with respect to the CAT. 
Subject to approval by the Operating Committee of such individual, 
the Operating Committee shall appoint such individual as an Officer. 
In addition, the Operating Committee by Supermajority Vote may 
appoint other Officers as it shall from time to time deem necessary, 
and may assign any title to any such Officer as it deems 
appropriate. Any Officer appointed pursuant to this Section 4.6(b) 
shall have only such duties and responsibilities as set forth in 
this Agreement or as the Operating Committee shall from time to time 
expressly determine, but no such Officer shall have any authority to 
bind the Company (which authority is vested solely in the Operating 
Committee) or be an employee of the Company, unless in each case the 
Operating Committee, by Supermajority Vote, expressly determines 
otherwise. No person subject to a ``statutory disqualification'' (as 
defined in Section 3(a)(39) of the Exchange Act) may serve as an 
Officer. It is the intent of the Participants that the Company have 
no employees.
    Section 4.7. Interpretation of Certain Rights and Duties of 
Participants, Members of the Operating Committee and Officers. To 
the fullest extent permitted by the Delaware Act and other 
applicable law:
    (a) the respective obligations of the Participants, Officers, 
and the members of the Operating Committee, to each other and to the 
Company are limited to the express obligations set forth in this 
Agreement;
    (b) the Participants hereby expressly acknowledge and agree that 
each member of the Operating Committee, individually, is serving 
hereunder solely as, and shall act in all respects hereunder solely 
as, an agent of the Participant appointing such member of the 
Operating Committee;
    (c) no Participant[, Officer,] or member of the Operating 
Committee, in such Person's

[[Page 84953]]

capacity as such, shall have any fiduciary or similar duties or 
obligations to the Company or any other Participant[, Officer,] or 
member of the Operating Committee, whether express or implied by the 
Delaware Act or any other law, in each case subject only to the 
implied contractual covenant of good faith and fair dealing, and 
each Participant[, Officer,] and the Company, to the fullest extent 
permitted by applicable law, waives any claim or cause of action 
against any Participant[, Officer,] or member of the Operating 
Committee that might otherwise arise in respect of any such 
fiduciary duty or similar duty or obligation; provided, however, 
that the provisions of this Section 4.7(c) shall have no effect on 
the terms of any relationship, agreement or arrangement between any 
member of the Operating Committee and the Participant appointing 
such member of the Operating Committee or between any Participant 
(other than solely in its capacity as a Participant) and the Company 
such as a contract between such Participant and the Company pursuant 
to which such Participant serves as the Plan Processor[ or between 
an Officer and the Plan Processor]. Each Officer shall have the same 
fiduciary duties and obligations to the Company as a comparable 
officer of a Delaware corporation and in all cases shall conduct the 
business of the Company and execute his or her duties and 
obligations in good faith and in the manner that the Officer 
reasonably believes to be in the best interests of the Company;
    (d) subject to Section 4.7(c), each Participant and each member 
of the Operating Committee may, with respect to any vote, consent or 
approval that such Person is entitled to grant or withhold pursuant 
to this Agreement, grant or withhold such vote, consent or approval 
in its sole and absolute discretion, with or without cause; and
    (e) for the avoidance of doubt, no Participant shall be entitled 
to appraisal or dissenter rights for any reason with respect to any 
Company Interest.
    Section 4.8. Exculpation and Indemnification.
    (a) Except for the indemnification obligations of Participants 
under Section 4.1, no Participant or member of the Operating 
Committee shall be liable to the Company or to any Participant for 
any loss suffered by the Company or by any other Participant unless 
such loss is caused by: (i) the fraud, gross negligence, willful 
misconduct or willful violation of law on the part of such 
Participant or member of the Operating Committee; or (ii) in the 
case of a Participant, a material breach of this Agreement by such 
Participant. The provisions of this Section 4.8(a) shall have no 
effect on the terms of any relationship, agreement or arrangement 
between any member of the Operating Committee and the Participant 
appointing such member to the Operating Committee or between any 
Participant (other than solely in its capacity as a Participant) and 
the Company such as a contract between such Participant and the 
Company pursuant to which such Participant serves as the Plan 
Processor.
    (b) Subject to the limitations and conditions as provided in 
this Section 4.8(b), the Company shall indemnify any Participant and 
any member of the Operating Committee (and may, upon approval of the 
Operating Committee, indemnify any employee or agent of the Company) 
who was or is made a party or is threatened to be made a party to or 
is involved in any threatened, pending or completed action, suit or 
proceeding, whether civil, criminal, administrative, arbitrative 
(hereinafter a ``Proceeding''), or any appeal in such a Proceeding 
or any inquiry or investigation that could lead to such a 
Proceeding, by reason of the fact that such Person is or was a 
Participant, a member of the Operating Committee or any 
Subcommittee, or an employee or agent of the Company against 
judgments, penalties (including excise and similar taxes and 
punitive damages), fines, settlements and reasonable expenses 
(including attorneys' fees) actually incurred by such Person in 
connection with such Proceeding, if and only if the Person seeking 
indemnification is entitled to exculpation pursuant to Section 
4.8(a). Indemnification under this Section 4.8(b) shall continue as 
to a Person who has ceased to serve in the capacity which initially 
entitled such Person to indemnification hereunder. As a condition 
precedent to an indemnified Person's right to be indemnified 
pursuant to this Section 4.8(b), such indemnified Person must notify 
the Company in writing as soon as practicable of any Proceeding for 
which such indemnified Person will or could seek indemnification. 
With respect to any Proceeding of which the Company is so notified, 
the Company shall be entitled to participate therein at its own 
expense and/or to assume the defense thereof at its own expense, 
with legal counsel reasonably acceptable to the indemnified Person. 
If the Company does not assume the defense of any such Proceeding of 
which the Company receives notice under this Section 4.8(b), 
reasonable expenses incurred by an indemnified Person in connection 
with any such Proceeding shall be paid or reimbursed by the Company 
in advance of the final disposition of such Proceeding upon receipt 
by the Company of: (i) written affirmation by the indemnified Person 
of such Person's good faith belief that such Person has met the 
standard of conduct necessary for such Person to be entitled to 
indemnification by the Company (which, in the case of a Person other 
than a Participant or a member of the Operating Committee, shall be, 
unless otherwise determined by the Operating Committee, that (A) 
such Person determined, in good faith, that such conduct was in, or 
was not opposed to, the best interests of the Company and (B) such 
conduct did not constitute gross negligence or willful misconduct); 
and (ii) a written undertaking by such Person to repay such expenses 
if it shall ultimately be determined by a court of competent 
jurisdiction that such Person has not met such standard of conduct 
or is otherwise not entitled to indemnification by the Company. The 
Company shall not indemnify an indemnified Person to the extent such 
Person is reimbursed from the proceeds of insurance, and in the 
event the Company makes any indemnification payments to an 
indemnified Person and such Person is subsequently reimbursed from 
the proceeds of insurance, such Person shall promptly refund such 
indemnification payments to the Company to the extent of such 
insurance reimbursement. The rights granted pursuant to this Section 
4.8(b) shall be deemed contract rights, and no amendment, 
modification or repeal of this Section 4.8(b) shall have the effect 
of limiting or denying any such rights with respect to actions taken 
or Proceedings arising prior to any amendment, modification or 
repeal. It is expressly acknowledged that the indemnification 
provided in this Section 4.8(b) could involve indemnification for 
negligence or under theories of strict liability. For Persons other 
than Participants or members of the Operating Committee, 
indemnification shall only be made upon the approval of the 
Operating Committee. Notwithstanding anything to the contrary in 
this Section 4.8 or elsewhere in this Agreement, no Person shall be 
indemnified hereunder for any losses, liabilities or expenses 
arising from or out of a violation of federal or state securities 
laws or any other intentional or criminal wrongdoing. Any 
indemnification under this Section 4.8 shall be paid from, and only 
to the extent of, Company assets, and no Participant shall have any 
personal liability on account thereof in the absence of a separate 
written agreement to the contrary.
    Section 4.9. Freedom of Action. Each Participant and such 
Participant's Affiliates, and their respective Representatives 
(individually, ``Permitted Person'' and collectively, the 
``Permitted Persons'') may have other business interests and may 
engage in any business or trade, profession, employment, or activity 
whatsoever (regardless of whether any such activity competes, 
directly or indirectly, with the Company's business or activities), 
for its own account, or in partnership with, or as a Representative 
of, any other Person. No Permitted Person (other than, if a 
Participant is then serving as the Plan Processor, any Officer then 
employed by the Plan Processor) shall be required to devote its 
entire time (business or otherwise), or any particular portion of 
its time (business or otherwise) to the business of the Company. 
Neither the Company nor any Participant nor any Affiliate thereof, 
by virtue of this Agreement, shall have any rights in and to any 
such independent venture or the income or profits derived therefrom, 
regardless of whether or not such venture was initially presented to 
a Permitted Person as a direct or indirect result of such Permitted 
Person's relationship with the Company. No Permitted Person shall 
have any obligation hereunder to present any business opportunity to 
the Company, even if the opportunity is one that the Company might 
reasonably have pursued or had the ability or desire to pursue, in 
each case, if granted the opportunity to do so, and no Permitted 
Person shall be liable to the Company or any Participant (or any 
Affiliate thereof) for breach of any fiduciary or other duty 
relating to the Company (whether imposed by applicable law or 
otherwise), by reason of the fact that the Permitted Person pursues 
or acquires such business opportunity, directs such business

[[Page 84954]]

opportunity to another Person or fails to present such business 
opportunity, or information regarding such business opportunity, to 
the Company. Each Participant and the Company, to the fullest extent 
permitted by applicable law, waives any claim or cause of action 
against any Permitted Person for breach of any fiduciary duty or 
other duty (contractual or otherwise) by reason of the fact that the 
Permitted Person pursues or acquires any opportunity for itself, 
directs such opportunity to another Person, or does not present such 
opportunity to the Company. This Section 4.9 shall have no effect on 
the terms of any relationship, agreement or arrangement between any 
Participant (other than solely in its capacity as a Participant) and 
the Company such as a contract between such Participant and the 
Company pursuant to which such Participant serves as the Plan 
Processor.
    Section 4.10. Arrangements with Participants and Members of the 
Operating Committee. Subject to the terms of this Agreement, 
including Section 4.3(b)(iv) and Section 4.3(d), and any limitations 
imposed on the Company and the Participants under applicable law, 
rules, or regulations, the Company may engage in business with, or 
enter into one or more agreements, leases, contracts or other 
arrangements for the furnishing to or by it of goods, services, 
technology or space with, any Participant, any member of the 
Operating Committee or any Affiliate of any Participant or member of 
the Operating Committee, and may pay compensation in connection with 
such business, goods, services, technology or space.
    Section 4.11. Participant Action Without a Meeting. Any action 
required or permitted to be taken by Participants pursuant to this 
Agreement (including pursuant to any provision of this Agreement 
that requires the consent or approval of Participants) may be taken 
without a meeting, by unanimous consent in writing, setting forth 
the action so taken, which consent shall be signed by all 
Participants entitled to consent.
    Section 4.12. Subcommittees.
    (a) The Operating Committee may, by Majority Vote, designate by 
resolution one (1) or more subcommittees (each, a ``Subcommittee'') 
it deems necessary or desirable in furtherance of the management of 
the business and affairs of the Company. For any Subcommittee, any 
member of the Operating Committee who wants to serve thereon may so 
serve, and if Affiliated Participants have collectively appointed 
one member to the Operating Committee to represent them, then such 
Affiliated Participants may have only that member serve on the 
Subcommittee or may decide not to have only that collectively 
appointed member serve on the Subcommittee. Such member may 
designate an individual other than himself or herself who is also an 
employee of the Participant or Affiliated Participants that 
appointed such member to serve on a Subcommittee in lieu of the 
particular member. Any Subcommittee, to the extent provided in the 
resolution of the Operating Committee designating it and subject to 
Section 4.1 and non-waivable provisions of the Delaware Act, shall 
have and may exercise all the powers and authority of the Operating 
Committee in the management of the business and affairs of the 
Company as so specified in the resolution of the Operating 
Committee. Each Subcommittee shall keep minutes and make such 
reports as the Operating Committee may from time to time request. 
Except as the Operating Committee may otherwise determine, any 
Subcommittee may make rules for the conduct of its business, but 
unless otherwise provided by the Operating Committee or in such 
rules, its business shall be conducted as nearly as possible in the 
same manner as is provided in this Agreement for the Operating 
Committee.
    (b) The Operating Committee shall maintain a compliance 
Subcommittee (the ``Compliance Subcommittee''). The Compliance 
Subcommittee's purpose shall be to aid the Chief Compliance Officer 
(who shall directly report to the Operating Committee in accordance 
with Section 6.2(a)(iii)) as necessary, including with respect to 
issues involving:
    (i) the maintenance of the confidentiality of information 
submitted to the Plan Processor or Central Repository pursuant to 
SEC Rule 613, applicable law, or this Agreement by Participants and 
Industry Members;
    (ii) the timeliness, accuracy, and completeness of information 
submitted pursuant to SEC Rule 613, applicable law, or this 
Agreement by Participants and Industry Members; and
    (iii) the manner in and extent to which each Participant is 
meeting its obligations under SEC Rule 613, Section 3.11, and as set 
fofth elsewhere in this Agreement and ensuring the consistency of 
this Agreement's enforcement as to al Participants.
    Section 4.13. Advisory Committee.
    (a) An advisory committee to the Company (the ``Advisory 
Committee'') shall be formed and shall function in accordance with 
SEC Rule 613(b)(7) and this Section 4.13.
    (b) No member of the Advisory Committee may be employed by or 
affiliated with any Participant or any of its Affiliates or 
facilities. A Representative of the SEC [The SEC's Chief Technology 
Officer (or the individual then currently employed in a comparable 
position providing equivalent services)] shall serve as an observer 
of the Advisory Committee (but shall not be a member thereof). The 
Operating Committee shall select one (1) member to serve on the 
Advisory Committee from representatives of each category identified 
in Sections 4.13(b)(i) through 4.13(b)(xii) to serve on the Advisory 
Committee on behalf of himself or herself individually and not on 
behalf of the entity for which the individual is then currently 
employed; provided that the members so selected pursuant to Sections 
4.13(b)(i) through 4.13(b)(xii) must include, in the aggregate, 
representatives of no fewer than three (3) broker-dealers that are 
active in the options business and representatives of no fewer than 
three (3) broker-dealers that are active in the equities business; 
and provided further that upon a change in employment of any such 
member so selected pursuant to Sections 4.13(b)(i) through 
4.13(b)(xii) a Majority Vote of the Operating Committee shall be 
required for such member to be eligible to continue to serve on the 
Advisory Committee:
    (i) a broker-dealer with no more than 150 Registered Persons;
    (ii) a broker-dealer with at least 151 and no more than 499 
Registered Persons;
    (iii) a broker-dealer with 500 or more Registered Persons;
    (iv) a broker-dealer with a substantial wholesale customer base;
    (v) a broker-dealer that is approved by a national securities 
exchange (A) to effect transactions on an exchange as a specialist, 
market maker, or floor broker; or (B) to act as an institutional 
broker on an exchange;
    (vi) a proprietary-trading broker-dealer;
    (vii) a clearing firm;
    (viii) an individual who maintains a securities account with a 
registered broker or dealer but who otherwise has no material 
business relationship with a broker or dealer or with a Participant;
    (ix) a member of academia who is a financial economist [with 
expertise in the securities industry or any other industry relevant 
to the operation of the CAT System];
    (x) [an ]three institutional investors, including an individual 
trading on behalf of an investment company or group of investment 
companies registered pursuant to the Investment Company Act of 
1940[trading on behalf of a public entity or entities];
    (xi) [an institutional investor trading on behalf of a private 
entity or entities; and
    (xii) ]an individual with significant and reputable regulatory 
expertise; and[.]
    (xii) a service bureau that provides reporting services to one 
or more CAT Reporters.
    (c) Four of the [twelve] fourteen initial members of the 
Advisory Committee, as determined by the Operating Committee, shall 
have an initial term of one (1) year. [Four]Five of the [twelve] 
fourteen initial members of the Advisory Committee, as determined by 
the Operating Committee, shall have an initial term of two (2) 
years. All other members of the Advisory Committee shall have a term 
of three (3) years. No member of the Advisory Committee may serve 
thereon for more than two consecutive terms.
    (d) The Advisory Committee shall advise the Participants on the 
implementation, operation, and administration of the Central 
Repository, including possible expansion of the Central Repository 
to other securities and other types of transactions. Members of the 
Advisory Committee shall have the right to attend meetings of the 
Operating Committee or any Subcommittee, to receive information 
concerning the operation of the Central Repository (subject to 
Section 4.13(e)), and to submit their views to the Operating 
Committee or any Subcommittee on matters pursuant to this Agreement 
prior to a decision by the Operating Committee on such matters; 
provided that members of the Advisory Committee shall have no right 
to vote on any matter considered by the Operating Committee or any 
Subcommittee and that the Operating Committee or any Subcommittee 
may meet in Executive Session if, by Majority Vote, the Operating 
Committee or Subcommittee determines that

[[Page 84955]]

such an Executive Session is advisable. The Advisory Committee may 
provide the Operating Committee with recommendations of one or more 
candidates for the Operating Committee to consider when selecting 
members of the Advisory Committee pursuant to Section 4.3(a)(ii); 
provided, however, that the Operating Committee, at its sole 
discretion, will select the members of the Advisory Committee 
pursuant to Section 4.3(a)(ii) from the candidates recommended to 
the Operating Committee by the Advisory Committee, the Operating 
Committee itself, Participants or other persons. The Operating 
Committee may solicit and consider views on the operation of the 
Central Repository in addition to those of the Advisory Committee.
    (e) Members of the Advisory Committee shall [have the right to] 
receive the same information concerning the operation of the Central 
Repository as the Operating Committee; provided, however, that the 
Operating Committee may withhold information it reasonably 
determines requires confidential treatment. [; provided that the 
Operating Committee retains the authority to determine the scope and 
content of information supplied to the Advisory Committee, which 
shall be limited to that information that is necessary and 
appropriate for the Advisory Committee to fulfill its functions.] 
Any information received by members of the Advisory Committee in 
furtherance of the performance of their functions pursuant to this 
Agreement shall remain confidential unless otherwise specified by 
the Operating Committee.

ARTICLE V

INITIAL PLAN PROCESSOR SELECTION

    Section 5.1. Selection Committee. The Participants shall 
establish a Selection Committee in accordance with this Article V to 
evaluate and review Bids and select the Initial Plan Processor.
    (a) Composition. Each Participant shall select from its staff 
one (1) senior officer (``Voting Senior Officer'') to represent the 
Participant as a member of the Selection Committee. In the case of 
Affiliated Participants, one (1) individual may be (but is not 
required to be) the Voting Senior Officer for more than one or all 
of the Affiliated Participants. Where one (1) individual serves as 
the Voting Senior Officer for more than one Affiliated Participant, 
such individual shall have the right to vote on behalf of each such 
Affiliated Participant.
    (b) Voting.
    (i) Unless recused pursuant to Sections 5.1(b)(ii), 5.1(b)(iii), 
or 5.1(b)(iv), each Participant shall have one vote on all matters 
considered by the Selection Committee.
    (ii) No Bidding Participant shall vote on whether a Shortlisted 
Bidder shall be permitted to revise its Bid pursuant to Section 
5.2(c)(ii) or 5.2(d)(i) below if a Bid submitted by or including the 
Participant or an Affiliate of the Participant is a Shortlisted Bid.
    (iii) No Bidding Participant shall vote in the process narrowing 
the set of Shortlisted Bidders as set forth in Section 5.2(c)(iii) 
if a Bid submitted by or including the Participant or an Affiliate 
of the Participant is a Shortlisted Bid.
    (iv) No Bidding Participant shall vote in any round if a Bid 
submitted by or including the Participant or an Affiliate of the 
Participant is a part of such round.
    (v) All votes by the Selection Committee shall be confidential 
and non-public. All such votes shall be tabulated by an independent 
third party approved by the Operating Committee, and a Participant's 
individual votes shall not be disclosed to other Participants or to 
the public.
    (c) Quorum.
    (i) Any action requiring a vote by the Selection Committee can 
only be taken at a meeting in which all Participants entitled to 
vote are present. Meetings of the Selection Committee shall be held 
as needed at such times and locations as shall from time to time be 
determined by the Selection Committee. Meetings may be held by 
conference telephone or other acceptable electronic means if all 
Participants entitled to vote consent thereto in writing or by other 
means the Selection Committee deems acceptable.
    (ii) For purposes of establishing a quorum, a Participant is 
considered present at a meeting only if the Participant's Voting 
Senior Officer is either in physical attendance at the meeting or is 
participating by conference telephone or other acceptable electronic 
means.
    (iii) Any Participant recused from voting on a particular action 
pursuant to Section 5.1(b) above shall not be considered ``entitled 
to vote'' for purposes of establishing whether a quorum is present 
for a vote to be taken on that action.
    (d) Qualifications for Voting Senior Officer of Bidding 
Participants. The following criteria must be met before a Voting 
Senior Officer is eligible to represent a Bidding Participant and 
serve on the Selection Committee:
    (i) the Voting Senior Officer is not responsible for the Bidding 
Participant's market operations, and is responsible primarily for 
the Bidding Participant's legal and/or regulatory functions, 
including functions related to the formulation and implementation of 
the Bidding Participant's legal and/or regulatory program;
    (ii) the Bidding Participant has established functional 
separation of its legal and/or regulatory functions from its market 
operations and other business or commercial objectives;
    (iii) the Voting Senior Officer ultimately reports (including 
through the Bidding Participant's CEO or Chief Legal Officer/General 
Counsel) to an independent governing body that determines or 
oversees the Voting Senior Officer's compensation, and the Voting 
Senior Officer does not receive any compensation (other than what is 
determined or overseen by the independent governing body) that is 
based on achieving business or commercial objectives;
    (iv) the Voting Senior Officer does not have responsibility for 
any non-regulatory functions of the Bidding Participant, other than 
the legal aspects of the organization performed by the Chief Legal 
Officer/General Counsel or the Office of the General Counsel;
    (v) the ultimate decision making of the Voting Senior Officer 
position is tied to the regulatory effectiveness of the Bidding 
Participant, as opposed to other business or commercial objectives;
    (vi) promotion or termination of the Voting Senior Officer is 
not based on achieving business or commercial objectives;
    (vii) the Voting Senior Officer has no decision-making authority 
with respect to the development or formulation of the Bid submitted 
by or including the Participant or an Affiliate of the Participant; 
however, the staff assigned to developing and formulating such Bid 
may consult with the Voting Senior Officer, provided such staff 
members cannot share information concerning the Bid with the Voting 
Senior Officer;
    (viii) the Voting Senior Officer does not report to any senior 
officers responsible for the development or formulation of the Bid 
submitted by or including the Participant or by an Affiliate of the 
Participant; however, joint reporting to the Bidding Participant's 
CEO or similar executive officer by the Voting Senior Officer and 
senior staff developing and formulating such Bid is permissible, but 
the Bidding Participant's CEO or similar executive officer cannot 
share information concerning such Bid with the Voting Senior 
Officer;
    (ix) the compensation of the Voting Senior Officer is not 
separately tied to income earned if the Bid submitted by or 
including the Participant or an Affiliate of the Participant is 
selected; and
    (x) the Voting Senior Officer, any staff advising the Voting 
Senior Officer, and any similar executive officer or member of an 
independent governing body to which the Voting Senior Officer 
reports may not disclose to any Person any non-public information 
gained during the review of Bids, presentation by Qualified Bidders, 
and selection process. Staff advising the Voting Senior Officer 
during the Bid review, presentation, and selection process may not 
include the staff, contractors, or subcontractors that are 
developing or formulating the Bid submitted by or including a 
Participant or an Affiliate of the Participant.
    Section 5.2. Bid Evaluation and Initial Plan Processor 
Selection.
    (a) Initial Bid Review to Determine Qualified Bids.
    (i) The Selection Committee shall review all Bids in accordance 
with the process developed by the Selection Committee.
    (ii) After review, the Selection Committee shall vote on each 
Bid to determine whether such Bid is a Qualified Bid. A Bid that is 
deemed unqualified by at least a two-thirds (\2/3\rds) vote of the 
Selection Committee shall not be deemed a Qualified Bid and shall be 
eliminated individually from further consideration.
    (b) Selection of Shortlisted Bids.
    (i) Each Qualified Bidder shall be given the opportunity to 
present its Bid to the Selection Committee. Following the 
presentations by Qualified Bidders, the Selection Committee shall 
review and evaluate the Qualified Bids to select the Shortlisted 
Bids in accordance with the process in this Section 5.1(b).
    (ii) If there are six (6) or fewer Qualified Bids, all such 
Qualified Bids shall be Shortlisted Bids.

[[Page 84956]]

    (iii) If there are more than six (6) Qualified Bids but fewer 
than eleven (11) Qualified Bids, the Selection Committee shall 
select five (5) Qualified Bids as Shortlisted Bids, subject to the 
requirement in Section 5.2(d) below. Each Voting Senior Officer 
shall select a first, second, third, fourth, and fifth choice from 
among the Qualified Bids.
    (A) A weighted score shall be assigned to each choice as 
follows:
    (1) First choice receives five (5) points;
    (2) Second choice receives four (4) points;
    (3) Third choice receives three (3) points;
    (4) Fourth choice receives two (2) points; and
    (5) Fifth choice receives one (1) point.
    (B) The five (5) Qualified Bids receiving the highest cumulative 
scores shall be Shortlisted Bids.
    (C) In the event of a tie to select the five Shortlisted Bids, 
all such tied Qualified Bids shall be Shortlisted Bids.
    (D) To the extent there are Non-SRO Bids that are Qualified 
Bids, the Shortlisted Bids selected pursuant to this Section 
5.2(b)(iii) must, if possible, include at least two Non-SRO Bids. 
If, following the vote set forth in this Section 5.2(b)(iii), no 
Non-SRO Bid was selected as a Shortlisted Bid, the two Non-SRO Bids 
receiving the highest cumulative votes (or one Non-SRO Bid if a 
single Non-SRO Bid is a Qualified Bid) shall be added as Shortlisted 
Bids. If one Non-SRO Bid was selected as a Shortlisted Bid, the Non-
SRO Bid receiving the next highest cumulative vote shall be added as 
a Shortlisted Bid.
    (iv) If there are eleven (11) or more Qualified Bids, the 
Selection Committee shall select fifty percent (50%) of the 
Qualified Bids as Shortlisted Bids, subject to the requirement in 
Section 5.2(d) below. If there is an odd number of Qualified Bids, 
the number of Shortlisted Bids chosen shall be rounded up to the 
next whole number (e.g., if there are thirteen Qualified Bids, then 
seven Shortlisted Bids shall be selected). Each Voting Senior 
Officer shall select as many choices as Shortlisted Bids to be 
chosen.
    (A) A weighted score shall be assigned to each choice in single 
point increments as follows:
    (1) Last receives one (1) point;
    (2) Next-to-last choice receives two (2) points;
    (3) Second-from-last choice receives three (3) points;
    (4) Third-from-last choice receives four (4) points;
    (5) Fourth-from-last choice receives five (5) points; and
    (6) Fifth-from-last choice receives six (6) points.
    For each additional Shortlisted Bid that must be chosen, the 
points assigned shall increase in single point increments.
    (B) The fifty percent (50%) of Qualified Bids (or, if there is 
an odd number of Qualified Bids, the next whole number above fifty 
percent (50%) of Qualified Bids) receiving the highest cumulative 
scores shall be Shortlisted Bids.
    (C) In the event of a tie to select the Shortlisted Bids, all 
such tied Qualified Bids shall be Shortlisted Bids.
    (D) To the extent there are Non-SRO Bids that are Qualified 
Bids, the Shortlisted Bids selected pursuant to this Section 
5.2(b)(iv) must, if possible, include at least two Non-SRO Bids. If, 
following the vote set forth in this Section 5.2(b)(iv), no Non-SRO 
Bid was selected as a Shortlisted Bid, the two Non-SRO Bids 
receiving the highest cumulative votes (or one Non-SRO Bid if a 
single Non-SRO Bid is a Qualified Bid) shall be added as Shortlisted 
Bids. If one Non-SRO Bid was selected as a Shortlisted Bid, the Non-
SRO Bid receiving the next highest cumulative vote shall be added as 
a Shortlisted Bid.
    (c) Formulation of the CAT NMS Plan.
    (i) The Selection Committee shall review the Shortlisted Bids to 
identify optimal proposed solutions for the CAT and provide 
descriptions of such proposed solutions for inclusion in this 
Agreement. This process may, but is not required to, include 
iterative discussions with Shortlisted Bidders to address any 
aspects of an optimal proposed solution that were not fully 
addressed in a particular Bid.
    (ii) Prior to the approval of the CAT NMS Plan, all Shortlisted 
Bidders will be permitted to revise their Bids one or more times if 
the Selection Committee determines, by majority vote, that such 
revision(s) are necessary or appropriate.
    (iii) Prior to approval of the CAT NMS Plan, and either before 
or after any revisions to Shortlisted Bids are accepted, the 
Selection Committee may determine, by at least a two-thirds vote, to 
narrow the number of Shortlisted Bids to three Bids, in accordance 
with the process in this Section 5.2(c)(iii).
    (A) Each Voting Senior Officer shall select a first, second, and 
third choice from among the Shortlisted Bids.
    (B) A weighted score shall be assigned to each choice as 
follows:
    (1) First receives three (3) points;
    (2) Second receives two (2) points; and
    (3) Third receives one (1) point.
    (C) The three Shortlisted Bids receiving the highest cumulative 
scores will be the new set of Shortlisted Bids.
    (D) In the event of a tie that would result in more than three 
final Shortlisted Bids, the votes shall be recounted, omitting each 
Voting Senior Officer's third choice, in order to break the tie. If 
this recount produces a tie that would result in a number of final 
Shortlisted Bids larger than or equal to that from the initial 
count, the results of the initial count shall constitute the final 
set of Shortlisted Bids.
    (E) To the extent there are Non-SRO Bids that are Shortlisted 
Bids, the final Shortlisted Bids selected pursuant to this Section 
5.2(c)(iii) must, if possible, include at least one Non-SRO Bid. If 
following the vote set forth in this Section 5.2(c)(iii), no Non-SRO 
Bid was selected as a final Shortlisted Bid, the Non-SRO Bid 
receiving the highest cumulative votes shall be retained as a 
Shortlisted Bid.
    (F) The third party tabulating votes, as specified in Section 
5.1(b)(5), shall identify to the Selection Committee the new set of 
Shortlisted Bids, but shall keep confidential the individual scores 
and rankings of the Shortlisted Bids from the process in this 
Section 5.2(c)(iii).
    (iv) The Participants shall incorporate information on optimal 
proposed solutions in this Agreement, including cost-benefit 
information as required by SEC Rule 613.
    (d) Review of Shortlisted Bids Under the CAT NMS Plan.
    (i) A Shortlisted Bidder shall be permitted to revise its Bid 
only upon approval by a majority of the Selection Committee, subject 
to the recusal provision in Section 5.1(b)(ii) above, that revisions 
are necessary or appropriate in light of the content of the 
Shortlisted Bidder's initial Bid and the provisions in this 
Agreement. A Shortlisted Bidder may not revise its Bid unless 
approved to do so by the Selection Committee pursuant to this 
Section 5.2(d)(i).
    (ii) The Selection Committee shall review and evaluate all 
Shortlisted Bids, including any permitted revisions thereto 
submitted by Shortlisted Bidders. In performing the review and 
evaluation, the Selection Committee may consult with the Advisory 
Committee established pursuant to paragraph (b)(7) of SEC Rule 613 
and Section 4.13, and such other Persons as the Selection Committee 
deems appropriate.
    (e) Selection of Plan Processor Under this Agreement.
    (i) There shall be two rounds of voting by the Selection 
Committee to select the Initial Plan Processor from among the 
Shortlisted Bidders. Each round shall be scored independently of 
prior rounds of voting, including the scoring to determine the 
Shortlisted Bids under Section 5.2(b).
    (ii) Each Participant shall have one vote in each round, except 
that no Bidding Participant shall be entitled to vote in any round 
if the Participant's Bid, a Bid submitted by an Affiliate of the 
Participant, or a Bid including the Participant or an Affiliate of 
the Participant is considered in such round.
    (iii) First Round Voting by the Selection Committee.
    (A) In the first round of voting, each Voting Senior Officer, 
subject to the recusal provisions in Section 5.2(e)(ii), shall 
select a first and second choice from among the Shortlisted Bids.
    (B) A weighted score shall be assigned to each choice as 
follows:
    (1) First choice receives two (2) points; and
    (2) Second choice receives one (1) point.
    (C) The two Shortlisted Bids receiving the highest cumulative 
scores in the first round shall advance to the second round.
    (D) In the event of a tie that would result in more than two 
Shortlisted Bids advancing to the second round, the tie shall be 
broken by assigning one point per vote, with the Shortlisted Bid(s) 
receiving the highest number of votes advancing to the second round. 
If, at this point, the Shortlisted Bids remain tied, a revote shall 
be taken with each vote receiving one point. If the revote results 
in a tie, the Participants shall identify areas for further 
discussion and, following any such discussion, voting shall continue 
until two Shortlisted Bids are selected to advance to the second 
round.
    (iv) Second Round Voting by the Selection Committee.
    (A) In the second round of voting, each Voting Senior Officer, 
subject to the recusal provisions in Section 5.2(e)(ii) above, shall 
vote for one Shortlisted Bid.

[[Page 84957]]

    (B) The Shortlisted Bid receiving the most votes in the second 
round shall be selected, and the proposed entity included in the 
Shortlisted Bid to serve as the Plan Processor shall be selected as 
the Plan Processor.
    (C) In the event of a tie, a revote shall be taken. If the 
revote results in a tie, the Participants shall identify areas for 
further discussions with the two Shortlisted Bidders. Following any 
such discussions, voting shall continue until one Shortlisted Bid is 
selected.

ARTICLE VI

FUNCTIONS AND ACTIVITIES OF CAT SYSTEM

    Section 6.1. Plan Processor.
    (a) The Initial Plan Processor shall be selected in accordance 
with Article V and shall serve as the Plan Processor until its 
resignation or removal from such position in accordance with this 
Section 6.1. The Company, under the direction of the Operating 
Committee shall enter into one or more agreements with the Plan 
Processor obligating the Plan Processor to perform the functions and 
duties contemplated by this Agreement to be performed by the Plan 
Processor, as well as such other functions and duties the Operating 
Committee deems necessary or appropriate.
    (b) The Plan Processor may appoint such officers of the Plan 
Processor as it deems necessary and appropriate to perform its 
functions under this Agreement and SEC Rule 613; provided that the 
Plan Processor shall, at a minimum, appoint, in accordance with 
Section 6.2: (i) the Chief Compliance Officer; (ii) the Chief 
Information Security Officer; and (iii) the Independent Auditor. 
Notwithstanding anything to the contrary, the Operating Committee, 
by Supermajority Vote, shall approve any appointment or removal of 
the Chief Compliance Officer, the Chief Information Security 
Officer, or the Independent Auditor.
    (c) The Plan Processor shall develop and, with the prior 
approval of the Operating Committee, implement policies, procedures, 
and control structures related to the CAT System that are consistent 
with SEC Rule 613(e)(4), Appendix C, and Appendix D.
    (d) The Plan Processor shall:
    (i) comply with applicable provisions of 15 U.S.C. Sec.  78u-6 
(Securities Whistleblower Incentives and Protection) and the 
recordkeeping requirements of SEC Rule 613(e)(8);
    (ii) consistent with Appendix D, Central Repository 
Requirements, ensure the effective management and operation of the 
Central Repository;
    (iii) consistent with Appendix D, Data Management, ensure the 
accuracy of the consolidation of the CAT Data reported to the 
Central Repository pursuant to Section 6.3 and Section 6.4; and
    (iv) consistent with Appendix D, Upgrade Process and Development 
of New Functionality, design and implement appropriate policies and 
procedures governing the determination to develop new functionality 
for the CAT including, among other requirements, a mechanism by 
which changes can be suggested by Advisory Committee members, 
Participants, or the SEC. Such policies and procedures also shall: 
(A) provide for the escalation of reviews of proposed technological 
changes and upgrades (including as required by Section 6.1(i) and 
Section 6.1(j) or as otherwise appropriate) to the Operating 
Committee; and (B) address the handling of surveillance, including 
coordinated, SEC Rule 17d-2 or Regulatory Service Agreement(s) 
(``RSA'') surveillance queries and requests for data.
    (e) Any policy, procedure or standard (and any material 
modification or amendment thereto) applicable primarily to the 
performance of the Plan Processor's duties as the Plan Processor 
(excluding, for the avoidance of doubt, any policies, procedures or 
standards generally applicable to the Plan Processor's operations 
and employees) shall become effective only upon approval thereof by 
the Operating Committee.
    (f) The Plan Processor shall, subject to the prior approval of 
the Operating Committee, establish appropriate procedures for 
escalation of matters to the Operating Committee.
    (g) In addition to other policies, procedures and standards 
generally applicable to the Plan Processor's employees and 
contractors, the Plan Processor shall have hiring standards and 
shall conduct and enforce background checks (e.g., fingerprint-
based) for all of its employees and contractors to ensure the 
protection, safeguarding and security of the facilities, systems, 
networks, equipment and data of the CAT System, and shall have an 
insider and external threat policy to detect, monitor and remedy 
cyber and other threats. Each Participant will also conduct 
background checks of its employees and contractors that will use the 
CAT System.
    (h) The Plan Processor shall enter into appropriate Service 
Level Agreements (``SLAs'') governing the performance of the Central 
Repository, as generally described in Appendix D, Functionality of 
the CAT System, with the prior approval of the Operating Committee. 
The Plan Processor in conjunction with the Operating Committee shall 
regularly review and, as necessary, update the SLAs, in accordance 
with the terms of the SLAs. As further contemplated in Appendix C, 
System Service Level Agreements (SLAs), and in Appendix D, System 
SLAs, the Plan Processor may enter into appropriate service level 
agreements with third parties applicable to the Plan Processor's 
functions related to the CAT System (``Other SLAs''), with the prior 
approval of the Operating Committee. The Chief Compliance Officer 
and/or the Independent Auditor shall, in conjunction with the Plan 
Processor and, as necessary, the Operating Committee, regularly 
review and, as necessary, update the Other SLAs, in accordance with 
the terms of the applicable Other SLA.
    (i) The Plan Processor shall, on an ongoing basis and consistent 
with any applicable policies and procedures, evaluate and implement 
potential system changes and upgrades to maintain and improve the 
normal day-to-day operating function of the CAT System.
    (j) In consultation with the Operating Committee, the Plan 
Processor shall, on an as needed basis and consistent with any 
applicable operational and escalation policies and procedures, 
implement such material system changes and upgrades as may be 
required to ensure effective functioning of the CAT System (i.e., 
those system changes and upgrades beyond the scope contemplated by 
Section 6.1(i)).
    (k) In consultation with the Operating Committee, the Plan 
Processor shall, on an as needed basis, implement system changes and 
upgrades to the CAT System to ensure compliance with any applicable 
laws, regulations or rules (including those promulgated by the SEC 
or any Participant).
    (l) The Plan Processor shall develop and, with the prior 
approval of the Operating Committee, implement a securities trading 
policy, as well as necessary procedures, control structures and 
tools to enforce this policy. The securities trading policy shall 
include:
    (i) the category(ies) of employees, and as appropriate, 
contractors, of the Plan Processor to whom the policy will apply;
    (ii) the scope of securities that are allowed or not allowed for 
trading;
    (iii) the creation and maintenance of restricted trading lists;
    (iv) a mechanism for declaring new or open account activity;
    (v) a comprehensive list of any exclusions to the policy (e.g., 
blind trust, non-discretionary accounts);
    (vi) requirements for duplicative records to be received by the 
Plan Processor for periodic review; and
    (vii) a mechanism to review employee trading accounts.
    (m) The Plan Processor shall develop and, with the prior 
approval of the Operating Committee, implement a training program 
that addresses the security and confidentiality of all information 
accessible from the CAT, as well as the operational risks associated 
with accessing the Central Repository. The training program will be 
made available to all individuals who have access to the Central 
Repository on behalf of the Participants or the SEC, prior to such 
individuals being granted access to the Central Repository.
    (n) The Operating Committee will review the Plan Processor's 
performance under this Agreement at least once each year, or more 
often than once each year upon the request of two Participants that 
are not Affiliated Participants. The Operating Committee shall 
notify the SEC of any determination made by the Operating Committee 
concerning the continuing engagement of the Plan Processor as a 
result of the Operating Committee's review of the Plan Processor and 
shall provide the SEC with a copy of any reports that may be 
prepared in connection therewith.
    (o) The Plan Processor shall provide the Operating Committee 
regular reports on the CAT System's operation and maintenance. The 
reports shall address:
    (i) operational performance management information regarding the 
capacity and performance of the CAT System as specified by the 
Operating Committee. Such reports shall at a minimum address:
    (A) the capacity and performance of the Central Repository, 
including at a minimum

[[Page 84958]]

the requirements set forth in Appendix D, Central Repository 
Requirements;
    (B) the basic functionality of the CAT System, including the 
functions set forth in Appendix D, Functionality of the CAT System.
    (ii) data security issues for the Plan Processor and the Central 
Repository taking into account the data security requirements set 
forth in Appendix D, Data Security;
    (iii) Participant usage statistics for the Plan Processor and 
the Central Repository, including capacity planning studies and 
daily reports called for by Appendix D, Capacity Requirements, as 
well as business continuity planning and disaster recovery issues 
for the Plan Processor and the Central Repository, taking into 
account the business continuity planning and disaster recovery 
requirements set forth in Appendix D, BCP/DR Process;
    (iv) system improvement issues with the Plan Processor and the 
Central Repository as contemplated by Appendix D, Upgrade Process 
and Development of New Functionality;
    (v) Error Rates relating to the Central Repository,\3682\ 
including, in each case to the extent the Operating Committee 
determines necessary or advisable, Error Rates by day and by delta 
over time, and Compliance Thresholds by CAT Reporter, by Reportable 
Event, by age before resolution, by symbol, by symbol type (e.g., 
ETF and Index) and by event time (by hour and cumulative on the 
hour) as set forth in Appendix C, Error Communication, Correction, 
and Processing;
---------------------------------------------------------------------------

    \3682\ This Error Rate includes errors by CAT Reporters and 
linkage validation errors. In addition, errors attributable to the 
Plan Processor will be memorialized and reported to the Operating 
Committee.
---------------------------------------------------------------------------

    (vi) financial statements of the Plan Processor prepared in 
accordance with GAAP (A) audited by an independent public accounting 
firm or (B) certified by the Plan Processor's Chief Financial 
Officer (which financial statements contemplated by this Section 
6.1(o)(vi) shall be provided no later than [90] 180 days after the 
Plan Processor's fiscal year end);
    (vii) continued solvency of the Plan Processor;
    (viii) budgetary status of any items subject to Section 
6.2(a)(ii);
    (ix) internal audit analysis and the status of any internal 
audit related deliverables; and
    (x) additional items as requested by the Operating Committee, 
any Officer of the Company, or the Independent Auditor.
    (p) Upon the request of the Operating Committee or any 
Subcommittee, the Plan Processor shall attend any meeting of the 
Operating Committee or such Subcommittee.
    (q) The Operating Committee, by Supermajority Vote, may remove 
the Plan Processor from such position at any time.
    (r) The Operating Committee may, by Majority Vote, remove the 
Plan Processor from such position at any time if it determines that 
the Plan Processor has failed to perform its functions in a 
reasonably acceptable manner in accordance with the provisions of 
this Agreement or that the Plan Processor's expenses have become 
excessive and are not justified. In making such determination, the 
Operating Committee shall consider, among other factors: (i) the 
reasonableness of the Plan Processor's response to requests from 
Participants or the Company for technological changes or 
enhancements; (ii) results of any assessments performed pursuant to 
Section 6.6; (iii) the timeliness of conducting preventative and 
corrective information technology system maintenance for reliable 
and secure operations; (iv) compliance with requirements of Appendix 
D; and (v) such other factors related to experience, technological 
capability, quality and reliability of service, costs, back-up 
facilities, failure to meet service level agreement(s) and 
regulatory considerations as the Operating Committee may determine 
to be appropriate.
    (s) The Plan Processor may resign from such position; provided 
that no such resignation shall be effective earlier than two (2) 
years (or such other shorter period as may be determined by the 
Operating Committee by Supermajority Vote) after the Plan Processor 
provides written notice of such resignation to the Company.
    (t) The Operating Committee, by Supermajority Vote, shall fill 
any vacancy in the Plan Processor position, and shall establish a 
Plan Processor Selection Subcommittee in accordance with Section 
4.12 to evaluate and review Bids and make a recommendation to the 
Operating Committee with respect to the selection of the successor 
Plan Processor. Any successor Plan Processor appointed pursuant to 
this Section 6.1(t) shall be subject to all the terms and conditions 
of this Agreement applicable to the Plan Processor commencing from 
such appointment effective date.
    (u) The Plan Processor shall afford to Participants and the 
Commission such access to the Representatives of the Plan Processor 
as any Participant or the Commission may [reasonably] request solely 
for the purpose of performing such Person's regulatory and oversight 
responsibilities pursuant to the federal securities laws, rules, and 
regulations or any contractual obligations, and shall direct such 
Representatives to [reasonably] cooperate with any inquiry, 
investigation, or proceeding conducted by or on behalf of any 
Participant or the Commission related to such purpose.
    Section 6.2. Chief Compliance Officer and Chief Information 
Security Officer.
    (a) Chief Compliance Officer.
    (i) The Plan Processor shall designate an employee of the Plan 
Processor to serve, subject to the approval of the Operating 
Committee by Supermajority Vote, as the Chief Compliance Officer. 
The Plan Processor shall also designate at least one other employee 
(in addition to the person then serving as Chief Compliance 
Officer), which employee the Operating Committee has previously 
approved, to serve temporarily as the Chief Compliance Officer if 
the employee then serving as the Chief Compliance Officer becomes 
unavailable or unable to serve in such capacity (including by reason 
of injury or illness). Any person designated to serve as the Chief 
Compliance Officer (including to serve temporarily) shall be 
appropriately qualified to serve in such capacity based on the 
duties and responsibilities assigned to the Chief Compliance Officer 
under this Agreement and shall dedicate such person's entire working 
time to such service (or temporary service) (except for any time 
required to attend to any incidental administrative matters related 
to such person's employment with the Plan Processor that do not 
detract in any material respect from such person's service as the 
Chief Compliance Officer). The Plan Processor may, at its 
discretion: (A) designate another employee previously approved by 
the Operating Committee by Supermajority Vote to serve in such 
capacity to temporarily serve as the Chief Compliance Officer if the 
employee then serving as the Chief Compliance Officer becomes 
unavailable or unable to serve as the Chief Compliance Officer 
(including by reason of injury or illness) for a period not in 
excess of thirty (30) days; or (B) designate another employee of the 
Plan Processor to replace, subject to approval of the Operating 
Committee by a Supermajority Vote, the Chief Compliance Officer. The 
Plan Processor shall promptly designate another employee of the Plan 
Processor to replace, subject to the approval of the Operating 
Committee by Supermajority Vote, the Chief Compliance Officer if the 
Chief Compliance Officer's employment with the Plan Processor 
terminates or the Chief Compliance Officer is otherwise unavailable 
or unable to serve as the Chief Compliance Officer (including by 
reason of injury or illness) for a period in excess of thirty (30) 
days. The Operating Committee shall report any action taken pursuant 
to Section 6.2(a)(i) to the SEC.
    (ii) The Plan Processor, subject to the oversight of the 
Operating Committee, shall ensure that the Chief Compliance Officer 
has appropriate resources to fulfill the obligations of the Chief 
Compliance Officer set forth in SEC Rule 613 and in this Agreement.
    (iii) In respect of all duties and responsibilities of the Chief 
Compliance Officer in such capacity (including those set forth in 
this Agreement), the Chief Compliance Officer shall be directly 
responsible and shall directly report to the Operating Committee, 
notwithstanding that he or she is employed by the Plan Processor.
    (iv) The compensation (including base salary and bonus) of the 
Chief Compliance Officer shall be payable by the Plan Processor, but 
subject to review and approval by the Operating Committee, and the 
Operating Committee shall render the Chief Compliance Officer's 
annual performance review.
    (v) The Chief Compliance Officer shall:
    (A) regularly review the operation of the Central Repository to 
ensure its continued effectiveness based on market and technological 
developments and consistent with Appendix D, Upgrade Process and 
Development of New Functionality, and make any appropriate 
recommendations for enhancements to the nature of the information 
collected and the manner in which it is processed;
    (B) identify and assist the Company in retaining an 
appropriately qualified independent auditor of national recognition 
(subject to the approval of the Operating

[[Page 84959]]

Committee by Supermajority Vote, the ``Independent Auditor'') and, 
in collaboration with such Independent Auditor, create and implement 
an annual audit plan (subject to the approval of the Operating 
Committee) which shall at a minimum include a review of all Plan 
Processor policies, procedures and control structures;
    (C) in collaboration with the Chief Information Security 
Officer, and consistent with Appendix D, Data Security, and any 
other applicable requirements related to data security, Customer 
Account Information and Customer Identifying Information, identify 
and assist the Company in retaining an appropriately qualified 
independent auditor (based on specialized technical expertise, which 
may be the Independent Auditor or subject to the approval of the 
Operating Company by Supermajority Vote, another appropriately 
qualified independent auditor), and in collaboration with such 
independent auditor, create and implement an annual audit plan 
(subject to the approval of the Operating Committee), which shall at 
a minimum include a review of all Plan Processor policies, 
procedures and control structures, and real time tools that monitor 
and address data security issues for the Plan Processor and the 
Central Repository;
    (D) have the ability to hire or retain adequate resources as 
needed (e.g., advisors and counsel) to fulfill its obligations;
    (E) perform reviews with respect to the matters referenced in 
Section 4.12(b) and report periodically, and on an as needed basis, 
to the Operating Committee concerning the findings of any such 
reviews;
    (F) report to the Operating Committee and conduct any relevant 
review of the Plan Processor or the Central Repository requested by 
the Operating Committee, including directing internal or external 
auditors, as appropriate, to support any such review;
    (G) perform and provide the regular written assessment to the 
SEC required by Section 6.6 and SEC Rule 613;
    (H) regularly review the information security program developed 
and maintained by the Plan Processor pursuant to Section 6.12 and 
determine the frequency of such reviews;
    (I) report in a timely manner to the Operating Committee any 
instances of non-compliance by the Plan Processor with any of the 
Central Repository's policies or procedures with respect to 
information security;
    (J) conduct regular monitoring of the CAT System for compliance 
by each Participant and each Industry Member with SEC Rule 613, this 
Agreement and Appendix D, Reporting and Linkage Requirements, and 
provide the results: (1) with regard to Industry Members, to each 
Participant with oversight of such Industry Member or to such 
Participant's agent pursuant to a regulatory services agreement, or 
to the Participant responsible for enforcing compliance by such 
Industry Member pursuant to an agreement entered into by the 
applicable Participant pursuant to SEC Rule 17d-2; and (2) with 
regard to each Participant, to the chief regulatory officer or 
equivalent of such Participant;
    (K) develop a mechanism to conduct regular monitoring of the CAT 
System for compliance by each Participant with SEC Rule 613, this 
Agreement, and Appendix D, Reporting and Linkage Requirements;
    (L) develop and implement a notification and escalation process 
to resolve and remediate any alleged noncompliance by a Participant 
or Industry Member with the rules of the CAT, which process will 
include appropriate notification and order of escalation to a 
Participant, the Operating Committee, or the Commission;
    (M) develop and conduct an annual assessment of Business Clock 
synchronization as specified in Section 6.8(c);
    (N) have access to Plan Processor staff and documentation as 
appropriate to fulfill its obligations;
    (O) have access to the Operating Committee, including attending 
all regular, special and emergency meetings of the Operating 
Committee as a non-voting observer; provided, however, that the 
Chief Compliance Officer shall not have the right to attend any 
Executive Session that the Operating Committee may hold;
    (P) work on a more regular and frequent basis with the 
Compliance Subcommittee or other Subcommittee as may be determined 
by the Operating Committee; and
    (Q) oversee the Plan Processor's compliance with applicable 
laws, rules and regulations related to the CAT System, in its 
capacity as Plan Processor.
    (b) Chief Information Security Officer.
    (i) The Plan Processor shall designate an employee of the Plan 
Processor to serve, subject to the approval of the Operating 
Committee by Supermajority Vote, as the Chief Information Security 
Officer. The Plan Processor shall also designate at least one other 
employee (in addition to the person then serving as Chief 
Information Security Officer), which employee the Operating 
Committee has previously approved, to serve temporarily as the Chief 
Information Security Officer if the employee then serving as the 
Chief Information Security Officer becomes unavailable or unable to 
serve in such capacity (including by reason of injury or illness). 
Any person designated to serve as the Chief Information Security 
Officer (including to serve temporarily) shall be appropriately 
qualified to serve in such capacity based on the duties and 
responsibilities assigned to the Chief Information Security Officer 
under this Agreement and shall dedicate such person's entire working 
time to such service (or temporary service) (except for any time 
required to attend to any incidental administrative matters related 
to such person's employment with the Plan Processor that do not 
detract in any material respect from such person's service as the 
Chief Information Security Officer). The Plan Processor may, at its 
discretion: (A) designate another employee previously approved by 
the Operating Committee by Supermajority Vote to serve in such 
capacity to temporarily serve as the Chief Information Security 
Officer if the employee then serving as Chief Information Security 
Officer becomes unavailable or unable to serve as Chief Information 
Security Officer (including by reason of injury or illness) for a 
period not in excess of thirty (30) days; or (B) designate another 
employee of the Plan Processor to replace, subject to approval of 
the Operating Committee by a Supermajority Vote, the Chief 
Information Security Officer. The Plan Processor shall promptly 
designate another employee of the Plan Processor to replace, subject 
to the approval of the Operating Committee by Supermajority Vote, 
the Chief Information Security Officer if the Chief Information 
Security Officer's employment with the Plan Processor terminates or 
the Chief Information Security Officer is otherwise unavailable or 
unable to serve as Chief Information Security Officer (including by 
reason of injury or illness) for a period in excess of thirty (30) 
days. The Operating Committee shall report any action taken pursuant 
to Section 6.2(b)(i) to the SEC.
    (ii) The Plan Processor, subject to the oversight of the 
Operating Committee, shall ensure that the Chief Information 
Security Officer has appropriate resources to fulfill the 
obligations of the Chief Information Security Officer set forth in 
SEC Rule 613 and in this Agreement, including providing appropriate 
responses to questions posed by the Participants and the SEC.
    (iii) In respect of all duties and responsibilities of the Chief 
Information Security Officer in such capacity (including those set 
forth in this Agreement), the Chief Information Security Officer 
shall be directly responsible and directly report to the Operating 
Committee, notwithstanding that he or she is employed by the Plan 
Processor.
    (iv) The compensation (including base salary and bonus) of the 
Chief Information Security Officer shall be payable by the Plan 
Processor, but subject to review and approval by the Operating 
Committee, and the Operating Committee shall render the Chief 
Information Security Officer's annual performance review.
    (v) Consistent with Appendices C and D, the Chief Information 
Security Officer shall be responsible for creating and enforcing 
appropriate policies, procedures, and control structures to monitor 
and address data security issues for the Plan Processor and the 
Central Repository including:
    (A) data security, including the standards set forth in Appendix 
D, Data Security;
    (B) connectivity and data transfer, including the standards set 
forth in Appendix D, Connectivity and Data Transfer;
    (C) data encryption, including the standards set forth in 
Appendix D, Data Encryption;
    (D) data storage and environment, including the standards set 
forth in Appendix D, Data Storage and Environment;
    (E) data access and breach management, including the standards 
set forth in Appendix D, Data Access, and Appendix D, Breach 
Management;
    (F) PII data requirements, including the standards set forth in 
Appendix D, PII Data Requirements;
    (G) industry standards, including the standards set forth in 
Appendix D, Industry Standards; and
    (H) penetration test reviews, which shall occur at least every 
year or earlier, or at the request of the Operating Committee, set 
forth in Appendix D, Data Storage and Environment.

[[Page 84960]]

    (vi) At regular intervals, to the extent that such information 
is available to the Company, the Chief Information Security Officer 
shall report to the Operating Committee the activities of the 
Financial Services Information Sharing and Analysis Center (``FS-
ISAC'') or other comparable body.
    (vii) The Chief Information Security Officer shall review the 
information security policies and procedures of the Participants 
that are related to the CAT to ensure that such policies and 
procedures are comparable to the information security policies and 
procedures applicable to the Central Repository. If the Chief 
Information Security Officer, in consultation with the Chief 
Compliance Officer, finds that any such policies and procedures are 
not comparable to the policies and procedures applicable to the CAT 
System, and the issue is not promptly addressed by the applicable 
Participant, the Chief Information Security Officer, in consultation 
with the Chief Compliance Officer, will be required to notify the 
Operating Committee of such deficiencies.
    Section 6.3. Data Recording and Reporting by Participants. This 
Section 6.3 shall become effective on the first anniversary of the 
Effective Date and shall remain effective thereafter until modified 
or amended in accordance with the provisions of this Agreement and 
applicable law.
    (a) Format. As contemplated in Appendix D, Data Types and 
Sources, each Participant shall report Participant Data to the 
Central Repository for consolidation and storage in a format or 
formats specified by the Plan Processor, approved by the Operating 
Committee and compliant with SEC Rule 613.
    (b) Timing of Recording and Reporting.
    (i) As further described in Appendix D, Reporting and Linkage 
Requirements, each Participant shall record Participant Data 
contemporaneously with the applicable Reportable Event.
    (ii) Each Participant shall report Participant Data to the 
Central Repository by 8:00 a.m. Eastern Time on the Trading Day 
following the day the Participant records such Participant Data. A 
Participant may voluntarily report Participant Data prior to the 
8:00 a.m. Eastern Time deadline.
    (c) Applicable Securities.
    (i) Each Participant that is a national securities exchange 
shall report Participant Data for each NMS Security registered or 
listed for trading on such exchange or admitted to unlisted trading 
privileges on such exchange.
    (ii) Each Participant that is a national securities association 
shall report Participant Data for each Eligible Security for which 
transaction reports are required to be submitted to such 
association.
    (d) Participant Data. Subject to Section 6.3(c), and Appendix D, 
Reporting and Linkage Requirements, and in accordance with the 
Technical Specifications, each Participant shall record and 
electronically report to the Central Repository the following 
details for each order and each Reportable Event, as applicable 
(``Participant Data''):
    (i) for original receipt or origination of an order:
    (A) Firm Designated ID(s) for each Customer;
    (B) CAT-Order-ID;
    (C) SRO-Assigned Market Participant Identifier of the Industry 
Member receiving or originating the order;
    (D) date of order receipt or origination;
    (E) time of order receipt or origination (using timestamps 
pursuant to Section 6.8); and
    (F) Material Terms of the Order;
    (ii) for the routing of an order:
    (A) CAT-Order-ID;
    (B) date on which the order is routed;
    (C) time at which the order is routed (using timestamps pursuant 
to Section 6.8);
    (D) SRO-Assigned Market Participant Identifier of the Industry 
Member or Participant routing the order;
    (E) SRO-Assigned Market Participant Identifier of the Industry 
Member or Participant to which the order is being routed;
    (F) if routed internally at the Industry Member, the identity 
and nature of the department or desk to which the order is routed; 
and
    (G) Material Terms of the Order;
    (iii) for the receipt of an order that has been routed, the 
following information:
    (A) CAT-Order-ID;
    (B) date on which the order is received;
    (C) time at which the order is received (using timestamps 
pursuant to Section 6.8);
    (D) SRO-Assigned Market Participant Identifier of the Industry 
Member or Participant receiving the order;
    (E) SRO-Assigned Market Participant Identifier of the Industry 
Member or Participant routing the order; and
    (F) Material Terms of the Order;
    (iv) if the order is modified or cancelled:
    (A) CAT-Order-ID;
    (B) date the modification or cancellation is received or 
originated;
    (C) time at which the modification or cancellation is received 
or originated (using timestamps pursuant to Section 6.8);
    (D) price and remaining size of the order, if modified;
    (E) other changes in the Material Terms of the Order, if 
modified; and
    (F) whether the modification or cancellation instruction was 
given by the Customer or was initiated by the Industry Member or 
Participant;
    (v) if the order is executed, in whole or in part:
    (A) CAT-Order-ID;
    (B) date of execution;
    (C) time of execution (using timestamps pursuant to Section 
6.8);
    (D) execution capacity (principal, agency or riskless 
principal);
    (E) execution price and size;
    (F) SRO-Assigned Market Participant Identifier of the 
Participant or Industry Member executing the order;
    (G) whether the execution was reported pursuant to an effective 
transaction reporting plan or the Plan for Reporting of Consolidated 
Options Last Sale Reports and Quotation Information; and
    (vi) other information or additional events as may be prescribed 
in Appendix D, Reporting and Linkage Requirements.
    (e) CAT-Reporter-ID.
    (i) Each Participant must submit to the Central Repository, on a 
daily basis,
    (A) all SRO-Assigned Market Participant Identifiers used by its 
Industry Members or itself; and[ as well as]
    (B) information to identify (1) each such Industry Member, 
including CRD number and LEI [the corresponding market participant 
(e.g., CRD number, or LEI) to the Central Repository] if such LEI 
has been obtained, and itself, including LEI, if such LEI has been 
obtained.
    (ii) The Plan Processor will use the SRO-Assigned Market 
Participant Identifiers and identifying information to assign a CAT-
Reporter-ID to each Industry Member or Participant for internal use 
across all CAT Data in the Central Repository.
    (f) Means of Transmission. As contemplated in Appendix D, each 
Participant may utilize such methods as may be provided by the Plan 
Processor and approved by the Operating Committee to transmit 
Participant Data to the Central Repository.
    Section 6.4. Data Reporting and Recording by Industry Members. 
The requirements for Industry Members under this Section 6.4 shall 
become effective on the second anniversary of the Effective Date in 
the case of Industry Members other than Small Industry Members, or 
the third anniversary of the Effective Date in the case of Small 
Industry Members, and shall remain effective thereafter until 
modified or amended in accordance with the provisions of this 
Agreement and applicable law.
    (a) Format. As contemplated in Appendix D, Data Types and 
Sources, each Participant shall, through its Compliance Rule, 
require its Industry Members to report Industry Member Data to the 
Central Repository for consolidation and storage in a format or 
formats specified by the Plan Processor, approved by the Operating 
Committee and compliant with SEC Rule 613.
    (b) Timing of Recording and Reporting.
    (i) As further described in Appendix D, Reporting and Linkage 
Requirements, each Participant shall, through its Compliance Rule, 
require its Industry Members to record Recorded Industry Member Data 
contemporaneously with the applicable Reportable Event.
    (ii) Consistent with Appendix D, Reporting and Linkage 
Requirements, each Participant shall, through its Compliance Rule, 
require its Industry Members to report: (A) Recorded Industry Member 
Data to the Central Repository by 8:00 a.m. Eastern Time on the 
Trading Day following the day the Industry Member records such 
Recorded Industry Member Data; and (B) Received Industry Member Data 
to the Central Repository by 8:00 a.m. Eastern Time on the Trading 
Day following the day the Industry Member receives such Received 
Industry Member Data. Each Participant shall, through its Compliance 
Rule, permit its Industry Members to voluntarily report Industry 
Member Data prior to the applicable 8:00 a.m. Eastern Time deadline.
    (c) Applicable Securities.
    (i) Each Participant that is a national securities exchange 
shall, through its

[[Page 84961]]

Compliance Rule, require its Industry Members to report Industry 
Member Data for each NMS Security registered or listed for trading 
on such exchange or admitted to unlisted trading privileges on such 
exchange.
    (ii) Each Participant that is a national securities association 
shall, through its Compliance Rule, require its Industry Members to 
report Industry Member Data for each Eligible Security for which 
transaction reports are required to be submitted to such 
association.
    (d) Required Industry Member Data.
    (i) Subject to Section 6.4(c) and Section 6.4(d)(iii) with 
respect to Options Market Makers, and consistent with Appendix D, 
Reporting and Linkage Requirements, and the Technical 
Specifications, each Participant shall, through its Compliance Rule, 
require its Industry Members to record and electronically report to 
the Central Repository for each order and each Reportable Event the 
information referred to in Section 6.3(d), as applicable (``Recorded 
Industry Member Data'').
    (ii) Subject to Section 6.4(c) and Section 6.4(d)(iii) with 
respect to Options Market Makers, and consistent with Appendix D, 
Reporting and Linkage Requirements, and the Technical 
Specifications, each Participant shall, through its Compliance Rule, 
require its Industry Members to record and report to the Central 
Repository the following, as applicable (``Received Industry Member 
Data'' and collectively with the information referred to in Section 
6.4(d)(i) ``Industry Member Data''):
    (A) if the order is executed, in whole or in part:
    (1) An Allocation Report;
    (2) SRO-Assigned Market Participant Identifier of the clearing 
broker or prime broker, if applicable; and
    (3) CAT-Order-ID of any contra-side order(s);
    (B) if the trade is cancelled, a cancelled trade indicator; and
    (C) for original receipt or origination of an order, the Firm 
Designated ID for the relevant Customer, and in accordance with 
Section 6.4(d)(iv), Customer Account Information[,] and Customer 
Identifying Information for the relevant Customer.
    (iii) With respect to the reporting obligations of an Options 
Market Maker with regard to its quotes in Listed Options, Reportable 
Events required pursuant to Section 6.3(d)(ii) and (iv) shall be 
reported to the Central Repository by an Options Exchange in lieu of 
the reporting of such information by the Options Market Maker. Each 
Participant that is an Options Exchange shall, through its 
Compliance Rule, require its Industry Members that are Options 
Market Makers to report to the Options Exchange the time at which a 
quote in a Listed Option is sent to the Options Exchange (and, if 
applicable, any subsequent quote modifications and/or cancellation 
time when such modification or cancellation is originated by the 
Options Market Maker). Such time information also shall be reported 
to the Central Repository by the Options Exchange in lieu of 
reporting by the Options Market Maker.
    (iv) Each Industry Member must submit an initial set of the 
Customer information required in Section 6.4(d)(ii)(C) for Active 
Accounts to the Central Repository upon the Industry Member's 
commencement of reporting to the Central Repository. Each Industry 
Member must submit to the Central Repository any updates, additions 
or other changes to the Customer information required in Section 
6.4(d)(ii)(C) on a daily basis for all Active Accounts [thereafter]. 
In addition, on a periodic basis as designated by the Plan Processor 
and approved by the Operating Committee, each Industry Member will 
be required to submit to the Central Repository a complete set of 
all Customer information required in Section 6.4(d)(ii)(C). The Plan 
Processor will correlate such Customer information across all 
Industry Members, use it to assign a Customer-ID for each Customer, 
and use the Customer-ID to link all Reportable Events associated 
with an order for a Customer.
    (v) Each Participant shall, through its Compliance Rule, require 
its Industry Members to record and report to the Central Repository 
other information or additional events as may be prescribed in 
Appendix D, Reporting and Linkage Requirements.
    (vi) Each Industry Member must submit to the Central Repository 
information sufficient to identify such Industry Member, including 
CRD number and LEI, if such LEI has been obtained [(e.g., CRD, or 
LEI)].
    (e) Means of Transmission. As contemplated in Appendix D, Data 
Types and Sources, each Industry Member may utilize such methods as 
may be provided by the Plan Processor and approved by the Operating 
Committee to transmit Industry Member Data to the Central 
Repository.
    Section 6.5. Central Repository.
    (a) Collection of Data.
    (i) The Central Repository, under the oversight of the Plan 
Processor, and consistent with Appendix D, Central Repository 
Requirements, shall receive, consolidate, and retain all CAT Data.
    (ii) The Central Repository shall collect (from a SIP or 
pursuant to an NMS Plan) and retain on a current and continuing 
basis, in a format compatible with the Participant Data and Industry 
Member Data, all data, including the following (collectively, ``SIP 
Data''):
    (A) information, including the size and quote condition, on 
quotes including the National Best Bid and National Best Offer for 
each NMS Security;
    (B) Last Sale Reports and transaction reports reported pursuant 
to an effective transaction reporting plan filed with the SEC 
pursuant to, and meeting the requirements of, SEC Rules 601 and 608;
    (C) trading halts, Limit Up/Limit Down price bands, and Limit 
Up/Limit Down indicators; and
    (D) summary data or reports described in the specifications for 
each of the SIPs and disseminated by the respective SIP.
    (b) Retention of Data.
    (i) Consistent with Appendix D, Data Retention Requirements, the 
Central Repository shall retain the information collected pursuant 
to paragraphs (c)(7) and (e)(7) of SEC Rule 613 in a convenient and 
usable standard electronic data format that is directly available 
and searchable electronically without any manual intervention by the 
Plan Processor for a period of not less than six (6) years. Such 
data when available to the Participant regulatory staff and the SEC 
shall be linked.
    (ii) The Plan Processor shall implement and comply with the 
records retention policy contemplated by Section 6.1(d)(i) (as such 
policy is reviewed and updated periodically in accordance with 
Section 6.1(d)(i)).
    (c) Access to the Central Repository
    (i) Consistent with Appendix D, Data Access, the Plan Processor 
shall provide Participants and the SEC access to the Central 
Repository (including all systems operated by the Central 
Repository), and access to and use of the CAT Data stored in the 
Central Repository, solely for the purpose of performing their 
respective regulatory and oversight responsibilities pursuant to the 
federal securities laws, rules and regulations or any contractual 
obligations.
    (ii) The Plan Processor shall create and maintain a method of 
access to CAT Data stored in the Central Repository that includes 
the ability to run searches and generate reports. The method in 
which the CAT Data is stored in the Central Repository shall allow 
the ability to return results of queries that are complex in nature, 
including market reconstruction and the status of order books at 
varying time intervals.
    (iii) The Plan Processor shall, at least annually and at such 
earlier time promptly following a request by the Operating 
Committee, certify to the Operating Committee that only Participants 
and the SEC have access to the Central Repository (other than access 
provided to any Industry Member for the purpose of correcting CAT 
Data previously reported to the Central Repository by such Industry 
Member).
    (iv) Appendix C, The Security and Confidentiality of Information 
Reported to the Central Repository, and Appendix D, Data Security, 
describes the security and confidentiality of the CAT Data, 
including how access to the Central Repository is controlled.
    (d) Data Accuracy
    (i) The Operating Committee shall set and periodically review a 
maximum Error Rate for data reported to the Central Repository. The 
initial maximum Error Rate shall be set to 5%.
    (ii) Consistent with Appendix D, Reporting and Linkage 
Requirements and Data Security, the Operating Committee shall adopt 
policies and procedures, including standards, requiring CAT Data 
reported to the Central Repository be timely, accurate, and 
complete, and to ensure the integrity of such CAT Data (e.g., that 
such CAT Data has not been altered and remains reliable). The Plan 
Processor shall be responsible for implementing such policies and 
procedures.
    (iii) Appendix D, Receipt of Data from Reporters, describes the 
mechanisms and protocols for Participant Data and Industry Member 
Data submission for all key phases, including:
    (A) file transmission and receipt validation;
    (B) validation of CAT Data; and
    (C) validation of linkages.
    (e) Appendix D, Receipt of Data from Reporters, also describes 
the mechanisms

[[Page 84962]]

and protocols for managing and handling corrections of CAT Data. The 
Plan Processor shall require an audit trail for corrected CAT Data 
in accordance with mechanisms and protocols approved by the 
Operating Committee.
    (f) Data Confidentiality
    (i) The Plan Processor shall, without limiting the obligations 
imposed on Participants by this Agreement and in accordance with the 
framework set forth in, Appendix D, Data Security, and Functionality 
of the CAT System, be responsible for the security and 
confidentiality of all CAT Data received and reported to the Central 
Repository. Without limiting the foregoing, the Plan Processor 
shall:
    (A) require all individuals who have access to the Central 
Repository (including the respective employees and consultants of 
the Participants and the Plan Processor, but excluding employees and 
Commissioners of the SEC) to agree: (1) to use appropriate 
safeguards to ensure the confidentiality of CAT Data stored in the 
Central Repository; and (2) not to use CAT Data stored in the 
Central Repository for purposes other than surveillance and 
regulation in accordance with such individual's employment duties; 
provided that a Participant will be permitted to use the [CAT] Raw 
Data it reports to the Central Repository for regulatory, 
surveillance, commercial or other purposes as permitted by 
applicable law, rule, or regulation;
    (B) require all individuals who have access to the Central 
Repository (including the respective employees and consultants of 
the Participants and the Plan Processor, but excluding employees and 
Commissioners of the SEC) to execute a personal ``Safeguard of 
Information Affidavit'' in a form approved by the Operating 
Committee providing for personal liability for misuse of data;
    (C) develop and maintain a comprehensive information security 
program with a dedicated staff for the Central Repository, 
consistent with Appendix D, Data Security, that employs state of the 
art technology, which program will be regularly reviewed by the 
Chief Compliance Officer and Chief Information Security Officer;
    (D) implement and maintain a mechanism to confirm the identity 
of all individuals permitted to access the CAT Data stored in the 
Central Repository and maintain a record of all instances where such 
CAT Data was accessed; and
    (E) implement and maintain appropriate policies regarding 
limitations on trading activities of its employees and independent 
contractors involved with all CAT Data consistent with Section 
6.1(n).
    (ii) Each Participant shall adopt and enforce policies and 
procedures that:
    (A) implement effective information barriers between such 
Participant's regulatory and non-regulatory staff with regard to 
access and use of CAT Data stored in the Central Repository;
    (B) permit only persons designated by Participants to have 
access to the CAT Data stored in the Central Repository; and
    (C) impose penalties for staff non-compliance with any of its or 
the Plan Processor's policies or procedures with respect to 
information security.
    (iii) Each Participant [and the Commission, as applicable,] 
shall as promptly as reasonably practicable, and in any event within 
24 hours, report to the Chief Compliance Officer, in accordance with 
the guidance provided by the Operating Committee, any instance of 
which such Participant becomes aware of: (A) noncompliance with the 
policies and procedures adopted by such Participant pursuant to 
Section 6.5(e)(ii); or (B) a breach of the security of the CAT.
    (iv) The Plan Processor shall:
    (A) ensure data confidentiality and security during all 
communications between CAT Reporters and the Plan Processor, data 
extractions, manipulation and transformation, loading to and from 
the Central Repository and data maintenance by the Central 
Repository;
    (B) require the establishment of secure controls for data 
retrieval and query reports by Participant regulatory staff [and the 
Commission]; and
    (C) otherwise provide appropriate database security for the 
Central Repository.
    (v) The Company shall endeavor to join the FS-ISAC and 
comparable bodies as the Operating Committee may determine.
    (g) Participants Confidentiality Policies and Procedures. The 
Participants shall establish, maintain and enforce written policies 
and procedures reasonably designed to (1) ensure the confidentiality 
of the CAT Data obtained from the Central Repository; and (2) limit 
the use of CAT Data obtained from the Central Repository solely for 
surveillance and regulatory purposes. Each Participant shall 
periodically review the effectiveness of the policies and procedures 
required by this paragraph, and take prompt action to remedy 
deficiencies in such policies and procedures.
    (h) A Participant may use the Raw Data it reports to the Central 
Repository for regulatory, surveillance, commercial or other 
purposes as otherwise not prohibited by applicable law, rule or 
regulation.
    Section 6.6. [Regular] Written Assessments, Audits and Reports.
    (a) One-Time Written Assessments and Reports. The Participants 
shall provide the SEC with the following written assessments, audits 
and reports:
    (i) at least one (1) month prior to submitting a rule filing to 
establish initial fees for CAT Reporters, 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;
    (ii) within six (6) months of effectiveness of the Plan, an 
assessment of the clock synchronization standard, including 
consideration of industry standards based on the type of CAT 
Reporter, Industry Member and type of system, and propose any 
appropriate amendment based on this assessment;
    (iii) within twelve (12) months of effectiveness of the Plan, a 
report detailing the Participants' consideration of coordinated 
surveillance (e.g., entering into 17d-2 agreements or regulatory 
services agreements);
    (iv) within 24 months of effectiveness of the Plan, a report 
discussing the feasibility, benefits, and risks of allowing an 
Industry Member to bulk download the Raw Data it submitted to the 
Central Repository;
    (v) within 36 months of effectiveness of the Plan, an assessment 
of errors in the customer information submitted to the Central 
Repository and whether to prioritize the correction of certain data 
fields over others;
    (vi) within 36 months of effectiveness of the Plan, a report on 
the impact of tiered-fees on market liquidity, including an analysis 
of the impact of the tiered-fee structure on Industry Members' 
provision of liquidity; and
    (vii) prior to the implementation of any Material Systems 
Change, an assessment of the projected impact of such Material 
Systems Change on the maximum Error Rate.
    (b) Regular Written Assessment of the Plan Processor's 
Performance.
    [(a)] (i) Requirement.
    [(i)] (A) Annually [At least every two (2) years], or more 
frequently in connection with any review of the Plan Processor's 
performance under this Agreement pursuant to Section 6.1(n), the 
Participants shall provide the SEC with a written assessment of the 
operation of the CAT that meets the requirements of SEC Rule 613, 
Appendix D, and this Agreement.
    [(ii)] (B) The Chief Compliance Officer shall oversee the 
assessment contemplated by Section 6.6(b)(i)(A) [(a)(i)] and shall 
provide the Participants a reasonable time to review and comment 
upon such assessment prior to its submission to the SEC. In no case 
shall the written assessment be changed or amended in response to a 
comment by a Participant; rather, any comment by a Participant shall 
be provided to the SEC at the same time as the written assessment.
    [(b)] (ii) Contents of Written Assessment. The annual written 
assessment required by this Section 6.6 shall include:
    [(i)] (A) an evaluation of the performance of the CAT, including 
the items specified in SEC Rule 613(b)(6)(i) and other performance 
metrics identified by the Chief Compliance Officer, and a 
description of such metrics;
    [(ii)] (B) a detailed plan, based on the evaluation conducted 
pursuant to Section 6.6(b)(i), for any potential improvements to the 
performance of the CAT with respect to the items specified in SEC 
Rule 613(b)(6)(ii), as well as:
    (1) an evaluation of potential technology upgrades based on a 
review of technological advancements over the preceding year, 
drawing on technological expertise whether internal or external;
    (2) an evaluation of the time necessary to restore and recover 
CAT Data at a back-up site;
    (3) an evaluation of the information security program to ensure 
that the program is consistent with the highest industry standards 
for the protection of data;
    (4) an evaluation of how the Plan Processor and the Participants 
are monitoring Error Rates and to explore the imposition of Error 
Rates based on product, data elements or other criteria;
    (5) a copy of the evaluation required by Section 6.8(c) as to 
whether industry standards have evolved such that: (i) the

[[Page 84963]]

synchronization standard in Section 6.8(a) should be shortened; or 
(ii) the required time stamp in Section 6.8(b) should be in finer 
increments;
    (6) an assessment of whether any data elements should be added, 
deleted or changed; and
    (7) any other items identified and described by the Chief 
Compliance Officer;
    [(iii)] (C) an estimate of the costs and benefits associated 
with any potential improvements to the performance of the CAT, 
including an assessment of the potential impact on competition, 
efficiency, [and] capital formation, and investor protection; and
    [(iv)] (D) an estimated implementation timeline for any 
potential improvements to the performance of the CAT, if applicable.
    Section 6.7. Implementation.
    (a) Unless otherwise ordered by the SEC:
    (i) within two (2) months after the Effective Date, the 
Participants shall jointly select the winning Shortlisted Bid and 
the Plan Processor pursuant to the process set forth in Article V. 
Following the selection of the Initial Plan Processor, the 
Participants shall file with the Commission a statement identifying 
the Plan Processor and including the information required by SEC 
Rule 608;
    (ii) within four (4) months after the Effective Date, each 
Participant shall, and through its Compliance Rule shall require its 
Industry Members to, synchronize its or their Business Clocks as 
required by Section 6.8 and certify to the Chief Compliance Officer 
(in the case of Participants) or the applicable Participant (in the 
case of Industry Members) that such Participant has met this 
requirement;
    (iii) within one (1) year after the Effective Date, each 
Participant shall report to the Central Repository Participant Data;
    (iv) within fourteen (14) months after the Effective Date, each 
Participant shall implement a new or enhanced surveillance system(s) 
in accordance with Section 6.10;
    (v) within two (2) years after the Effective Date, each 
Participant shall, through its Compliance Rule, require its Industry 
Members (other than Small Industry Members) to report to the Central 
Repository Industry Member Data; and
    (vi) within three (3) years after the Effective Date, each 
Participant shall, through its Compliance Rule, require its Small 
Industry Members to report to the Central Repository Industry Member 
Data.
    (b) The Chief Compliance Officer shall appropriately document 
objective milestones to assess progress toward the implementation of 
this Agreement.
    (c) Industry Members and Participants shall be required to 
participate in testing with the Central Repository on a schedule to 
be determined by the Operating Committee.
    (d) Appendix C, A Plan to Eliminate Existing Rules and Systems 
(SEC Rule 613(a)(1)(ix)), and Appendix D, Data Types and Sources, 
set forth additional implementation details concerning the 
elimination of rules and systems.
    Section 6.8. Timestamps and Synchronization of Business Clocks.
    (a) Each Participant shall:
    (i) other than such Business Clocks used solely for Manual Order 
Events, synchronize its Business Clocks at a minimum to within [50 
milliseconds] 100 microseconds of the time maintained by the 
National Institute of Standards and Technology, consistent with 
industry standards;
    (ii) other than such Business Clocks used solely for Manual 
Order Events or the time of allocation on Allocation Reports, 
through its Compliance Rule, require its Industry Members to:
    (A) synchronize their respective Business Clocks at a minimum to 
within fifty (50) milliseconds of the time maintained by the 
National Institute of Standards and Technology, and maintain such a 
synchronization;
    (B) certify periodically (according to a schedule to be defined 
by the Operating Committee) that their Business Clocks meet the 
requirements of the Compliance Rule;
    (C) and report to the Plan Processor and the Participant any 
violation of the Compliance Rule pursuant to the thresholds set by 
the Operating Committee; and
    (iii) synchronize its Business Clocks and, through its 
Compliance Rule, require its Industry Members to synchronize their 
Business Clocks used solely for Manual Order Events at a minimum to 
within one second of the time maintained by the National Institute 
of Standards and Technology (``NIST''), consistent with industry 
standards, and maintain such synchronization. Each Participant shall 
require its Industry Members to certify periodically (according to a 
schedule defined by the Operating Committee) that their Business 
Clocks used solely for Manual Order Events meet the requirements of 
the Compliance Rule. The Compliance Rule of a Participant shall 
require its Industry Members using Business Clocks solely for Manual 
Order Events to report to the Plan Processor any violation of the 
Compliance Rule pursuant to the thresholds set by the Operating 
Committee.
    (iv) through its Compliance Rule, require its Industry Members 
to synchronize their Business Clocks used solely for the time of 
allocation on Allocation Reports at a minimum to within one second 
of the time maintained by NIST, consistent with industry standards, 
and maintain such synchronization. Each Participant shall require 
its Industry Members to certify periodically (according to a 
schedule defined by the Operating Committee) that their Business 
Clocks used solely for the time of allocation on Allocation Reports 
meet the requirements of the Compliance Rule. The Compliance Rule of 
a Participant shall require its Industry Members using Business 
Clocks solely for the time of allocation on Allocation Reports to 
report to the Plan Processor any violation of the Compliance Rule 
pursuant to the thresholds set by the Operating Committee.
    (b) Each Participant shall, and through its Compliance Rule 
shall require its Industry Members to, report information required 
by SEC Rule 613 and this Agreement to the Central Repository in 
milliseconds. To the extent that any Participant's order handling or 
execution systems utilize[s] timestamps in increments finer than the 
minimum required in this Agreement, such Participant shall utilize 
such finer increment when reporting CAT Data to the Central 
Repository so that all Reportable Events reported to the Central 
Repository can be adequately sequenced. Each Participant shall, 
through its Compliance Rule: (i) require that, to the extent that 
its Industry Members utilize timestamps in increments finer than the 
minimum required in this Agreement in their order handling or 
execution systems, such Industry Members shall utilize such finer 
increment when reporting CAT Data to the Central Repository; and 
(ii) provide that a pattern or practice of reporting events outside 
of the required clock synchronization time period without reasonable 
justification or exceptional circumstances may be considered a 
violation of SEC Rule 613 and the CAT NMS Plan. Notwithstanding the 
preceding sentences, each Participant and Industry Member shall be 
permitted to record and report: (i) Manual Order Events to the 
Central Repository in increments up to and including one second, 
provided that Participants and Industry Members shall be required to 
record and report the time when a Manual Order Event has been 
captured electronically in an order handling and execution system of 
such Participant or Industry Member (``Electronic Capture Time'') in 
milliseconds; and (ii) the time of allocation on Allocation Reports 
in increments up to and including one second.
    (c) In conjunction with Participants' and other appropriate 
Industry Member advisory groups, the Chief Compliance Officer shall 
annually evaluate and make a recommendation to the Operating 
Committee as to whether industry standards have evolved such that: 
(i) the synchronization standard in Section 6.8(a) should be 
shortened; or (ii) the required time stamp in Section 6.8(b) should 
be in finer increments. Industry standards should be determined 
based on the type of CAT Reporter, Industry Member and type of 
system.
    Section 6.9. Technical Specifications.
    (a) Publication. The Plan Processor shall publish technical 
specifications that are at a minimum consistent with Appendices C 
and D, and updates thereto as needed, providing detailed 
instructions regarding the submission of CAT Data by Participants 
and Industry Members to the Plan Processor for entry into the 
Central Repository (collectively, the ``Technical Specifications''). 
The Technical Specifications shall be made available on a publicly 
available web site to be developed and maintained by the Plan 
Processor. The initial Technical Specifications and any Material 
Amendments thereto shall be provided to the Operating Committee for 
approval by Supermajority Vote.
    (b) Content. The Technical Specifications shall include a 
detailed description of the following:
    (i) the specifications for the layout of files and records 
submitted to the Central Repository;
    (ii) the process for the release of new data format 
specification changes;
    (iii) the process for industry testing for any changes to data 
format specifications;
    (iv) the procedures for obtaining feedback about and submitting 
corrections to

[[Page 84964]]

information submitted to the Central Repository;
    (v) each data element, including permitted values, in any type 
of report submitted to the Central Repository;
    (vi) any error messages generated by the Plan Processor in the 
course of validating the data;
    (vii) the process for file submissions (and re-submissions for 
corrected files);
    (viii) the storage and access requirements for all files 
submitted;
    (ix) metadata requirements for all files submitted to the CAT 
System;
    (x) any required secure network connectivity;
    (xi) data security standards, which shall, at a minimum: (A) 
satisfy all applicable regulations regarding database security, 
including provisions of Regulation Systems Compliance and Integrity 
under the Exchange Act (``Reg SCI''); (B) to the extent not 
otherwise provided for under this Agreement (including Appendix C 
hereto), set forth such provisions as may be necessary or 
appropriate to comply with SEC Rule 613(e)(4); and (C) comply with 
industry best practices; and
    (xii) any other items reasonably deemed appropriate by the Plan 
Processor and approved by the Operating Committee.
    (c) Amendments. Amendments to the Technical Specifications may 
be made only in accordance with this Section 6.9(c). For purposes of 
this Section 6.9(c), an amendment to the Technical Specifications 
shall be deemed ``material'' if it would require a Participant or an 
Industry Member to engage in significant changes to the coding 
necessary to submit information to the Central Repository pursuant 
to this Agreement or if it is required to safeguard the security or 
confidentiality of the CAT Data (``Material Amendment'').
    (i) Except for Material Amendments to the Technical 
Specifications, the Plan Processor shall have the sole discretion to 
amend and publish interpretations regarding the Technical 
Specifications as needed in furtherance of the purposes and 
requirements of this Agreement. All non-Material Amendments made to 
the Technical Specifications and all published interpretations shall 
be provided to the Operating Committee in writing at least ten (10) 
days before being published. Such non-Material Amendments and 
published interpretations shall be deemed approved ten (10) days 
following provision to the Operating Committee unless two (2) 
unaffiliated Participants call for a vote to be taken on the 
proposed amendment or interpretation. If an amendment or 
interpretation is called out for a vote by two or more unaffiliated 
Participants, the proposed amendment must be approved by Majority 
Vote of the Operating Committee. Once a non-Material amendment has 
been approved, or deemed approved, by the Operating Committee, the 
Plan Processor shall be responsible for determining the specific 
changes to the Central Repository and providing technical 
documentation of those changes, including an implementation 
timeline.
    (ii) The Operating Committee, by Supermajority Vote, shall 
approve any Material Amendments to the Technical Specifications.
    (iii) The Operating Committee, by Supermajority Vote, may amend 
the Technical Specifications on its own motion.
    Section 6.10. Surveillance.
    (a) Surveillance Systems. Using the tools provided for in 
Appendix D, Functionality of the CAT System, each Participant shall 
develop and implement a surveillance system, or enhance existing 
surveillance systems, reasonably designed to make use of the 
consolidated information contained in the Central Repository. Unless 
otherwise ordered by the SEC, within fourteen (14) months after the 
Effective Date, each Participant shall initially implement a new or 
enhanced surveillance system(s) as required by SEC Rule 613 and the 
preceding sentence.
    (b) Coordinated Surveillance. Participants may, but are not 
required to, coordinate or share surveillance efforts through the 
use of regulatory services agreements and agreements adopted 
pursuant to SEC Rule 17d-2.
    (c) Use of CAT Data by Regulators.
    (i) Consistent with Appendix D, Functionality of the CAT System, 
the Plan Processor shall provide Participants and the SEC with 
access to all CAT Data stored in the Central Repository. Regulators 
will have access to processed CAT Data through two different 
methods; an online targeted query tool, and user-defined direct 
queries and bulk extracts.
    (A) The online targeted query tool will provide authorized users 
with the ability to retrieve CAT Data via an online query screen 
that includes the ability to choose from a variety of pre-defined 
selection criteria. Targeted queries must include date(s) and/or 
time range(s), as well as one or more of a variety of fields.
    (B) The user-defined direct queries and bulk extracts will 
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.
    (ii) Extraction of CAT Data shall be consistent with all 
permission rights granted by the Plan Processor. All CAT Data 
returned shall be encrypted, and PII data shall be masked unless 
users have permission to view the CAT Data that has been requested.
    (iii) The Plan Processor shall implement an automated mechanism 
to monitor direct query usage. Such monitoring shall include 
automated alerts to notify the Plan Processor of potential issues 
with bottlenecks or excessively long queues for queries or CAT Data 
extractions. The Plan Processor shall provide the Operating 
Committee or its designee(s) details as to how the monitoring will 
be accomplished and the metrics that will be used to trigger alerts.
    (iv) The Plan Processor shall reasonably assist regulatory staff 
(including those of Participants) with creating queries.
    (v) Without limiting the manner in which regulatory staff 
(including those of Participants) may submit queries, the Plan 
Processor shall submit queries on behalf of a regulatory staff 
(including those of Participants) as reasonably requested.
    (vi) The Plan Processor shall staff a CAT help desk, as 
described in Appendix D, CAT Help Desk, to provide technical 
expertise to assist regulatory staff (including those of 
Participants) with questions about the content and structure of the 
CAT Data.
    Section 6.11. Debt Securities and Primary Market Transactions. 
Unless otherwise ordered by the Commission, within six (6) months 
after the Effective Date, the Participants shall jointly provide to 
the SEC a document outlining how the Participants could incorporate 
into the CAT information with respect to equity securities that are 
not NMS Securities or OTC Equity Securities, including Primary 
Market Transactions in securities that are not NMS Securities or OTC 
Equity Securities and in debt securities, which document shall 
include details for each order and Reportable Event that may be 
required to be provided, which market participants may be required 
to provide the data, the implementation timeline, and a cost 
estimate.
    Section 6.12. Information Security Program. The Plan Processor 
shall develop and maintain a comprehensive information security 
program for the Central Repository, to be approved and reviewed at 
least annually by the Operating Committee, and which contains at a 
minimum the specific requirements detailed in Appendix D, Data 
Security.

ARTICLE VII

INTENTIONALLY OMITTED

[CAPITAL ACCOUNTS]

    [Section 7.1 Capital Accounts.]
    [(a) A separate capital account (``Capital Account'') shall be 
established and maintained by the Company for each Participant in 
accordance with Sec.  704(b) of the Code and Treasury Regulation 
Sec.  1.704-1 (b)(2)(iv). There shall be credited to each 
Participant's Capital Account the capital contributions (at fair 
market value in the case of contributed property) made by such 
Participant (which shall be deemed to be zero for the initial 
Participants), and allocations of Company profits and gain (or items 
thereof) to such Participant pursuant to Article VIII (excluding 
those allocated in Section 8.3). Each Participant's Capital Account 
shall be decreased by the amount of distributions (at fair market 
value in the case of property distributed in kind) to such 
Participant, and allocations of Company losses to such Participant 
pursuant to Article VIII (including expenditures which can neither 
be capitalized nor deducted for tax purposes, organization and 
syndication expenses not subject to amortization and loss on sale or 
disposition of Company property, whether or not disallowed under 
Sec. Sec.  267 or 707 of the Code). Capital Accounts shall not be 
adjusted to reflect a Participant's share of liabilities under Sec.  
752 of the Code.]
    [(b) If, following the date hereof, money or property is 
contributed to the Company in other than a de minimis amount in 
exchange for an equity interest in the Company (which shall not 
include the Participation Fee paid by a new Participant pursuant to 
Section 3.3, which is not treated as a contribution to capital), or 
money or property is distributed to a Participant in exchange for an 
interest in the Company but the Company is not

[[Page 84965]]

liquidated, the Capital Accounts of the Participants shall be 
adjusted based on the fair market value of Company property at the 
time of such contribution or distribution and the unrealized income, 
gain, loss, or deduction inherent in the Company property which has 
not previously been reflected in the Capital Accounts shall be 
allocated among the Participants as if there had been a taxable 
disposition of the Company property at its fair market value on such 
date. The fair market value of contributed, distributed, or revalued 
property shall be approved by the Operating Committee or, if there 
is no such agreement, by an appraisal by an independent third party 
valuation firm selected by the Operating Committee by Majority 
Vote.]
    [(c) The foregoing provisions and the other provisions of this 
Agreement relating to the maintenance of Capital Accounts are 
intended to comply with Treasury Regulation Sec.  1.704-1(b) 
promulgated under Sec.  704(b) of the Code, and shall be interpreted 
and applied in a manner consistent with such Regulations.]
    [Section 7.2 Interest. Except as otherwise provided herein, no 
Participant shall be entitled to receive interest on amounts in its 
Capital Account.]

ARTICLE VIII

TAX STATUS

[ALLOCATIONS OF INCOME AND LOSS; DISTRIBUTIONS]

    [Section 8.1 Periodic Allocations. As of the end of each 
calendar quarter or such other period selected by the Operating 
Committee, the net profit or net loss of the Company (and each item 
of income, gain, loss, deduction, and credit for federal income tax 
purposes) for the period shall be determined, and in the event the 
book value of any Company property is adjusted pursuant to Treasury 
Regulation Sec.  1.704-1(b)(2)(iv)(f), net profit, net losses and 
items thereof shall be determined as provided in Treasury Regulation 
Sec.  1.704-1(b)(2)(iv)(g). Except as provided in Section 8.2, such 
net profit or net loss (and each item of income, gain, loss, 
deduction, and credit) shall be allocated equally among the 
Participants.]
    [Section 8.2 Special Allocations. Notwithstanding Section 8.1, 
this Agreement shall be deemed to contain, and the allocations of 
net profit and net loss as set forth in Section 8.1 shall be subject 
to, each of the following: (a) a ``qualified income offset'' as 
described in Treasury Regulation Sec.  1.704-1(b)(2)(ii)(d); (b) a 
``partnership minimum gain chargeback'' as described in Treasury 
Regulation Sec.  1.704-2(f); and (c) a ``partner non-recourse debt 
minimum gain chargeback'' as described in Treasury Regulation Sec.  
1.704-2(i)(4). The Participants intend that the allocations required 
to be made pursuant to Section 8.1 and this Section 8.2 shall 
satisfy the requirements of Sec.  704(b) of the Code and the 
Treasury Regulations promulgated thereunder. Without the consent of 
the Participants, the Operating Committee shall have the power to 
interpret and amend the provisions of Section 8.1 and this Section 
8.2 in the manner necessary to ensure such compliance; provided that 
such amendments shall not change the amounts distributable to a 
Participant pursuant to this Agreement.]
    [Section 8.3 Allocations Pursuant to   704(c) of the Code. In 
accordance with Sec.  704(c) of the Code and the Treasury 
Regulations promulgated thereunder, income, gain, loss, and 
deduction with respect to any property contributed to the capital of 
the Company shall, solely for tax purposes, be allocated among the 
Participants so as to take account of any variation between the 
adjusted basis of such property to the Company for federal income 
tax purposes and its initial fair market value. In the event the 
book value of any Company property is adjusted pursuant to Treasury 
Regulation Sec.  1.704-1(b)(2)(iv)(f), allocations of income, gain, 
loss, and deduction with respect to such asset shall take account of 
any variation between the adjusted basis of such asset for federal 
income tax purposes and its adjusted book value in the same manner 
as under Sec.  704(c) of the Code and the Treasury Regulations 
promulgated thereunder. Such allocations shall be made by the 
Operating Committee using the ``traditional method'' set forth in 
Treasury Regulation Sec.  1.704-3(b). Allocations pursuant to this 
Section 8.3 are solely for purposes of federal, state, and local 
taxes and shall not affect, or in any way be taken into account in 
computing, any Participant's share of distributions pursuant to any 
provision of this Agreement.]
    [Section 8.4 Changes in Participants' Interests. If during any 
fiscal period of the Company there is a change in any Participant's 
Company Interest as a result of the admission or withdrawal of one 
or more Participants, the net profit, net loss or any other item 
allocable to the Participants under this Article VIII for the period 
shall be allocated among the Participants so as to reflect their 
varying interests in the Company during the period. In the event 
that the change in the Company Interests of the Participants results 
from the admission or withdrawal of a Participant, the allocation of 
net profit, net loss, or any other item allocable among the 
Participants under this Article VIII shall be made on the basis of 
an interim closing of the Company's books as of each date on which a 
Participant is admitted to or withdraws from the Company; provided 
that the Company may use interim closings of the books as of the end 
of the month preceding and the month of the admission or withdrawal, 
and prorate the items for the month of withdrawal on a daily basis, 
unless the Operating Committee determines that such an allocation 
would be materially unfair to any Participant. In the event that the 
change in the Company Interests of the Participants results from a 
Transfer of all or any portion of a Company Interest by a 
Participant, the net profit, net loss, or any other items allocable 
among the Participants under this Article VIII shall be determined 
on a daily, monthly, or other basis, as determined by the Operating 
Committee using any permissible method under Sec.  706 of the Code 
and the Treasury Regulations promulgated thereunder.]
    [Section 8.5 Distributions.]
    [(a) Subject to Section 10.2, cash and property of the Company 
shall not be distributed to the Participants unless the Operating 
Committee approves by Supermajority Vote (subject to Sec.  18-607 of 
the Delaware Act) a distribution after fully considering the reason 
that such distribution must or should be made to the Participants, 
including the circumstances contemplated under Section 8.3, Section 
8.6, and Section 9.3. To the extent a distribution is made, all 
Participants shall participate equally in any such distribution 
except as otherwise provided in Section 10.2.]
    [(b) No Participant shall have the right to require any 
distribution of any assets of the Company in kind. If any assets of 
the Company are distributed in kind, such assets shall be 
distributed on the basis of their fair market value net of any 
liabilities as reasonably determined by the Operating Committee. Any 
Participant entitled to any interest in such assets shall, unless 
otherwise determined by the Operating Committee, receive separate 
assets of the Company and not an interest as a tenant-in-common with 
other Participants so entitled in any asset being distributed.]
    [Section 8.6 Tax Status.]
    [(a)] The Company intends to operate in a manner such that it 
qualifies as a ``business league'' within the meaning of Section 
501(c)(6) of the Code. The Operating Committee [by Supermajority 
Vote, without the consent of any Participant, may] shall cause the 
Company to: (i) make an election to be treated as a corporation for 
U.S. federal income tax purposes by filing Form 8832 with the 
Internal Revenue Service effective as of the date of formation and 
(ii) file with the Internal Revenue Service, Form 1024, Application 
for Recognition of Exemption under Section 501(a) to[; or (ii)] be 
treated as a [``trade association''] ``business league'' as 
described in [Sec.  ] Section 501(c)(6) of the Code.
    [(b) If the Company so elects to be taxed as a corporation or is 
treated as a ``trade association'' as described in Sec.  501(c)(6) 
of the Code, it shall continue to maintain Capital Accounts in the 
manner provided in this Agreement, consistent with provisions of 
Sec.  704 of the Code, to determine the economic rights of the 
Participants under this Agreement, notwithstanding that it is not 
taxed as a partnership for U.S. federal income tax purposes, as 
interpreted by the Operating Committee and the Company's counsel in 
a manner to preserve the economic rights and obligations of the 
Participants under this Agreement. Sections 8.2, 8.3 and 9.5 shall 
not be applicable with respect to any period during with the Company 
is treated as a corporation for U.S. federal income tax purposes; 
provided, however, if the Company is initially treated as a 
partnership for U.S. federal income tax purposes and has made 
allocations under Section 8.2, it shall adjust the Capital Accounts 
to reflect the amount the Capital Accounts would have been had all 
allocations been made pursuant to Section 8.1.]

ARTICLE IX

RECORDS AND ACCOUNTING; REPORTS

    Section 9.1. Books and Records. The Company shall maintain 
complete and accurate books and records of the Company

[[Page 84966]]

in accordance with SEC Rule 17a-1, which shall be maintained and be 
available, in addition to any documents and information required to 
be furnished to the Participants under the Act, at the office of the 
Plan Processor and/or such other location(s) as may be designated by 
the Company for examination and copying by any Participant or its 
duly authorized representative, at such Participant's reasonable 
request and at its expense during ordinary business hours for any 
purpose reasonably related to such Participant's involvement with 
the CAT NMS Plan, including for compliance and other regulatory 
purposes, and in compliance with such other conditions as may be 
reasonably established by the Operating Committee. For the avoidance 
of doubt, all CAT Data and other books and records of the Company 
shall be the property of the Company, rather than the Plan 
Processor, and, to the extent in the possession or control of the 
Plan Processor, shall be made available by the Plan Processor to the 
Commission upon [reasonable] request. Except as provided in this 
Section 9.1 or required by non-waivable provisions of applicable 
law, no Participant shall have any right to examine or copy any of 
the books and records of the Company.
    Section 9.2. Accounting.
    (a) Except as provided in [Section 9.2(b) and] Section 9.3, the 
Operating Committee shall maintain a system of accounting 
established and administered in accordance with GAAP [(or other 
standard if determined appropriate by the Operating Committee)], and 
all financial statements or information that may be supplied to the 
Participants shall be prepared in accordance with GAAP (except that 
unaudited statements shall be subject to year-end adjustments and 
need not include footnotes) [(or other standard if determined 
appropriate by the Operating Committee)]. [To the extent the 
Operating Committee determines it advisable, the] The Company shall 
prepare and provide to each Participant (1) within 30 days after the 
end of each calendar month, an unaudited balance sheet, income 
statement, statement of cash flows and statement of changes in [each 
Participant's Capital Account] equity for, or as of the end of, (x) 
such month and (y) the portion of the then current Fiscal Year 
ending at the end of such month; and (2) as soon as practicable 
after the end of each Fiscal Year, a[n audited] balance sheet, 
income statement, statement of cash flows and statement of changes 
in [each Participant's Capital Account] equity for, or as of the end 
of, such year, audited by an independent public accounting firm 
(which audited balance sheet, income statement, statement of cash 
flows and statement of changes in equity contemplated by this 
Section 9.2(a) shall be made publicly available). The Fiscal Year 
shall be the calendar year unless otherwise determined by the 
Operating Committee.
    [(b) Assets received by the Company as capital contributions 
shall be recorded at their fair market values, and the Capital 
Account maintained for each Participant shall comply with Treasury 
Regulations Sec.  1.704-1(b)(2)(iv) promulgated under Sec.  704(b) 
of the Code. In the event fair market values for certain assets of 
the Company are not determined by appraisals, the fair market value 
for such assets shall be reasonably agreed to among the Participants 
as if in arm's-length negotiations.]
    [(c)] (b) In all other respects, [All] matters concerning 
accounting procedures shall be determined by the Operating 
Committee.
    Section 9.3. Tax Returns. The Operating Committee shall cause 
federal, state, provincial, and local income tax returns for the 
Company to be prepared and timely filed with the appropriate 
authorities. [If the Company is taxed as a partnership, it shall 
arrange for the timely delivery to the Participants of such 
information as is necessary for such Participants to prepare their 
federal, state and local tax returns.]
    Section 9.4. Company Funds. Pending use in the business of the 
Company or distribution to the Participants, the funds of the 
Company shall be held and/or invested in accordance with the then 
effective cash management and investment policy adopted by the 
Operating Committee.
    Section 9.5 [Tax Matters Partner.] Intentionally Omitted.
    [(a) A Participant designated by the Operating Committee shall 
serve as the ``Tax Matters Partner'' of the Company for all purposes 
pursuant to Sec. Sec.  6221-6231 of the Code. As Tax Matters 
Partner, the Tax Matters Partner shall: (i) furnish to each 
Participant affected by an audit of the Company income tax returns a 
copy of each notice or other communication received from the 
Internal Revenue Service or applicable state authority (except such 
notices or communications as are sent directly to the Participant); 
(ii) keep such Participant informed of any administrative or 
judicial proceeding, as required by Sec.  6623(g) of the Code; (iii) 
allow each such Participant an opportunity to participate in all 
such administrative and judicial proceedings; and (iv) advise and 
consult with each such Participant as to proposed adjustments to the 
federal or state income tax returns of the Company.]
    [(b) The Tax Matters Partner, as such, shall not have the 
authority to: (i) enter into a settlement agreement with the 
Internal Revenue Service that purports to bind any Participant, 
without the written consent of such Participant; or (ii) enter into 
an agreement extending the period of limitations as contemplated in 
Sec.  6229(b)(1)(B) of the Code without the prior approval of the 
Operating Committee.]
    [(c) The Company shall not be obligated to pay any fees or other 
compensation to the Tax Matters Partner in its capacity as such, but 
may pay compensation to the Tax Matters Partner for services 
rendered to the Company in any other capacity. However, the Company 
shall reimburse the Tax Matters Partner for any and all out-of-
pocket costs and expenses (including reasonable attorneys and other 
professional fees) incurred by it in its capacity as Tax Matters 
Partner. The Company shall indemnify, defend and hold the Tax 
Matters Partner harmless from and against any loss, liability, 
damage, costs or expense (including reasonable attorneys' fees) 
sustained or incurred as a result of any act or decision concerning 
Company tax matters and within the scope of such Participant's 
responsibilities as Tax Matters Partner, so long as such act or 
decision does not constitute gross negligence or willful 
misconduct.]
    Section 9.6. Confidentiality.
    (a) For purposes of this Agreement, ``Information'' means 
information disclosed by or on behalf of the Company or a 
Participant (the ``Disclosing Party'') to the Company or any other 
Participant (the ``Receiving Party'') in connection with this 
Agreement or the CAT System, but excludes any CAT Data or 
information otherwise disclosed pursuant to the requirements of SEC 
Rule 613. The Receiving Party agrees to maintain the Information in 
confidence with the same degree of care it holds its own 
confidential information (but in any event not less than reasonable 
care). A Receiving Party may only disclose Information to its 
Representatives (as defined below) on a need-to-know basis, and only 
to those of such Representatives whom shall have agreed to abide by 
the non-disclosure and non-use provisions in this Section 9.6. Each 
Receiving Party that is a Participant agrees that he, she or it 
shall not use for any purpose, other than in connection with the 
operation of the Company, and the Company agrees not to use for any 
purpose not expressly authorized by the Disclosing Party, any 
Information. The ``Representatives'' of a Person are such Person's 
Affiliates and the respective directors, managers, officers, 
employees, consultants, advisors and agents of such Person and such 
Person's Affiliates; provided, however, that a Participant is not a 
Representative of the Company. The obligations set forth in this 
Section 9.6(a) shall survive indefinitely (including after a 
Participant ceases to hold any Company Interest) but shall not apply 
to: (i) any Information that was already lawfully in the Receiving 
Party's possession and, to the knowledge of the Receiving Party, 
free from any confidentiality obligation to the Disclosing Party at 
the time of receipt from the Disclosing Party; (ii) any Information 
that is, now or in the future, public knowledge through no act or 
omission in breach of this Agreement by the Receiving Party; (iii) 
any Information that was lawfully obtained from a third party 
having, to the knowledge of the Receiving Party, the right to 
disclose it free from any obligation of confidentiality; or (iv) any 
Information that was independently developed by the Receiving Party 
prior to disclosure to it pursuant hereto and without recourse to or 
reliance upon Information disclosed to it pursuant hereto as 
established by its written records or other competent evidence. The 
obligations set forth in this Section 9.6(a) shall not restrict: (x) 
disclosures that are, in the opinion of the Receiving Party after 
consultation with counsel; required to be made by applicable laws 
and regulations, stock market or exchange requirements or the rules 
of any self-regulatory organization having jurisdiction; (y) 
disclosures required to be made pursuant to an order, subpoena or 
legal process; or (z) disclosures reasonably necessary for the 
conduct of any litigation or arbitral proceeding among the 
Participants (and their respective Representatives) and/or the 
Company; provided that the Receiving

[[Page 84967]]

Party shall, to the extent not prohibited by applicable law, notify 
the Disclosing Party prior to making any disclosure permitted by the 
foregoing clause (x) or clause (y), and, in the case of a disclosure 
permitted by the foregoing clause (y), shall consult with the 
Disclosing Party with respect to such disclosure, and prior to 
making such disclosure, to the extent not prohibited by applicable 
law, shall permit the Disclosing Party, at such Disclosing Party's 
cost and expense, to seek a protective order or similar relief 
protecting the confidentiality of such Information.
    (b) The Company shall not, and shall cause its Representatives 
not to, disclose any Information of a Participant to any other 
Participant without the prior written approval of the disclosing 
Participant.
    (c) A Participant shall be free, in its own discretion, to share 
Information of such Participant to other Participants without the 
approval of the Company.

ARTICLE X

DISSOLUTION AND TERMINATION

    Section 10.1. Dissolution of Company. The Company shall, subject 
to the SEC's approval, dissolve and its assets and business shall be 
wound up upon the occurrence of any of the following events:
    (a) unanimous written consent of the Participants to dissolve 
the Company;
    (b) an event that makes it unlawful or impossible for the 
Company business to be continued;
    (c) the termination of one or more Participants such that there 
is only one remaining Participant; or
    (d) the entry of a decree of judicial dissolution under Section 
18-802 of the Delaware Act.
    Section 10.2. Liquidation and Distribution. Following the 
occurrence of an event described in Section 10.1, the Operating 
Committee shall act as liquidating trustee and shall wind up the 
affairs of the Company by: (a) selling its assets in an orderly 
manner (so as to avoid the loss normally associated with forced 
sales); and (b) applying and distributing the proceeds of such sale, 
together with other funds held by the Company: (i) first, to the 
payment of all debts and liabilities of the Company; (ii) second, to 
the establishments of any reserves reasonably necessary to provide 
for any contingent recourse liabilities and obligations; and (iii) 
third, to [the Participants in proportion to the balances in their 
positive Capital Accounts (after such Capital Accounts have been 
adjusted for all items of income, gain, deduction, loss and items 
thereof in accordance with Article VII through the date of the such 
distribution) at the date of such distribution] such persons or 
institutions as is consistent with the purposes of the Company and 
consistent with Section 501(c)(6) of the Code.
    Section 10.3. Termination. Each of the Participants shall be 
furnished with a statement prepared by the Company's independent 
accountants, which shall set forth the assets and liabilities of the 
Company as of the date of the final distribution of the Company's 
assets under Section 10.2 and the net profit or net loss for the 
fiscal period ending on such date. Upon compliance with the 
distribution plan set forth in Section 10.2, the Participants shall 
cease to be such, and the liquidating trustee shall execute, 
acknowledge, and cause to be filed a certificate of cancellation of 
the Company. Upon completion of the dissolution, winding up, 
liquidation and distribution of the liquidation proceeds, the 
Company shall terminate.

ARTICLE XI

FUNDING OF THE COMPANY

    Section 11.1. Funding Authority.
    (a) On an annual basis the Operating Committee shall approve an 
operating budget for the Company. The budget shall include the 
projected costs of the Company, including the costs of developing 
and operating the CAT for the upcoming year, and the sources of all 
revenues to cover such costs, as well as the funding of any reserve 
that the Operating Committee reasonably deems appropriate for 
prudent operation of the Company.
    (b) Subject to Section 11.2, the Operating Committee shall have 
discretion to establish funding for the Company, including: (i) 
establishing fees that the Participants shall pay; and (ii) 
establishing fees for Industry Members that shall be implemented by 
Participants. The Participants shall 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.''
    (c) To fund the development and implementation of the CAT, the 
Company shall time the imposition and collection of all fees on 
Participants and Industry Members in a manner reasonably related to 
the timing when the Company expects to incur such development and 
implementation costs. In determining fees on Participants and 
Industry Members the Operating Committee shall take into account 
fees, costs and expenses (including legal and consulting fees and 
expenses) incurred by the Participants on behalf of the Company 
prior to the Effective Date in connection with the creation and 
implementation of the CAT, and such fees, costs and expenses shall 
be fairly and reasonably shared among the Participants and Industry 
Members. Any surplus of the Company's revenues over its expenses 
shall be treated as an operational reserve to offset future fees.
    (d) Consistent with this Article XI, the Operating Committee 
shall adopt policies, procedures, and practices regarding the budget 
and budgeting process, assignment of tiers, resolution of disputes, 
billing and collection of fees, and other related matters. For the 
avoidance of doubt, as part of its regular review of fees for the 
CAT, the Operating Committee shall have the right to change the tier 
assigned to any particular Person in accordance with fee schedules 
previously filed with the Commission that are reasonable, equitable 
and not unfairly discriminatory and subject to public notice and 
comment, pursuant to this Article XI. Any such changes will be 
effective upon reasonable notice to such Person.
    Section 11.2. Funding Principles. In establishing the funding of 
the Company, the Operating Committee shall seek:
    (a) to create transparent, predictable revenue streams for the 
Company that are aligned with the anticipated costs to build, 
operate and administer the CAT and the other costs of the Company;
    (b) to establish an allocation of the Company's related costs 
among Participants and Industry Members that is consistent with the 
Exchange Act, taking into account the timeline for implementation of 
the CAT and distinctions in the securities trading operations of 
Participants and Industry Members and their relative impact upon 
Company resources and operations;
    (c) to establish a tiered fee structure in which the fees 
charged to: (i) CAT Reporters that are Execution Venues, including 
ATSs, are based upon the level of market share; (ii) Industry 
Members' non-ATS activities are based upon message traffic; and 
(iii) the CAT Reporters with the most CAT-related activity (measured 
by market share and/or message traffic, as applicable) are generally 
comparable (where, for these comparability purposes, the tiered fee 
structure takes into consideration affiliations between or among CAT 
Reporters, whether Execution Venues and/or Industry Members).
    (d) to provide for ease of billing and other administrative 
functions;
    (e) to avoid any disincentives such as placing an inappropriate 
burden on competition and a reduction in market quality; and
    (f) to build financial stability to support the Company as a 
going concern.
    Section 11.3. Recovery.
    (a) The Operating Committee will establish fixed fees to be 
payable by Execution Venues as provided in this Section 11.3(a):
    (i) Each Execution Venue that: (A) executes transactions; or (B) 
in the case of a national securities association, has trades 
reported by its members to its trade reporting facility or 
facilities for reporting transactions effected otherwise than on an 
exchange, in NMS Stocks or OTC Equity Securities will pay a fixed 
fee depending on the market share of that Execution Venue in NMS 
Stocks and OTC Equity Securities, with the Operating Committee 
establishing at least two and no more than five tiers of fixed fees, 
based on an Execution Venue's NMS Stocks and OTC Equity Securities 
market share. For these purposes, market share for Execution Venues 
that execute transactions will be calculated by share volume, and 
market share for a national securities association that has trades 
reported by its members to its trade reporting facility or 
facilities for reporting transactions effected otherwise than on an 
exchange in NMS Stocks or OTC Equity Securities will be calculated 
based on share volume of trades reported, provided, however, that 
the share volume reported to such national securities association by 
an Execution Venue shall not be included in the calculation of such 
national security association's market share.
    (ii) Each Execution Venue that executes transactions in Listed 
Options will pay a fixed fee depending on the Listed Options market 
share of that Execution Venue, with

[[Page 84968]]

the Operating Committee establishing at least two and no more than 
five tiers of fixed fees, based on an Execution Venue's Listed 
Options market share. For these purposes, market share will be 
calculated by contract volume.
    (b) The Operating Committee will establish fixed fees to be 
payable by Industry Members, based on the message traffic generated 
by such Industry Member, with the Operating Committee establishing 
at least five and no more than nine tiers of fixed fees, based on 
message traffic. For the avoidance of doubt, the fixed fees payable 
by Industry Members pursuant to this paragraph shall, in addition to 
any other applicable message traffic, include message traffic 
generated by: (i) an ATS that does not execute orders that is 
sponsored by such Industry Member; and (ii) routing orders to and 
from any ATS sponsored by such Industry Member.
    (c) The Operating Committee may establish any other fees 
ancillary to the operation of the CAT that it reasonably determines 
appropriate, including fees: (i) for the late or inaccurate 
reporting of information to the CAT; (ii) for correcting submitted 
information; and (iii) based on access and use of the CAT for 
regulatory and oversight purposes (and not including any reporting 
obligations).
    (d) The Company shall make publicly available a schedule of 
effective fees and charges adopted pursuant to this Agreement as in 
effect from time to time. The Operating Committee shall review such 
fee schedule on at least an annual basis and shall make any changes 
to such fee schedule that it deems appropriate. The Operating 
Committee is authorized to review such fee schedule on a more 
regular basis, but shall not make any changes on more than a semi-
annual basis unless, pursuant to a Supermajority Vote, the Operating 
Committee concludes that such change is necessary for the adequate 
funding of the Company.
    Section 11.4. Collection of Fees. The Operating Committee shall 
establish a system for the collection of fees authorized under this 
Article XI. The Operating Committee may include such collection 
responsibility as a function of the Plan Processor or another 
administrator. Alternatively, the Operating Committee may use the 
facilities of a clearing agency registered under Section 17A of the 
Exchange Act to provide for the collection of such fees. 
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. Each Participant shall pay all 
applicable fees authorized under this Article XI as required by 
Section 3.7(b).
    Section 11.5. Fee Disputes. Disputes with respect to fees the 
Company charges Participants pursuant to this Article XI shall be 
determined by the Operating Committee or a Subcommittee designated 
by the Operating Committee. Decisions by the Operating Committee or 
such designated Subcommittee on such matters shall be binding on 
Participants, without prejudice to the rights of any Participant to 
seek redress from the SEC pursuant to SEC Rule 608 or in any other 
appropriate forum. The Participants shall adopt rules requiring that 
disputes with respect to fees charged to Industry Members pursuant 
to this Article XI be determined by the Operating Committee or a 
Subcommittee. Decisions by the Operating Committee or Subcommittee 
on such matters shall be binding on Industry Members, without 
prejudice to the rights of any Industry Member to seek redress from 
the SEC pursuant to SEC Rule 608 or in any other appropriate forum.

ARTICLE XII

MISCELLANEOUS

    Section 12.1. Notices and Addresses. All notices required to be 
given under this Agreement shall be in writing and may be delivered 
by certified or registered mail, postage prepaid, by hand, or by any 
private overnight courier service. Such notices shall be mailed or 
delivered to the Participants at the addresses set forth on Exhibit 
A to this Agreement or such other address as a Participant may 
notify the other Participants of in writing. Any notices to be sent 
to the Company shall be delivered to the principal place of business 
of the Company or at such other address as the Operating Committee 
may specify in a notice sent to all of the Participants. Notices 
shall be effective: (i) if mailed, on the date three (3) days after 
the date of mailing; or (ii) if hand delivered or delivered by 
private courier, on the date of delivery.
    Section 12.2. Governing Law; Submission to Jurisdiction. This 
Agreement shall be governed by and construed in accordance with the 
Delaware Act and internal laws and decisions of the State of 
Delaware without giving effect to any choice or conflict of law 
provision or rule (whether of the State of Delaware or any other 
jurisdiction) that would cause the application of laws of any 
jurisdictions other than those of the State of Delaware; provided 
that the rights and obligations of the Participants, Industry 
Members and other Persons contracting with the Company in respect of 
the matters covered by this Agreement shall at all times also be 
subject to any applicable provisions of the Exchange Act and any 
rules and regulations promulgated thereunder. Each of the Company 
and the Participants: (a) consents to submit itself to the exclusive 
personal jurisdiction of the Court of Chancery of the State of 
Delaware, New Castle County, or, if that court does not have 
jurisdiction, a federal court sitting in Wilmington, Delaware in any 
action or proceeding arising out of or relating to this Agreement or 
any of the transactions contemplated by this Agreement; (b) agrees 
that all claims in respect of such action or proceeding shall be 
heard and determined only in any such court; (c) agrees that it 
shall not attempt to deny or defeat such personal jurisdiction by 
motion or other request for leave from any such court; and (d) 
agrees not to bring any action or proceeding arising out of or 
relating to this Agreement or any of the transaction contemplated by 
this Agreement in any other court. Each of the Company and the 
Participants waives any defense of inconvenient forum to the 
maintenance of any action or proceeding so brought and waives any 
bond, surety or other security that might be required of any other 
Person with respect thereto. The Company or any Participant may make 
service on the Company or any other Participant by sending or 
delivering a copy of the process to the party to be served at the 
address and in the manner provided for the giving of notices in 
Section 12.1. Nothing in this Section 12.2, however, shall affect 
the right of any Person to serve legal process in any other manner 
permitted by law.
    Section 12.3. Amendments. Except as provided by Section 3.3, 
Section 3.4, Section 3.7, and Section 5.3, [and Section 8.2,] this 
Agreement may be amended from time to time only by a written 
amendment authorized by the affirmative vote of not less than two-
thirds of all of the Participants or with respect to Section 3.8 by 
the affirmative vote of all of the Participants, in each case that 
has been approved by the SEC pursuant to SEC Rule 608 or has 
otherwise become effective under SEC Rule 608. Notwithstanding the 
foregoing or anything else to the contrary, to the extent the SEC 
grants exemptive relief applicable to any provision of this 
Agreement, Participants and Industry Members shall be entitled to 
comply with such provision pursuant to the terms of the exemptive 
relief so granted at the time such relief is granted irrespective of 
whether this Agreement has been amended.
    Section 12.4. Successors and Assigns. Subject to the 
restrictions on Transfers set forth herein, this Agreement: (a) 
shall be binding upon, and inure to the benefit of, the Company and 
the Participants, and their respective successors and permitted 
assigns; and (b) may not be assigned except in connection with a 
Transfer of Company Interests permitted hereunder.
    Section 12.5. Counterparts. This Agreement may be executed in 
multiple counterparts, each of which shall be deemed an original, 
but all of which shall constitute one instrument. Any counterpart 
may be delivered by facsimile transmission or by electronic 
communication in portable document format (.pdf) or tagged image 
format (.tif), and the parties hereto agree that their 
electronically transmitted signatures shall have the same effect as 
manually transmitted signatures.
    Section 12.6. Modifications to be in Writing; Waivers. This 
Agreement constitutes the entire understanding of the parties hereto 
with respect to the subject matter hereof, and no amendment, 
modification or alteration shall be binding unless the same is in 
writing and adopted in accordance with Section 12.3. No waiver of 
any provision of this Agreement shall be valid unless the same shall 
be in writing and signed by each Person granting the waiver. No 
waiver by any Person of any default or breach hereunder, whether 
intentional or not,

[[Page 84969]]

shall be deemed to extend to any prior or subsequent default or 
breach or affect in any way any rights arising by virtue of any 
prior or subsequent such occurrence.
    Section 12.7. Captions. The captions are inserted for 
convenience of reference only and shall not affect the construction 
of this Agreement.
    Section 12.8. Validity and Severability. If any provision of 
this Agreement shall be held invalid or unenforceable, that shall 
not affect the validity or enforceability of any other provisions of 
this Agreement, all of which shall remain in full force and effect. 
If the final judgment of a court of competent jurisdiction declares 
that any term or provision hereof is invalid or unenforceable, each 
of the Company and the Participants agrees that the body making the 
determination of invalidity or unenforceability shall have the power 
to reduce the scope, duration or area of the term or provision, to 
delete specific words or phrases, or to replace any invalid or 
unenforceable term or provision with a term or provision that is 
valid and enforceable and that comes closest to expressing the 
intention of the invalid or unenforceable term or provision, and 
this Agreement shall be enforceable as so modified.
    Section 12.9. Third Party Beneficiaries. Except to the extent 
provided in any separate written agreement between the Company and 
another Person, the provisions of this Agreement are not intended to 
be for the benefit of any creditor or other Person (other than a 
Participant in its capacity as such) to whom any debts, liabilities 
or obligations are owed by (or who otherwise has any claim against) 
the Company or any Participants. Moreover, notwithstanding anything 
contained in this Agreement (but subject to the immediately 
following sentence), no such creditor or other Person shall obtain 
any rights under this Agreement or shall, by reason of this 
Agreement, make any claim in respect of any debt, liability or 
obligation (or otherwise) against the Company or any Participant. 
Notwithstanding the foregoing provisions of this Section 12.9, each 
Person entitled to indemnification under Section 4.8 that is not a 
party to this Agreement shall be deemed to be an express third party 
beneficiary of this Agreement for all purposes relating to such 
Person's indemnification and exculpation rights hereunder.
    Section 12.10. Expenses. Except as may be otherwise specifically 
provided to the contrary in this Agreement, including in Article XI, 
or as may be otherwise determined by the Operating Committee, each 
of the Company and the Participants shall bear its own internal 
costs and expenses incurred in connection with this Agreement, 
including those incurred in connection with all periodic meetings of 
the Participants or the Operating Committee, and the transactions 
contemplated hereby.
    Section 12.11. Specific Performance. Each of the Company and the 
Participants acknowledges and agrees that one or more of them would 
be damaged irreparably in the event any of the provisions of this 
Agreement are not performed in accordance with their specific terms 
or otherwise are breached. Accordingly, each such Person agrees that 
each other such Person may be entitled to an injunction or 
injunctions to prevent breaches of the provisions of this Agreement 
and to enforce specifically this Agreement and the terms and 
provisions hereof in any action instituted in any court having 
jurisdiction over the Parties and the matter, in each case with no 
need to post bond or other security.
    Section 12.12. Waiver of Partition. Each Participant agrees that 
irreparable damage would be done to the Company if any Participant 
brought an action in court to partition the assets or properties of 
the Company. Accordingly, each Participant agrees that such Person 
shall not, either directly or indirectly, take any action to require 
partition or appraisal of the Company or of any of the assets or 
properties of the Company, and notwithstanding any provisions of 
this Agreement to the contrary, each Participant (and such 
Participant's successors and permitted assigns) accepts the 
provisions of this Agreement as such Person's sole entitlement on 
termination, dissolution and/or liquidation of the Company and 
hereby irrevocably waives any and all right to maintain any action 
for partition or to compel any sale or other liquidation with 
respect to such Person's interest, in or with respect to, any assets 
or properties of the Company. Each Participant agrees not to 
petition a court for the dissolution, termination or liquidation of 
the Company.
    Section 12.13. Construction. The Company and all Participants 
have participated jointly in negotiating and drafting this 
Agreement. If an ambiguity or a question of intent or interpretation 
arises, this Agreement shall be construed as if drafted jointly by 
the Company and all Participants, and no presumption or burden of 
proof shall arise favoring or disfavoring any Person by virtue of 
the authorship of any provision of this Agreement.
    Section 12.14. Incorporation of Exhibits, Appendices, 
Attachments, Recitals and Schedules. The Exhibits, Appendices, 
Attachments, Recitals and Schedules identified in this Agreement are 
incorporated herein by reference and made a part hereof.

[SIGNATURE PAGE FOLLOWS]

    IN WITNESS WHEREOF, the Participants have executed this Limited 
Liability Company Agreement as of the day and year first above 
written.

PARTICIPANTS:

[BATS EXCHANGE, INC.]

BATS BZX EXCHANGE, INC.

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

[BATS Y-EXCHANGE, INC.]

BATS BYX EXCHANGE, INC.

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

BOX OPTIONS EXCHANGE LLC

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

C2 OPTIONS EXCHANGE, INCORPORATED

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

CHICAGO BOARD OPTIONS EXCHANGE, INCORPORATED

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

CHICAGO STOCK EXCHANGE, INC.

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

[EDGA EXCHANGE, INC.]

BATS EDGA EXCHANGE, INC.

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

[EDGX EXCHANGE, INC.]

BATS EDGX EXCHANGE, INC.

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC.

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

ISE GEMINI, LLC

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

ISE MERCURY, LLC

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

INTERNATIONAL SECURITIES EXCHANGE, LLC

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

INVESTORS' EXCHANGE, LLC

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

MIAMI INTERNATIONAL SECURITIES EXCHANGE LLC

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

[NASDAQ OMX BX, INC.]

NASDAQ BX, INC.

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

[NASDAQ OMX PHLX LLC]

NASDAQ PHLX LLC

By:--------------------------------------------------------------------

[[Page 84970]]

-----------------------------------------------------------------------
Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

THE NASDAQ STOCK MARKET LLC

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

NATIONAL STOCK EXCHANGE, INC.

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

NEW YORK STOCK EXCHANGE LLC

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

NYSE MKT LLC

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

NYSE ARCA, INC.

By:--------------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------

EXHIBIT A

PARTICIPANTS IN CAT NMS, LLC

------------------------------------------------------------------------
 
------------------------------------------------------------------------
[BATS Exchange, Inc.] Bats    [BATS Y-Exchange,     BOX Options Exchange
 BZX Exchange, Inc., 8050      Inc.] Bats BYX        LLC, 101 Arch St.,
 Marshall Drive, Lenexa, KS    Exchange, Inc.,       Suite 610, Boston,
 66214.                        8050 Marshall         MA 02110.
                               Drive, Lenexa, KS
                               66214.
C2 Options Exchange,          Chicago Board         Chicago Stock
 Incorporated, 400 South       Options Exchange,     Exchange, Inc., 440
 LaSalle St., Chicago, IL      Incorporated, 400     South LaSalle St.,
 60605.                        South LaSalle St.,    Suite 800, Chicago,
                               Chicago, IL 60605.    IL 60605.
[EDGA Exchange, Inc.] Bats    [EDGX Exchange,       Financial Industry
 EDGA Exchange, Inc., 8050     Inc.] Bats EDGX       Regulatory
 Marshall Drive Lenexa, KS     Exchange, Inc.,       Authority, Inc.,
 66214.                        8050 Marshall         1735 K Street NW.,
                               Drive, Lenexa, KS     Washington DC,
                               66214.                20006.
ISE Gemini, LLC, 60 Broad     International         Miami International
 Street, New York, New York    Securities            Securities Exchange
 10004.                        Exchange, LLC, 60     LLC, 7 Roszel Road,
                               Broad Street, New     5th floor,
                               York, New York        Princeton, NJ
                               10004.                08540.
[NASDAQ OMX BX, Inc.] NASDAQ  [NASDAQ OMX PHLX      The NASDAQ Stock
 BX, Inc., One Liberty         LLC] NASDAQ PHLX      Market LLC, One
 Plaza, 165 Broadway, New      LLC., 1900 Market     Liberty Plaza, 165
 York, NY 10006.               Street,               Broadway, New York,
                               Philadelphia, PA      NY 10006.
                               19103.
National Stock Exchange,      New York Stock        NYSE MKT LLC, 11
 Inc., 101 Hudson Street       Exchange LLC, 11      Wall St., New York,
 Suite 1200, Jersey City, NJ   Wall St., New York,   NY 10005.
 07302.                        NY 10005.
NYSE Arca, Inc., 11 Wall      ISE Mercury, LLC, 60  Investors' Exchange,
 St., New York, NY 10005.      Broad Street, New     LLC, 4 World Trade
                               York, NY 10004.       Center 44th Floor,
                                                     New York, NY 10007.
------------------------------------------------------------------------

APPENDIX A

Consolidated Audit Trail National Market System Plan Request for 
Proposal, issued February 26, 2013, version 3.0 updated March 3, 2014

(The Request for Proposal is available at Securities Exchange Act 
Release No. 77724 (CAT NMS Plan published for comment on May 17, 
2016))

Certain provisions of Articles I-XII have been modified as noted on 
the cover page of this CAT NMS Plan. To the extent text in the 
following Appendices conflicts with any such modifications, the 
modified language of Articles I-XII shall control

APPENDIX B

[Reserved]

APPENDIX C

DISCUSSION OF CONSIDERATIONS

SEC Rule 613(a)(1) Considerations

    SEC Rule 613(a) requires the Participants to discuss various 
``considerations'' related to how the Participants propose to 
implement the requirements of the CAT NMS Plan, cost estimates for 
the proposed solution, and a discussion of the costs and benefits of 
alternate solutions considered but not proposed.\3683\ This Appendix 
C discusses the considerations identified in SEC Rule 613(a). The 
first section below provides a background of the process the 
Participants have undertaken to develop and draft the CAT NMS Plan. 
Section A below addresses the requirements, set forth in SEC Rule 
613(a)(1)(i) through (a)(1)(vi), that the ``Participants specify and 
explain the choices they made to meet the requirements specified in 
[SEC Rule 613] for the [CAT].'' \3684\ In many instances, details of 
the requirements (i.e., the specific technical requirements that the 
Plan Processor must meet) will be set forth in the Plan Processor 
Requirements document (``PPR''). Relevant portions of the PPR are 
outlined and described throughout this Appendix C, as well as 
included as Appendix D.
---------------------------------------------------------------------------

    \3683\ Securities Exchange Act Release No. 67457 (July 18, 
2012), 77 Fed. Reg. 45722, 45789 (Aug. 1, 2012) (``Adopting 
Release'').
    \3684\ See Adopting Release at 45790. Section B below includes 
discussions of reasonable alternatives to approaching the creation, 
implementation, and maintenance of the CAT that the Participants 
considered. See SEC Rule 613(a)(1)(xii).
---------------------------------------------------------------------------

    Section B below discusses the requirements in SEC Rule 
613(a)(1)(vii) and SEC Rule 613(a)(1)(viii) that the CAT NMS Plan 
include detailed estimates of the costs, and the impact on 
competition, efficiency, and capital formation, for creating, 
implementing, and maintaining the CAT. The information in Section B 
below is intended to aid the Commission in its economic analysis of 
the CAT and the CAT NMS Plan.\3685\
---------------------------------------------------------------------------

    \3685\ See Adopting Release at 45793.
---------------------------------------------------------------------------

    Section C below, in accordance with SEC Rule 613(a)(1)(x), 
establishes objective milestones to assess the Participants' 
progress toward the implementation of the CAT in accordance with the 
CAT NMS Plan. This section includes a plan to eliminate existing 
rules and systems (or components thereof) that will be rendered 
duplicative by the CAT, as required by SEC Rule 613(a)(1)(ix).
    Section D below addresses how the Participants solicited the 
input of their Industry Members and other appropriate parties in 
designing the CAT NMS Plan as required by SEC Rule 613(a)(1)(xi).
    Capitalized terms used and not otherwise defined in this 
Appendix C have the respective meanings ascribed to such terms in 
the Agreement to which this Appendix C is attached.

Background

    SEC Rule 613 requires the Participants to jointly file a 
national market system plan to govern the creation, implementation, 
and maintenance of the CAT, and the Central Repository. Early in the 
process, the Participants concluded that the publication of a 
request for proposal soliciting Bids from interested parties to 
serve as the Plan Processor for the CAT was necessary prior to 
filing the CAT NMS Plan to ensure that potential alternative 
solutions to creating the CAT could be presented and considered by 
the Participants and that a detailed and meaningful cost/benefit 
analysis could be performed, both of which are required 
considerations to be addressed in the CAT NMS Plan. To that end, the 
Participants published the RFP on February 26, 2013,\3686\ and 31 
firms formally notified the Participants of their intent to bid.
---------------------------------------------------------------------------

    \3686\ The initial RFP was amended in March 2014. See 
Consolidated Audit Trail National Market System Plan Request for 
Proposal (last updated Mar. 3, 2014), available at http://catnmsplan.com/web/groups/catnms/documents/catnms/p213400.zip (the 
``RFP'').
---------------------------------------------------------------------------

    On September 3, 2013, the Participants filed with the Commission 
the Selection Plan, a national market system plan to govern the 
process for Participant review of the Bids submitted in response to 
the RFP, the procedure for evaluating the Bids, and,

[[Page 84971]]

ultimately, selection of the Plan Processor. Several critical 
components of the Participants' process for formulating and drafting 
the CAT NMS Plan were contingent upon approval of the Selection 
Plan, which occurred on February 21, 2014.\3687\ Bids in response to 
the RFP were due four weeks following approval of the Selection 
Plan, on March 21, 2014. Ten Bids were submitted in response to the 
RFP.
---------------------------------------------------------------------------

    \3687\ The SEC has approved two amendments to the Selection 
Plan. See Securities Exchange Act Rel. No. 75192 (June 17, 2015), 80 
Fed. Reg. 36028 (June 23, 2015); and Securities Exchange Act Rel. 
No.75980 (Sept. 24, 2015), 80 Fed. Reg. 58796 (Sept. 30, 2015).
---------------------------------------------------------------------------

    The Participants considered each Bid in great detail to ensure 
that the Participants can address the considerations enumerated in 
SEC Rule 613, including analysis of the costs and benefits of the 
proposed solution(s), as well as alternative solutions considered 
but not proposed, so that the Commission and the public will have 
sufficiently detailed information to carefully consider all aspects 
of the CAT NMS Plan the Participants ultimately submit. Soon after 
receiving the Bids, and pursuant to the Selection Plan, the 
Participants determined that all ten Bids were ``qualified'' 
pursuant to the Selection Plan.\3688\ On July 1, 2014, after the 
Participants had hosted Bidder presentations to learn additional 
details regarding the Bids and conducted an analysis and comparison 
of the Bids, the Participants voted to select six Shortlisted 
Bidders.
---------------------------------------------------------------------------

    \3688\ See Selection Plan, 78 Fed. Reg. 69910, Ex. A Sec. Sec.  
I(Q) (defining ``Qualified Bid''), VI(A) (providing the process for 
determining whether Bids are determined to be ``Qualified Bids'').
---------------------------------------------------------------------------

    Under the terms of the Selection Plan, and as incorporated into 
the CAT NMS Plan, the Plan Processor for the CAT has not been 
selected and will not be selected until after approval of the CAT 
NMS Plan.\3689\ Any one of the six remaining Shortlisted Bidders 
could be selected as the Plan Processor, and because each 
Shortlisted Bidder has proposed different approaches to various 
issues, the CAT NMS Plan does not generally mandate specific 
technical approaches; rather, it mandates specific requirements that 
the Plan Processor must meet, regardless of approach. Where 
possible, this Appendix C discusses specific technical requirements 
the Participants have deemed necessary for the CAT; however, in some 
instances, provided the Plan Processor meets certain general 
obligations, the specific approach taken in implementing aspects of 
the CAT NMS Plan will be dependent upon the Bidder ultimately 
selected as the Plan Processor.
---------------------------------------------------------------------------

    \3689\ See Selection Plan Sec.  6; see also id. Article V.
---------------------------------------------------------------------------

    SEC Rule 613 also includes provisions to facilitate input on the 
implementation, operation, and administration of the Central 
Repository from the broker-dealer industry.\3690\ To this end, the 
Participants formed a Development Advisory Group (``DAG'') to 
solicit industry feedback. Following multiple discussions between 
the Participants and both the DAG and the Bidders, as well as among 
the Participants themselves, the Participants recognized that some 
provisions of SEC Rule 613 would not permit certain solutions to be 
included in the CAT NMS Plan that the Participants determined 
advisable to effectuate the most efficient and cost-effective CAT. 
Consequently, the Participants submitted their original Exemptive 
Request Letter seeking exemptive relief from the Commission with 
respect to certain provisions of SEC Rule 613 regarding (1) options 
market maker quotes; (2) Customer-IDs; (3) CAT-Reporter-IDs; (4) 
linking of executions to specific subaccount allocations on 
allocation reports; and (5) timestamp granularity for Manual Order 
Events.\3691\ Specifically, the Participants requested that the 
Commission grant an exemption from:
---------------------------------------------------------------------------

    \3690\ See SEC Rules 613(a)(1)(xi) and 613(b)(7).

    \3691\ See original Exemptive Request Letter, available at 
http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602383.pdf.
---------------------------------------------------------------------------

 Rule 613(c)(7)(ii) and (iv) for options market makers with 
regard to their options quotes.
 Rule 613(c)(7)(i)(A), (c)(7)(iv)(F), (c)(7)(viii)(B)and 
(c)(8) which relate to the requirements for Customer-IDs.\3692\
---------------------------------------------------------------------------

    \3692\ See Participants' Proposed RFP Concepts Document (last 
updated Jan. 16, 2013) (the ``Proposed RFP Concepts Document''). The 
Proposed RFP Concepts Document was posted on the Consolidated Audit 
Trail NMS Plan website, http://catnmsplan.com (the ``CAT NMS Plan 
Website'').
---------------------------------------------------------------------------

 Rule 613(c)(7)(i)(C), (c)(7)(ii)(D), (c)(7)(ii)(E), 
(c)(7)(iii)(D), (c)(7)(iii)(E), (c)(7)(iv)(F), (c)(7)(v)(F), 
(c)(7)(vi)(B) and (c)(8) which relate to the requirements for CAT-
Reporter-IDs.
 Rule 613(c)(7)(vi)(A), which requires CAT Reporters to 
record and report the account number of any subaccounts to which the 
execution is allocated.
 The millisecond timestamp granularity requirement in Rule 
613(d)(3) for certain Manual Order Events subject to timestamp 
reporting under Rules 613(c)(7)(i)(E), 613(c)(7)(ii)(C), 
613(c)(7)(iii)(C), and 613(c)(7)(iv)(C).

The Participants supplemented their original Exemptive Request 
Letter with a supplemental Exemptive Request Letter (together, the 
``Exemptive Request Letters''), clarifying its original requested 
exemption from the requirement in Rule 613(c)(7)(viii)(B) 
(including, in some instances, requesting an exemption from the 
requirement to provide an account number, account type and date 
account opened under Rule 613(c)(7)(viii)(B)).\3693\ The 
Participants believe that the requested relief is critical to the 
development of a cost-effective approach to the CAT.
---------------------------------------------------------------------------

    \3693\ See Letter from the Participants to Brent J. Fields, 
Secretary, SEC re: Supplement to Request for Exemptive Relief from 
Certain Provisions of SEC Rule 613 of Regulation NMS under the 
Securities Exchange Act of 1934 (Sept. 2, 2015), available at the 
CAT NMS Plan Website. Separately, on April 3, 2015, the Participants 
filed with the Commission examples demonstrating how the proposed 
request for exemptive relief related to allocations would operate; 
this filing did not substantively update or amend the Exemptive 
Request Letter. See Letter from the Participants to Brent J. Fields, 
Secretary, SEC re: Supplement to Request for Exemptive Relief from 
Certain Provisions of SEC Rule 613 of Regulation NMS under the 
Securities Exchange Act of 1934 (Apr. 3, 2015), available at the CAT 
NMS Plan Website.
---------------------------------------------------------------------------

    The Participants also will seek to comply with their obligations 
related to the CAT under Reg SCI as efficiently as possible. When it 
adopted Reg SCI, the Commission expressed its belief that the CAT 
``will be an SCI system of each SCI SRO that is a member of an 
approved NMS plan under Rule 613, because it will be a facility of 
each SCI SRO that is a member of such plan.'' \3694\ The 
Participants intend to work together and with the Plan Processor, in 
consultation with the Commission, to determine a way to effectively 
and efficiently meet the requirements of Reg SCI without 
unnecessarily duplicating efforts.
---------------------------------------------------------------------------

    \3694\ See Securities Exchange Act Release No. 73639 (Nov. 19, 
2014), 79 Fed. Reg. 72252, 72275 n. 246 (Dec. 5, 2014) (adopting Reg 
SCI and citing the Adopting Release at 45774).
---------------------------------------------------------------------------

A. Features and Details of the CAT NMS Plan

1. Reporting Data to the CAT

    As required by SEC Rule 613(a)(1)(i), this section describes the 
reporting of data to the Central Repository, including the sources 
of such data and the manner in which the Central Repository will 
receive, extract, transform, load, and retain such data. As a 
general matter, the data reported to the Central Repository is of 
two distinct types: (1) Reference data (e.g., data concerning CAT 
Reporters and customer information, issue symbology information, and 
data from the SIPs); and (2) order and trade data submitted by CAT 
Reporters, including national securities exchanges, national 
securities associations and broker-dealers. Each of these types of 
data is discussed separately below.

[ssquf] Sources of Data

    In general, data will be reported to the Central Repository by 
national securities exchanges, national securities associations, 
broker-dealers, the SIPs for the CQS, CTA, UTP and Plan for 
Reporting of Consolidated Options Last Sale Reports and Quotation 
Information(``OPRA'') Plans, and certain other vendors or 
appropriate third parties (``Data Submitters'').\3695\ Specifically, 
in accordance with SEC Rule 613(c)(5) and Sections 6.3 and 6.4 of 
the CAT NMS Plan, each national securities exchange and its members 
must report to the Central Repository the information required by 
SEC

[[Page 84972]]

Rule 613(c)(7) for each NMS Security registered or listed for 
trading on such exchange or admitted to unlisted trading privileged 
on such exchange (subject to relief pursuant to the Exemptive 
Request Letters).\3696\ Similarly, in accordance with SEC Rule 
613(c)(6), each national securities association and its members must 
report to the Central Repository the information required by SEC 
Rule 613(c)(7) for each NMS Security for which transaction reports 
are required to be submitted to the association (subject to relief 
pursuant to the Exemptive Request Letters). Additionally, the 
Participants, in consultation with the DAG and with industry 
support, have determined to include OTC Equity Securities in the 
initial phase-in of the CAT; thus, CAT Reporters must also include 
order and trade information regarding orders for OTC Equity 
Securities in addition to those involving NMS Securities.\3697\
---------------------------------------------------------------------------

    \3695\ See Adopting Release at 45748 n.278 (noting that ``the 
Rule does not preclude the NMS plan from allowing broker-dealers to 
use a third party to report the data required to the central 
repository on their behalf''). The Participants note that CAT 
Reporters using third party service providers to submit information 
on their behalf would still be responsible for all the data 
submitted on their behalf. The term ``CAT Reporters'' is generally 
used to refer to those parties that are required by SEC Rule 613 and 
the CAT NMS Plan to submit data to the CAT (i.e., national 
securities exchanges, national securities associations, and members 
thereof). The term ``Data Submitters'' includes those third-parties 
that may submit data to the CAT on behalf of CAT Reporters as well 
as outside parties that are not required to submit data to the CAT 
but from which the CAT may receive data (e.g., SIPs). Thus, all CAT 
Reporters are Data Submitters, but not all Data Submitters are CAT 
Reporters.
    \3696\ As noted, the Participants submitted the Exemptive 
Request Letters to facilitate compliance with the goals and purposes 
of the rule while minimizing the impact on existing market practices 
and reducing burdens on both Participants and broker-dealers.
    \3697\ See SIFMA Industry Recommendations for the Creation of 
the Consolidated Audit Trail (CAT) at 70 (Mar. 28, 2013) (``SIFMA 
Recommendations''), available at http://www.sifma.org/workarea/downloadasset.aspx?id=8589942773. Section 1.1 of the CAT NMS Plan 
includes OTC Equity Securities as ``Eligible Securities.'' As 
discussed in Appendix C, Plan to Eliminate Existing Rules and 
Systems (SEC Rule 613(a)(1)(ix)), inclusion of OTC Equity Securities 
in the initial phase of the CAT should facilitate the retirement of 
FINRA's Order Audit Trail System (``OATS'') and reduce costs to the 
industry.
---------------------------------------------------------------------------

    In addition to order and execution data, SEC Rule 613 requires 
Industry Members to report customer information, including Customer-
IDs, to the CAT so that order and execution data can be associated 
with particular Customers. However, in the Exemptive Request 
Letters, the Participants request relief that would permit CAT 
Reporters to provide information to the Central Repository using 
Firm Designated IDs instead of Customer-IDs. In addition, Industry 
Members are permitted to use Data Submitters that are not national 
securities exchanges, national securities associations, or members 
thereof to report the required data to the Central Repository on 
their behalf. The approach proposed in the Exemptive Request Letters 
also would permit Data Submitters to provide information to the 
Central Repository using Firm Designated ID for purposes of 
reporting information to the CAT.
    The Central Repository also is required to collect National Best 
Bid and National Best Offer information, transaction reports 
reported to an effective transaction reporting plan filed with the 
SEC pursuant to SEC Rule 601, and Last Sale Reports reported 
pursuant to the OPRA Plan.\3698\ Consequently, the Plan Processor 
must receive information from the SIPs for those plans and 
incorporate that information into the CAT. Lastly, as set forth in 
Appendix D, the Plan Processor must maintain a complete symbology 
database, including historical symbology. CAT Reporters will submit 
data to the CAT with the listing exchange symbology format, and the 
CAT must use the listing exchange symbology format in the display of 
linked data. The Participants will be responsible for providing the 
Plan Processor with issue symbol information, and issue symbol 
validation must be included in the processing of data submitted by 
CAT Reporters.
---------------------------------------------------------------------------

    \3698\ SEC Rule 613(e)(7).
---------------------------------------------------------------------------

    After reviewing the Bids and receiving industry input, the 
Participants do not believe there is a need to dictate that the Plan 
Processor adopt a particular format for the submission of data to 
the Central Repository. Rather, regardless of the format(s) adopted, 
the CAT must be able to monitor incoming and outgoing data feeds and 
be capable of performing the following functions:
    Support daily files from each CAT Reporter;
    Support files that cover multiple days (for re-transmission);
    Support error correction files;
    Capture operational logs of transmissions, success, failure 
reasons, etc.; and
    Support real-time and batch feeds.
    The Plan Processor will be required to ensure that each CAT 
Reporter is able to access its submissions for error correction 
purposes and transmit their data to the Central Repository on a 
daily basis. The Plan Processer must have a robust file management 
tool that is commercially available, including key management. In 
addition, at a minimum, the Plan Processor must be able to accept 
data from CAT Reporters and other Data Submitters via automated 
means (e.g., Secure File Transfer Protocol (``SFTP'')) as well as 
manual entry means (e.g., GUI interface).
    The Plan Processor will be required to ensure that all file 
processing stages are handled correctly. This will include the start 
and stop of data reception, the recovery of data that is 
transmitted, the retransmission of data from CAT Reporters, and the 
resynchronization of data after any data loss. At a minimum, this 
will require the Plan Processor to have logic that identifies 
duplication of files. If transmission is interrupted, the Plan 
Processor must specify:

data recovery process for partial submissions;
operational logs/reporting;
operational controls for receipt of data; and
managing/handling failures.

    The Plan Processor is required to establish a method for 
developing an audit trail of data submitted to and received by the 
Central Repository. This must include a validation of files to 
identify file corruption and incomplete transmissions. As discussed 
more fully below, an acknowledgement of data receipt and information 
on rejected data must be transmitted to CAT Reporters.

1. Data Submission for Orders and Reportable Events, including Manual 
Submission

    Sections 6.3 and 6.4 of the CAT NMS Plan require CAT Reporters 
to provide details for each order and each Reportable Event to the 
Central Repository.\3699\ In the RFP, the Participants requested 
that the Bidders describe the following:
---------------------------------------------------------------------------

    \3699\ See SEC Rule 613(c)(7).

system interfaces, including data submission, data access and user 
interfaces; \3700\
---------------------------------------------------------------------------

    \3700\ RFP Question 49.
---------------------------------------------------------------------------

the proposed messaging and communication protocol(s) used in data 
submission and retrieval and the advantage(s) of such protocol(s); 
\3701\
---------------------------------------------------------------------------

    \3701\ RFP Questions 59-60.
---------------------------------------------------------------------------

the process and associated protocols for accepting batch 
submissions; \3702\ and
---------------------------------------------------------------------------

    \3702\ RFP Question 62.
---------------------------------------------------------------------------

the process and any associated protocols for supporting manual data 
submissions.\3703\
---------------------------------------------------------------------------

    \3703\ RFP Question 63.
---------------------------------------------------------------------------

2. The Timing of Reporting Data

    Pursuant to SEC Rule 613(c)(3), Sections 6.3 and 6.4 of the CAT 
NMS Plan require that CAT Reporters report certain order and 
transaction information recorded pursuant to SEC Rule 613 or the CAT 
NMS Plan to the Central Repository by 8:00 a.m. Eastern Time on the 
Trading Day following the day such information is recorded.\3704\ 
SEC Rule 613(c)(3) notes, however, that the CAT NMS Plan ``may 
accommodate voluntary reporting prior to 8:00 a.m. Eastern Time, but 
shall not impose an earlier deadline on the reporting parties.'' 
Sections 6.3 and 6.4 of the CAT NMS Plan explicitly permit, but do 
not require, CAT Reporters to submit information to the CAT 
throughout the day. Because of the amount of data that will 
ultimately be reported to the CAT, the Participants have decided to 
permit Data Submitters to report data to the CAT as end of day files 
(submitted by 8:00 a.m. Eastern Time the following Trading Day) or 
throughout the day. The Participants believe that permitting Data 
Submitters to report data throughout the day may reduce the total 
amount of bandwidth used by the Plan Processor to receive data files 
and will allow CAT Reporters and other Data Submitters to determine 
which method is most efficient and cost-effective for them. However, 
the Plan Processor will still be required to have the capacity to 
handle two times the historical peak daily volume to ensure that, if 
CAT Reporters choose to submit data on an end-of-day basis, the Plan 
Processor can handle the influx of data.\3705\
---------------------------------------------------------------------------

    \3704\ SEC Rule 613 and Sections 6.3 and 6.4 of the CAT NMS Plan 
permit certain other information to be reported by 8:00 a.m. Eastern 
Time on the Trading Day following the day the CAT Reporter receives 
the information. See SEC Rule 613(c)(4), (c)(7)(vi)-(viii).
    \3705\ SIFMA's recommendations to the Participants regarding the 
CAT indicates support for the ability of Data Submitters to submit 
data in batch or near-real-time reporting. See SIFMA 
Recommendations, at 55.
---------------------------------------------------------------------------

3. Customer and Customer Account Information

    In addition to the submission of order and trade data, broker-
dealer CAT Reporters must also submit customer information to the 
CAT so that the order and trade data can be matched to the specific 
customer.\3706\ SEC

[[Page 84973]]

Rule 613(c)(7) sets forth data recording and reporting requirements 
that must be included in the CAT NMS Plan. Under SEC Rule 
613(c)(7)(i)(A), the CAT NMS Plan must require each CAT Reporter to 
record and report ``Customer-ID(s) for each customer'' when 
reporting to the CAT order receipt or origination information.\3707\ 
When reporting the modification or cancellation of an order, the 
rule further requires the reporting of ``the Customer-ID of the 
Person giving the modification or cancellation instruction.'' \3708\ 
In addition, SEC Rule 613(c)(8) mandates that all CAT Reporters 
``use the same Customer-ID . . . for each customer and broker-
dealer.'' \3709\ For purposes of SEC Rule 613, ``Customer-ID'' 
means, ``with respect to a customer, a code that uniquely identifies 
such customer for purposes of providing data to the central 
repository.'' \3710\ Also, SEC Rule 613(c)(7)(viii) requires that, 
for original receipt or origination of an order, CAT Reporters 
report ``customer account information,'' which is defined as 
including ``account number, account type, customer type, date 
account opened, and large trader identifier (if applicable).'' 
\3711\
---------------------------------------------------------------------------

    \3706\ As noted above, the term ``customer'' means ``(i) [t]he 
account holder(s) of the account at a broker-dealer originating an 
order, and (ii) [a]ny person from whom the broker-dealer is 
authorized to accept trading instructions for such account, if 
different than the account holder(s).'' SEC Rule 613(j)(3).
    \3707\ SEC Rule 613(c)(7)(i)(A).
    \3708\ SEC Rule 613(c)(7)(iv)(F).
    \3709\ SEC Rule 613(c)(8).
    \3710\ SEC Rule 613(j)(5).
    \3711\ SEC Rule 613(j)(4).
---------------------------------------------------------------------------

    After considering the requirements of SEC Rule 613 with respect 
to recording and reporting Customer-IDs, Customer Account 
Information, and information of sufficient detail to identify the 
Customer as well as industry input and the Commission's reasons for 
adopting these requirements, the Participants requested that 
Industry Members and other industry participants provide ideas on 
implementing the Customer-ID requirement. After careful 
consideration, including numerous discussions with the DAG, the 
Participants concluded that the CAT NMS Plan should use a reporting 
model that requires broker-dealers to provide detailed account and 
Customer information to the Central Repository, including the 
specific identities of all Customers associated with each account, 
and have the Central Repository correlate the Customer information 
across broker-dealers, assign a unique customer identifier to each 
Customer (i.e., the Customer-ID), and use that unique customer 
identifier consistently across all CAT Data (hereinafter, the 
``Customer Information Approach'').
    Under the Customer Information Approach, the CAT NMS Plan would 
require each broker-dealer to assign a unique Firm Designated ID to 
each customer, as that term is defined in SEC Rule 613. For the Firm 
Designated ID, broker-dealers would be permitted to use an account 
number or any other identifier defined by the firm, provided each 
identifier is unique across the firm for each business date (i.e., a 
single firm may not have multiple separate customers with the same 
identifier on any given date). Under the Customer Information 
Approach, broker-dealers must submit an initial set of customer 
information to the Central Repository, including, as applicable, the 
Firm Designated ID for the customer, name, address, date of birth, 
Individual Tax ID (``ITIN'')/social security number (``SSN''), 
individual's role in the account (e.g., primary holder, joint 
holder, guardian, trustee, person with the power of attorney) and 
Legal Entity Identifier (``LEI''),\3712\ and/or Large Trader ID 
(``LTID''), if applicable.\3713\ Under the Customer Information 
Approach, broker-dealers would be required to submit to the Central 
Repository daily updates for reactivated accounts, newly established 
or revised Firm Designated IDs, or associated reportable Customer 
information.\3714\
---------------------------------------------------------------------------

    \3712\ Where a validated LEI is available for a Customer or 
entity, it may obviate the need to report other identifier 
information (e.g., Customer name, address).
    \3713\ The Participants anticipate that Customer information 
that is initially reported to the CAT could be limited to only 
customer accounts that have, or are expected to have, CAT-reportable 
activity. For example, accounts that are considered open, but have 
not traded Eligible Securities in a given timeframe may not need to 
be pre-established in the CAT, but rather could be reported as part 
of daily updates after they have CAT-reportable activity.
    \3714\ Because reporting to the CAT is on an end-of-day basis, 
intra-day changes to information could be captured as part of the 
daily updates to the information. See SEC Rule 613(c)(3). To ensure 
the completeness and accuracy of Customer information and 
associations, in addition to daily updates, broker-dealers would be 
required to submit periodic full refreshes of Customer information 
to the CAT. The scope of the ``full'' Customer information refresh 
would need to be further defined, with the assistance of the Plan 
Processor, to determine the extent to which inactive or otherwise 
terminated accounts would need to be reported.
---------------------------------------------------------------------------

    Within the Central Repository, each Customer would be uniquely 
identified by identifiers or a combination of identifiers such as 
TIN/SSN, date of birth, and, as applicable, LEI and LTID. The Plan 
Processor would be required to use these unique identifiers to map 
orders to specific customers across all broker-dealers. Broker-
dealers would therefore be required to report only Firm Designated 
ID information on each new order submitted to the Central Repository 
rather than the ``Customer-ID'' as set forth in SEC Rule 613(c)(7), 
and the Plan Processor would associate specific customers and their 
Customer-IDs with individual order events based on the reported Firm 
Designated ID.
    The Customer-ID approach is strongly supported by the industry 
as it believes that to do otherwise would interfere with existing 
business practices and risk leaking proprietary order and customer 
information into the market.\3715\ To adopt such an approach, 
however, requires certain exemptions from the requirements of SEC 
Rule 613. Therefore, the Participants included the Customer 
Information Approach in the Exemptive Request Letters so that this 
approach could be included in the CAT NMS Plan.
---------------------------------------------------------------------------

    \3715\ SIFMA Recommendations at 30-31; Financial Industry Forum 
(FIF) Consolidated Audit Trail (CAT) Working Group Response to 
Proposed RFP Concepts Document at 12 (Jan. 18, 2013), available at 
http://catnmsplan.com/industryFeedback/P197808 (``FIF Response'').
---------------------------------------------------------------------------

    In addition to the approach described above, the CAT NMS Plan 
details a number of requirements which the Plan Processor must meet 
regarding Customer and Customer Account Information.
    The Plan Processor must maintain information of sufficient 
detail to uniquely and consistently identify each Customer across 
all CAT Reporters, and associated accounts from each CAT Reporter. 
The Plan Processor must document and publish, with the approval of 
the Operating Committee, the minimum list of attributes to be 
captured to maintain this association.
    The CAT Processor must maintain valid Customer and Customer 
Account Information for each Trading Day and provide a method for 
Participants and the SEC to easily obtain historical changes to that 
information (e.g., name changes, address changes).
    The CAT Processor will design and implement a robust data 
validation process for submitted Firm Designated ID, Customer 
Account Information and Customer Identifying Information.
    The Plan Processor must be able to link accounts that move from 
one CAT Reporter to another due to mergers and acquisitions, 
divestitures, and other events. Under the approach proposed by the 
Participants, broker-dealers will initially submit full account 
lists for all active accounts to the Plan Processor and subsequently 
submit updates and changes on a daily basis.\3716\ In addition, the 
Plan Processor must have a process to periodically receive full 
account lists to ensure the completeness and accuracy of the account 
database.
---------------------------------------------------------------------------

    \3716\ ``Active accounts'' are defined as accounts that have had 
activity within the last six months.
---------------------------------------------------------------------------

    In the RFP, the Participants asked for a description of how 
Customer and Customer Account Information will be captured, updated 
and stored with associated detail sufficient to identify each 
Customer.\3717\ All Bidders anticipated Customer and Customer 
Account Information to be captured in an initial download of data. 
The precise method(s) by which CAT Reporters submit Customer data to 
the Central Repository will be set out in the Technical 
Specifications provided by the Plan Processor in accordance with 
Section 6.9 of the CAT NMS Plan. Data capture would occur using both 
file-based and entry screen methods. Data validation would check for 
potential duplicates with error messages being generated for follow-
up by CAT Reporters. Data Reporters can update data as needed or on 
a predetermined schedule.
---------------------------------------------------------------------------

    \3717\ RFP Question 1.
---------------------------------------------------------------------------

4. Error Reporting

    SEC Rule 613(e)(6) requires the prompt correction of errors in 
data submitted to the Central Repository. As discussed in Appendix 
C, Time and Method by which CAT Data will be Available to 
Regulators, initial validation, lifecycle linkages, and 
communications of errors to CAT Reporters will be required to occur 
by 12:00 p.m. Eastern Time T+1 and corrected data will be required 
to be resubmitted to the Central Repository by 8:00 a.m. Eastern 
Time on T+3.

[[Page 84974]]

Each of the Bidders indicated that it was able to meet these 
timeframes.
    However, the industry expressed concern that reducing the error 
repair window will constitute a significant burden to Data 
Submitters and also question whether the proposed error correction 
timeframe is possible.\3718\ Financial Information Forum (``FIF'') 
supports maintaining the current OATS Error Handling timelines, 
which allows for error correction within five OATS business days 
from the date of original submission.\3719\ Securities Industry and 
Financial Markets Association (``SIFMA'') also recommends a five-day 
window for error correction.\3720\ Nevertheless, the Participants 
believe that it is imperative to the utility of the Central 
Repository that corrected data be available to regulators as soon as 
possible and recommend the three-day window for corrections to 
balance the need for regulators to access corrected data in a timely 
manner while considering the industry's concerns.
---------------------------------------------------------------------------

    \3718\ FIF Response at 35.
    \3719\ Id.
    \3720\ SIFMA Recommendations at 62.
---------------------------------------------------------------------------

[ssquf] The Manner in which the Central Repository will Receive, 
Extract, Transform, Load, and Retain Data

    The Central Repository must receive, extract, transform, load, 
and retain the data submitted by CAT Reporters and other Data 
Submitters. In addition, the Plan Processor is responsible for 
ensuring that the CAT contains all versions of data submitted by a 
CAT Reporter or other Data Submitter (i.e., the Central Repository 
must include different versions of the same information, including 
such things as errors and corrected data).\3721\
---------------------------------------------------------------------------

    \3721\ Data retention requirements by the Central Repository are 
discussed more fully in Appendix D, Functionality of the CAT System.
---------------------------------------------------------------------------

    In the RFP, the Participants requested that each Bidder perform 
a detailed analysis of current industry systems and interface 
specifications to propose and develop their own format for 
collecting data from the various data sources relevant under SEC 
Rule 613, as outlined in the RFP. Bidders also were requested to 
perform an analysis on their ability to develop, test and integrate 
this interface with the CAT.\3722\ In addition, the Participants 
sought input from the industry regarding different data submission 
mechanisms and whether there needs to be a method to allow broker-
dealers with very small order volumes to submit their data in a non-
automated manner.\3723\
---------------------------------------------------------------------------

    \3722\ RFP Sec.  2.3 at 19.
    \3723\ SEC Rule 613: Consolidated Audit Trail (CAT), Questions 
for Industry Consideration, available at http://catnmsplan.com/QuestionsforIndustryConsideration.
---------------------------------------------------------------------------

    As noted above, since the Central Repository is required to 
collect and transform customer, order and trade information from 
multiple sources, the RFP requested that Bidders describe:

how Customer and Customer Account Information will be captured, 
updated and stored with associated detail sufficient to identify 
each customer; \3724\
---------------------------------------------------------------------------

    \3724\ RFP Question 1.
---------------------------------------------------------------------------

the system interfaces, including data submission, data access and 
user interfaces; \3725\
---------------------------------------------------------------------------

    \3725\ RFP Question 49.
---------------------------------------------------------------------------

the proposed messaging and communication protocol(s) used in data 
submission and retrieval and the advantage(s) of such protocol(s); 
\3726\
---------------------------------------------------------------------------

    \3726\ RFP Questions 59-60.
---------------------------------------------------------------------------

the process and associated protocols for accepting batch 
submissions; \3727\ and
---------------------------------------------------------------------------

    \3727\ RFP Question 62.
---------------------------------------------------------------------------

the process and any associated protocols for supporting manual data 
submissions.\3728\
---------------------------------------------------------------------------

    \3728\ RFP Question 63.

    Various Bidders proposed multiple methods by which Data 
Reporters could report information to the Central Repository. 
Bidders proposed secure VPN, direct line access through TCP/IP or at 
co-location centers, and web-based manual data entry.
    The RFP also requested that Bidders describe:

the overall technical architecture; \3729\ and
---------------------------------------------------------------------------

    \3729\ RFP Question 43.
---------------------------------------------------------------------------

the network architecture and describe how the solution will handle 
the necessary throughput, processing timeline and 
resubmissions.\3730\
---------------------------------------------------------------------------

    \3730\ RFP Question 50.

    There are two general approaches by which the Central Repository 
could receive information. Approach 1 described a scenario in which 
broker-dealers would submit relevant data to the Central Repository 
using their choice of existing industry messaging protocols, such as 
the Financial Information eXchange (``FIX'') protocol. Approach 2 
provided a scenario in which broker-dealers would submit relevant 
data to the Central Repository using a defined or specified format, 
such as an augmented version of OATS.
    Following receipt of data files, the Plan Processor will be 
required to send an acknowledgement of data received to CAT 
Reporters and third party Data Submitters. This acknowledgement will 
enable CAT Reporters to create an audit trail of their data 
submissions and allow for tracing of data breakdowns if data is not 
received. The minimum requirements for receipt acknowledgement are 
detailed in Appendix D, Receipt of Data from Reporters.
    Once the Central Repository has received the data from the CAT 
Reporters, it will extract individual records from the data, and 
validate the data through a review process that must be described in 
the Technical Specifications involving context, syntax, and matching 
validations. The Plan Processor will need to validate data and 
report back to any CAT Reporter any data that has not passed 
validation checks according to the requirements in Appendix D, 
Receipt of Data from Reporters. To ensure the accuracy and integrity 
of the data in the Central Repository, data that does not pass the 
basic validation checks performed by the Plan Processor must be 
rejected until it has been corrected by the CAT Reporter responsible 
for submitting the data/file. After the Plan Processor has processed 
the data, it must provide daily statistics regarding the number of 
records accepted and rejected to each CAT Reporter.
    The Plan Processor also will be required to capture rejected 
records for each CAT Reporter and make them available to the CAT 
Reporter. The ``rejects'' file must be accessible via an electronic 
file format, and the rejections and daily statistics must also be 
available via a web interface. The Plan Processor must provide 
functionality for CAT Reporters to amend records that contain 
exceptions. The Plan Processor must also support bulk error 
correction so that rejected records can be resubmitted as a new file 
with appropriate indicators for rejection repairs. The Plan 
Processor must, in these instances, reprocess repaired records. In 
addition, a web GUI must be available for CAT Reporters to make 
updates, including corrections, to individual records or attributes. 
The Plan Processor must maintain a detailed audit trail capturing 
corrections to and replacements of records.
    The Plan Processor must provide CAT Reporters with documentation 
that details how to amend/upload records that fail the required 
validations, and if a record does not pass basic validations, such 
as syntax rejections, then it must be rejected and sent back to the 
CAT Reporter as soon as possible, so it can be repaired and 
resubmitted.\3731\ In order for regulators to have access to 
accurate and complete data as expeditiously as practicable, the Plan 
Processor will provide CAT Reporters with their error reports as 
they become available, and daily statistics must be provided after 
data has been uploaded and validated. The reports will include 
descriptive details as to why each data record was rejected by the 
Plan Processor.
---------------------------------------------------------------------------

    \3731\ The industry supports receiving information on reporting 
errors as soon as possible to enable CAT Reporters to address errors 
in a timely manner. See FIF Response at 36.
---------------------------------------------------------------------------

    In addition, on a monthly basis, the Plan Processor should 
produce and publish reports detailing CAT Reporter performance and 
comparison statistics, similar to the report cards published for 
OATS presently. These reports should include data to enable CAT 
Reporters to assess their performance in comparison to the rest of 
their industry peers and to help them assess the risk related to 
their reporting of transmitted data.
    CAT Reporters will report data to the Central Repository either 
in a uniform electronic format, or in a manner that would allow the 
Central Repository to convert the data to a uniform electronic 
format, for consolidation and storage. The Technical Specifications 
will describe the required format for data reported to the Central 
Repository. Results of a study conducted of broker-dealers showed 
average implementation and maintenance costs for use of a new file 
format to be lower than those for use of an existing file format 
(e.g., FIX) \3732\, although an FIF ``Response to Proposed RFP 
Concepts Document'' dated January 18, 2013 did indicate a preference

[[Page 84975]]

among its members for use of the FIX protocol.
---------------------------------------------------------------------------

    \3732\ See Appendix C, Analysis of Expected Benefits and 
Estimated Costs for Creating, Implementing, and Maintaining the 
Consolidated Audit Trail (SEC Rule 613(a)(1)(vii)), for additional 
details on cost studies.
---------------------------------------------------------------------------

    As noted above, the specific formats of data submission and 
loading will depend upon the Bidder chosen as the Plan Processor. 
Regardless of the ultimate Plan Processor, however, data submitted 
to the CAT will be loaded into the Central Repository in accordance 
with procedures that are subject to approval by the Operating 
Committee.\3733\ The Central Repository will retain data, including 
the Raw Data, linked data, and corrected data, for at least six 
years. Data submitted to the Central Repository, including 
rejections and corrections, must be stored in repositories designed 
to hold information based on the classification of the Data 
Submitter (e.g., whether the Data Submitter is a Participant, a 
broker-dealer, or a third party Data Submitter). After ingestion by 
the Central Repository, the Raw Data must be transformed into a 
format appropriate for data querying and regulatory output.
---------------------------------------------------------------------------

    \3733\ See Section 6.1(c) of the CAT NMS Plan.
---------------------------------------------------------------------------

    SEC Rule 613 reflects the fact that the Participants can choose 
from alternative methods to link order information to create an 
order lifecycle from origination or receipt to cancellation or 
execution.\3734\ After review of the Bids and discussions with 
Industry Members, the CAT NMS Plan reflects the fact that the 
Participants have determined that the ``daisy chain'' approach to 
CAT-Order-ID that requires linking of order events rather than the 
repeated transmission of an order ID throughout an order's lifecycle 
is appropriate. This approach is widely supported by the industry, 
and using the daisy chain approach should minimize impact on 
existing OATS reporters, since OATS already uses this type of 
linking.\3735\ The RFP asked Bidders to propose any additional 
alternatives to order lifecycle creation; however, all of the 
Bidders indicated that they would use the daisy chain approach to 
link order events.\3736\
---------------------------------------------------------------------------

    \3734\ See SEC Rule 613(j)(1).
    \3735\ See SIFMA Recommendations at 13, 39-42; FIF Response at 
19.
    \3736\ See RFP Questions 11 and 12.
---------------------------------------------------------------------------

    In the daisy chain approach, a series of unique order 
identifiers assigned by CAT Reporters to individual order events are 
linked together by the CAT and assigned a single CAT-generated CAT-
Order-ID that is associated with each individual order event and 
used to create the complete lifecycle of an order. Under this 
approach, each CAT Reporter generates its own unique order ID but 
can pass a different identifier as the order is routed to another 
CAT Reporter, and the CAT will link related order events from all 
CAT Reporters involved in the life of the order.\3737\
---------------------------------------------------------------------------

    \3737\ A detailed example of the application of the daisy chain 
approach to an order routed to an exchange on an agency basis can be 
found in the Proposed RFP Concepts Document at 26.
---------------------------------------------------------------------------

    The Participants believe that the daisy chain approach can 
handle anticipated order handling scenarios, including aggregation 
and disaggregation, and generally apply to both equities and 
options. The Participants created a subcommittee of DAG members and 
Participants to walk through multiple complex order-handling 
scenarios to ensure that the daisy chain approach can handle even 
the most complex of order handling methods.\3738\
---------------------------------------------------------------------------

    \3738\ This subcommittee included 21 Industry Members and 16 
Participants. It met 11 times over the course of 13 months to 
discuss order handling and CAT reporting requirements. Examples of 
order handling scenarios that must be addressed include, in addition 
to the agency scenario referenced above: orders handled on a 
riskless principal basis, orders routed out of a national securities 
exchange through a broker-dealer router to another national 
securities exchange, orders executed on an average price basis and 
orders aggregated for further routing and execution. Detailed 
examples of these types of scenarios can be found in the Proposed 
RFP Concepts Document at 27-30.
---------------------------------------------------------------------------

    Additionally, the daisy chain approach can handle representative 
order reporting scenarios \3739\ and order handling scenarios 
sometimes referred to as ``complex orders'' that are specific to 
options and may include an equity component and multiple option 
components (e.g., buy-write, straddle, strangle, ratio spread, 
butterfly and qualified contingent transactions). Typically, these 
orders are referenced by exchange systems on a net credit/debit 
basis, which can cover between two and twelve different components. 
Such ``complex orders'' must also be handled and referenced within 
the CAT. The Bidder must develop, in close consultation with 
Industry Members, a linking mechanism that will allow the CAT to 
link the option leg(s) to the related equity leg or the individual 
options components to each other in a multi-leg strategy scenario.
---------------------------------------------------------------------------

    \3739\ These scenarios, and how the daisy chain approach could 
be applied, can be found in the Representative Order Proposal (Feb. 
2013), available at http://catnmsplan.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=P197815.
---------------------------------------------------------------------------

    Once a lifecycle is assembled by the CAT, individual lifecycle 
events must be stored so that each unique event (e.g., origination, 
route, execution, modification) can be quickly and easily associated 
with the originating customer(s) for both targeted queries and 
comprehensive data scans. For example, an execution on an exchange 
must be linked to the originating customer(s) regardless of how the 
order may have been aggregated, disaggregated, and routed through 
multiple broker-dealers before being sent to the exchange for 
execution.
    The Plan Processor must transform and load the data in a way 
that provides the Participants with the ability to build and 
generate targeted queries against data in the Central Repository 
across product classes submitted to the Central Repository. The 
Participants' regulatory staff and the SEC must be able to create, 
adjust, and save ad-hoc queries to provide data to the regulators 
that can then be used for their market surveillance purposes. All 
data fields may be included in the result set from targeted queries. 
Because of the size of the Central Repository and its use by 
multiple parties simultaneously, online queries will require a 
minimum set of criteria, including data or time range as well as one 
or more of the parameters specified in Appendix D, Functionality of 
the CAT System.\3740\
---------------------------------------------------------------------------

    \3740\ Although the Plan Processor must account for multiple 
simultaneous queries, the Central Repository must also support the 
ability to schedule when jobs are run.
---------------------------------------------------------------------------

    Because of the potential size of the possible result sets, the 
Plan Processor must have functionality to create an intermediate 
result count of records before running the full query so that the 
query can be refined if warranted. The Plan Processor must include a 
notification process that informs users when reports are available, 
and there should be multiple methods by which query results can be 
obtained (e.g., web download, batch feed). Regulatory staff also 
must have the ability to create interim tables for access/further 
investigation. In addition, the Plan Processor must provide a way to 
limit the number of rows from a result set on screen with full 
results being created as a file to be delivered via a file transfer 
protocol.
    The Plan Processor will be reasonably required to work with the 
regulatory staff at the Participants and other regulators \3741\ to 
design report generation screens that will allow them to request on-
demand pre-determined report queries. These would be standard 
queries that would enable regulators quick access to frequently-used 
information and could include standard queries that will be used to 
advance the retirement of existing reports, such as Large Trader 
reporting.
---------------------------------------------------------------------------

    \3741\ Initially, only the SEC and Participants will have access 
to data stored in the Central Repository.
---------------------------------------------------------------------------

    The Central Repository must, at a minimum, be able to support 
approximately 3,000 active users, including Participants' regulatory 
staff and the SEC, authorized to access data representing market 
activity (excluding the PII associated with customers and 
accounts).\3742\
---------------------------------------------------------------------------

    \3742\ The RFP required support for a minimum of 3,000 users. 
The actual number of users may be higher based upon regulator and 
Participant usage of the system.
---------------------------------------------------------------------------

Time and Method by which CAT Data will be Available to Regulators (SEC 
Rule 613(a)(1)(ii))

    SEC Rule 613(a)(1)(ii) requires the Participants to discuss the 
``time and method by which the data in the Central Repository will 
be made available to regulators to perform surveillance or analyses, 
or for other purposes as part of their regulatory and oversight 
responsibilities.'' \3743\ As the Commission noted, ``[t]he time and 
method by which data will be available to regulators are fundamental 
to the utility of the Central Repository because the purpose of the 
repository is to assist regulators in fulfilling their 
responsibilities to oversee the securities markets and market 
participants.'' \3744\
---------------------------------------------------------------------------

    \3743\ SEC Rule 613(a)(1)(ii).
    \3744\ Adopting Release at 45790.
---------------------------------------------------------------------------

[ssquf] Time Data will be Made Available to Regulators

    At any point after data is received by the Central Repository 
and passes basic format validations, it will be available to the 
Participants and the SEC. 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.
    As noted above, SEC Rule 613(e)(6) requires the prompt 
correction of data reported to the Central Repository, and the

[[Page 84976]]

Participants believe that the timeframes established in Appendix D, 
Data Availability, meet this requirement. Additionally, each of the 
Bidders indicated that it would be able to process the reported data 
within these timeframes. However, the FIF, an industry trade group, 
expressed concern that the error repair window will constitute a 
significant burden to CAT Reporters and questioned whether the error 
repair window ``can be reasonably met.'' \3745\ FIF supports 
maintaining the current OATS Error Handling timelines, which allow 
for error correction within five OATS-business days from the date of 
original submission.\3746\ SIFMA also recommends a five-day window 
for error correction.\3747\ Nevertheless, the Participants believe 
that it is imperative to the utility of the Central Repository that 
corrected data be available to regulators as soon as possible, and 
therefore the Participants do not support adopting the five-day 
repair window permitted under OATS, but instead are providing a 
three-day repair window for the Central Repository.\3748\
---------------------------------------------------------------------------

    \3745\ FIF Response at 35.
    \3746\ FIF Response at 35.
    \3747\ SIFMA Recommendations at 62.
    \3748\ One example of why the Participants believe a five day 
repair window is too long is that regulators may need access to the 
data as quickly as possible in order to conduct market 
reconstruction.
---------------------------------------------------------------------------

[ssquf] Method by which Data will be Available to Regulators

    As required by SEC Rule 613(a)(1)(ii), this section describes 
the ability of regulators to use data stored in the Central 
Repository for investigations, examinations and surveillance, 
including the ability to search and extract such data.\3749\ The 
utility of the Central Repository is dependent on regulators being 
able to have access to data for use in market reconstruction, market 
analysis, surveillance and investigations.\3750\ The Participants 
anticipate that the Plan Processor will adopt policies and 
procedures with respect to the handling of surveillance (including 
coordinated, SEC Rule 17d-2 or RSA surveillance) queries and 
requests for data. In the RFP, the Participants asked that the 
Bidders describe:
---------------------------------------------------------------------------

    \3749\ SEC Rule 613(a)(1)(ii).
    \3750\ Adopting Release at 45790.

the tools and reports that would allow for the extraction of data 
search criteria; \3751\
---------------------------------------------------------------------------

    \3751\ RFP Question 81.
---------------------------------------------------------------------------

how the system will accommodate simultaneous users from Participants 
and the SEC submitting queries; \3752\
---------------------------------------------------------------------------

    \3752\ RFP Question 82.
---------------------------------------------------------------------------

the expected response time for query results, the manner in which 
simultaneous queries will be managed and the maximum number of 
concurrent queries and users that can be supported by the system; 
\3753\
---------------------------------------------------------------------------

    \3753\ RFP Question 83.
---------------------------------------------------------------------------

the format in which the results of targeted queries will be provided 
to users; \3754\
---------------------------------------------------------------------------

    \3754\ RFP Question 84.
---------------------------------------------------------------------------

the methods of data delivery that would be made available to 
Participant regulatory staff and the Commission; \3755\
---------------------------------------------------------------------------

    \3755\ RFP Question 85.
---------------------------------------------------------------------------

any limitations on the size of data that can be delivered at one 
time, such as number of days or number of terabytes; \3756\ and
---------------------------------------------------------------------------

    \3756\ RFP Question 86.
---------------------------------------------------------------------------

how simultaneous bulk data requests will be managed to ensure fair 
and equitable access.\3757\
---------------------------------------------------------------------------

    \3757\ RFP Question 87.

    All Bidders provide means for off-line analysis \3758\ and 
dynamic search and extraction. The Bids described a variety of tools 
that could be used for providing access and reports to the 
Participants and the SEC, including: Oracle Business Intelligence 
Experience Edition, SAS Enterprises Business Intelligence, and IBM 
Cognos. The Bids proposed data access via direct access portals and 
via web-based applications. In addition, the Bids proposed various 
options for addressing concurrent users and ensuring fair access to 
the data, including: processing queries on a first in, first out 
(FIFO) basis; monitoring to determine if any particular user is 
using more systems resources than others and prioritizing other 
users' queries; or evaluating each users' demands on the systems 
over a predetermined timeframe and, if there is an imbalance, 
working with users to provide more resources needed to operate the 
system more efficiently.
---------------------------------------------------------------------------

    \3758\ The SEC defined ``off-line'' analysis as ``any analysis 
performed by a regulator based on data that is extracted from the 
[CAT] database, but that uses the regulator's own analytical tools, 
software, and hardware.'' Adopting Release at 45798 n.853.
---------------------------------------------------------------------------

    The Bids included a multitude of options for formatting the data 
provided to regulators in response to their queries, including but 
not limited to FIX, Excel, Binary, SAS data sets, PDF, XML, XBRL, 
CSV, and .TXT. Some Bidders would provide Participants and the SEC 
with a ``sandbox'' in which the user could store data and upload its 
own analytical tools and software to analyze the data within the 
Central Repository, in lieu of performing off-line analyses.
    The Participants anticipate that they will be able to utilize 
Central Repository data to enhance their existing regulatory 
schemes. The Participants do not endorse any particular technology 
or approach, but rather set forth standards which the Plan Processor 
must meet. By doing so, the Participants are seeking to maximize the 
utility of the data from the Central Repository without burdening 
the Plan Processor to comply with specific format or application 
requirements which will need to be updated over time. In addition, 
the Participants wanted to ensure that the Bidders have the ability 
to put forth the ideas they believe are the most effective.

[ssquf] Report Building--Analysis Related to Usage of Data by 
Regulators

    It is anticipated that the Central Repository will provide 
regulators with the ability to, for example, more efficiently 
conduct investigations, examinations, conduct market analyses, and 
to inform policy-making decisions. The Participants' regulatory 
staff and the SEC will frequently need to be able to perform queries 
on large amounts of data. The Plan Processor must provide the 
Participants and other regulators the access to build and generate 
targeted queries against data in the Central Repository. The Plan 
Processor must provide the regulatory staff at the Participants and 
regulators with the ability to create, adjust, and save any ad-hoc 
queries they run for their surveillance purposes via online or 
direct access to the Central Repository.\3759\ Queries will require 
a minimum set of criteria that are detailed in Appendix D.\3760\ The 
Plan Processor will have controls to manage load, cancel queries, if 
needed, and create a request process for complex queries to be 
run.\3761\ The Plan Processor must have a notification process to 
inform users when reports are available, provide such reports in 
multiple formats, and have the ability to schedule when queries are 
run.\3762\
---------------------------------------------------------------------------

    \3759\ Id.
    \3760\ Id.
    \3761\ Id.
    \3762\ Id.
---------------------------------------------------------------------------

    In addition, the Plan Processor will be required to reasonably 
work with the regulatory staff at the Participants and other 
regulators to design report generation screens that will allow them 
to request on-demand pre-determined report queries.\3763\ These 
would be standard queries that would enable regulators quick access 
to frequently-used information. This could include standard queries 
that will be used to advance the retirement of existing reports, 
such as Large Trader.\3764\
---------------------------------------------------------------------------

    \3763\ Id.
    \3764\ Id.
---------------------------------------------------------------------------

    The Plan Processor should meet the following response times for 
different query types. For targeted search criteria, the minimum 
acceptable response times would be measured in time increments of 
less than one minute. For the complex queries that either scan large 
volumes of data (e.g., multiple trade dates) or return large result 
sets (>1M records), the response time should generally be available 
within 24 hours of the submission of the request.
    The Central Repository will support a permission mechanism to 
assign data access rights to all users so that CAT Reporters will 
only have access to their own reported data, the regulatory staff at 
the Participants and other regulators will have access to data; 
except for PII.\3765\ Regulators that are authorized to access PII 
will be required to complete additional authentications. The Central 
Repository will be able to provide access to the data at the working 
locations of both the Participants' and SEC's regulatory staff as 
well as other non-office locations. The Central Repository must be 
built with operational controls to control access to make requests 
and to track data requests to support an event-based and time-based 
scheduler for queries that allows Participants to rely on the data 
generated.
---------------------------------------------------------------------------

    \3765\ As documented in Appendix D, each CAT Reporter will be 
issued a public key pair (``PKI'') that it can use to submit data, 
and access confirmation that their data has been received.
---------------------------------------------------------------------------

    In addition to targeted analysis of data from the Central 
Repository, regulators will also need access to bulk data for 
analysis. The Participants and other regulators will need the 
ability to do bulk extraction and download of data, based on a 
specified date

[[Page 84977]]

or time range, market, security, and Customer-ID. The size of the 
resulting data set may require the ability to feed data from the 
Central Repository into analytical ``alert'' programs designed to 
detect potentially illegal activity.\3766\ ``For example, the 
Commission is likely to use data from the Central Repository to 
calculate detailed statistics on order flow, order sizes, market 
depth and rates of cancellation, to monitor trends and inform 
Participant and SEC rulemaking.'' \3767\
---------------------------------------------------------------------------

    \3766\ Adopting Release at 45799. See also RFP Sec.  2.8.2.
    \3767\ Adopting Release at 45799.
---------------------------------------------------------------------------

    The Plan Processor must provide for bulk extraction and download 
of data in industry standard formats. In addition, the Plan 
Processor is required to generate data sets based on market event 
data to the Participants and other regulators. The Central 
Repository must provide the ability to define the logic, frequency, 
format, and distribution method of the data. It must be built with 
operational controls to track data requests to oversee the bulk 
usage environment and support an event-based and time-based 
scheduler for queries that allows Participants to rely on the data 
generated. Extracted data should be encrypted, and PII data should 
be masked unless users have permission to view the data that has 
been requested.
    The Plan Processor must have the capability and capacity to 
provide bulk data necessary for the Participants and the other 
regulators to run and operate their surveillance processing. Such 
data requests can be very large; therefore, the Plan Processor must 
have the ability to split large requests into smaller data sets for 
data processing and handling. All reports should be generated by a 
configurable workload manager that is cost based, while also 
ensuring that no single user is using a disproportionate amount of 
resources for query generation.

[ssquf] System Service Level Agreements (SLAs)

    As further described in Appendix D, Functionality of CAT 
Systems, the Participants and the Plan Processor will enter into 
appropriate SLAs in order to establish system and operational 
performance requirements for the Plan Processor and help ensure 
timely Regulator access to Central Repository data. Among the items 
to be included in the SLA(s) will be specific requirements regarding 
query performance, linkage and order event processing performance of 
the Central Repository (e.g., linkage and data availability 
timelines, linkage errors not related to invalid data, and data 
retention) as well as system availability requirements (e.g., system 
uptime and DR/BCP performance). The Operating Committee will 
periodically review the SLAs according to the terms to be 
established in negotiation with the Plan Processor.

The Reliability and Accuracy of the Data (SEC Rule 613(a)(1)(iii))

    As required by SEC Rule 613(a)(1)(iii), this section discusses 
the reliability and accuracy of the data reported to and maintained 
by the Central Repository throughout its lifecycle, including: 
transmission and receipt from CAT Reporters; data extraction, 
transformation and loading at the Central Repository; data 
maintenance at the Central Repository; and data access by the 
Participants and other regulators. In the Adopting Release, the 
Commission noted that the usefulness of the data to regulators would 
be significantly impaired if it is unreliable or inaccurate and as 
such, the Commission requested that the Participants discuss in 
detail how the Central Repository will be designed, tested and 
monitored to ensure the reliability and accuracy of the data 
collected and maintained in it.\3768\
---------------------------------------------------------------------------

    \3768\ Adopting Release at 45790-91, 45799.
---------------------------------------------------------------------------

[ssquf] Transmission, Receipt, and Transformation

    The initial step in ensuring the reliability and accuracy of 
data in the Central Repository is the validation checks made by the 
Plan Processor when data is received and before it is accepted into 
the Central Repository. In the RFP, the Participants stated that 
validations must include checks to ensure that data is submitted in 
the required formats and that lifecycle events can be accurately 
linked by 12:00 p.m. Eastern Time on T+1, four hours following the 
submission deadline for CAT Reporters.\3769\ Once errors are 
identified, they must be efficiently and effectively communicated to 
CAT Reporters on a daily basis. CAT Reporters will be required to 
correct and resubmit identified errors within established timeframes 
(as discussed in Appendix D, Data Availability).
---------------------------------------------------------------------------

    \3769\ RFP Section 2.2.4.
---------------------------------------------------------------------------

    The Plan Processor must develop specific data validations in 
conjunction with development of the Central Repository which must be 
published in the Technical Specifications. The objective of the data 
validation process is to ensure that data is accurate, timely and 
complete at or near the time of submission, rather than to identify 
submission errors at a later time after data has been processed and 
made available to regulators. To achieve this objective, a 
comprehensive set of data validations must be developed that 
addresses both data quality and completeness. For any data that 
fails to pass these validations, the Plan Processor will be required 
to handle data correction and resubmission within established 
timeframes both in a batch process format and via manual web-based 
entry.
    To assess different validation mechanisms and integrity checks, 
the RFP required Bidders to provide information on the following:

how data format and context validations for order and quote events 
submitted by CAT Reporters will be performed and how rejections or 
errors will be communicated to CAT Reporters; \3770\
---------------------------------------------------------------------------

    \3770\ RFP Question 14.
---------------------------------------------------------------------------

a system flow diagram reflecting the overall data format, syntax and 
context validation process that includes when each types of 
validation will be completed and errors communicated to CAT 
Reporters, highlighting any dependencies between the different 
validations and impacts of such dependencies on providing errors 
back to CAT Reporters; \3771\
---------------------------------------------------------------------------

    \3771\ RFP Question 15.
---------------------------------------------------------------------------

how related order lifecycle events submitted by separate CAT 
Reporters will be linked and how unlinked events will be identified 
and communicated to CAT Reporters for correction and resubmission, 
including a description of how unlinked records will be provided to 
CAT Reporters for correction (e.g., specific transmission methods 
and/or web-based downloads); \3772\
---------------------------------------------------------------------------

    \3772\ RFP Question 16.
---------------------------------------------------------------------------

how Customer and Customer Account Information submitted by broker-
dealers will be validated and how rejections or errors will be 
communicated to CAT Reporters; \3773\ and
---------------------------------------------------------------------------

    \3773\ RFP Question 17.
---------------------------------------------------------------------------

the mechanisms that will be provided to CAT Reporters for the 
correction of both market data (e.g., order, quotes, and trades) 
errors, and Customer and account data errors, including batch 
resubmissions and manual web-based submissions.\3774\
---------------------------------------------------------------------------

    \3774\ RFP Question 18.

    Most Bidders indicated that Customer Account Information 
including SSN, TIN or LEI will be validated in the initial 
onboarding processing. Additional validation of Customer Account 
Information, such as full name, street address, etc., would occur 
across CAT Reporters and potential duplications or other errors 
would be flagged for follow-up by the CAT Reporters.
    All Bidders recommended that order data validation be performed 
via rules engines, which allow rules to be created and modified over 
time in order to meet future market data needs. Additionally, all 
Bidders indicated that data validations will be real-time and begin 
in the data ingestion component of the system. Standard data 
validation techniques include format checks, data type checks, 
consistency checks, limit and logic checks, or data validity checks. 
Some Bidders mentioned the ability to schedule the data validation 
at a time other than submission, because there may be a need to have 
rules engines perform validation in a batch mode or customized 
schedule during a different time. All Bidders indicated that when 
errors are found, the Raw Data will be stored in an error database 
and notifications would be sent to the CAT Reporters. Most Bidders 
permitted error correction to be submitted by CAT Reporters at any 
time.
    Section 6.3(b) of the CAT NMS Plan sets forth the policies and 
procedures for ensuring the timeliness, accuracy and completeness of 
the data provided to the Central Repository as required by SEC Rule 
613(e)(4)(ii) and the accuracy of the data consolidated by the Plan 
Processor pursuant to SEC Rule 613(e)(4)(iii).\3775\ It also 
mandates that each Participant and its Industry Members that are CAT 
Reporters must ensure that its data reported to the Central 
Repository is accurate, timely, and complete. Each Participant and 
its Industry Members that are CAT Reporters must correct and 
resubmit such errors within established timeframes. In furtherance 
thereof, data

[[Page 84978]]

related to a particular order will be reported accurately and 
sequenced from receipt or origination, to routing, modification, 
cancellation and/or execution. Additionally each Participant and its 
Industry Members that are CAT Reporters must test their reporting 
systems thoroughly before beginning to report data to the Central 
Repository and Appendix D sets forth that the Plan Processor must 
make testing facilities available for such testing.
---------------------------------------------------------------------------

    \3775\ SEC Rule 613(e)(4)(ii) and (iii).
---------------------------------------------------------------------------

    Pursuant to SEC Rule 613(e)(4)(iii), the Plan Processor will 
design, implement and maintain (1) data accuracy and reliability 
controls for data reported to the Central Repository and (2) 
procedures for testing data accuracy and reliability during any 
system release or upgrade affecting the Central Repository and the 
CAT Reporters.\3776\ The Operating Committee will, as needed, but at 
least annually, review policies and procedures to ensure the 
timeliness, accuracy, and completeness of data reported to the 
Central Repository.
---------------------------------------------------------------------------

    \3776\ SEC Rule 613(e)(4)(iii).
---------------------------------------------------------------------------

    In order to validate data receipt, the Plan Processor will be 
required to send an acknowledgement to each CAT Reporter notifying 
them of receipt of data submitted to the Central Repository to 
enable CAT Reporters to create an audit trail of their own 
submissions and allow for tracking of data breakdowns when data is 
not received. The data received by the Plan Processor must be 
validated at both the file and individual record level if 
appropriate. The required data validations may be amended based on 
input from the Operating Committee and the Advisory Committee. 
Records that do not pass basic validations, such as syntax 
rejections, will be rejected and sent back to the CAT Reporter as 
soon as possible, so it can repair and resubmit the data.

[ssquf] Error Communication, Correction, and Processing

    The Plan Processor will define and design a process to 
efficiently and effectively communicate to CAT Reporters identified 
errors. All identified errors will be reported back to the CAT 
Reporter and other Data Submitters who submitted the data to the 
Central Repository on behalf of the CAT Reporter, if necessary. The 
Central Repository must be able to receive error corrections and 
process them at any time, including timeframes after the standard 
repair window. The industry supports a continuous validation process 
for the Central Repository, continuous feedback to CAT Reporters on 
error identification and the ability to provide error correction at 
any time even if beyond the error correction timeframe.\3777\ The 
industry believes that this will better align with the reporting of 
complex transactions and allocations and is more efficient for CAT 
Reporters.\3778\ CAT Reporters will be able to submit error 
corrections through a web-interface or via bulk uploads or file 
submissions. The Plan Processor must support bulk replacement of 
records, subject to approval by the Operating Committee, and 
reprocess such replaced records. A GUI must be available for CAT 
Reporters to make updates to individual records or attributes. 
Additionally, the Plan Processor will provide a mechanism to provide 
auto-correction of identified errors and be able to support group 
repairs (i.e., the wrong issue symbol affecting multiple reports).
---------------------------------------------------------------------------

    \3777\ FIF Consolidated Audit Trail Working Group Processor 
Proposed Optimal Solution Recommendations at 6 (Sep. 15, 2014), 
available at http://www.sec.gov/comments/4-668/4668-16.pdf (the 
``FIF Optimal Solution Recommendations'').
    \3778\ FIF Response at 36.
---------------------------------------------------------------------------

    SEC Rule 613(e)(6) also requires the Participants to specify a 
maximum Error Rate for data reported to the Central Repository 
pursuant to SEC Rule 613(c)(3) and (4).\3779\ The Participants 
understand that the Central Repository will require new reporting 
elements and methods for CAT Reporters and there will be a learning 
curve when CAT Reporters begin to submit data to the Central 
Repository.\3780\ However, the utility of the CAT is dependent on it 
providing a timely, accurate and complete audit trail for the 
Participants and other regulators.\3781\ Therefore, the Participants 
are proposing an initial maximum Error Rate of 5%, subject to 
quality assurance testing performed prior to launch, and it is 
anticipated that it will be reset when Industry Members, excluding 
Small Industry Members, begin to report to the Central Repository 
and again when Small Industry Members begin to report to the Central 
Repository. The Participants believe that this rate strikes the 
balance of making allowances for adapting to a new reporting regime, 
while ensuring that the data provided to regulators will be capable 
of being used to conduct surveillance and market reconstruction. 
Periodically, the Plan Processor will analyze reporting statistics 
and Error Rates and make recommendations to the Operating Committee 
for proposed changes to the maximum Error Rate. Changes to the 
maximum Error Rate will be approved by the Operating Committee. The 
maximum Error Rate will be reviewed and reset at least on an annual 
basis.
---------------------------------------------------------------------------

    \3779\ SEC Rule 613(e)(6)(i) defines ``Error Rate'' to mean 
``[t]he percentage of reportable events collected by the central 
repository for which the data reported does not fully and accurately 
reflect the order event that occurred in the market.'' All CAT 
Reporters, including the Participants, will be included in the Error 
Rate. CAT Reporters will be required to meet separate compliance 
thresholds, which will be a CAT Reporter-specific rate that may be 
used as the basis for further review or investigation into CAT 
Reporter performance (the ``Compliance Thresholds''). Compliance 
Thresholds will compare a CAT Reporter's error rate to the aggregate 
Error Rate over a period of time to be defined by the Operating 
Committee. See infra note 3790 and accompanying text (discussing 
Compliance Thresholds). A CAT Reporter's performance with respect to 
the Compliance Threshold will not signify, as a matter of law, that 
such CAT Reporter has violated SEC Rule 613 or the rules of any 
Participant concerning the CAT.
    \3780\ As indicated by FINRA in its comment to the Adopting 
Release, OATS compliance rates have steadily improved as reporters 
have become more familiar with the system. When OATS was first 
adopted compliance rates were 76%, but current compliance rates are 
99%. See Letter from Marcia E. Asquith, Senior Vice President and 
Corporate Secretary, FINRA, to Elizabeth M. Murphy, Secretary, 
Commission (Aug. 9, 2010).
    \3781\ Adopting Release at 45790-91.
---------------------------------------------------------------------------

    In order to help reduce the maximum Error Rate, the Plan 
Processor will measure the Error Rate on each business day and must 
take the following steps in connection with error reporting: (1) the 
Plan Processor will provide CAT Reporters with their error reports 
as they become available and daily statistics will be provided after 
data has been uploaded and validated by the Central Repository; (2) 
error reports provided to CAT Reporters will include descriptive 
details as to why each data record was rejected by the Central 
Repository; and (3) on a monthly basis, the Plan Processor will 
produce and publish reports detailing performance and comparison 
statistics, similar to the Report Cards published for OATS 
presently, which will enable CAT Reporters to identify how they 
compare to the rest of their industry peers and help them assess the 
risk related to their reporting of transmitted data.
    All CAT Reporters exceeding the Error Rate will be notified each 
time that they have exceeded the maximum allowable Error Rate and 
will be informed of the specific reporting requirements that they 
did not fully meet (e.g., timeliness or rejections). Upon request 
from the Participants or other regulators, the Plan Processor will 
produce and provide reports containing Error Rates and other metrics 
as needed on each CAT Reporter's Compliance Thresholds so that the 
Participants as Participants or the SEC may take appropriate action 
for failing to comply with the reporting obligations under the CAT 
NMS Plan and SEC Rule 613.
    SEC Rule 613(e)(6) requires the prompt correction of data to the 
Central Repository. As discussed in the NMS Plan, there are a 
minimum of three validation processes that will be performed on data 
submitted to the Central Repository. The Plan Processor will be 
required to identify specific validations and metrics to define the 
Data Quality Governance requirements, as defined in Appendix D, 
Receipt of Data from Reporters.
    The Plan Processor will identify errors on CAT file submissions 
that do not pass the defined validation checks above and conform to 
the Data Quality Governance requirements. Error Rates will be 
calculated during the CAT Data and linkage validation processes. As 
a result, the Participants propose an initial maximum overall Error 
Rate of 5% \3782\ on initially submitted data, subject to quality 
assurance testing period performed prior to launch.\3783\ It is 
anticipated that this Error

[[Page 84979]]

Rate will be evaluated when Industry Members, excluding Small 
Industry Members, begin to report to the Central Repository and then 
again when Small Industry Members begin to report to the Central 
Repository.
---------------------------------------------------------------------------

    \3782\ As required by SEC Rule 613(e)(6)(ii), the Error Rate 
will be calculated on a daily basis as the number of erroneous 
records divided by the total number of records received on any given 
day and will be inclusive of validation of CAT Data and linkage 
validations. Error Rates are calculated for reporting groups as a 
whole, not for individual firms. Individual firms within a reporting 
group may have higher or lower Error Rates, though they would still 
be subject to any penalties or fines for excessive Error Rates to be 
defined by the Operating Committee. Additionally, this Error Rate 
will be considered for the purpose of reporting metrics to the SEC 
and the Operating Committee and individual firms will need to 
maintain Compliance Thresholds as described below.
    \3783\ The Participants expect that error rates after 
reprocessing of error corrections will be de minimis.
---------------------------------------------------------------------------

    In determining the initial maximum Error Rate of 5%, the 
Participants have considered the current and historical OATS Error 
Rates, the magnitude of new reporting requirements on the CAT 
Reporters and the fact that many CAT Reporters may have never been 
obligated to report data to an audit trail.
    The Participants considered industry experience with FINRA's 
OATS system over the last 10 years. During that timeframe there have 
been three major industry impacting releases. These three releases 
are known as (1) OATS Phase III, which required manual orders to be 
reported to OATS; \3784\ (2) OATS for OTC Securities which required 
OTC equity securities to be reported to OATS; \3785\ and (3) OATS 
for NMS which required all NMS stocks to be reported to OATS.\3786\ 
Each of these releases was accompanied by significant updates to the 
required formats which required OATS reporters to update and test 
their reporting systems and infrastructure.
---------------------------------------------------------------------------

    \3784\ See FINRA, OATS Phase III, http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/PhaseIII/.
    \3785\ See FINRA, OATS Reporting Requirements to OTC Equity 
Securities, http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/OTCEquitySecurities/.
    \3786\ See FINRA, OATS Expansion to all NMS Stocks, https://www.finra.org/Industry/Compliance/MarketTransparency/OATS/NMS/.
---------------------------------------------------------------------------

    The combined average error rates for the time periods 
immediately following release across five significant categories for 
these three releases follow. The average rejection percentage rate, 
representing order events that did not pass systemic validations, 
was 2.42%. The average late percentage rate, representing order 
events not submitted in a timely manner, was 0.36%. The average 
order/trade matching error rate, representing OATS Execution Reports 
unsuccessfully matched to a TRF trade report was 0.86%. The average 
Exchange/Route matching error rate, representing OATS Route Reports 
unsuccessfully matched to an exchange order was 3.12%. Finally, the 
average Interfirm Route matching error rate, representing OATS Route 
Reports unsuccessfully matched to a report representing the receipt 
of the route by another reporting entity was 2.44%. Although the 
error rates for the 1999 initial OATS implementation were 
significantly higher than those laid out above, the Participants 
believe that technical innovation and institutional knowledge of 
audit trail creation over the past 15 years makes the more recent 
statistics a better standard for the initial Error Rate.\3787\ Based 
upon these historical error rates, and given that reporting to the 
Central Repository will involve reporting on new products (i.e., 
options) and reporting by new reporters (including both broker-
dealers and Participants who have not previously been required to 
report to OATS), the Participants believe that the initial Error 
Rate will be higher than the recent rates associated with OATS 
releases and that an initial Error Rate of 5% is an appropriate 
standard.
---------------------------------------------------------------------------

    \3787\ The initial rejection rates for OATS were 23% and a late 
reporting rate of 2.79%.
---------------------------------------------------------------------------

    The Participants believe that to achieve this Error Rate, 
however, the Participants and the industry must be provided with 
ample resources, including a stand-alone test environment 
functionally equivalent to the production environment, and time to 
test their reporting systems and infrastructure. Additionally, the 
Technical Specifications must be well written and effectively 
communicated to the reporting community with sufficient time to 
allow proper technical updates, as necessary. The Participants 
believe that the Error Rate strikes the balance of adapting to a new 
reporting regime, while ensuring that the data provided to 
regulators will be capable of being used to conduct surveillance and 
market reconstruction, as well as having a sufficient level of 
accuracy to facilitate the retirement of existing regulatory reports 
and systems where possible.
    The Participants are proposing a phased approach to lowering the 
maximum Error Rate. Under the proposed approach, one year after a 
CAT Reporter's respective filing obligation has begun, their maximum 
Error Rate would become 1%.\3788\ Maximum Error Rates under the 
proposed approach would thus be as follows:
---------------------------------------------------------------------------

    \3788\ Error rate reporting will be bifurcated by reporter group 
(e.g., Large Broker/Dealers) rather than product type to minimize 
the complexity of Error Rate calculations.
    \3789\ As used in this table, ``years'' refer to years after 
effectiveness of the NMS Plan.

----------------------------------------------------------------------------------------------------------------
                                                     One year
                                                      \3789\         Two years      Three years     Four years
----------------------------------------------------------------------------------------------------------------
Participants....................................              5%              1%              1%              1%
Large broker-dealers............................             N/A              5%              1%              1%
Small broker-dealers............................             N/A             N/A              5%              1%
----------------------------------------------------------------------------------------------------------------

    In addition to the above mentioned daily Error Rate, CAT 
Reporters will be required to meet separate Compliance 
Thresholds,\3790\ which rather than the Error Rate, will be a CAT 
Reporter-specific rate that may be used as the basis for further 
review or investigation into CAT Reporter performance. Although 
Compliance Thresholds will not be calculated on a daily basis, this 
does not: (1) relieve CAT Reporters from their obligation to meet 
daily reporting requirements set forth in SEC Rule 613; or (2) 
prohibit disciplinary action against a CAT Reporter for failure to 
meet its daily reporting requirements set forth in SEC Rule 613. The 
Operating Committee may consider other exceptions to this reporting 
obligation based on demonstrated legal or regulatory requirements or 
other mitigating circumstances.
---------------------------------------------------------------------------

    \3790\ Compliance Thresholds will be set by the Operating 
Committee. Compliance Thresholds for CAT Reporters will be 
calculated at intervals to be set by the Operating Committee. All 
CAT Reporters, including the Participants, will be subject to 
Compliance Thresholds. Compliance Thresholds will include, among 
other items, compliance with clock synchronization requirements.
---------------------------------------------------------------------------

    In order to reduce the maximum Error Rate and help CAT Reporters 
to meet their Compliance Thresholds, the Plan Processor must provide 
support for CAT Reporter ``go-live'' dates, as specified in Appendix 
D, User Support.

[ssquf] Sequencing Orders and Clock Synchronization

    SEC Rule 613(c)(1) requires the Central Repository to provide 
``an accurate, time-sequenced record of orders,'' and SEC Rule 
613(d)(1) requires the CAT NMS Plan to require each CAT Reporter 
``to synchronize its business clocks that are used for the purposes 
of recording the date and time of any reportable event . . . to the 
time maintained by the National Institute of Standards and 
Technology (NIST), consistent with industry standards.'' As an 
initial matter, because of the drift between clocks, an accurately-
sequenced record of orders cannot be based solely on the time stamps 
provided by CAT Reporters. As discussed above, the CAT NMS Plan 
requires that CAT Reporters synchronize their clocks to within 50 
milliseconds of the NIST. Because of this permitted drift, any two 
separate clocks can vary by 100 milliseconds: one clock can drift 
forward 50 milliseconds while another can drift back 50 
milliseconds. Thus, it is possible to have, for example, one firm 
report the route of an order at 10:40:00.005 while the firm 
receiving the routed order reports a receipt time of 10:39:59.983 
(i.e., the time stamps alone indicate that the routed order was 
received before it was sent). For this reason, the Participants plan 
to require that the Plan Processor develop a way to accurately track 
the sequence of order events without relying entirely on time 
stamps.\3791\
---------------------------------------------------------------------------

    \3791\ Events occurring within a single system that uses the 
same clock to time stamp those events should be able to be 
accurately sequenced based on the time stamp. For unrelated events, 
e.g., multiple unrelated orders from different broker-dealers, there 
would be no way to definitively sequence order events within the 
allowable clock drift as defined in Article 6.8.
---------------------------------------------------------------------------

    There were several different approaches suggested by the Bidders 
to accomplish the accurate sequencing of order events. Some Bidders 
suggested using time stamp-based sequencing; however, most Bidders 
recognized that, while all CAT Reporters should have their time 
stamp clocks synchronized, in practice this

[[Page 84980]]

synchronization cannot be wholly relied upon due to variations in 
computer systems. These Bidders rely on linkage logic to derive the 
event sequencing chain, such as parent/child orders. To help resolve 
time stamp issues, one Bidder proposed adding unique sequence ID 
numbers as well to the event information to help with time clock 
issues and a few others would analyze the variations on clock time 
and notify those CAT Reporters that need to resynchronize their 
clocks.
    The Participants believe that using a linking logic not 
dependent on time stamps would enable proper sequencing of an order. 
This decision is supported by the industry since time stamps across 
disparate systems cannot be guaranteed and are likely to be error-
prone.\3792\ The Participants believe that this type of sequencing 
can be successfully used for both simple and complex orders that 
will be reported to the Central Repository. The industry supports 
using event sequencing that is already built into the exchange 
protocols, which imposes sequencing and determines the true market 
environment.\3793\
---------------------------------------------------------------------------

    \3792\ See Letter from Manisha Kimmel, Executive Director, 
Financial Information Forum, to Participant Representatives of the 
CAT (June 12, 2013), available at http://catnmsplan.com/industryFeedback/P284394 (``FIF Letter'').
    \3793\ FIF Letter at 11.
---------------------------------------------------------------------------

    As required by Section 6.8(a) of the CAT NMS Plan, each 
Participant will synchronize its Business Clocks (other than 
Business Clocks used solely for Manual Order Events, which will be 
required to be synchronized to within one second of the time 
maintained by the NIST) used for the purposes of recording the date 
and time of any Reportable Event that must be reported under SEC 
Rule 613 to within 50 milliseconds of the time maintained by the 
NIST, and will adopt a Compliance Rule requiring its Industry 
Members to do the same. Furthermore, in order to ensure the accuracy 
of time stamps for Reportable Events, the Participants anticipate 
that Participants and Industry Members will adopt policies and 
procedures to verify such required synchronization each Trading Day 
(1) before the market opens and (2) periodically throughout the 
Trading Day.
    As noted above, Rule 613(d)(1) requires the CAT NMS Plan to 
impose a clock synchronization requirement ``consistent with 
industry standards.'' The Participants believe that the 50 
millisecond clock synchronization drift tolerance included in 
Section 6.8(a) represents the current industry clock synchronization 
standard and therefore satisfies the Rule. To determine the current 
industry standard, the Participants relied on survey feedback 
provided by industry members, as further discussed in Appendix C, 
D.12.
    Importantly, Section 6.8 requires, pursuant to Rule 613(c)(2), 
that Participants, together with the Plan Processor's Chief 
Compliance Officer, evaluate the clock synchronization standard on 
an annual basis to reflect changes in industry standards. 
Accordingly, to the extent existing technology that synchronizes 
business clocks with a lower tolerance (i.e., within less than 50 
milliseconds drift from NIST) becomes widespread enough throughout 
the industry to constitute a new standard, the clock synchronization 
requirement of the CAT NMS Plan would be revised to take account of 
the new standard.
    In accordance with SEC Rule 613(d), Section 6.8(c) of the CAT 
NMS Plan states that ``[i]n conjunction with Participants and other 
appropriate Industry Member advisory groups, the Chief Compliance 
Officer shall annually evaluate whether industry standards have 
evolved such that: (i) the synchronization standard in Section 
6.8(a) should be shortened; or (ii) the required time stamp in 
Section 6.8(b) should be in finer increments.''
    The Participants anticipate that compliance with this provision 
will require Participants and Industry Members to perform the 
following or comparable procedures. The Participants and their 
Industry Members will document their clock synchronization 
procedures and maintain a log recording the time of each clock 
synchronization performed, and the result of such synchronization, 
specifically identifying any synchronization revealing that the 
discrepancy between its Business Clock and the time maintained by 
the NIST exceeded 50 milliseconds. At all times such log will 
include results for a period of not less than five years ending on 
the then current date.
    In addition to clock synchronization requirements, the 
Participants considered the appropriate level of time granularity to 
be required in the CAT NMS Plan. Although millisecond increments are 
generally the industry standard for trading systems, there is a wide 
range of time stamp granularity across the industry commonly ranging 
from seconds to milliseconds to micro-seconds for Latency sensitive 
applications.\3794\ The disparity is largely attributed to the age 
of the system being utilized for reporting, as older systems cannot 
cost effectively support, finer time stamp granularity.\3795\ To 
comply with a millisecond time stamp requirement, the Participants 
understand that firms may face significant costs in both time and 
resources to implement a consistent time stamp across multiple 
systems.\3796\ This may include a need to upgrade databases, 
internal messaging applications/protocols, data warehouses, and 
reporting applications to enable the reporting of such time stamps 
to the Central Repository.\3797\ Because of this, FIF recommended to 
the Participants a two year grace period for time stamp 
compliance.\3798\ FIF and SIFMA also supported an exception for 
millisecond reporting for order events that are manually processed, 
which is discussed below.\3799\
---------------------------------------------------------------------------

    \3794\ Letter from T.R. Lazo, Managing Director, SIFMA, and 
Thomas Price, Managing Director, SIFMA (June 11, 2013), available at 
http://catnmsplan.com/industryFeedback/P284395 (``SIFMA Letter''); 
FIF Letter at 10.
    \3795\ FIF Letter at 10.
    \3796\ FIF Letter at 10; SIFMA Comments on Selected Topics at 
11.
    \3797\ FIF Letter at 10.
    \3798\ FIF Letter at 10.
    \3799\ FIF Letter at 10; SIFMA Letter at 11.
---------------------------------------------------------------------------

    To the extent that any CAT Reporter uses time stamps in 
increments finer than the minimum required by the CAT NMS Plan, each 
Participant will, and will adopt a rule requiring its Industry 
Members that are CAT Reporters to, use such finer increments when 
providing data to the Central Repository.
    With respect to the requirement under SEC Rule 613(c) and (d)(3) 
that time stamps ``reflect current industry standards and be at 
least to the millisecond,'' the Participants believe that time stamp 
granularity to the millisecond reflects current industry standards. 
However, after careful consideration, including numerous discussions 
with the DAG, the Participants have determined that time stamp 
granularity at the level of a millisecond is not practical for order 
events that involve non-electronic communication of information 
(``Manual Order Events''). In particular, it is the Participants' 
understanding that recording Manual Order Events to the millisecond 
would be both very costly, requiring specialized software 
configurations and expensive hardware, and inherently imprecise due 
to the manner in which human interaction is required. The industry 
feedback that the Participants received through the DAG suggests 
that the established business practice with respect to Manual Order 
Events is to manually capture time stamps with granularity at the 
level of a second because finer increments cannot be accurately 
captured when dealing with manual processes which, by their nature, 
take longer to perform than a time increment of under one second. 
The Participants agree that, due to the nature of transactions 
originated over the phone, it is not practical to attempt 
granularity finer than one second, as any such finer increment would 
be inherently unreliable. Further, the Participants do not believe 
that recording Manual Order Events to the second will hinder the 
ability of regulators to determine the sequence in which Reportable 
Events occur.
    As a result of these discussions, the Exemptive Request Letter 
requested exemptive relief from the Commission to allow the CAT NMS 
Plan to require Manual Order Events to be captured with granularity 
of up to and including one second or better, but also require CAT 
Reporters to report the time stamp of when a Manual Order Event was 
captured electronically in the relevant order handling and execution 
system of the party to the event. Granularity of the Electronic 
Capture Time will be consistent with the SEC Rule 613(d)(3) 
requirement that time stamps be at least to the millisecond.
    Thus, the Participants have determined that adding the 
Electronic Capture Time would be beneficial for successful 
reconstruction of the order handling process and would add important 
information about how the Manual Order Events are processed once 
they are entered into an electronic system. Additionally, Manual 
Order Events, when reported, must be clearly identified as such.

[ssquf] Data Maintenance and Management

    Data Maintenance and Management of the Central Repository 
``refers to the process for storing data at the [C]entral 
[R]epository, indexing the data for linkages, searches, and

[[Page 84981]]

retrieval, dividing the data into logical partitions when necessary 
to optimize access and retrieval, and the creation and storage of 
data backups.'' \3800\
---------------------------------------------------------------------------

    \3800\ Adopting Release at 45790 n.782.
---------------------------------------------------------------------------

    The Plan Processor must create a formal records retention policy 
to be approved by the Operating Committee. All of the data 
(including both corrected and uncorrected or rejected data) in the 
Central Repository must be kept online for a rolling six year 
period, which would create a six year historical audit trail. This 
data must be directly available and searchable by regulators 
electronically without any manual intervention. Additionally, the 
Plan Processor is required to create and maintain for a minimum of 
six years a symbol history and mapping table, as well as to provide 
a tool that will display a complete issue symbol history that will 
be accessible to CAT Reporters, Participants and the SEC.
    Assembled lifecycles of order events must be stored in a linked 
manner so that each unique event (e.g., origination, route, 
execution, modification) can be quickly and easily associated with 
the originating customer(s) for both targeted queries and 
comprehensive data scans. For example, an execution on an exchange 
must be linked to the originating customer(s) regardless of how the 
order may have been aggregated, disaggregated, or routed through 
multiple broker-dealers before being sent to the exchange for 
execution.
    Most Bidders recommended dividing data in the Central Repository 
into nodes based on symbol, date or a combination thereof in order 
to speed query response times. The Participants are not specifying 
how the data is divided, but will require that it be partitioned in 
a logical manner in order to optimize access and retrieval.
    All of the Bidders addressed data loss through data replication 
and redundancy. Some of the Bidders proposed a hot-hot design for 
replication for primary and secondary data, so both sites are fully 
operational at all times and there would be no recovery time 
necessary in the case of fall-over to the secondary site. However, 
this is a more costly solution, and many Bidders therefore proposed 
data loss prevention by operating in a hot-warm design for 
replication to a secondary site. The Participants are requiring that 
the Plan Processor implement a disaster recover capability that will 
ensure no loss of data and will support the data availability 
requirements for the Central Repository and a secondary processing 
site will need to be capable of recovery and restoration of services 
at the secondary site within 48 hours of a disaster event.

[ssquf] Data Access by Regulators

    As detailed in Appendix C, Time and Method by which CAT Data 
will be Available to Regulators, the Participants and other 
regulators will have access to raw unprocessed data that has been 
ingested by the Central Repository prior to Noon Eastern Time on 
T+1.\3801\ Between Noon Eastern Time on T+1 and T+5, the 
Participants and other regulators should have access to all 
iterations of processed data.\3802\ At T+5, the Participants and 
other regulators should have access to corrected data.\3803\ The 
Plan Processor must adopt policies and procedures to reasonably 
inform Participants and the SEC of material data corrections made 
after T+5. The Participants and other regulators will be able to 
build and generate targeted queries against data in the Central 
Repository. More information about the report, query, and extraction 
capabilities can be found in Appendix D, Functionality of the CAT 
System.
---------------------------------------------------------------------------

    \3801\ See Appendix C, Time and Method by which CAT Data will be 
Available to Regulators.
    \3802\ Id.
    \3803\ Id.
---------------------------------------------------------------------------

[ssquf] Data Recovery and Business Continuity

    As noted above, in addition to describing data security and 
confidentiality, all of the Bidders were required to set forth an 
approach to data loss recovery and business continuity in the event 
of data loss. All of the Bidders addressed data loss through data 
replication and redundancy. Some of the Bidders proposed a hot-hot 
design for replication for primary and secondary data, so both sites 
are fully operational at all times and there would be no recovery 
time necessary in the case of fall-over to the secondary site. 
However, this is a more costly solution, and many Bidders therefore 
proposed data loss prevention by operating in a hot-warm design for 
replication to a secondary site.
    The Plan Processor must comply with industry best practices for 
disaster recovery and business continuity planning, including the 
standards and requirements set forth in Appendix D, BCP/DR Process.
    With respect to business continuity, the Participants have 
developed the following requirements that the Plan Processor must 
meet. In general, the Plan Processor will implement efficient and 
cost-effective backup and disaster recovery capability that will 
ensure no loss of data and will support the data availability 
requirements and anticipated volumes of the Central Repository. The 
disaster recovery site must have the same level of availability/
capacity/throughput and data as the primary site. In addition, the 
Plan Processor will be required to design a Business Continuity Plan 
that is inclusive of the technical and business activities of the 
Central Repository, including the items specified in Appendix D, 
BCP/DR Process (e.g., bi-annual DR testing and an annual Business 
Continuity Audit).

The Security and Confidentiality of the Information Reported to the 
Central Repository (SEC Rule 613(a)(1)(iv))

    As required by SEC Rule 613(a)(1)(iv), this section describes 
the security and confidentiality of the information reported to the 
Central Repository. As the Commission noted in the Adopting Release, 
keeping the data secure and confidential is critical to the efficacy 
of the Central Repository and the confidence of market participants. 
There are two separate categories for purposes of treating data 
security and confidentiality: (1) PII; and (2) other data related to 
orders and trades reported to the CAT.\3804\
---------------------------------------------------------------------------

    \3804\ Some trade data (e.g., trade data feeds disseminated by 
the SIPs) is public and therefore of little concern from a security 
standpoint. However, because this data may be linked to confidential 
order data or other non-public information, the Participants are 
requiring the Plan Processor to store this public data in the same 
manner as the non-public order and trade information submitted to 
the Central Repository by Data Submitters.
---------------------------------------------------------------------------

    Because of the importance of data security, the Participants 
included in the RFP numerous questions to Bidders requesting 
detailed information on their data security approaches. In the RFP, 
the Participants requested general information regarding the 
following:

how the Bidder's solution protects data during transmission, 
processing, and at rest (i.e., when stored in the Central 
Repository); \3805\
---------------------------------------------------------------------------

    \3805\ RFP Question 65.
---------------------------------------------------------------------------

the specific security governance/compliance methodologies utilized 
in the proposed solution; \3806\
---------------------------------------------------------------------------

    \3806\ RFP Question 66.
---------------------------------------------------------------------------

how access to the data is controlled and how the system(s) confirms 
the identity of persons (e.g., username/password), monitors who is 
permitted to access the data and logs every instance of user access; 
\3807\
---------------------------------------------------------------------------

    \3807\ RFP Question 67.
---------------------------------------------------------------------------

what system controls for users are in place to grant different 
levels of access depending on their role or function; \3808\
---------------------------------------------------------------------------

    \3808\ RFP Question 68.
---------------------------------------------------------------------------

the strategy, tools and techniques, and operational and management 
practices that will be used to maintain security of the system; 
\3809\
---------------------------------------------------------------------------

    \3809\ RFP Question 69.
---------------------------------------------------------------------------

the proposed system controls and operational practices; \3810\
---------------------------------------------------------------------------

    \3810\ RFP Question 70.
---------------------------------------------------------------------------

the organization's security auditing practices, including internal 
audit, external audit, third-party independent penetration testing, 
and all other forms of audit and testing; \3811\
---------------------------------------------------------------------------

    \3811\ RFP Question 71.
---------------------------------------------------------------------------

how security practices may differ across system development 
lifecycles and environments that support them (e.g., development, 
testing, and production); \3812\
---------------------------------------------------------------------------

    \3812\ RFP Question 72.
---------------------------------------------------------------------------

experiences in developing policies and procedures for a robust 
security environment, including the protection of PII; \3813\
---------------------------------------------------------------------------

    \3813\ RFP Question 75.
---------------------------------------------------------------------------

the use of monitoring and incident handling tools to log and manage 
the incident handling lifecycle; \3814\
---------------------------------------------------------------------------

    \3814\ RFP Question 76.
---------------------------------------------------------------------------

the approach(es) to secure user access, including security features 
that will prevent unauthorized users from accessing the system; 
\3815\
---------------------------------------------------------------------------

    \3815\ RFP Question 77.
---------------------------------------------------------------------------

the processes/procedures followed if security is breached; \3816\
---------------------------------------------------------------------------

    \3816\ RFP Question 78.

---------------------------------------------------------------------------

[[Page 84982]]

the infrastructure security architecture, including network, 
firewalls, authentication, encryption, and protocols; and \3817\
---------------------------------------------------------------------------

    \3817\ RFP Question 79.
---------------------------------------------------------------------------

the physical security controls for corporate, data center and leased 
data center locations.\3818\
---------------------------------------------------------------------------

    \3818\ RFP Question 80.

    All Bidders acknowledged the importance of data security; 
however, the proposals varied in the details about security 
policies, data access management, proactive monitoring and intrusion 
prevention, and how data security will be implemented. Some Bidders 
intend to leverage their experience in financial services and adopt 
their policies and technologies to control data, and many Bidders 
supported such measures as role-based access controls, two factor 
authentication, detailed system logs, and segmentation of sensitive 
data that is isolated in both logical and physical layers. Other 
Bidders indicated that they would use role-based security policies, 
data and file encryption, and redundant and layered controls to 
prevent unauthorized access. Additionally, Bidders noted that the 
physical locations at which data is stored need security measures to 
ensure data is not compromised. Some Bidders indicated that physical 
controls would include background checks for employees working with 
the system; physical building security measures (e.g., locks, 
alarms, key control programs, CCTV monitoring for all critical 
areas, and computer controlled access systems with ID badges).
    The RFP also requested additional information specific to the 
treatment and control over PII. The RFP required Bidders to 
specifically address:

how PII will be stored; \3819\ and
---------------------------------------------------------------------------

    \3819\ RFP Question 5.
---------------------------------------------------------------------------

how PII access will be controlled and tracked.\3820\
---------------------------------------------------------------------------

    \3820\ RFP Question 6.

    All of the Bidders proposed segregating PII from the other data 
in the Central Repository. Additionally, all of the Bidders 
recommended limiting access to PII to only those regulators who need 
to have access to such information, and requiring additional 
validations to access PII. Although all Bidders proposed to keep a 
log of access to the Central Repository by user, the Bidders 
suggested different methods of authentication and utilized varying 
security policies, including the use of VPNs or HTTPS.
    The RFP also requested information from Bidders on data loss 
prevention (``DLP'') and business continuity to ensure the continued 
security and availability of the data in the Central Repository. 
Specifically, the RFP asked Bidders to describe:

their DLP program; \3821\ and
---------------------------------------------------------------------------

    \3821\ RFP Question 73. The Bidders were asked to include 
information pertaining to strategy, tools and techniques, and 
operational and management practices that will be used.
---------------------------------------------------------------------------

the process of data classification and how it relates to the DLP 
architecture and strategy.\3822\
---------------------------------------------------------------------------

    \3822\ RFP Question 74.

    Based upon the RFP responses, as well as input from the 
Participants' information security teams and discussions with the 
DAG, information security requirements were developed and are 
defined in Appendix D, Data Security. These requirements are further 
explained below.

[ssquf] General Security Requirements

    SEC Rule 613 requires that the Plan Processor ensure the 
security and confidentiality of all information reported to and 
maintained by the Central Repository in accordance with the 
policies, procedures, and standards in the CAT NMS Plan.\3823\ Based 
on the numerous options and proposals identified by the Bidders, the 
Participants have outlined multiple security requirements the Plan 
Processor will be required to meet to ensure the security and 
confidentiality of data reported to the Central Repository. The Plan 
Processor will be responsible for ensuring the security and 
confidentiality of data during transmission and processing as well 
as data at rest.
---------------------------------------------------------------------------

    \3823\ SEC Rule 613(e)(4). This section of Appendix C provides 
an outline of the policies and procedures to be implemented. When 
adopting this requirement, the Commission recognized ``the utility 
of allowing the [Participants] flexibility to subsequently delineate 
them in greater detail with the ability to make modifications as 
needed.'' Adopting Release at 45782. Additional detail is provided 
in Appendix D, Data Security.
---------------------------------------------------------------------------

    The Plan Processor must provide a solution addressing physical 
security controls for corporate, data center and any leased 
facilities where any of the above data is transmitted or stored. In 
addition to physical security, the Plan Processor must provide for 
data security for electronic access by outside parties, including 
Participants and the SEC and, as permitted, CAT Reporters or Data 
Submitters. Specific requirements are detailed in Appendix D, Data 
Security, and include requirements such as role-based user access 
controls, audit trails for data access, and additional levels of 
protection for PII.
    Pursuant to SEC Rule 613(i)(C), the Plan Processor has to 
develop and maintain a comprehensive security program for the 
Central Repository with dedicated staff: (1) that is subject to 
regular reviews by the Chief Compliance Officer; (2) that has a 
mechanism to confirm the identity of all persons permitted to access 
the data; and (3) that maintains a record of all such instances 
where such persons access the data. In furtherance of this 
obligation, the CAT NMS Plan requires the Plan Processor to 
designate a Chief Compliance Officer and a Chief Information 
Security Officer, each subject to approval by the Operating 
Committee. Each position must be a full-time position. Section 
6.2(a) of the CAT NMS Plan provides that the Chief Compliance 
Officer must develop a comprehensive compliance program covering all 
CAT Reporters, including the Participants and Industry 
Members.\3824\ Section 6.2(b) of the CAT NMS Plan provides that the 
Chief Information Security Officer shall be responsible for creating 
and enforcing appropriate policies, procedures, standards and 
control structures to monitor and address data security issues for 
the Plan Process and the CAT System as detailed in Appendix D, Data 
Security.
---------------------------------------------------------------------------

    \3824\ See Section 6.2(a)(v) of the CAT NMS Plan for a more 
detailed list of the activities to be performed by the Chief 
Compliance Officer.
---------------------------------------------------------------------------

    Section 6.12 of the CAT NMS Plan requires that the Plan 
Processor develop and maintain a comprehensive information 
technology security program for the Central Repository, to be 
approved and reviewed at least annually by the Operating Committee. 
To effectuate these requirements, Appendix D sets forth certain 
provisions designed to (1) limit access to data stored in the 
Central Repository to only authorized personnel and only for 
permitted purposes; (2) ensure data confidentiality and security 
during all communications between CAT Reporters and the Plan 
Processor, data extractions, manipulation and transformation, 
loading to and from the Central Repository, and data maintenance by 
the Central Repository; (3) require the establishment of secure 
controls for data retrieval and query reports by Participants' 
regulatory staff and the SEC; and (4) otherwise provide appropriate 
database security for the Central Repository. Section 6.2(a) of the 
CAT NMS Plan provides that the Chief Compliance Officer, in 
collaboration with the Chief Information Security Officer, will 
retain independent third parties with appropriate data security 
expertise to review and audit on an annual basis the policies, 
procedures, standards, and real time tools that monitor and address 
data security issues for the Plan Processor and the Central 
Repository.\3825\
---------------------------------------------------------------------------

    \3825\ See SEC Rule 613(e)(5).
---------------------------------------------------------------------------

    The Plan Processor must have appropriate solutions and controls 
in place to ensure data confidentiality and security during all 
communication between CAT Reporters and the CAT System, data 
extraction, manipulation and transformation, loading to and from the 
Central Repository and data maintenance by the system. The solution 
must also address secure controls for data retrieval and query 
reports by Participant regulatory staff and the SEC. The solution 
must provide appropriate tools, logging, auditing and access 
controls for different components of the system, such as access to 
the Central Repository, access for CAT Reporters, access to rejected 
data, processing status and CAT Reporter calculated Error Rates.
    In addition, pursuant to SEC Rule 613(e)(4)(i)(C)(2), the Plan 
Processor will develop and maintain a mechanism to confirm the 
identity of all persons permitted to access the data. The Plan 
Processor is responsible for defining, assigning and monitoring CAT 
Reporter entitlements. Similarly, pursuant to SEC Rule 
613(e)(4)(i)(C)(3), the Plan Processor will record all instances 
where a person accesses the data.
    Pursuant to SEC Rule 613(e)(4)(i)(B), Section 6.5(e)(ii) of the 
CAT NMS Plan requires each Participant to adopt and enforce rules 
that require information barriers between its regulatory staff and 
non-regulatory staff with regard to access to and use of data in the 
Central Repository, and permit only persons designated by such 
Participants to have access to and use of the data in the Central 
Repository.

[[Page 84983]]

    The Plan Processor will also develop a formal cyber incident 
response plan to provide guidance and direction during security 
incidents, and will also document all information relevant to any 
security incidents, as detailed in Appendix D, Data Security.

[ssquf] PII

    As noted above, because of the sensitivity of PII, the 
Participants have determined PII should be subject to more stringent 
standards and requirements than other order and trading data. In 
response to the RFP questions, many Bidders mentioned that a range 
of techniques were required to ensure safety of PII. These 
techniques included development of PII policies and managerial 
processes for use by Plan Processor as well as Participants' staff 
and the SEC, physical data center considerations and strong 
automated levels, such as application, mid-tier, database, and 
operating systems levels, and use of role-based access and other 
parameters such as time-limited, case-restricted, and 
compartmentalized privilege. Most Bidders advocated for separate 
storage of PII in a dedicated repository to reduce the ability for 
hacking events to occur.
    In accordance with SEC Rule 613(e)(4)(i)(A), all Participants 
and their employees, as well as all employees of the Plan Processor, 
will be required to use appropriate safeguards to ensure the 
confidentiality of data reported to the Central Repository and not 
to use such data for any purpose other than surveillance and 
regulatory purposes. A Participant, however, may use the data that 
it reports to the Central Repository for regulatory, surveillance, 
commercial, or other purposes.
    The Participants anticipate that access to PII will be limited 
to a ``need-to-know'' basis. Therefore, it is expected that access 
to PII associated with customers and accounts will have a much lower 
number of registered users, and access to this data will be limited 
to Participants' staff and the SEC who need to know the specific 
identity of an individual. For this reason, PII such as SSN and TIN 
will not be made available in the general query tools, reports, or 
bulk data extraction.\3826\ The Participants will require that the 
Plan Processor provide for a separate workflow granting access to 
PII (including an audit trail of such requests) that allows this 
information to be retrieved only when required by specific 
regulatory staff of a Participant or the SEC, including additional 
security requirements for this sensitive data. Specifically, the 
Plan Processor must take steps to protect PII as defined in Appendix 
D, Data Security and including items such as storage of PII 
separately from order and transaction data, multi-factor 
authentication for access to PII data, and a full audit trail of all 
PII data access.
---------------------------------------------------------------------------

    \3826\ As described in Appendix C, Reporting Data to the CAT, 
general queries can be carried out using the Customer-ID without the 
need to know specific, personally-identifiable information (i.e., 
who the individual Person associated with the Customer-ID is). The 
Customer-ID will be associated with the relevant accounts of that 
Person; thus, the use of Customer-ID for querying will not reduce 
surveillance.
---------------------------------------------------------------------------

    It is anticipated that the Technical Specifications will set 
forth additional policies and procedures concerning the security of 
data reported to the Central Repository; however, any such policies 
and procedures must, at a minimum, meet the requirements set forth 
in the CAT NMS Plan and Appendix D.

The Flexibility and Scalability of the CAT (SEC Rule 613(a)(1)(v))

[ssquf] Overview

    As required by SEC Rule 613(a)(1)(v), this section discusses the 
flexibility and scalability of the systems used by the Central 
Repository to collect, consolidate and store CAT Data, including the 
capacity of the Central Repository to efficiently incorporate, in a 
cost-effective manner, improvements in technology, additional 
capacity, additional order data, information about additional 
Eligible Securities or transactions, changes in regulatory 
requirements, and other developments.
    The Plan Processor will ensure that the Central Repository's 
technical infrastructure is scalable, adaptable to new requirements 
and operable within a rigorous processing and control environment. 
As a result, the technical infrastructure will require an 
environment with significant throughput capabilities, advanced data 
management services and robust processing architecture. The 
technical infrastructure should be designed so that in the event of 
a capacity upgrade or hardware replacement, the Central Repository 
can continue to receive data from CAT Reporters with no unexpected 
issues.
    The Plan Processor will perform assessments of the Central 
Repository's technical infrastructure to ensure the technology 
employed therein continues to meet the functional requirements 
established by the Participants. The Plan Processor will provide 
such assessments to, and review such assessments with, the Operating 
Committee within one month of completion. The Operating Committee 
will set forth the frequency with which the Plan Processor is 
required to perform such assessments. The Operating Committee must 
approve all material changes/upgrades proposed by the Plan Processor 
before they can be acted upon. The Operating Committee may solicit 
feedback from the Advisory Committee for additional comments and/or 
suggestions on changes to the capacity study as the Operating 
Committee determines necessary.
    The Central Repository will employ optimal technology for 
supporting (1) scalability to increase capacity to handle a 
significant increase in the volume of data reported, (2) 
adaptability to support future technology developments and new 
requirements and (3) maintenance and upgrades to ensure that 
technology is kept current, supported and operational.
    Participants will provide metrics and forecasted growth to 
facilitate Central Repository capacity planning. The Plan Processor 
will maintain records of usage statistics to identify trends and 
processing peaks. The Central Repository's capacity levels will be 
determined by the Operating Committee and used to monitor resources, 
including CPU power, memory, storage, and network capacity.
    The Plan Processor will ensure the Central Repository's 
compliance with all applicable service level agreements concerning 
flexibility and scalability of the Central Repository, including 
those specified in the CAT NMS Plan and by the Operating Committee.

[ssquf] Approaches proposed by Bidders

    Information received from Shortlisted Bidders indicated that all 
six Shortlisted Bidders considered incoming transaction volumes to 
be one of their most significant drivers of cost across hardware, 
software, and full-time employees (``FTEs''), with the expected rate 
of increase in transaction volumes and retention requirements also 
being prominent drivers of cost. The approaches described above will 
facilitate effective management of these factors to provide for a 
cost-effective and flexible Central Repository.
    As noted in the RFP, the Bidders were required to provide 
comments on how the Central Repository would be scalable for growth 
in the following aspects: number of issues accepted by the CAT, 
types of messages accepted by the CAT, addition of fields stored on 
individual data records or increases in any data type due to market 
growth. The Bidders were also requested to describe how the system 
can be scaled up for peak periods and scaled down as needed.
    Bidders using a network infrastructure of data collection hubs 
noted the use of Ethernet links throughout a single hub as a method 
of handling additional throughput and capacity. Other Bidders note 
access points will be load balanced, allowing for additional 
capacity. Some Bidders note the need for continued monitoring to 
facilitate timely addition of capacity or other upgrades. Other 
Bidders highlighted the ability to scale processing horizontally by 
adding nodes to the database structure which will allow for 
additional capacity. In this instance, adding nodes to an existing 
clustered environment allows for the preservation of processing 
speed in the existing processing environment. In a cloud solution, 
Bidders note the systems will scale automatically. That is, the 
processing load or capacity is determined at the instance the tool 
is `run' by the processer.\3827\ Some Bidders broadly note that the 
selection of platform components or features of their proposed 
solution infrastructure was the key in developing a scalable system. 
It is further noted that the selection of these elements allows for 
technological upgrades to incorporate newer technologies without a 
system replacement. Bidders identify the use of additional server 
and storage capacity as a key proponent of providing a scalable 
system.
---------------------------------------------------------------------------

    \3827\ See, e.g., Google Cloud Platform, https://cloud.google.com/developers/articles/auto-scaling-on-the-google-cloud-platform/.

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[[Page 84984]]

The Feasibility, Benefits, and Costs for Broker-Dealers Reporting 
Allocations in Primary Market Transactions to the Consolidated Audit 
Trail (SEC Rule 613(a)(1)(vi))

    SEC Rule 613(a)(1)(vi) requires the Participants to assess the 
feasibility, benefits and costs of broker-dealers reporting to the 
consolidated audit trail in a timely manner:

The identity of all market participants (including broker-dealers 
and customers) that are allocated NMS Securities, directly or 
indirectly, in a Primary Market Transaction; \3828\
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    \3828\ All observations and costs as provided in this section 
include secondary offerings.
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The number of such NMS Securities each such market participant is 
allocated; and
The identity of the broker-dealer making each such allocation.\3829\
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    \3829\ SEC Rule 613(a)(1)(vi).

    The objective of this CAT NMS Plan is to provide a comprehensive 
audit trail that ``allows regulators to efficiently and accurately 
track all activity in NMS securities throughout the U.S. markets.'' 
The Participants believe that an eventual expansion of the CAT to 
gather complete information on Primary Market Transactions would be 
beneficial to achieving that objective. However, based on the 
analysis directed to be completed as part of this plan, the 
Participants have concluded that it is appropriate to limit CAT 
submissions related to allocations in Primary Market Transactions to 
sub-account allocations, as described below.
    Specifically, based on comments received by the Participants on 
this and other topics related to the consolidated audit trail,\3830\ 
the Participants believe that information related to sub-account 
allocations--the allocation of shares in a primary market offering 
to the accounts that ultimately will own them--currently is 
maintained by broker-dealers in a manner that would allow for 
reporting to the Central Repository without unreasonable costs and 
could assist the Commission and the Participants in their regulatory 
obligations, including a variety of rulemaking and policy decisions. 
By contrast, the reporting of so-called ``top account'' information 
in Primary Market Transactions to the Central Repository would 
involve significantly more costs which, when balanced against the 
marginal benefit, is not justified at this time. These issues are 
discussed further below.
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    \3830\ Questions for Public Comment re the CAT NMS Plan (Apr. 
22, 2013), available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p246652.pdf (``April Request for 
Comment'').
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    As a preliminary matter, the analysis required pursuant to this 
section is limited to Primary Market Transactions in NMS Securities 
that involve allocations. As the Commission has noted, `` `a primary 
market transaction is any transaction other than a secondary market 
transaction and refers to any transaction where a person purchases 
securities in an offering.' '' \3831\ The Participants understand 
that Primary Market Transactions generally involve two phases that 
implicate the allocation of shares. The ``book building'' phase 
involves the process ``by which underwriters gather and assess 
investor demand for an offering of securities and seek information 
important to their determination as to the size and pricing of an 
issue.'' \3832\ This process may involve road shows to market an 
offering to potential investors, typically institutional investors, 
including the discussion of the prospective issuer, and its 
management and prospects. The book building phase also involves 
efforts by the underwriter to ascertain indications of interest in 
purchasing quantities of the underwritten securities at varying 
prices from potential investors.\3833\ Using this and other 
information, the underwriter will then decide how to allocate IPO 
shares to purchasers. The Participants understand that these are so-
called ``top account'' allocations--allocations to institutional 
clients or retail broker-dealers, and that such allocations are 
conditional and may fluctuate until the offering syndicate 
terminates. Sub-account allocations occur subsequently, and are made 
by top account institutions and broker-dealers prior to settlement. 
Sub-account allocations represent the allocation of IPO shares to 
the actual account receiving the shares and are based on an 
allocation process that is similar to secondary market 
transactions.\3834\
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    \3831\ Adopting Release at 45792 n.792.
    \3832\ See generally, Securities Act Release No. 8565, 70 Fed. 
Reg. 19672 (Apr. 13, 2005) (Commission guidance regarding prohibited 
conduct in connection with IPO allocations) (``IPO Allocation 
Release'').
    \3833\ Id.
    \3834\ See FIF Letter at 4.
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[ssquf] Feasibility

    In the April 2013 Request for Comment, the Participants 
requested information on how firms handle Primary Market 
Transactions. In response to the request, FIF, SIFMA and Thomson 
Reuters submitted comments explaining current industry practice with 
respect to Primary Market Transactions.\3835\ Both SIFMA and FIF 
noted that broker-dealers generally maintain top account allocation 
information in book building systems that are separate from their 
systems for secondary market transactions and that differ across the 
industry, including the use of applications provided by third 
parties, in house systems and spreadsheets for small firms.\3836\ 
The Participants also understand that the investment banking 
divisions of broker-dealers typically use different compliance 
systems than those used for secondary market transactions.\3837\ The 
DAG also provided feedback \3838\ indicating that the impacted 
systems differ across the industry, given differing processes for 
Primary Market Transactions depending upon the structure of the 
deal, and that initial allocations are stored in book-building 
systems with varying levels of sophistication across the industry, 
including third-party systems, custom-built systems, and 
spreadsheets. The Participants thus believe that capturing 
indications of interest and other information about top account 
allocations in an accurate and consistent manner across the industry 
would be challenging.
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    \3835\ See FIF Letter; SIFMA Letter; Thomson Reuters (May 21, 
2013) (``Thomson Reuters Letter''), available at http://catnmsplan.com/industryFeedback/; see also Thomson Reuters Letter, 
http://catnmsplan.com/industryFeedback/P284396 (systems used for 
primary market allocations differ from those used for secondary 
market transactions).
    \3836\ FIF Letter at 4; SIFMA Letter at 3
    \3837\ FIF Letter at 4. The Participants also understand that 
top account allocation systems do not generally have execution 
reporting capacity, since reporting of primary market transactions 
is not currently required under OATS and other transaction reporting 
systems. SIFMA Letter at 2.
    \3838\ See DAG Cost Estimate for Adding Primary Market 
Transactions into CAT (Feb. 17, 2015), available at http://catnmsplan.com/industryFeedback/P602480.
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    By contrast, the Participants believe that it would be more 
feasible to gather information relating to sub-account allocations 
in Primary Market Transactions. The Participants understand that 
sub-account allocations are received in a manner and level of detail 
similar to allocations in secondary market transactions,\3839\ and 
that the same middle and back office systems that are used for the 
processing of sub-account allocations for secondary market 
transactions generally are also used for the sub-account allocations 
for Primary Market Transactions.\3840\ Similarly, sub-account 
allocations for Primary Market Transactions generally are maintained 
in an electronic format that could be converted into a reportable 
format acceptable for the CAT System. Therefore, these systems could 
more easily report information about sub-account allocations to the 
Central Repository than systems containing information regarding 
top-account allocations.
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    \3839\ FIF Letter at 4.
    \3840\ For example, commenters noted that ``firms generally use 
the same clearance and settlement systems for clearing and settling 
final allocations in primary market transactions as they do for 
clearing and settling secondary market trades.'' SIFMA Letter at 4.
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[ssquf] Benefits

    As the Commission notes, data about the final allocations of NMS 
Securities in Primary Market Transactions could improve compliance 
monitoring and market analyses by the Commission and the 
Participants, which, in turn, could help inform rulemaking and other 
policy decisions.\3841\ For example, such data could enhance the 
Commission's understanding of the role of the allocations in the 
capital formation process, when and how investors receiving 
allocations sell their Eligible Securities and how allocations 
differ among broker-dealers.\3842\ Such data also could assist the 
Commission and Participants in conducting their respective 
examinations and investigations related to Primary Market 
Transactions.\3843\
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    \3841\ Adopting Release at 45792-93.
    \3842\ Id.
    \3843\ Id.
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    The Participants believe that most of these potential benefits 
could be achieved through the gathering of information relating to 
sub-account allocations rather than top account information. For 
example, sub-account allocation information would aid the

[[Page 84985]]

Commission and the Participants in gaining a better understanding of 
how shares allocated in Primary Market Transactions are sold in the 
secondary market, or how allocations differ across broker-dealers. 
By contrast, because top account information of conditional and 
interim allocations for NMS Securities fluctuates throughout the 
syndicate process and may vary significantly among firms, the 
marginal benefits of such information over final sub-account 
allocations are much less clear.

[ssquf] Costs

    The cost of reporting Primary Market Transaction information 
will depend on the scope of allocation information subject to the 
rule, as well as the related technology upgrades that would be 
necessary to report such information to the Central Repository. 
Based on the response of commenters, the Participants believe that 
reporting top account information about conditional allocations to 
the Central Repository would require significant technology 
enhancements. As noted above, current market practices capture top 
account allocations using systems and data sources that are 
different and separate from those used in secondary market 
transactions. Commenters also noted that there may be significant 
variability among underwriters in terms of the systems and 
applications used to gather such data.
    The DAG provided cost estimates associated with the reporting of 
Primary Market Transactions.\3844\ These estimates indicated that to 
report both initial and sub-account allocations would cost the 
industry as a whole at least $234.8 million \3845\ and require 
approximately 36 person-months per firm to implement. The DAG's 
estimate to report sub-account allocations only was approximately 
$58.7 million \3846\ for the industry and would require 
approximately 12 person-months per firm to implement. The DAG 
commented that given the higher costs associated with reporting 
initial allocations, if Primary Market Transactions are required to 
be reported to the Central Repository, that only reporting final 
sub-account allocations be required.
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    \3844\ See supra note 3838.
    \3845\ Based upon an assumption of 12 person-months of business 
analysis, an implementation timeline of 3x the business analysis 
timeline, 21.741 person-days per month, a $1,200 daily FTE rate, and 
a multiplier of 250 to reflect the costs of the 250 largest 
reporting firms. 12 person-months of analysis * 3 * 21.741 person-
days per month * $1,200 daily FTE rate = $939,211 * 250 = $234.8 
million.
    \3846\ Based upon an assumption of 3 person-months of business 
analysis, an implementation timeline of 3x the business analysis 
timeline, 21.741 person-days per month, a $1,200 daily FTE rate, and 
a multiplier of 250 to reflect the costs of the 250 largest 
reporting firms. 3 person-months of analysis * 3 * 21.741 person-
days per months * $1,200 daily FTE rate = $234,802 * 250 = $58.7 
million.
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    Based upon this analysis, the Participants are supportive of 
considering the reporting of Primary Market Transactions, but only 
at the sub-account level, and will incorporate analysis of this 
requirement, including how and when to implement such a requirement, 
into their document outlining how additional Eligible Securities 
could be reported to the Central Repository, in accordance with SEC 
Rule 613(i) and Section 6.11 of the Plan.
    Analysis of the CAT NMS Plan: These considerations are intended 
to help inform the Commission about the cost for development, 
implementation and maintenance of the CAT and to help determine if 
such plan is in the public interest.

Analysis of Expected Benefits and Estimated Costs for Creating, 
Implementing, and Maintaining the Consolidated Audit Trail (SEC Rule 
613(a)(1)(vii))

    The analysis of expected benefits and estimated costs presented 
here is informed by the Commission's public guidance on conducting 
economic analysis in conjunction with SEC rulemaking.\3847\ The 
analysis begins with a statement of the need for regulatory action, 
describes the sources of information used in the analysis, and 
provides a description of the economic baseline used to evaluate the 
impacts associated with the CAT NMS Plan. The analysis then provides 
estimates of the costs to build, implement, and maintain the CAT, as 
contemplated, and ends with a description of the alternatives 
considered.
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    \3847\ See, e.g., Memorandum to File Re: Current Guidance on 
Economic Analysis in SEC Rulemakings (Mar. 16, 2012), available at 
http://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (outlining foundational 
elements of regulatory economic analysis).
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[ssquf] Need for Regulatory Action

    SEC Rule 613 further requires the Participants to consider and 
discuss in the CAT NMS Plan detailed estimated costs for creating, 
implementing, and maintaining the CAT as contemplated by the CAT NMS 
Plan. Specifically, SEC Rule 613 requires that the estimated costs 
should specify: (1) an estimate of the costs to the Participants in 
establishing and maintaining the Central Repository; (2) an estimate 
of the costs to broker-dealers, initially and on an ongoing basis, 
for reporting the data required by the CAT NMS Plan; (3) an estimate 
of the costs to the Participants, initially and on an ongoing basis, 
for reporting the data required by the CAT NMS Plan; and (4) the 
Participants' proposal to fund the creation, implementation, and 
maintenance of the CAT, including the proposed allocation of such 
estimated costs among the Participants and broker-dealers. Set forth 
below is a discussion of cost estimates, including the studies 
undertaken to obtain relevant data, as well as the proposed funding 
model.

[ssquf] Economic Analysis

5. Sources of Cost Information

    Participants relied on two primary sources of information to 
estimate current audit trail costs (i.e., costs associated with the 
economic baseline), the costs incurred to meet the requirements of 
SEC Rule 613 for both the Participants and other CAT Reporters and 
the costs associated with the creation, implementation and 
maintenance of the CAT. First, to assess the costs associated with 
Participant and CAT Reporter obligations, Participants solicited 
study responses from Participants, broker-dealers and third party 
vendors. These three constituencies are the primary parties with 
direct costs arising from SEC Rule 613, as discussed further below. 
Second, to assess the costs associated with creating, implementing 
and maintaining the CAT, this analysis relies on estimated costs 
submitted by the Bidders as part of the bidding process.

Studies

Costs to Participants Study

    The first study undertaken collected information from the 
Participants about current audit trail reporting costs under the 
existing regulatory reporting framework and the potential costs of 
reporting to the Central Repository (the ``Costs to Participants 
Study''). Respondents were asked to estimate separately hardware, 
FTE staffing costs, and third party provider costs, where 
applicable. The study also requested information about costs 
associated with retiring current regulatory systems that would be 
rendered redundant by the CAT.
    The Costs to Participants Study was distributed to the 19 
Participants on August 11, 2014. The initial due date for responses 
was August 25, 2014; however due to the complexity of the data 
collection effort, the due date for the study was extended to 
September 24, 2014. Discussions with respondents suggested that at 
least some of the costs were more appropriate to measure at the 
level of the group of Affiliated Participants that hold multiple 
licenses (``Affiliated Participants Group''). Based on this 
approach, study results are presented for four Participants holding 
a single exchange registration and FINRA, which also is a 
Participant but is a registered securities association, and another 
five Affiliated Participants Groups representing the remaining 
fourteen registered exchanges. Subsequent to the filing of the CAT 
NMS Plan, the Participants determined that additional detail about 
anticipated costs could be provided to enhance the data collected as 
part of the Costs to Participants Study and a second data collection 
was conducted.

Costs to CAT Reporters Study

    The study sent to broker-dealers (the ``Costs to CAT Reporters 
Study'') was distributed to 4,406 broker-dealers,\3848\ and 
requested estimates for current costs under the existing regulatory 
reporting framework as well as future costs for reporting to the 
Central Repository. Broker-dealer respondents were asked to estimate 
the future costs to report to the Central Repository under two 
separate scenarios.\3849\ Approach 1 described a scenario in which 
broker-dealers would submit data to the

[[Page 84986]]

Central Repository using their choice of existing industry messaging 
protocols, such as the FIX protocol. Approach 2 provided a scenario 
in which broker-dealers would submit data to the Central Repository 
using a defined or specified format, such as an augmented version of 
OATS. For each approach, respondents were asked to estimate 
separately hardware, FTE staffing costs, and third party provider 
costs, where applicable. Finally, broker-dealers were requested to 
provide the cost of retirement of existing systems to be replaced by 
the CAT.
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    \3848\ A unique study link was distributed to 4,406 broker-
dealers. For 381 of the broker-dealers, the distribution email 
either was undeliverable or the broker-dealer responded that the 
study did not apply to them.
    \3849\ See SEC Rule 613--Consolidated Audit Trail (CAT) Cost 
Study Overview and Assumptions, available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p535485.pdf.
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    The development of the Costs to CAT Reporters Study took place 
over two months, starting in May 2014, and included detailed 
discussions with the DAG. The Participants developed an initial 
outline of questions based on the requirements in SEC Rule 613, as 
well as a detailed assumptions document. To make the Costs to CAT 
Reporters Study effective and informative, the Participants spent 
two months formulating the Costs to CAT Reporters Study with 
detailed input from the DAG. The initial draft of the Costs to CAT 
Reporters Study was presented to the DAG in May 2014, and was 
discussed in two additional meetings with the DAG until mid-June 
2014. In addition, on June 4, 2014, the Participants received and 
subsequently incorporated detailed written feedback from DAG members 
on the Costs to CAT Reporters Study and associated assumptions 
document.\3850\
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    \3850\ See Past Events and Announcements, SROs Launch Study to 
Analyze Implementation Cost of the Consolidated Audit Trail (last 
updated Dec. 10, 2014), available at http://catnmsplan.com/PastEvents/.
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    The study link was sent on June 23, 2014, to the compliance 
contact at each recipient CAT Reporter identified by the applicable 
designated examining authority or designated options examining 
authority to receive regulatory update and information requests. The 
initial due date for the study was August 6, 2014. On June 25, 2014 
and July 9, 2014, the Participants hosted a webinar \3851\ to review 
the materials associated with the Costs to CAT Reporters Study, and 
to answer any questions from the CAT Reporters. On July 17, 2014, 
July 30, 2014, and August 4, 2014, reminders were sent to the CAT 
Reporters to submit their final responses to the Costs to CAT 
Reporters Study by August 6, 2014. In addition, the Participants 
requested that industry associations that are part of the DAG 
encourage their members to respond to the Costs to CAT Reporters 
Study.
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    \3851\ See SEC Rule 613: Consolidated Audit Trail (CAT), SRO 
Hosted Consolidated Audit Trail Cost Study Webinar (July 9, 2014), 
available at http://catnmsplan.com/PastEvents/P551992.
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    On August 6, 2014, the first extension was granted for the Costs 
to CAT Reporters Study, extending the due date to August 20, 2014. 
On August 20, 2014, an additional extension was granted, extending 
the due date to September 3, 2014.
    During the process of collecting responses to the Costs to CAT 
Reporters Study, CAT Reporters were informed that all responses were 
captured on an anonymous basis and would only be reported to the 
Participants in an aggregated, anonymous format. The third party 
facilitator of the Costs to CAT Reporters Study reviewed all 
responses received through the study portal. Study respondents had 
the option of identifying their firm should additional follow-up be 
required; any such follow-up was undertaken by the third-party 
facilitator, as necessary, to enhance the overall quality of 
responses received.
    The Participants received 422 responses. Of those responses, 180 
were deemed to be materially incomplete \3852\ and, thus, they were 
considered effectively nonresponsive. An additional 75 responses 
were determined to be clearly erroneous; for example the responses 
had repeating values that could not be used in analysis, or the 
magnitude of reported FTEs or other costs was so high as to be 
considered an outlier \3853\. As a result, the Participants excluded 
these incomplete and clearly erroneous responses from the data set, 
resulting in a population of 167 responses that was used for 
purposes of conducting the cost analysis described herein.
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    \3852\ Materially incomplete responses were those that provided 
responses for less than half of the cost-related questions.
    \3853\ Responses were outliers if their values were two times 
greater than the next highest value.
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Costs to Vendors Study

    A study requested information from various service providers and 
vendors about the potential costs of reporting to the Central 
Repository (the ``Costs to Vendors Study''). The Participants 
developed the content of the Costs to Vendors Study, based on the 
structure and content of the Costs to CAT Reporters Study. The 
distribution list for the Costs to Vendors Study was provided by the 
DAG, and was distributed to 13 service bureaus and technology 
vendors on August 13, 2014. The initial due date for responses was 
September 1, 2014; however, due to the complexity of the data 
collection effort, the due date for the study was extended to 
September 12, 2014. The Participants received five completed 
responses to the Costs to Vendors Study.

Bidder Estimates

    To estimate the costs to Participants for creating, implementing 
and maintaining the CAT, Bidders were asked to provide in their Bid 
documents total one-year and annual recurring cost estimates. As 
part of the RFP process, the Bidders were asked to provide a 
schedule of the anticipated total cost of creating, implementing and 
maintaining the CAT. As noted above in the Background Section of 
Appendix C, any one of the six Shortlisted Bidders could be selected 
as the Plan Processor and each Shortlisted Bidder \3854\ has 
proposed different approaches to various issues. The Bidder selected 
as the Plan Processor must meet the specific requirements set forth 
in the Plan and Appendix D and may be given the opportunity to 
revise its Bid prior to the final selection of a Plan Processor. 
Accordingly, the Participants anticipate that the cost estimates to 
create, implement and maintain the CAT may differ from what is set 
forth below.\3855\
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    \3854\ Section 5.2(b) of the CAT NMS Plan describes how the 
Participants selected the Shortlisted Bidders.
    \3855\ More specifically, Participants anticipate that 
technology costs and technological solutions may evolve over the 
bidding process and may affect the Bids. For instance, one Bidder 
recently provided an update to the Participants, noting ``We expect 
continued cost reductions as Moore's Law is applied to cloud pricing 
and to have this bring down total cost to the industry on an ongoing 
basis.'' As another example, evolving technologies for data security 
may either increase or decrease estimated costs.
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    In its final rule for the Consolidated Audit Trail, the 
Commission amended its proposal to include enhanced security and 
privacy requirements. Specifically, SEC Rule 613(e)(4) requires the 
NMS Plan to include policies and procedures, including standards, to 
be used by the Plan Processor to ensure the security and 
confidentiality of all information reported to the Central 
Repository. Participants did not ask Bidders to separately assess 
the costs associated with the enhanced security requirements in SEC 
Rule 613; rather these costs were embedded in the Bids as a 
component of the total costs.
    The RFP requested that Bidders provide an estimate of the total 
one-time cost to build the CAT, including technological, 
operational, administrative, and any other material costs. The six 
Shortlisted Bidders provided estimates ranging from a low of 
$30,000,000 to a high of $91,600,000, with an average one-time cost 
of $53,000,000.\3856\
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    \3856\ Due to the complexity of the cost estimation effort, all 
figures provided in this analysis section have been rounded to a 
reasonable degree of accuracy and should be considered approximate.
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    The RFP also requested that Bidders provide an estimate of 
annual recurring operating and maintenance costs for the five year 
period following the selection of the Plan Processor, and an 
estimate of the annual peak year costs (i.e., cost for the year 
during which it will cost the most to operate the CAT). The six 
Shortlisted Bidders provided estimates ranging from a low of 
$135,000,000 to a high of $465,100,000 over the course of the first 
five years of operation, with an average five-year cost of 
$255,600,000 and an average annual cost of $51,100,000. Estimates of 
peak year recurring costs range from a low of $27,000,000 to a high 
of $109,800,000, with an average of $59,400,000. The table presented 
below reports the low, median, average, and maximum expected costs 
for the build, maintenance, and peak year maintenance of the Central 
Repository arising from the Shortlisted Bids. These figures are 
subject to change as Bidders may update their cost estimates.

[[Page 84987]]

                                            Bidder Estimates Summary
----------------------------------------------------------------------------------------------------------------
                                                      Minimum         Median           Mean           Maximum
----------------------------------------------------------------------------------------------------------------
Build Costs (One-time)..........................     $30,000,000     $46,100,000     $53,000,000     $91,600,000
Maintenance Costs (Annual)......................     $27,000,000     $42,200,000     $51,100,000     $93,000,000
Maintenance Costs (5 year)......................    $135,000,000    $211,200,000    $255,600,000    $465,100,000
Peak Year Maintenance...........................     $27,000,000     $52,400,000     $59,400,000    $109,800,000
----------------------------------------------------------------------------------------------------------------

    The Participants note, however, that there may be a relation 
between the initial construction costs and maintenance costs based 
on technological choices, among other factors. To better compare 
estimates, the Participants are providing a range based on the 
reported combined build and annual recurring costs for the five year 
period following Plan Processor selection, discounted by a factor of 
2%.\3857\ Estimates of total costs range from $159,800,000 to 
$538,700,000.
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    \3857\ The discount factor represents an estimate of the average 
yield on AAA-rated corporate debt for the month period August 28, 
2014 to September 27, 2014. Costs anticipated to be accrued after 
the first year (years 2 through 5) are discounted back to the first 
year to permit Participants to compare the anticipated costs 
associated with different Bids on a constant dollar basis.
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    Participants sought insight into the economic drivers of the 
cost estimates from the Shortlisted Bidders. Specifically, 
Participants asked each Shortlisted Bidder to identify the factors, 
such as the amount of message traffic, complexity of order life 
cycles, number and complexity of Participant and Commission data 
requests and administration and support costs that were material to 
its Bid. Bidders identified the following as primary drivers of 
their Bid costs: (1) reportable volumes of data ingested into the 
Central Repository; (2) number of technical environments that would 
be have to be built to report to the Central Repository; (3) likely 
future rate of increase of reportable volumes; (4) data archival 
requirements; and (5) user support and/or help desk resource 
requirements.\3858\
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    \3858\ Bidders indicated that user support costs primarily 
consisted of FTE costs.
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6. Economic Baseline

    In publishing SEC Rule 613, the Commission stated that it 
``believes that the regulatory infrastructure on which the 
Participants and the Commission currently must rely generally is 
outdated and inadequate to effectively oversee a complex, dispersed, 
and highly automated national market system.'' \3859\ The purpose of 
the CAT NMS Plan is to develop, build and maintain a system that 
provides an infrastructure to appropriately monitor, surveil and 
oversee the national market system in its current state and provide 
sufficient flexibility to reasonably adjust for future financial 
market innovations.
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    \3859\ Adopting Release at 45723.
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    Such a system will necessarily impact the Commission, 
Participants, potential future Participant entrants, broker-dealers 
and other market participants, issuers and investors. Each party may 
derive costs, benefits and other economic impacts, depending upon 
plan implementation, the relevant economic activities of each entity 
and the allocation of costs and responsibilities across those 
entities. These estimated costs, benefits, and other economic 
impacts must be assessed against the current economic baseline, 
capturing the existing state of regulatory audit trail activity in 
the markets. The economic baseline for different affected parties is 
described in greater detail below.

Description of Current Audit Trail Reporting

    Currently, separate audit trails exist within each exchange in 
addition to the audit trail requirements for FINRA members to report 
to OATS.\3860\ For equities, all broker-dealers that are members of 
FINRA must report their orders in NMS Stocks and OTC Equity 
Securities, including executions or cancellations, to OATS. 
Accordingly, for FINRA members, it is possible to match OATS reports 
to related exchange audit trail entries, provided that the related 
exchange has a regulatory services agreement with FINRA such that 
FINRA has access to the exchange data. Broker-dealers that are not 
FINRA members do not have a regular equity audit trail reporting 
requirement, although NYSE and NASDAQ member proprietary firms that 
are not FINRA members have an obligation to record OATS data and 
report to FINRA upon request. Additionally, each exchange creates 
its own audit trail for each order received that it receives and 
processes.
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    \3860\ See FINRA Rule 7410 et seq.
---------------------------------------------------------------------------

    For options, the options exchanges utilize the Consolidated 
Options Audit Trail System (``COATS'') to obtain and review 
information on options transactions. COATS data includes trades, the 
National Best Bid and National Best Offer at the time of the trade 
and clearing information for customers at the clearing firm level. 
It also identifies clearing firm proprietary trading and individual 
marker maker transactions if they are reported correctly at the time 
of the trade. However, COATS does not include adjustment data from 
the Options Clearing Corporation; these adjustments include changes 
to either the account type or size of the position. Additionally, 
order information is only available to the Commission upon request 
from the options exchanges. Currently reports need to be constructed 
based on order information received from the various options 
exchanges. As previously noted, only the National Best Bid and 
National Best Offer at the time of the trade is included in the 
COATS data; however, this is optional data that the exchanges may or 
may not provide. The options exchanges utilize their independent 
quote information to build their reports.
    In sum, each equities and options exchange is built on its own 
unique platform, utilizes unique entry protocols and requirements 
and thus creates uniquely formatted audit trails.
    The existence of multiple non-integrated audit trails has direct 
consequences on the accuracy and efficiency of regulatory oversight. 
The Commission has stated that:

. . . there are shortcomings in the completeness, accuracy, 
accessibility, and timeliness of these existing audit trail systems. 
Some of these shortcomings are a result of the disparate nature of 
the systems, which make it impractical, for example, to follow 
orders through their entire lifecycle as they may be routed, 
aggregated, re-routed, and disaggregated across multiple markets. 
The lack of key information in the audit trails that would be useful 
for regulatory oversight, such as the identity of the customers who 
originate orders, or even the fact that two sets of orders may have 
been originated by the same customer, is another shortcoming.\3861\
---------------------------------------------------------------------------

    \3861\ Adopting Release at 45722.

    In addition, the Intermarket Surveillance Group's (``ISG'') 
consolidated equity audit trail combines transaction data from all 
exchanges and is used by all Participants for surveillance purposes. 
However, the ISG audit trail is limited because it contains clearing 
member and executing broker's CRD numbers, but does not contain 
information about the beneficial owner to a trade. It also does not 
contain order detail information such as a complete order entry time 
or routing history.
    COATS and the ISG equity audit trails are utilized to generate 
various option cross market/cross product exception reports, such as 
front-running and anticipatory hedges. Since the current data is 
unable to drill down to beneficial owner or order information, these 
reports are less effective and produce a large number of false 
positives.

Costs, Benefits, and Other Economic Impacts of Audit Trail 
Reporting on Regulators and Market Participants

Participants

    There are 19 Participants of varying sizes that have established 
audit trail reporting requirements for NMS Securities. Of these, one 
is a registered securities association. The other 18 Participants 
are exchanges. Fourteen of these exchanges permit quotation and 
transactions in NMS Securities and 12 permit transactions and 
quotations in Listed Options.
    Participants expend resources currently to maintain and update 
their audit trail reporting systems. Costs for current surveillance 
programs as indicated by Participants responding to the Costs to 
Participants Study vary significantly,

[[Page 84988]]

reflecting the various sizes of Participants: total annual costs 
associated with meeting current regulatory requirements are 
estimated to be $6,900,000. Total annual costs for current 
surveillance programs for all Participants are $147,200,000.

Broker-Dealers

    Broker-dealers benefit from the current regime of audit trail 
reporting to the extent that reporting today permits the Commission 
and Participants to monitor for rule compliance. Effective 
regulatory and compliance oversight ensures increased market 
integrity and supports investor confidence in participating in 
financial markets. Conversely, if investors believe that regulators 
are unable to adequately and effectively monitor activities in a 
complex market (through current audit trail reporting), broker-
dealers bear some of the cost in the form of lower market activity.
    Broker-dealers that are FINRA members must have systems and 
processes in place to provide FINRA with the reportable data in the 
required format. These systems also require resources to ensure that 
data quality and consistency and timeliness of reporting are 
maintained, and record-keeping obligations are fulfilled.\3862\ 
Additionally, firm trading and order routing systems send orders and 
quotations to each exchange in the format required by such exchange. 
In turn, each exchange must store and convert the data for the 
purposes of creating internal exchange audit trails. Broker-dealers 
also commit staff to respond to Participant and Commission requests 
for additional data and related information based upon surveillance.
---------------------------------------------------------------------------

    \3862\ See, e.g., SEC Rules 17a-3, 17a-4; FINRA Rules 4511-13.
---------------------------------------------------------------------------

    Broker-dealers may take varied approaches to fulfilling their 
regulatory reporting obligations. For instance, many broker-dealers 
develop internal systems for the purpose of compiling order and 
trading data into a reportable format. In these instances, the firms 
may need to centralize varied and disparate systems. Other broker-
dealers typically use third parties to help them comply with their 
reporting obligations. These third parties may include service 
bureaus that provide the firms with order management systems. Firms 
may also contract with their clearing firms to package and submit 
order data files on their behalf.
    Some broker-dealers that are FINRA members may be exempt from 
OATS reporting, or are excluded under FINRA rules from OATS 
requirements. Exempt firms go through a formal exemption request 
process through which they certify that they meet the exemption 
criteria which includes: (1) the member firm has total annual 
revenue of less than $2,000,000; (2) the member firm and current 
control affiliates and associated persons of the member have not 
been subject within the last five years to any final disciplinary 
action, and within the last 10 years to any disciplinary action 
involving fraud; (3) the member does not conduct any clearing or 
carrying activities for other firms; (4) the member does not conduct 
any market making activities in NMS Stocks and OTC Equity 
Securities; and (5) the member does not execute principal 
transactions with its customers.\3863\ FINRA also excludes some 
members from the definition of a reporting member. The criteria to 
receive this exclusion include: (1) the member must engage in a non-
discretionary order routing process where the firm immediately 
routes all of its orders to a single receiving reporting member; (2) 
the member cannot direct or maintain control over subsequent routing 
or execution by the receiving reporting member; (3) the receiving 
reporting member must record and report all information under 
applicable FINRA rules; and (4) the member must have a written 
agreement with the receiving reporting member specifying the 
respective functions and responsibilities of each party.\3864\ 
Approximately 660 broker-dealers are either exempt or excluded from 
OATS requirements, but will be required to report to the Central 
Repository. These broker-dealers are included in the estimate of 
broker-dealers currently quoting or executing trades in NMS 
Securities and/or Listed Options.
---------------------------------------------------------------------------

    \3863\ See FINRA Rule 7470.
    \3864\ See FINRA Rule 7410(o).
---------------------------------------------------------------------------

    Additionally, the OATS rules do not require that proprietary 
orders generated in the normal course of market-making be 
reported.\3865\ While some firms have chosen to voluntarily report 
such orders, there may be current gaps in the audit trail.
---------------------------------------------------------------------------

    \3865\ See FINRA Rule 7410(j).
---------------------------------------------------------------------------

    Broker-dealers that are members of other Participants must also 
have systems and processes in place to provide the necessary 
reportable data in the required format. These systems also require 
resources to ensure data quality and consistency, timeliness of 
reporting, and record-keeping obligations.\3866\ Broker-dealers that 
are members of more than one Participant must maintain and manage 
systems that provide the relevant audit trail data to each 
Participant for which they have an obligation to report such data, 
in the manner and by the rules proscribed by each Participant, as 
applicable.
---------------------------------------------------------------------------

    \3866\ See, e.g., SEC Rules 17a-3, 17a-4; FINRA Rules 4511-13.
---------------------------------------------------------------------------

    Upon request, broker-dealers must submit Electronic Blue Sheet 
(``EBS'') data to the requesting Participant by the specified due 
date, which is generally ten business days after receipt of the 
initial request. An EBS request is made by product and trade date 
range, with the data providing detailed information about the 
underlying accounts that transacted in the requested security. EBS 
requests can only be made for settled transactions in equity, 
option, or fixed income products, and they include information on 
allocations and executions of the requested product and may cover a 
time period of up to seven years from the date requested. Large 
Trader Reports are similar to EBS reports, except they are requested 
only by the Commission. Large trader requests may only be requested 
for NMS Securities, which may include unsettled transactions. In 
addition to requests being made by security and trade date range, a 
Large Trader request may be made by a LTID and trade date range. An 
LTID is an SEC identifier used to identify related entities under 
the same beneficial ownership structure. Broker-dealers must have 
systems and processes in place to provide EBS or large trader 
reportable data in the required format. These systems require 
resources to ensure that the data quality and timeliness of 
reporting are maintained, and record-keeping obligations are met. As 
with OATS, broker-dealers must commit staff to respond to requests 
for EBS or large trader data and may take varied approaches to 
fulfilling their regulatory reporting obligations.
    PHLX Rule 1022 initially required members to submit specified 
data to PHLX for all accounts, however this rule was amended in May 
2014 to more closely mirror NYSE Rule 757, ARCA Rule 6.39, and CBOE 
Rule 8.9, and to only require broker-dealers to report data for all 
of the accounts for which they engage in trading activities or which 
they exercise investment discretion upon request, rather than on a 
continuing basis. PHLX Rule 1022 was in place prior to the existence 
of the compliance data files from ISG (COATS and ECAT) and OCC 
(position). The remaining requirement for members to provide data 
upon request is to enable a review if required for regulatory 
purposes. PHLX Rule 1022 is anticipated to be retired once all CAT 
Reporters are submitting data to the CAT as the information would be 
obtainable from CAT, rather than from Industry Members.
    CBOE Rule 8.9(b) requires clearing firms to submit, on a daily 
basis and in a manner prescribed by CBOE, every executed order 
entered by market makers for securities underlying options traded on 
CBOE or convertible into such securities or for securities traded on 
CBOE, as well as for opening and closing positions in all such 
securities held in each market maker account. To the extent that 
clearing firms do not report such orders and information, the market 
maker who entered the order is responsible for reporting the order 
information. These data files are commonly known as Market Maker 
Equity Trade (MMET) and Market Maker Stock Position (MMSTK) files. 
The CBOE daily reporting requirement for market makers is comparable 
to other option exchange reporting requirements. CBOE Rule 8.9(b) is 
anticipated to be amended once all CAT Reporters are submitting data 
to the CAT as the information would be obtainable from CAT rather 
than from Industry Members.
    As of June 30, 2014, there were 4,406 registered broker-dealers 
that were members of at least one Participant. The Participants 
determined that, as of July 31, 2014, approximately 1,800 of these 
registered broker-dealers quoted or executed transactions in NMS 
Securities, Listed Options or OTC Equity Securities. Of these 1,800 
broker-dealers, approximately 1,700 are FINRA members and are either 
reporting to OATS or were identified as routing firms in OATS 
reports submitted by other OATS reporting broker-dealers, but are 
otherwise excluded from the definition of an OATS reporting member 
or exempt from the OATS rules. In addition, there are an estimated 
100 broker-dealers that reported transactions to another SRO, but 
that are not FINRA members. This determination was made

[[Page 84989]]

through a review of the number of broker-dealers that transmitted 
order information to OATS, reported transaction information or 
quoted messages to a Participant for each month, over the previous 
18 months. The Participants also reviewed message traffic data in 
the same month in the prior year and found that July 2014 was a 
reasonable representation of such activity.
    Cost components considered in this process included technology 
costs (hardware/software costs), FTE costs (including, technology, 
operational, and compliance staffing requirements), and any 
outsourcing costs.\3867\ The study also contained questions related 
to current costs that are intended to capture the baseline costs to 
broker-dealers for regulatory reporting, including costs related to 
compliance with OATS, the EBS and Large Trader reporting, and other 
reporting requirements, such as NYSE Rule 410B, PHLX Rule 1022, 
FESC/NYSE Rule123(e)/(f), and CBOE Rule 8.9.
---------------------------------------------------------------------------

    \3867\ These costs are not mutually exclusive, and respondents 
may have included a combination of costs across all categories.
---------------------------------------------------------------------------

Description of Costs to CAT Reporters Study Results

    Of the 167 responses to the Costs to CAT Reporters Study used in 
the analysis of costs associated with reporting to the Central 
Repository, 49 were from large firms and 118 were from small 
firms.\3868\ Fifty-one respondents indicated that they have OATS 
reporting obligations and 116 respondents \3869\ stated that they do 
not currently have OATS reporting obligations.\3870\ Of these 51 
OATS reporters, 21 were large and 30 were small broker-dealers, with 
one firm completing all reporting using in-house staffing, 26% using 
a combination of in-house staffing and outsourcing, 44% of firms 
outsourcing to clearing firms, and the remaining 26% outsourcing 
their reporting to service bureaus. Of the remaining 116 broker-
dealers, self-identified as non-OATS reporters,\3871\ 28 were large 
and 88 were small. Figures for each respondent category have been 
provided for reference to support the cost analysis and include the 
average, median, minimum, maximum, and number of responses received 
equal to zero (0) or blank.\3872\
---------------------------------------------------------------------------

    \3868\ Firms were requested to self-select as ``small'' if they 
would qualify under Exchange Act Rule 0-10(c) as a broker or dealer 
that:
    (1) had total capital (net worth plus subordinated liabilities) 
of less than $500,000 on the date in the prior fiscal year as of 
which its audited financial statements were prepared pursuant to 
240.17a5(d) or, if not required to file such statements, a broker or 
dealer that had total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the last business day of the 
preceding fiscal year (or in the time that it has been in business, 
if shorter); and
    (2) is not affiliated with any Person (other than a natural 
Person) that is not a small business or small organization as 
defined in this section.
    \3869\ Participants recognize that 116 respondents stated that 
they do not currently report to OATS and this number is greater than 
the Participants' estimate of the total number of broker-dealers 
with reporting obligations to SROs other than FINRA. Participants 
assume that some broker-dealers who are FINRA members and currently 
exempt or excluded from OATS reporting requirements identified 
themselves as having no OATS reporting requirement. Given that these 
study responses provided data that could not otherwise be presumed 
to be incomplete or inaccurate, the Participants have chosen to 
include these responses in the analysis.
    \3870\ The distinction between cost estimates for OATS and non-
OATS reporters is being made so that Participants may assess 
potential differences in estimated costs across the two identified 
scenarios in order to capture potential differences in costs that 
might arise from current reporting practices.
    \3871\ The distinction between cost estimates for OATS and non-
OATS reporters is made so that Plan Participants may assess 
potential differences in estimated costs across the two identified 
scenarios in order to capture potential differences in costs that 
may arise from current reporting practices.
    \3872\ Some respondents provided no response to a specific 
question, i.e., left that response blank, while providing responses 
to the other questions in the study. The tables provided throughout 
this section provide a count of such blank responses for each 
question.
---------------------------------------------------------------------------

    In analyzing responses to the Costs to CAT Reporters Study, 
Participants found responses to specific questions to be outliers. 
However, if the overall response from that respondent was otherwise 
deemed to be reasonably complete, the response was included in the 
analysis. As a result, in some cases, this may result in averages or 
medians being higher or lower than may be expected. In addition, a 
significant number of firms, in particular large firms, indicated 
that their current cost for regulatory obligations is $0. It is the 
Participants' understanding that this is likely due to current 
operational practices among broker-dealers that do not differentiate 
between technology and headcount costs that support business 
functionality and regulatory reporting.
    Tables 1 and 2 describe the costs associated with current 
regulatory reporting requirements. Current costs for study 
respondents consisted of hardware/software costs, FTE costs 
consisting of development/maintenance, operational, and compliance 
staffing as well as third party outsourcing costs. Current average 
(median) hardware/software costs for the 49 large firms were equal 
to $310,000 ($0) and the 118 small firms were equal to $130,000 
($0).
    Large firms reported that they employ an average (median) of 
9.56 (0.00) FTEs for OATS, EBS and other regulatory reporting 
requirements, while small firms employed 2.36 (0.00) FTEs for the 
same reporting requirements. Participants estimate the dollar costs 
associated with these FTEs by applying an annual expenditure of 
$401,440 per FTE \3873\ to determine cost. The resulting average 
(median) FTE costs were equal to $3,800,000 ($0) for the 49 large 
firms and $950,000 ($0) for the 118 small firms.
---------------------------------------------------------------------------

    \3873\ Participants assume an annual cost per FTE of $401,440, 
consistent with the rate applied by the Commission in the Adopting 
Release. Participants do note, however, that as part of the Costs to 
CAT Reporters Study, respondents were solicited to provide a cost 
for FTEs. Based on responses, the estimated annual cost per FTE 
would be $210,000 for large firms and $167,000 for small firms. 
Applying these estimates instead of the Commission's assumed annual 
cost would lead to dollar costs for FTEs on the order of half as 
large as reported here.
---------------------------------------------------------------------------

    Third party/outsourcing costs were also varied by firm size. 
Average (median) third party/outsourcing costs for large firms was 
$180,000 ($0) and $130,000 ($0) for small firms.\3874\
---------------------------------------------------------------------------

    \3874\ One anonymous small firm in the sample reported a total 
current regulatory reporting cost of $14 million. The Participants 
are not in a position to verify this number or determine whether it 
is due to an erroneous response (e.g., the respondent may not have 
recognized that the study collected responses to the cost questions 
in $1,000 increments). Therefore, Participants believe median 
numbers might better represent the typical costs across large and 
small firms instead of reported averages.
---------------------------------------------------------------------------

    Based on the costs associated with current regulatory reporting 
requirements, large firms provided an average cost of $4,290,000, 
and small firms reported an average cost of $1,210,000 for current 
reporting costs, with a median estimate of $0 for both large and 
small firms.

                          Table 1--Current Costs: Large Respondents Summary (49 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $310,000            9.56      $3,800,000        $180,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            0.13         $52,000          $1,000
Maximum.........................................      $6,000,000          190.00     $76,300,000      $6,000,000
Count of Zero Responses.........................              31              25              25              36
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

[[Page 84990]]

                          Table 2--Current Costs: Small Respondents Summary (118 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $130,000            2.36        $950,000        $130,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            0.15         $60,000          $1,000
Maximum.........................................     $14,000,000           68.00     $27,300,000      $6,500,000
Count of Zero Responses.........................              96              89              89              93
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

    Tables 3 to 6 describe the current regulatory costs for 
respondents who identified themselves as having OATS reporting 
obligations versus those that do not (referred to as non-OATS). For 
the 21 large OATS reporters, current hardware/software costs 
averaged $720,000, with a median cost of $10,000, while the 28 large 
non-OATS reporters reported an average hardware/software cost of 
$2,600, with a median cost of $0. For the 30 small OATS reporters, 
current hardware/software costs averaged $490,000, with a median 
value of $3,000, with the 88 small non-OATS reporters reporting an 
average hardware/software cost of $900 and a median cost of $0.
    Large OATS reporters stated they required, on average, 17.88 
FTEs, with a median value of 7.00 FTEs. Applying the FTE rate 
described above, this translates into an average FTE cost of 
$7,200,000, and a median value of $2,800,000. Large non-OATS 
reporters indicated an average FTE requirement of 3.32 and a median 
requirement of 0.00, translating into an average cost of $1,300,000 
and a median cost of $0. On the other side of the spectrum, small 
OATS reporters stated they required, on average, 6.11 FTEs, with a 
median value of 3.50 FTEs. Applying the FTE rate described 
previously, this translates into an average FTE cost of $2,500,000, 
and a median value of $1,400,000. Small non-OATS reporters indicated 
average FTE requirements of 1.08 and a median requirement of 0.00, 
translating into an average cost of $430,000 and median cost of $0.
    Third party/outsourcing costs for Large OATS reporters averaged 
$400,000, with a median value of $0; large non-OATS reporters 
indicated average third party/outsourcing costs of $22,000, with a 
median value of $0. For small OATS reporters, third party/
outsourcing costs averaged $510,000 with a median value of $3,000; 
small non-OATS reporters provided average costs of $2,900, with 
median costs of $0.
    Based on the cost estimates above, large OATS reporters 
estimated an average (median) cost equal to $8,320,000 ($2,810,000) 
while large non-OATS respondents estimated an average (median) cost 
equal to $1,324,600 ($0). Small OATS reporters estimated an average 
(median) cost equal to $3,500,000 ($1,406,000) while small non-OATS 
respondents estimated an average (median) cost equal to $433,800 
($0).

                        Table 3--Current Costs: Large OATS Respondents Summary (21 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $720,000           17.88      $7,200,000        $400,000
Median..........................................         $10,000            7.00      $2,800,000              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            0.13         $52,000          $1,000
Maximum.........................................      $6,000,000          190.00     $76,300,000      $6,000,000
Count of Zero Responses.........................               6               2               2              11
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

                      Table 4--Current Costs: Large Non-OATS Respondents Summary (28 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................          $2,600            3.32      $1,300,000         $22,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $5,000            1.00        $400,000         $60,000
Maximum.........................................         $50,000           60.00     $24,100,000        $300,000
Count of Zero Responses.........................              25              23              23              25
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

                        Table 5--Current Costs: Small OATS Respondents Summary (30 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $490,000            6.11      $2,500,000        $510,000
Median..........................................          $3,000            3.50      $1,400,000          $3,000
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            0.15         $60,000          $1,000
Maximum.........................................     $14,000,000           29.00     $11,600,000      $6,500,000
Count of Zero Responses.........................              11               6               6               8
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

[[Page 84991]]

                      Table 6--Current Costs: Small Non-OATS Respondents Summary (88 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................            $900            1.08        $430,000          $2,900
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $3,000            3.00      $1,200,000          $3,000
Maximum.........................................         $72,000           68.00     $27,300,000        $220,000
Count of Zero Responses.........................              85              83              83              85
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

    To understand the current costs associated with regulatory 
reporting and estimate the direct costs associated with the CAT NMS 
Plan, the Participants also conducted the Costs to Vendors Study. 
CAT Reporters may currently rely on third-parties to provide key 
services necessary to meet the reporting obligations. Smaller 
broker-dealers may rely wholly or in part on third-party providers 
for the infrastructure to manage and maintain their electronic 
records, including all of the data required for audit trail 
reporting. Larger broker-dealers and Participants may augment their 
own internal IT capacity and capabilities by purchasing the services 
of one or more third-party vendor. As a result, it is important to 
understand the current reporting cost as well as the likely impact 
of SEC Rule 613 on these vendors and to include them in the estimate 
of aggregate economic impacts.
    The Participants received five completed responses to the Costs 
to Vendors Study. One of the respondents indicated that the vendor 
did not currently have any reporting expenses on behalf of its 
clients and did not expect to face any costs under the CAT. Of the 
remaining responses, three respondents supported more than 100 
clients, and one supported between 50 and 99 clients. Two of the 
respondents supported up to 25 million accounts, and two supported 
up to 50 million accounts. Two of the respondents serviced clients 
with institutional and retail businesses, while the remaining two 
supported clients with institutional businesses only.
    For equity order reporting, two respondents indicated that they 
process up to 1 million equity orders per day on behalf of their 
clients, and two respondents indicated that they process up to 2 
million equity orders per day on behalf of their clients. For 
options order reporting, three respondents indicated that they 
report up to 1 million options orders per day on behalf of their 
clients, and one respondent indicated that it reports up to 2 
million options orders per day on behalf of its clients. All four 
respondents indicated that they report between 3 million and 100 
million OATS reportable order events \3875\ per day on behalf of 
their clients. Three of the four respondents submitted EBS reports 
for their clients, with two submitting up to 200 responses per month 
and one submitting up to 400 responses per month.
---------------------------------------------------------------------------

    \3875\ See FINRA, OATS Frequently Asked Questions at D8 (last 
updated July 6, 1998), available at http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/FAQ/P085541.
---------------------------------------------------------------------------

    Reported costs for current regulatory reporting for vendors 
varied widely across both dollar costs and FTE requirements. Each 
respondent provided an FTE rate associated with their FTE 
requirements; therefore, FTE costs for the vendors are reported 
using rates provided by each respondent. Dollar costs for hardware 
and software ranged from $50,000 to $15,000,000, and FTE 
requirements (cost) ranged from 11 ($2,700,000) to 92 ($8,600,000). 
While the respondent with the largest number of clients reported the 
highest costs, costs did not always correlate uniformly with the 
number of clients for other firms.

7. Estimated Costs, Benefits, and Other Economic Impacts of the CAT NMS 
Plan on Affected Parties

    As required by SEC Rule 613(a)(1)(vii), this section provides 
detailed estimated costs for creating, implementing, and maintaining 
the CAT, specifying (1) an estimate of the costs to Participants for 
establishing and maintaining the CAT; (2) an estimate of the costs 
to members of the Participants, initially and on an ongoing basis, 
for reporting the data required by the CAT NMS Plan; (3) an estimate 
of the costs to the Participants, initially and on an ongoing basis, 
for reporting the data required by the CAT NMS Plan; and (4) the 
Participants' proposal to fund the creation, implementation, and 
maintenance of the CAT, including the proposed allocation of such 
estimated costs among the Participants, and between the Participants 
and members of the Participants. The Participants are sensitive to 
the economic impacts of SEC Rule 613. Throughout the development of 
the CAT NMS Plan, the Participants have continued to focus on 
minimizing the costs associated with the CAT. The Participants note 
that the figures presented in this analysis are estimates based on 
research completed and currently available data and are inherently 
subject to uncertainties.
    Through the RFP, review of proposals received, and interaction 
with industry, the Participants have identified the sources of the 
costs associated with the CAT NMS Plan. These include direct costs 
associated with creating, implementing and maintaining the CAT 
necessary to meet the requirements of the CAT NMS Plan. There are 
also direct costs associated with developing and adapting applicable 
CAT Reporter systems to meet the requirements of the CAT NMS Plan 
and comply with the Plan on an ongoing basis. Additionally, 
Participants and broker-dealers may incur direct costs associated 
with the retirement of redundant reporting systems, although there 
may also be significant savings to broker-dealers associated with 
retiring those systems over time.
    In order to meet the responsibilities outlined in SEC Rule 613, 
the Participants have accrued, and will continue to accrue, direct 
costs associated with the development of the CAT NMS Plan. These 
costs include staff time contributed by each Participant to, among 
other things, determine the technological requirements for the 
Central Repository, develop the RFP, evaluate Bids received, design 
and collect the data necessary to evaluate costs and other economic 
impacts, meet with Industry Members to solicit feedback, and 
complete the CAT NMS Plan submitted to the Commission for 
consideration. The Participants estimate that they have collectively 
contributed 20 FTEs in the first 30 months of the CAT NMS Plan 
development process. In addition, the Participants have incurred 
public relations, legal, and consulting costs in the preparation of 
the CAT NMS Plan. The Participants estimate the costs of these 
services to be $8,800,000. These public relations, legal, and 
consulting costs are considered reasonably associated with creating, 
implementing, and maintaining the CAT upon the Commission's adoption 
of the CAT NMS Plan.
    Given the size and scope of the CAT initiative, estimating the 
costs of the creation, implementation and maintenance of the CAT is 
a complex task, and one that necessarily relies on input from 
parties not directly charged under SEC Rule 613 with the 
responsibility to create and file the CAT NMS Plan. In light of 
this, the Participants have used a multi-pronged approach to assess 
the potential costs of the CAT. Among other things, the Participants 
have evaluated the many cost-related comments received in response 
to the Commission's rule proposal for SEC Rule 613 and during the 
CAT NMS Plan development process. In addition, the Participants have 
considered cost analyses and considerations provided by Bidders as 
well as the views and related information provided by the DAG and 
written feedback from the SIFMA and the FIF.
    The economic baseline against which the potential costs and 
benefits of the CAT must be compared are discussed above in Section 
B(7)(b)(ii). The potential impacts and estimated costs of the CAT 
are discussed separately below, presenting study results where 
applicable.

[[Page 84992]]

Investors

    Approximately 52% of Americans hold individual stocks, stock 
mutual funds or stocks through their retirement plan,\3876\ and the 
retail options industry continues to grow.\3877\
---------------------------------------------------------------------------

    \3876\ See Hibah Yousuf, Only Half of All Americans Invested in 
Stocks, CNN Money (May 9, 2014), http://money.cnn.com/2013/05/09/investing/american-stock-ownership/ (includes Gallup Poll results).
    \3877\ See, e.g., Andy Nybo, The Retail Options Renaissance, 
TABB Forum (Jan. 27, 2014), http://tabbforum.com/opinions/the-retail-options-reneissance.
---------------------------------------------------------------------------

    Investors benefit from the protections provided through the use 
of audit trail data, permitting regulators to adequately and 
effectively monitor activities in today's complex securities 
markets. In SEC Rule 613, the Commission identified several ways 
that the CAT would enhance the protections to investors. These 
include: facilitating risk-based examinations, better identification 
of potentially manipulative trading activity, improved processes for 
evaluating tips, complaints and referrals of potential misconduct 
made to regulators, increased efficiency of cross-market and 
principal order surveillance, improved analysis and reconstruction 
of broad-based market events, improved ability to monitor and 
evaluate changes to market structure, and efficiencies from a 
potential reduction in disparate reporting requirements and data 
requests.
    For instance, as shown in academic literature, surveillance has 
been demonstrated to increase investor confidence, by mitigating 
manipulative behavior and increasing trading activity.\3878\ 
Academic literature provides support for the notion that investors 
associate enhanced surveillance with greater investment opportunity 
across a larger number of listed companies and with higher market 
capitalizations.\3879\ Cross-market surveillance--an opportunity 
expected to be improved by CAT--is likely more effective in 
detecting manipulative behavior than single-market surveillance. A 
more recent study provides evidence that better surveillance is 
associated with reduced insider trading, as it would be harder to 
hide such trades.\3880\
---------------------------------------------------------------------------

    \3878\ Cumming et al., Global Market Surveillance, 10(2) Am. Law 
& Econ. Rev. at 454-506 (July 24, 2008).
    \3879\ See, e.g., La Porta, et al., Legal Determinants of 
External Finance, 52(3) J. Finance 1131-1150 (1997).
    \3880\ Cumming et al., Exchange Trading Rules, Surveillance and 
Insider Trading (working paper, Oct. 29, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2101826.
---------------------------------------------------------------------------

    To the extent that better surveillance leads to more effective 
rulemaking,\3881\ investors should also benefit from the 
improvements in market quality that might arise from such 
rulemaking. For example, one study shows that detailed trading rules 
are positively correlated with liquidity measures evidenced by lower 
volatility and bid-ask spreads.\3882\ Similarly, a separate study 
finds that European Union countries that have more effective rules 
to prevent market abuse and enhance transparency experience higher 
market liquidity.\3883\
---------------------------------------------------------------------------

    \3881\ Where better surveillance identifies behaviors and 
practices that are manipulative and harmful to the investing public 
more quickly and more accurately, the Commission and Participants 
may be able to adopt rules to stop these practices more quickly and 
in a more tailored fashion.
    \3882\ Cumming et al., Exchange Trading Rules and Stock Market 
Liquidity, 99(3) J. Financial Economics 651-71 (Mar. 2011).
    \3883\ Christensen et al., Capital-Market Effects of Securities 
Regulation: Prior Conditions, Implementation, and Enforcement (Dec. 
31, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1745105.
---------------------------------------------------------------------------

    Investors may also bear the costs associated with maintaining 
and enhancing the current audit trail systems. In some cases, 
broker-dealers may pass on regulatory charges that support 
Participant supervision, such as with respect to Section 31 
fees.\3884\ In other cases, broker-dealers may cover some of their 
regulatory charges through commissions and other charges. Similarly, 
broker-dealers may seek to pass on to investors their costs to build 
and maintain the CAT, which may include their own costs and any 
costs passed on to them by Participants. This analysis does not 
measure either the likelihood of these costs being passed through to 
investors nor the potential dollar impact on investors. The extent 
to which these costs are passed on to investors depends on the 
materiality of the costs and the ease with which investors can 
substitute away from any given broker-dealer.
---------------------------------------------------------------------------

    \3884\ Pursuant to Section 31 of the Exchange Act, Participants 
are required to pay transaction fees and assessments to the 
Commission that are designed to recover the costs related to the 
government's supervision and regulation of the securities markets 
and securities professionals. Participants, in turn, may collect 
their Section 31 fees and assessments from their broker-dealer 
members. 15 U.S.C. Sec.  78ee.
---------------------------------------------------------------------------

Participants

    Participants are expected to benefit from the requirements to 
report to the Central Repository. To the extent that the CAT 
enhances comparability of audit trail data--thereby enhancing order 
lifecycle comparability across different trading venues--
Participants may better fulfill their obligations 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 regulating, clearing, settling, 
processing information with respect to, and facilitating 
transactions in securities'' as set forth in Section 6 of the 
Exchange Act.
    Participants would also incur direct costs associated with 
creating, implementing and maintaining the CAT infrastructure. The 
full cost associated with the build and maintenance of the CAT would 
be shared among Participants and Industry Members, consistent with 
the CAT NMS Plan. Participants would also be subject to costs 
associated with updating and maintaining their own systems to comply 
with their obligations to report to the Central Repository.

Central Repository Build and Maintenance Costs

    The CAT NMS Plan provides that the costs arising from the build 
and maintenance of the CAT will be collected from all CAT Reporters, 
which includes Participants. As described in Article XI of the CAT 
NMS Plan and in Section C(b)(7)(iii) below, Participants will be 
required to pay their allocated portion of these costs on an annual 
basis.
    The CAT NMS Plan also contemplates that Participants may impose 
greater requirements on the Central Repository based on their use of 
information in the repository for regulatory purposes. These 
requirements may take the form of frequent and complex analyses of 
data which may likely require more resources from the Central 
Repository. It is critical that the Company recover its costs in a 
manner consistent with the principles articulated in the CAT NMS 
Plan, which include both the need to allocate costs in a manner 
consistent with the cost to operations and that the CAT NMS Plan not 
create significant disincentives to Participants in seeking to meet 
their regulatory obligations. As such, the CAT NMS Plan permits the 
Company to assess additional charges to Participants associated with 
their use of the Central Repository's data and reporting facilities 
as it deems necessary.

Costs to Participants to Meet Reporting Requirements

    The Costs to Participants Study was distributed to the 
Participants to collect information about the potential costs of the 
CAT to the Participants. The Costs to Participants Study was 
designed to provide insight into the current total costs associated 
with regulatory reporting and surveillance programs discussed above, 
as well as expected implementation and maintenance costs associated 
with reporting to and surveillance through the Central Repository.
    The anticipated costs associated with the implementation of 
regulatory reporting to the Central Repository were estimated to be 
a total of $17,900,000 across all ten Participants. Included in this 
cost, Participants reported a total of $770,000 in legal and 
consulting costs, as well as total FTE costs of $10,300,000 for 
operational, technical/development and compliance-type functions.
    Maintenance costs associated with regulatory reporting to 
Central Repository were estimated to be a total of $14,700,000 
across all ten Participants. Included in this estimate are legal, 
consulting, and other costs associated with maintenance, a total of 
$720,000, and $7,300,000 to FTEs for operational, technical/
development, and compliance functions regarding the maintenance of 
regulatory reporting associated with CAT.
    The Participants were also asked to identify the costs 
associated with the implementation of surveillance programs within 
the Central Repository. The estimated total costs across all ten 
Participants were $23,200,000 including estimated legal, consulting, 
and other costs of $560,000. Also included in the total, 
Participants reported that they would allocate a total of 
$17,500,000 to FTEs to operational, technical/development, and 
compliance staff to be engaged in the creation of surveillance 
programs.

[[Page 84993]]

    The estimated total costs associated with the maintenance of 
surveillance programs were $87,700,000, including $1,000,000 for 
legal, consulting, and other costs. Of the total cost, the 
Participants estimated that they would allocate a total of 
$66,700,000 to FTEs to operational, technical/development and 
compliance staff.
    Retirement costs for current systems were estimated to be 
$310,000 across all Participants. However, Participants expect that 
by no longer needing to maintain these legacy systems due to 
adoption of the CAT, they will realize aggregate savings of 
$10,600,000, which will partially offset some of the costs expected 
to be borne by the Participants as described further below. To the 
extent that the Participants are able to retire legacy systems and 
replace them with more efficient and cost effective technologies, 
they may experience additional cost savings. The Costs to 
Participants Study does not attempt to quantify any such additional 
cost savings to broker-dealers.

Broker-Dealers

    The CAT is expected to provide a more resilient audit trail 
system that may benefit broker-dealers. For instance, as noted 
above, more effective oversight of market activity may increase 
investor confidence and help expand the investment opportunity set 
through increased listings. Broker-dealers may benefit from 
increased investor confidence, provided that it results in increased 
trading activity. In addition, broker-dealers may experience less 
burden, to the extent that, data provided to the Central Repository 
reduces the number of direct requests by regulators for their 
surveillance, examination and enforcement programs. For example, 
after the implementation of CAT, regulators seeking to identify 
activity for NMS Securities at the customer account level, would 
access that information from the Central Repository, rather than 
making a Blue Sheet request.
    More broadly, one benefit identified to broker-dealers of the 
CAT may arise from consolidating the collection and transmission of 
audit trail data into a uniform activity, regardless of where the 
quoting and trading occur. Such a consolidation may permit some 
broker-dealers to reduce the number of systems they operate to 
provide audit trail data to Participants and to retire legacy 
systems, at an appropriate time. Additionally, technological 
advances may make the operation of the new CAT Systems more 
efficient than those associated with the legacy systems. The Costs 
to CAT Reporters Study did not attempt to quantify any such cost 
savings to firms, and as such, the cost estimates provided here do 
not include consideration that such cost savings may be low.
    Broker-dealers would also incur costs associated with creating, 
implementing and maintaining the CAT infrastructure. These costs 
would arise from building and maintaining the CAT and updating and 
maintaining their own systems to comply with their reporting 
obligations.

CAT Build and Maintenance Costs

    Broker-dealers will also be required to contribute their portion 
of the direct costs associated with building and maintaining the 
CAT, as required by SEC Rule 613 and implemented by the CAT NMS 
Plan. Broker-dealers with CAT reporting obligations will be required 
to pay their allocated portion of these costs on an annual basis, 
pursuant to the Funding Model.
    The Funding Model acknowledges that the operating models of 
broker-dealers and Execution Venues are substantially different. 
Therefore, the Funding Model imposes different fee structures for 
broker-dealers and Executions Venues. ATSs that execute orders, 
which are operated by registered broker-dealers pursuant to 
Regulation ATS, are considered Execution Venues, for purposes of the 
CAT NMS Plan.

CAT Reporters Costs to Meeting Reporting Requirements

    Responses to the Costs to CAT Reporters Study provide estimates 
of the direct costs to broker-dealers associated with meeting 
requirements to report to the Central Repository. The Costs to CAT 
Reporters Study contained questions related to future costs related 
to both the retirement of existing systems and compliance with 
requirements of SEC Rule 613.
    Respondents were asked to evaluate the future costs under two 
separate approaches.\3885\ For each approach, respondents were asked 
to estimate both for CAT implementation and maintenance: (1) the 
associated hardware and software costs; (2) the number of required 
FTEs; and (3) third-party provider costs.
---------------------------------------------------------------------------

    \3885\ The two approaches are described in detail in Appendix C, 
Analysis of Expected Benefits and Estimated Costs for Creating, 
Implementing, and Maintaining the Consolidated Audit Trail (SEC Rule 
613(a)(1)(vii)).
---------------------------------------------------------------------------

a. Implementation Phase of Approach 1

    Tables 7 and 8 describe the costs associated with the 
implementation of Approach 1. Based on the 167 study responses for 
the implementation of Approach 1, large firms provided an average 
(medium) hardware/software cost of $580,000 ($0) and small firms 
provided an average (median) cost estimates of $5,200 ($0).
    Large firms provided an average (median) FTE count of 11.00 
(0.00). Multiplying these counts by the rate employed by the 
Commission in SEC Rule 613 as described above, FTE costs are 
estimated as $4,400,000, with a median FTE cost of $0. Small firms 
provided an average FTE count requirement of 1.17, with the median 
response provided by small respondents equal to 0.00. Participants 
estimate a dollar cost for the small respondent FTE requirements to 
be on average $470,000, with a median estimated cost of $0.
    Participants estimate large firms would incur average (median) 
third party/outsourcing costs of $72,000 ($0) and small firms would 
incur an estimated average (median) cost of $76,000 ($0).
    Total average (median) costs for Approach 1 Implementation are 
estimated to be $5,052,000 ($0) for large firms, and $551,200 ($0) 
for small firms.

                 Table 7--Approach 1 Implementation Costs: Large Respondents Summary (49 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $580,000           11.00      $4,400,000         $72,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $5,000            0.02          $8,000          $1,000
Maximum.........................................     $10,000,000          142.00     $57,000,000      $2,000,000
Count of Zero Responses.........................              28              27              27              41
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

                 Table 8--Approach 1 Implementation Costs: Small Respondents Summary (118 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................          $5,200            1.17        $470,000         $76,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            0.20         $80,000          $1,000

[[Page 84994]]

 
Maximum.........................................        $500,000           20.00      $8,000,000      $8,000,000
Count of Zero Responses.........................              95              94              94              95
Count of Blank Responses........................               2               0               0               1
----------------------------------------------------------------------------------------------------------------

    Tables 9 and 10 describe the costs associated with the 
implementation of Approach 1 for large respondents with current OATS 
and non-OATS reporting obligations. Large OATS respondents provided 
an average (median) hardware/software cost estimate of $750,000 
($0), and large non-OATS respondents providing average (median) 
estimated costs of $450,000 ($0).
    Large OATS reporters provided an average (median) FTE 
requirement of 14.92 (7.00), translating into estimated costs of 
$6,000,000 ($2,800,000), while large non-OATS respondents provided 
an average (median) FTE requirement of 8.05 (0.00), translating into 
an average (median) estimated cost of $3,200,000 ($0).
    Large OATS respondents estimated an average (median) third 
party/outsourcing cost of $150,000 ($0), while large non-OATS 
respondents provided an average (median) estimate of $9,500 ($0).

               Table 9--Approach 1 Implementation Costs: Large OATS Respondents Summary (21 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $750,000           14.92      $6,000,000        $150,000
Median..........................................         $60,000            7.00      $2,800,000              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $5,000            0.02          $8,000          $1,000
Maximum.........................................      $7,000,000           63.00     $25,300,000      $2,000,000
Count of Zero Responses.........................               6               5               5              15
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

            Table 10--Approach 1 Implementation Costs: Large Non-OATS Respondents Summary (28 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $450,000            8.05      $3,200,000          $9,500
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $5,000            1.00        $400,000         $15,000
Maximum.........................................     $10,000,000          142.00     $57,000,000        $250,000
Count of Zero Responses.........................              22              22              22              26
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

    Tables 11 and 12 describe the costs associated with the 
implementation of Approach 1 for small respondents with current OATS 
and non-OATS reporting obligations, small OATS respondents provided 
an average (median) hardware/software cost estimate of $21,000 
($1,000), with small non-OATS respondents providing an estimated 
average (median) cost of $100 ($0).
    Small OATS reporters provided an average (median) FTE 
requirement of 3.51 (2.00), translating into estimated an average 
(median) costs of $1,400,000 ($800,000), while small non-OATS 
respondents provided an average (median) FTE requirement of 0.38 
(0.00), translating into an estimated average (median) cost of 
$150,000 ($0).
    Finally, small OATS respondents estimated an average (median) 
third party/outsourcing cost of $300,000 ($1,000), while small non-
OATS respondents provided an average (median) estimate of $1,100 
($0).

              Table 11--Approach 1 Implementation Costs: Small OATS Respondents Summary (30 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................         $21,000            3.51      $1,400,000        $300,000
Median..........................................          $1,000            2.00        $800,000          $1,000
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            0.20         $80,000          $1,000
Maximum.........................................        $500,000           20.00      $8,000,000      $8,000,000
Count of Zero Responses.........................              12              12              12              12
Count of Blank Responses........................               1               0               0               1
----------------------------------------------------------------------------------------------------------------

[[Page 84995]]

            Table 12--Approach 1 Implementation Costs: Small Non-OATS Respondents Summary (88 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................            $100            0.38        $150,000          $1,100
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            3.00      $1,200,000          $1,000
Maximum.........................................          $5,000           15.00      $6,000,000         $72,000
Count of Zero Responses.........................              83              82              82              83
Count of Blank Responses........................               1               0               0               0
----------------------------------------------------------------------------------------------------------------

b. Maintenance Phase of Approach 1

    Tables 13 and 14 describe the costs associated with the 
maintenance of CAT reporting obligations for the full set of study 
responses under Approach 1. Based on the 167 study responses for the 
maintenance of Approach 1, large firms reported an average (median) 
hardware/software cost estimate of $210,000 ($0), and small firms 
reported an estimated cost of $1,600 ($0).
    Large firms provided an average FTE count requirement of 8.54, 
with the median response provided by large firms equaled to 0.00. 
Multiplying these counts by the rate employed by the Commission in 
SEC Rule 613 as described above, FTE costs are estimated to be 
$3,400,000, with a median FTE cost of $0. Small firms provided an 
average FTE count requirement of 1.12, with the median response 
provided by small respondents equal to 0.00. Participants estimated 
the average dollar cost for the small respondent FTE requirement l 
to be $450,000, and a median cost of $0.
    Large firms estimated that the average (median) third party/
outsourcing cost is equal to $52,000 ($0) and small firms estimated 
average (median) costs to be equal to $24,000 ($0).
    Total average (median) costs for Approach 1 Maintenance are 
estimated to be $3,662,000 ($0) for large firms and $475,600 ($0) 
for small firms.

                  Table 13--Approach 1 Maintenance Costs: Large Respondents Summary (49 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $210,000            8.54      $3,400,000         $52,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $2,000            0.02          $8,000          $1,000
Maximum.........................................      $5,200,000          152.00     $61,000,000      $1,000,000
Count of Zero Responses.........................              28              27              27              41
Count of Blank Responses........................               1               0               0               0
----------------------------------------------------------------------------------------------------------------

                  Table 14--Approach 1 Maintenance Costs: Small Respondents Summary (118 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................          $1,600            1.12        $450,000         $24,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................            $500            0.15         $60,000            $500
Maximum.........................................        $120,000           18.00      $7,200,000      $1,500,000
Count of Zero Responses.........................              96              93              93              96
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

    Tables 15 and 16 show the costs associated with the maintenance 
of CAT reporting obligations for Approach 1 for large respondents 
with current OATS and non-OATS reporting obligations. Large OATS 
respondents provided estimated average (median) hardware/software 
requirements of $380,000 ($22,000), with large non-OATS respondents 
providing estimated average (median) costs of $80,000 ($0).
    Large OATS reporters provided average (median) FTE requirements 
of 10.03 (4.00), translating to estimated costs of $4,000,000 
($1,600,000), while large non-OATS respondents provided average 
(median) FTE requirements of 7.41 (0.00), translating to estimated 
costs of $3,000,000 ($0).
    Large OATS respondents estimated average (median) third party/
outsourcing costs of $120,000 ($0), while large non-OATS respondents 
provided estimates of $1,300 ($0).

                Table 15--Approach 1 Maintenance Costs: Large OATS Respondents Summary (21 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $380,000           10.03      $4,000,000        $120,000
Median..........................................         $22,000            4.00      $1,600,000              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $2,000            0.02          $8,000          $1,000
Maximum.........................................      $5,200,000           50.00     $20,100,000      $1,000,000
Count of Zero Responses.........................               6               5               5              14

[[Page 84996]]

 
Count of Blank Responses........................               1               0               0               0
----------------------------------------------------------------------------------------------------------------

              Table 16--Approach 1 Maintenance Costs: Large Non-OATS Respondents Summary (28 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................         $80,000            7.41      $3,000,000          $1,300
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $8,000            1.00        $400,000         $35,000
Maximum.........................................        $900,000          152.00     $61,000,000         $35,000
Count of Zero Responses.........................              22              22              22              27
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

    Tables 17 and 18 describe the costs associated with the 
maintenance of CAT reporting obligations for Approach 1 for small 
respondents with current OATS and non-OATS reporting obligations. 
Small OATS respondents provided estimated average (median) hardware/
software requirements of $6,000 ($1,000), with small non-OATS 
respondents providing estimated average (median) costs of $100 ($0).
    Small OATS reporters provided average (median) FTE requirements 
of 3.52 (2.00), translating to estimated costs of $1,400,000 
($800,000), while small non-OATS respondents provided average 
(median) FTE requirements of 0.31 (0.00), translating to estimated 
costs of $120,000 ($0).
    Finally, small OATS respondents estimated average (median) third 
party/outsourcing costs of $90,000 ($1,000), while small non-OATS 
respondents provided estimates of $1,100 ($0).

                Table 17--Approach 1 Maintenance Costs: Small OATS Respondents Summary (30 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................          $6,000            3.52      $1,400,000         $90,000
Median..........................................          $1,000            2.00        $800,000          $1,000
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................            $500            0.15         $60,000            $500
Maximum.........................................        $120,000           18.00      $7,200,000      $1,500,000
Count of Zero Responses.........................              12              10              10              12
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

              Table 18--Approach 1 Maintenance Costs: Small Non-OATS Respondents Summary (88 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................            $100            0.31        $120,000          $1,100
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            3.00      $1,200,000          $1,000
Maximum.........................................          $2,000           14.00      $5,600,000         $72,000
Count of Zero Responses.........................              84              83              83              84
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

c. Implementation Phase of Approach 2

    Tables 19 and 20 show the costs associated with the 
implementation phase of Approach 2 for the full set of study 
responses. Based on the 167 study responses for the implementation 
phase of Approach 2, large firms provided average (median) hardware/
software costs of $570,000 ($0), and small firms provided costs 
estimates of $5,000 ($0).
    Large firms provided average FTE count requirements of 10.15, 
with the median response provided by a large firm equal to 0.00. 
Multiplying these counts by the rate employed by the Commission in 
SEC Rule 613 as described above, FTE costs can be estimated to be 
$4,100,000, with a median FTE cost of $0. Small firms provided 
average FTE count requirements of 1.08, with the median response 
provided by a small respondent equal to 0.00. Participants estimate 
the dollar cost for the small respondent FTE requirements to be 
$440,000, and a median cost of $0.
    Large firms estimated that average (median) third party/
outsourcing costs are equal to $68,000 ($0) and small firms 
estimated average (median) costs to be equal to $16,000 ($0).
    Total average (median) costs for Approach 2 Implementation are 
estimated to be $4,738,000 ($0) for large firms, and $461,000 ($0) 
for small firms.

[[Page 84997]]

                 Table 19--Approach 2 Implementation Costs: Large Respondents Summary (49 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $570,000           10.15      $4,100,000         $68,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $5,000            0.02          $8,000          $1,000
Maximum.........................................     $10,000,000          116.00     $46,600,000      $2,000,000
Count of Zero Responses.........................              28              28              28              41
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

                Table 20--Approach 2 Implementation Costs: Small Respondents Summary (118 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................          $5,000            1.08        $440,000         $16,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            1.00        $400,000          $1,000
Maximum.........................................        $500,000           20.00      $8,000,000      $1,000,000
Count of Zero Responses.........................              98              96              96              97
Count of Blank Responses........................               1               0               0               1
----------------------------------------------------------------------------------------------------------------

    Tables 21 and 22 show the costs associated with the 
implementation phase of Approach 2 for large respondents with 
current OATS and non-OATS reporting obligations. Large OATS 
respondents provided estimated average (median) hardware/software 
requirements of $740,000 ($60,000), with large non-OATS respondents 
providing estimated average (median) costs of $450,000 ($0).
    Large OATS reporters provided average (median) FTE requirements 
of 14.81 (7.00), translating to estimated costs of $5,900,000 
($2,800,000), while large non-OATS respondents provided average 
(median) FTE requirements of 6.66 (0.00), translating to estimated 
costs of $2,700,000 ($0).
    Finally, large OATS respondents estimated average (median) third 
party/outsourcing costs of $140,000 ($0), while large non-OATS 
respondents provided estimates of $10,000 ($0).

              Table 21--Approach 2 Implementation Costs: Large OATS Respondents Summary (21 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $740,000           14.81      $5,900,000        $140,000
Median..........................................         $60,000            7.00      $2,800,000              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $5,000            0.02          $8,000          $1,000
Maximum.........................................      $7,000,000           63.00     $25,300,000      $2,000,000
Count of Zero Responses.........................               6               5               5              15
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

            Table 22--Approach 2 Implementation Costs: Large Non-OATS Respondents Summary (28 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $450,000            6.66      $2,700,000         $10,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $5,000            1.00        $400,000         $35,000
Maximum.........................................     $10,000,000          116.00     $46,600,000        $250,000
Count of Zero Responses.........................              22              23              23              26
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

    Tables 23 and 24 show the costs associated with the 
implementation of Approach 2 for small respondents with current OATS 
and non-OATS reporting obligations. Small OATS respondents provided 
estimated average (median) hardware/software requirements of $20,000 
($1,000), with small non-OATS respondents providing estimated 
average (median) costs of $100 ($0).
    Small OATS reporters provided average (median) FTE requirements 
of 3.33 (2.00), translating to estimated costs of $1,300,000 
($800,000), while small non-OATS respondents provided average 
(median) FTE requirements of 0.32 (0.00), translating to estimated 
costs of $130,000 ($0).
    Finally, small OATS respondents estimated average (median) third 
party/outsourcing costs of $60,000 ($1,000), while small non-OATS 
respondents provided estimates of $1,100 ($0).

[[Page 84998]]

              Table 23--Approach 2 Implementation Costs: Small OATS Respondents Summary (30 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................         $20,000            3.33      $1,300,000         $60,000
Median..........................................          $1,000            2.00        $800,000          $1,000
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            1.00        $400,000          $1,000
Maximum.........................................        $500,000           20.00      $8,000,000      $1,000,000
Count of Zero Responses.........................              14              13              13              13
Count of Blank Responses........................               1               0               0               1
----------------------------------------------------------------------------------------------------------------

            Table 24--Approach 2 Implementation Costs: Small Non-OATS Respondents Summary (88 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................            $100            0.32        $130,000          $1,100
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            3.00      $1,200,000          $1,000
Maximum.........................................          $5,000           15.00      $6,000,000         $72,000
Count of Zero Responses.........................              84              83              83              84
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

d. Maintenance Phase of Approach 2

    Tables 25 and 26 show the costs associated with the maintenance 
of CAT reporting obligations for Approach 2 for the full set of 
study responses. Based on the 167 study responses for the 
maintenance phase of Approach 2, large firms provided average 
(median) hardware/software costs of $200,000 ($0) and small firms 
provided costs estimates of $1,500 ($0).
    Large firms provided average FTE count requirements of 7.27, 
with the median response provided by a large firm equal to 0.00. 
Multiplying these counts by the rate employed by the Commission in 
SEC Rule 613 as described above, FTE costs can be estimated to be 
$2,900,000, with a median FTE cost of $0. Small firms provided 
average FTE count requirements of 1.06, with the median response 
provided by a small respondent equal to 0.00. Participants estimate 
the dollar cost for the small respondent FTE requirements to be 
$430,000, with a median cost of $0.
    Large firms estimated that average (median) third party/
outsourcing costs are equal to $48,000 ($0) and small firms 
estimated average (median) costs to be equal to $10,000 ($0).
    Total average (median) costs for Approach 2 Maintenance are 
estimated to be $3,148,000 ($0) for large firms, and $441,500 ($0) 
for small firms.

                  Table 25--Approach 2 Maintenance Costs: Large Respondents Summary (49 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $200,000            7.27      $2,900,000         $48,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $2,000            0.00              $0          $1,000
Maximum.........................................      $5,200,000          102.00     $40,900,000      $1,000,000
Count of Zero Responses.........................              28              28              28              41
Count of Blank Responses........................               1               0               0               0
----------------------------------------------------------------------------------------------------------------

                  Table 26--Approach 2 Maintenance Costs: Small Respondents Summary (118 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................          $1,500            1.06        $430,000         $10,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................            $500            1.00        $400,000            $500
Maximum.........................................        $100,000           18.00      $7,000,000      $1,000,000
Count of Zero Responses.........................              97              94              94              93
Count of Blank Responses........................               2               0               0               5
----------------------------------------------------------------------------------------------------------------

    Tables 27 and 28 provide the costs associated with the 
maintenance of CAT reporting obligations for Approach 2 for large 
respondents with current OATS and non-OATS reporting obligations. 
Large OATS respondents provided estimated average (median) hardware/
software requirements of $370,000 ($14,000), with large non-OATS 
respondents providing estimated average (median) costs of $79,000 
($0).
    Large OATS reporters provided average (median) FTE requirements 
of 9.79 (5.60), translating to estimated costs of $3,900,000 
($2,200,000), while large non-OATS respondents provided average 
(median) FTE requirements of 5.38 (0.00), translating to estimated 
costs of $2,200,000 ($0).

[[Page 84999]]

    Finally, large OATS respondents estimated average (maximum) 
third party/outsourcing costs of $110,000 ($0), while large non-OATS 
respondents provided estimates of $1,300 ($0).

                Table 27--Approach 2 Maintenance Costs: Large OATS Respondents Summary (21 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $370,000            9.79      $3,900,000        $110,000
Median..........................................         $14,000            5.60      $2,200,000              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $2,000            0.02          $8,000          $1,000
Maximum.........................................      $5,200,000           50.00     $20,100,000      $1,000,000
Count of Zero Responses.........................               6               5               5              14
Count of Blank Responses........................               1               0               0               0
----------------------------------------------------------------------------------------------------------------

              Table 28--Approach 2 Maintenance Costs: Large Non-OATS Respondents Summary (28 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................         $79,000            5.38      $2,200,000          $1,300
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $3,000            1.00        $400,000         $36,000
Maximum.........................................        $900,000          102.00     $40,900,000         $36,000
Count of Zero Responses.........................              22              23              23              27
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

    Tables 29 and 30 show the costs associated with the maintenance 
of CAT reporting obligations for Approach 2 for small respondents 
with current OATS and non-OATS reporting obligations. Small OATS 
respondents provided estimated average (median) hardware/software 
requirements of $6,000 ($500), with small non-OATS respondents 
providing estimated average (median) costs of $100 ($0).
    Small OATS reporters provided average (median) FTE requirements 
of 3.28 (2.00), translating to estimated costs of $1,300,000 
($800,000), while small non-OATS respondents provided average 
(median) FTE requirements of 0.31 (0.00), translating to estimated 
costs of $120,000 ($0).
    Finally, small OATS respondents estimated average (median) third 
party/outsourcing costs of $42,000 ($1,000), while small non-OATS 
respondents provided estimates of $1,100 ($0).

                Table 29--Approach 2 Maintenance Costs: Small OATS Respondents Summary (30 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................          $6,000            3.28      $1,300,000         $42,000
Median..........................................            $500            2.00        $800,000          $1,000
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................            $500            1.00        $400,000            $500
Maximum.........................................        $120,000           18.00      $7,000,000      $1,000,000
Count of Zero Responses.........................              14              11              11              12
Count of Blank Responses........................               1               0               0               2
----------------------------------------------------------------------------------------------------------------

              Table 30--Approach 2 Maintenance Costs: Small Non-OATS Respondents Summary (88 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................            $100            0.31        $120,000          $1,100
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            3.00      $1,200,000          $1,000
Maximum.........................................          $2,000           14.00      $5,600,000         $72,000
Count of Zero Responses.........................              83              83              83              81
Count of Blank Responses........................               1               0               0               3
----------------------------------------------------------------------------------------------------------------

e. Implementation and Maintenance Costs for Approach 1 vs. Approach 2

    Participants compared the estimated implementation and 
maintenance costs for Approach 1 and Approach 2 to determine if one 
solution would be more cost effective for the industry than the 
other. In general, respondents indicated that Approach 1 would lead 
to larger costs than Approach 2. Large firms estimated that it will 
cost approximately $5,052,000 to implement Approach 1, versus an 
estimated $4,738,000 for Approach 2, a cost difference of $314,000. 
From a maintenance perspective, large firms estimated that it would 
cost $3,662,000 for Approach 1 versus $3,148,000 for Approach 2, a 
cost difference of $514,000. Small firms also indicated that 
Approach 1 would be

[[Page 85000]]

more expensive to implement and maintain than Approach 2. Small 
firms indicated that it would cost $551,200 to implement Approach 1 
versus $475,600 for Approach 2, indicating a cost difference of 
$90,200. For the maintenance phases, small firms estimated it would 
cost approximately $475,600 for Approach 1 maintenance, versus 
$441,500 for Approach 2 maintenance, a cost difference of $34,100 
between approaches. However, the cost estimates between these two 
approaches are not statistically significant and Participants 
conclude that there would likely be no incremental costs associated 
with either Approach.\3886\
---------------------------------------------------------------------------

    \3886\ Participants arrive at this conclusion on the basis of a 
standard t-test of the hypothesis that the difference between 
Approach 1 and Approach 2 costs is different from zero. The t-test 
is unable to reject the null hypothesis (i.e., that the difference 
in costs between the two approaches is not distinguishable from 
zero) at the 0.05% level. The t-test rejects the null hypothesis for 
estimates of hardware/software costs, FTE costs, vendor costs, and 
total costs. The t-test also rejects any significant difference in 
estimated costs under the two approaches separately for large OATS 
reporters, small OATS reporters, large non-OATS reporters, and small 
non-OATS reporters.
---------------------------------------------------------------------------

f. Retirement of Systems Costs

    Participants recognize that in implementing the anticipated 
requirements in the CAT NMS Plan, broker-dealers would likely 
replace some components of their current systems. The costs 
associated with retiring current systems were considered as part of 
the impacts associated with the CAT NMS Plan.
    Tables 31 and 32 describe the cost associated with retirement of 
systems for the full set of study responses. Based on the 167 study 
responses for the retirement of systems large firms provided average 
(median) hardware/software costs of $120,000 ($0) and small firms 
provided cost estimates of $31,000 ($0).
    Large firms provided average FTE count requirements of 6.80, 
with the median response provided by a large firm equal to 0.00. 
Multiplying these counts by the rate employed by the Commission in 
SEC Rule 613 as described above, FTE costs are estimated to be 
$2,700,000, with a median FTE cost of $0. Small firms provided 
average FTE count requirements of 1.92, with the median response 
provided by a small respondent of 0.00. Participants estimate the 
dollar cost for the small respondent FTE requirements to be an 
average costs of $770,000, and a median cost of $0.
    Large firms estimated that average (median) third party/
outsourcing costs to be $10,000 ($0) and small firms estimated 
average (median) costs to be $63,000 ($0).
    Total average (median) costs for the Retirement of Systems are 
estimated to be $2,830,000 ($0) for large firms and $864,000 ($0) 
for small firms.

                   Table 31--Retirement of Systems Costs: Large Respondents Summary (49 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $120,000            6.80      $2,700,000         $10,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,500            0.06         $24,000          $5,000
Maximum.........................................      $4,000,000          206.00     $82,700,000        $360,000
Count of Zero Responses.........................              37              32              32              44
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

                  Table 32--Retirement of Systems Costs: Small Respondents Summary (118 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................         $31,000            1.92        $770,000         $63,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            1.00        $400,000          $1,000
Maximum.........................................      $3,500,000           68.00     $27,300,000      $7,000,000
Count of Zero Responses.........................              98             100             100              97
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

    Tables 33 and 34 describe the costs associated with the 
retirement of systems for large respondents with current OATS and 
non-OATS reporting obligations. Large OATS respondents provided 
estimated average (median) hardware/software requirements of 
$270,000 ($0), with large non-OATS respondents providing estimated 
average (median) costs of $4,300 ($0).
    Large OATS reporters provided average (median) FTE requirements 
of 4.92 (3.10), translating to estimated costs of $2,000,000 
($1,200,000), while large non-OATS respondents provided average 
(median) FTE requirements of 8.21 (0.00), translating to estimated 
costs of $3,300,000 ($0).
    Finally, large OATS respondents estimated average (median) third 
party/outsourcing costs of $18,000 ($0), while large non-OATS 
respondents provided estimates of $4,800 ($0).

                Table 33--Retirement of Systems Costs: Large OATS Respondents Summary (21 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................        $270,000            4.92      $2,000,000         $18,000
Median..........................................              $0            3.10      $1,200,000              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,500            0.06         $24,000          $5,000
Maximum.........................................      $4,000,000           33.00     $13,200,000        $360,000
Count of Zero Responses.........................              11               6               6              18
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

[[Page 85001]]

              Table 34--Retirement of Systems Costs: Large Non-OATS Respondents Summary (28 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................          $4,300            8.21      $3,300,000          $4,800
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................         $10,000           24.00      $9,600,000         $60,000
Maximum.........................................        $110,000          206.00     $82,700,000         $75,000
Count of Zero Responses.........................              26              26              26              26
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

    Tables 35 and 36 show the costs associated with the retirement 
of systems for small respondents with current OATS and non-OATS 
reporting obligations for the full set of study respondents. Small 
OATS respondents provided estimated average (median) hardware/
software requirements of $3,600 ($500), with small non-OATS 
respondents providing estimated average (median) costs of $40,000 
($0).
    Small OATS reporters provided average (median) FTE requirements 
of 4.60 (0.00), translating to estimated costs of $1,800,000 ($0), 
while small non-OATS respondents provided average (median) FTE 
requirements of 1.00 (0.00), translating to estimated costs of 
$400,000 ($0).
    Finally, small OATS respondents estimated average (median) third 
party/outsourcing costs of $240,000 ($1,500), while small non-OATS 
respondents provided estimates of $3,000 ($0).

                Table 35--Retirement of Systems Costs: Small OATS Respondents Summary (30 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................          $3,600            4.60      $1,800,000        $240,000
Median..........................................            $500            0.00              $0          $1,500
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            1.00        $400,000          $1,000
Maximum.........................................         $39,000           30.00     $12,000,000      $7,000,000
Count of Zero Responses.........................              15              16              16              13
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

              Table 36--Retirement of Systems Costs: Small Non-OATS Respondents Summary (88 Firms)
----------------------------------------------------------------------------------------------------------------
                                                     Hardware/                                     Third party/
                                                     software       FTE counts       FTE costs      outsourcing
----------------------------------------------------------------------------------------------------------------
Average.........................................         $40,000            1.00        $400,000          $3,000
Median..........................................              $0            0.00              $0              $0
Minimum.........................................              $0            0.00              $0              $0
Minimum (non-zero)..............................          $1,000            3.00      $1,200,000          $3,000
Maximum.........................................      $3,500,000           68.00     $27,300,000        $220,000
Count of Zero Responses.........................              83              84              84              84
Count of Blank Responses........................               0               0               0               0
----------------------------------------------------------------------------------------------------------------

    In comparing the two approaches and their costs to the current 
costs incurred by a broker-dealer for current regulatory reporting, 
respondents have indicated that they estimate both Approach 1 and 
Approach 2 to be less expensive than current regulatory reporting 
requirements. Overall, firms estimated that current costs would be 
$4,290,000 for large firms versus $1,210,000 for small firms, while 
maintenance costs of Approach 1 for large firms would cost 
$3,662,000 and $475,600 for small firms, indicating cost savings of 
$628,000 for large firms and cost savings of $734,400 for small 
firms. For maintenance costs related to Approach 2, large firms 
indicated costs of $3,148,000 with an expected savings of $1,142,000 
while small firms estimated maintenance costs of $441,500 with 
expected savings of $768,500.
    Although there are differences in the current and anticipated 
maintenance costs discussed above, the Participants conclude that 
there would be no statistical difference in costs associated with 
the maintenance of the CAT, compared to maintenance costs for 
existing regulatory reporting requirements. Participants arrive at 
this conclusion on the basis of a standard t-test of the hypothesis 
that the difference in costs to broker-dealers between Approach 1 
and Approach 2 is different from zero. The t-test is unable to 
reject the null hypothesis (i.e., that the difference in costs 
between the two approaches is not distinguishable from zero) at the 
0.05% level separately for estimates of hardware/software costs, FTE 
costs, vendor costs, and total costs across large OATS reporters, 
small OATS reporters, large non-OATS reporters, and small non-OATS 
reporters.

g. Industry Feedback on Costs to CAT Reporters Study

    Participants' understanding of broker-dealer costs has been 
enhanced through frequent dialogue with Industry Members. The DAG 
has largely provided written feedback on costs through the industry 
association members. In March 2013, SIFMA provided feedback on 
industry costs in its Consolidated Audit Trail White Paper.\3887\ 
The association group stated that the industry is likely to face 
costs related to upgrading the regulatory reporting infrastructure. 
SIFMA highlighted that additional costs borne will be distributed 
across the front office, middle office, customer master data, 
compliance and risk and data management. Additionally, in February 
2012, the FIF conducted a study to assess the costs associated with 
the implementation of OATS.\3888\ In a summary of the study, FIF 
highlights that ``future estimates of cost should consider the FIF 
cost model, most importantly the effort expended

[[Page 85002]]

on business analysis and testing as part of the implementation 
effort.'' One key view presented by the DAG was that retiring legacy 
systems will likely reduce costs to the industry, given their 
redundancies with the CAT. However, the FIF highlighted that 
existing timelines do not take into account costs associated with 
concurrent reporting for existing regulatory reporting and new 
regulatory requirements associated with the Central 
Repository.\3889\ Additional detail around the plan to retire 
existing regulatory reports can be found in Appendix C, Section C.9.
---------------------------------------------------------------------------

    \3887\ See SIFMA Recommendations.
    \3888\ See SEC Memorandum to File No. S7-11-10, Re: Staff 
Meeting with the Financial Information Forum (Feb. 29, 2012), 
available at http://www.sec.gov/comments/s7-11-10/s71110-112.pdf.
    \3889\ See FIF, Comment Letter Re: Consolidated Audit Trail 
National Market System Plan Submission (Nov. 19, 2014), available at 
http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p601972.pdf.
---------------------------------------------------------------------------

Vendors

    The Costs to Vendors Study requested information regarding 
various third party service provider and vendor costs to comply with 
the requirements of SEC Rule 613.
    Based upon the responses to the Costs to Vendors Study, the 
expected dollar costs for implementation and maintenance of the CAT 
are largely the same for both approaches, and ranged widely between 
$0 and $20,000,000 for implementation and $50,000 and $6,000,000 for 
ongoing maintenance. One firm did indicate that Approach 1 would 
have substantially higher maintenance costs ($400,000 for Approach 1 
versus $50,000 for Approach 2). For headcount and costs associated 
with implementation and maintenance of the CAT, all respondents 
indicated that Approach 1 would require more FTE resources (costs) 
to implement (ranging from 14 ($9,600,000) to 170 ($35,900,000) FTEs 
for Approach 1 and from 4 ($2,700,000) to 45 ($24,200,000) for 
Approach 2), while Approach 2 would require more FTE resources to 
maintain (ranging from 4.5 ($4,100,000) to 35 ($9,300,000) for 
Approach 1 and from 2 ($2,500,000) to 56 ($11,200,000) for Approach 
2). As with current regulatory reporting costs, the firm with the 
largest number of clients reported the highest costs, but number of 
clients did not always correlate uniformly with higher expected 
costs for the other firms.
    Three of the four respondents to the vendor study indicated that 
they would incur costs to retire current regulatory reporting 
systems, with costs ranging from $500,000 to $5,000,000, with the 
firm with the highest expected retirement costs also having the 
highest current reporting costs. FTE requirements ranged from 1.5 
($250,000) to 23 ($7,200,000) FTEs.
    Under Approach 1, two respondents expected ongoing maintenance 
to cost less than the maintenance of current regulatory reporting 
requirements, with the remaining two expecting higher costs. Under 
Approach 2, two respondents expected ongoing maintenance to cost 
less than the maintenance of current regulatory reporting 
requirements, one expected costs to be the same, and the final firm 
expected costs to be greater. All firms expected headcount 
associated with ongoing maintenance of the CAT to be less than under 
current reporting requirements.

Issuers

    Issuers also benefit from an effective regulatory regime 
supported by a reliable and complete audit trail. Specifically, 
issuers may benefit from enhanced investor confidence associated 
with better and more efficient oversight. The increase in investor 
confidence may draw more investors into the market, relative to 
other investment opportunities that do not provide the same 
protections. Increasing the pool of investors willing to invest in a 
primary offering may manifest itself in a lower cost of capital. 
Increased investor participation in secondary trading may also 
increase demand in the primary market, as the increased interest 
would be associated with greater efficiency in pricing and lower 
adverse selection costs. To the extent that the issuers do not have 
independent reporting obligations to the Central Repository (i.e., 
they are not otherwise CAT Reporters), they are not anticipated to 
incur direct costs associated with the CAT NMS Plan.

Indirect Costs

    The Participants recognize that in addition to direct costs, 
there may be indirect costs borne by parties as a result of the 
implementation of the CAT NMS Plan. As discussed further below, it 
is not possible for the Participants to quantify these costs, and as 
such, we present a qualitative discussion.
    The Participants have identified at least three distinct ways 
for indirect costs to arise as a result of the implementation of the 
CAT NMS Plan. First, all CAT Reporters are subject to direct fees to 
pay for the creation, implementation, and maintenance of the CAT 
along with other direct costs to meet CAT NMS Plan obligations. CAT 
Reporters may endeavor to shift these fees and other costs to their 
clients. Where CAT Reporters can do so successfully, the clients 
bear an indirect cost arising from the CAT NMS Plan. Second, to the 
extent that the Commission and the Participants amend their 
surveillance programs in the presence of the Central Repository, the 
broker-dealers may incur costs to adjust their internal compliance 
programs. And third, as described more fully in Appendix C, Analysis 
of the Impact on Competition, Efficiency and Capital Formation, 
broker-dealer competition may be impacted if the direct and indirect 
costs associated with meeting the CAT NMS Plan's requirements 
materially impact the provision of their services to the public. 
Such a reduction in the provision of these services may impose an 
indirect cost on the public as well.
    The Participants considered the potential for CAT Reporters to 
shift fees and other costs associated with the CAT NMS Plan. 
Participants may charge their members to cover the CAT NMS Plan 
costs either explicitly or subsume those costs in other fees or 
assessments. Broker-dealers may charge their clients for their own 
costs, whether incurred directly or indirectly, either through 
explicit fees associated with CAT or through their existing fee 
structures. This analysis does not measure either the likelihood of 
costs being passed from the Participant to the broker-dealers or 
from the broker-dealers to their clients, or the potential 
associated dollar impacts. The extent to which these costs may be 
passed on to clients is related to alternative sources of revenue 
available to the CAT Reporters, the materiality of those costs, and 
the ease with which clients can substitute away from any given 
Participant or broker-dealer. Participants note, however, that 
Participants and broker-dealers may currently have incentives and 
opportunity to shift regulatory compliance costs to their customers 
and that nothing in the CAT NMS Plan alters those incentives or the 
likelihood of those costs being passed on.
    In addition, indirect costs to broker-dealers may arise as a 
result of the implementation of the CAT NMS Plan. First, broker-
dealers may incur additional costs related to training and 
professional development, to equip the staff with the necessary 
knowledge necessary for compliance with the SEC Rule 613. Broker-
dealers were specifically asked to consider these costs as part of 
their study response. Second, the enhanced and standardized data to 
be captured by the Central Repository is anticipated to increase the 
effectiveness of surveillance by regulators, which may impact 
broker-dealer compliance programs.

8. Estimate of Aggregate Direct Costs and the Allocation of Costs 
across CAT Reporters

Estimate of Aggregate Costs

    In order to create the regulatory data infrastructure required 
by SEC Rule 613, this Plan proposes to build and maintain the CAT, 
along with resources necessary to generate regulatory reports and 
related analysis. CAT Reporters, including Participants and broker-
dealers engaging in trading and quoting activities in Eligible 
Securities, will be jointly responsible for providing the capital to 
build and maintain the CAT. Costs eligible to be allocated jointly 
include any associated liabilities accrued during the planning and 
building phases of the project that are directly attributable to the 
CAT NMS Plan, for example, legal and consulting fees, and will be 
allocated according to the funding model described in Article XI of 
the CAT NMS Plan.
    In order to calculate to the implementation and annual 
maintenance costs of the CAT, the Participants considered the 
relevant cost factors for the following entities: Plan Processor, 
Participants, broker-dealers (large and small) and vendors. All 
implementation costs reflected below are in dollar costs for the 
year they are expected to be incurred, while all maintenance costs 
are estimated for the fifth year after the approval of the CAT NMS 
Plan, when all CAT Reporters are expected to be live.

(1) Plan Processor

    Implementation Costs. For implementation costs associated with 
the Plan Processor, the Participants reviewed the build costs 
received from the Shortlisted Bidders and identified the high and 
low costs to use as a component of the overall industry cost. The 
lowest cost received was $30,000,000 and the highest estimate 
received was $91,600,000.

[[Page 85003]]

    Maintenance Costs. For maintenance costs associated with the 
Plan Processor, the Participants also reviewed the cost schedules 
received from the Shortlisted Bidders to build the range. To define 
the range of maintenance costs, the Participants reviewed the peak 
year maintenance costs from the Shortlisted Bidders. In addition to 
the costs received from the Shortlisted Bidders associated with the 
maintenance of operating and running the CAT, the Participants also 
included a yearly technical upgrade estimate to conservatively take 
into account changes in technology that may take place during the 
maintenance of the CAT. These additional costs begin at 
approximately 20% in year one, and slowly decrease to 5% during year 
five of operation. As such, the annual maintenance costs are 
estimated to range from $35,200,000 to $134,900,000.
    Retirement of Systems Costs. The Plan Processor is not expected 
to incur costs related to the retirement of systems.

(2) Participants

    Upon review of the requirements associated with Approach 1 and 
Approach 2, the Participants identified that they do not favor one 
approach over the other.
    Implementation Costs. To estimate implementation costs for the 
Participants, the Participants used the aggregated results from the 
Costs to Participants Study. Based on the responses received from 
the Participants, the implementation of regulatory reporting is 
expected to cost $17,900,000 and the implementation of surveillance 
functions is estimated to cost $23,200,000.
    Maintenance Costs. To estimate the maintenance costs for the 
Participants, the Participants reviewed the results from the Costs 
to Participants Study for regulatory reporting and surveillance 
costs. The Participants estimated that annual aggregate regulatory 
reporting costs would be equal to $14,700,000 and that annual 
aggregate surveillance maintenance costs would cost $87,700,000.
    Retirement of Systems Costs. To estimate the costs related to 
the retirement of systems for the Participants, the Participants 
reviewed the results from the Costs to Participants Study for 
retirement of systems costs. The Participants estimated that costs 
associated with retirement of systems would be equal to $310,000.

(3) Broker-Dealers

    Implementation and maintenance costs related to the CAT for 
broker-dealers were extrapolated from the results of the Costs to 
CAT Reporters Study. As described above, the Participants believe 
there to be approximately 1,800 broker-dealers that would be CAT 
Reporters. Of the 167 respondents to the Costs to CAT Reporters 
Study, 49 were large firms, and 118 were small firms, indicating a 
large to small firm ratio in the overall population of 29% to 71%. 
Applying this ratio to the total population of 1,800 broker-dealers, 
results in 522 large firms and 1,278 small firms. In comparing the 
costs between the two approaches, the Participants have identified 
that Approach 1 is more expensive than the Approach 2, which causes 
Approach 1 to form the upper bound of the broker-dealer cost range, 
and Approach 2 to form the lower bound of the broker-dealer cost 
range.
    Implementation Costs. For Approach 1, large firm respondents 
estimated that implementation costs would be equal to $5,052,000 per 
firm, for a total estimated implementation cost of approximately 
$2.6 billion. Small firm respondents estimated that implementation 
costs for Approach 1 would be equal to $551,200 per firm, for a 
total estimated implementation cost of $740 million.\3890\ For 
Approach 2, large firm respondents estimated that implementation 
costs would be equal to $4,738,000 per firm, for a total estimated 
implementation cost of approximately $2.5 billion, while small firms 
estimated implementation costs for Approach 2 to be equal to 
$461,000 per firm, for a total cost of $619 million.\3891\ This 
results in a cost range of $2.5 billion to $2.6 billion for large 
firms, and a cost range of $619 million to $740 million for small 
firms for the implementation of the CAT.
---------------------------------------------------------------------------

    \3890\ Small firm total estimated implementation costs include a 
compound annual growth rate of 5% to account for increases in labor 
and operational costs over time. The rate was applied for one year, 
from the beginning of CAT reporting in year 1 through the expected 
incurring of build costs by small firms in the year prior to the 
start of their reporting (i.e., year 2). Because large firms report 
a year earlier than small firms and would incur most implementation 
costs in year 1, a similar rate has not been applied to their 
implementation costs.
    \3891\ Id.
---------------------------------------------------------------------------

    Maintenance Costs. For Approach 1, large firm respondents 
estimated that maintenance costs would be equal to $3,662,000 per 
firm per year, for a total estimated annual maintenance cost of 
approximately $2.3 billion.\3892\ Small firm respondents estimated 
that maintenance costs for Approach 1 would be equal to $475,600 per 
firm per year, for a total estimated annual maintenance cost of 
approximately $739 million.\3893\ For Approach 2, large firm 
respondents estimated that maintenance costs would be equal to 
$3,148,000 per firm per year, for a total estimated annual 
maintenance cost of approximately $2.0 billion,\3894\ while small 
firms estimated maintenance costs for Approach 2 to be equal to 
$441,500 per firm per year, for a total annual cost of approximately 
$686 million.\3895\ This implies an annual cost range of 
approximately $2.0 billion to $2.3 billion for large firms, and an 
annual cost range of approximately $686 million to $739 million for 
small firms for maintenance of reporting to the Central Repository. 
These maintenance costs are discrete costs for the maintenance of 
CAT reporting, and are not intended to show incremental costs 
against current regulatory reporting requirements. Based on the 
Costs to CAT Reporters Study, Participants estimate these 
incremental costs to be negligible.
---------------------------------------------------------------------------

    \3892\ Large and small firm total estimated maintenance costs 
are estimated in year 5 to account for a steady state of reporting, 
and include a compound annual growth rate of 5% to account for 
increases in labor and operational costs over time. The rate was 
applied for four years, from the beginning of CAT reporting in year 
1 through year 5.
    \3893\ Id.
    \3894\ Id.
    \3895\ Id.
---------------------------------------------------------------------------

    Retirement of Systems Costs. To estimate the costs related to 
the retirement of systems for the broker dealers, the Participants 
reviewed the results from the Costs to CAT Reporters Study for 
retirement of systems costs. Large firm respondents estimated costs 
to be equal to $2,830,000, for a total retirement of systems cost 
equal to approximately $1.47 billion. Small firms estimated that 
costs related to the retirement of systems would cost $864,000, for 
a total retirement of systems cost of approximately $1.10 billion.

(4) Vendors

    Implementation Costs. For implementation costs associated with 
Vendors, the Participants reviewed the aggregate build costs 
received from the Costs to Vendors Study and identified that 
Approach 1 would cost $118,200,000 to implement, while it would cost 
$51,600,000 to implement Approach 2.\3896\
---------------------------------------------------------------------------

    \3896\ Vendor cost estimates assume an annual cost per FTE of 
$401,440, consistent with the rate applied by the Commission in the 
Adopting Release.
---------------------------------------------------------------------------

    Maintenance Costs. For maintenance costs associated with 
Vendors, the Participants also reviewed the cost schedules received 
from the Costs to Vendors Study. Vendors indicated an aggregate 
estimated annual cost of $38,600,000 for maintenance of Approach 1, 
and annual estimated maintenance costs of $48,700,000 for Approach 
2.\3897\
---------------------------------------------------------------------------

    \3897\ The total estimated vendor maintenance costs include a 
compound annual growth rate of 5% to account for increases in labor 
and operational costs over time. The rate was applied for four 
years, from the beginning of broker-dealer CAT reporting in year one 
through year five.
---------------------------------------------------------------------------

    Retirement of Systems Costs. Vendors indicated an aggregate cost 
of $21,300,000 for the retirement of existing regulatory reporting 
systems.

(5) Total Aggregate Costs

    Based on the analysis of responses to the studies described 
above, and cost estimates provided by the Shortlisted Bidders, the 
Participants estimate the initial aggregate cost to the industry 
related to building and implementing the CAT would range from $3.2 
billion to $3.6 billion. Estimated annual aggregate costs for the 
maintenance and enhancement of the CAT would range from $2.8 billion 
and $3.4 billion. Additionally, costs to retire existing systems 
would be approximately $2.6 billion.

Impacts of Not Receiving Requested Exemptions

    On January 30, 2015, the Participants submitted a letter to 
request that the Commission grant exemptions, pursuant to its 
authority under Section 36 of the Exchange Act, from the requirement 
to submit a national market system plan that meets certain reporting 
requirements specified in SEC Rule 613(c) and (d). Specifically, the 
Participants requested exemptive relief related to: (1) options 
market maker quotes; (2) Customer-IDs; (3) CAT-Reporter-IDs; (4) 
linking executions to specific subaccount allocations on Allocation

[[Page 85004]]

Reports; and (5) time stamp granularity. On September 2, 2015, the 
Participants supplemented their request with a supplemental request, 
clarifying its original requested exemption from the requirement in 
Rule 613(c)(7)(viii)(B) (including, in some instances, requesting an 
exemption from the requirement to provide an account number, account 
type and date account opened under Rule 613(c)(7)(viii)(B)).
    First, SEC Rule 613(c)(7) requires both options market makers 
and the options exchanges to record and report the details of 
options market maker quotes received by the options exchanges to the 
Central Repository. The Participants requested that the Commission 
provide the Participants with an exemption so that only options 
exchanges would record and report details for each options market 
maker quote and related Reportable Event to the Central Repository, 
while options market makers would be relieved of their obligation to 
record and report their quotes and related Reportable Events to the 
Central Repository. The Participants estimated that having both 
parties report options market maker quotes to the CAT would impose 
significant costs on the Plan Processor due to increased data 
storage and technical infrastructure, and on the options market 
makers due to a higher volume of reporting obligations. The 
Participants estimated that having both parties report options 
market maker quotes to the CAT would increase the size of data 
submitted to the CAT by approximately 18 billion records each day. 
Bidders estimated that requiring dual reporting of options market 
maker quotes would, over a five year period, lead to additional 
costs of between $2 million and $16 million for data storage and 
technical infrastructure for the Plan Processor. In addition, 
according to the results of a cost study conducted by three industry 
associations,\3898\ the cost to options market makers to meet their 
quote reporting obligations ranges from $307 million to $382 million 
over a five year period.
---------------------------------------------------------------------------

    \3898\ Cost Survey Report on CAT Reporting of Options Quotes by 
Market Makers, conducted by the Financial Information Forum, 
Securities Industry and Financial Markets Association and Securities 
Traders Association (Nov. 5, 2013); available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p601771.pdf.
---------------------------------------------------------------------------

    Second, Rule 613(c)(7) requires each CAT Reporter to record and 
report ``Customer-ID(s) for each customer'' when reporting order 
receipt or origination information to the Central Repository. The 
Commission noted that including a unique customer identifier could 
enhance the efficiency of surveillance and regulatory oversight. The 
Participants, however, favor the Customer Information Approach, that 
would require broker-dealers to provide detailed account and 
Customer information to the CAT, and have the Plan Processor 
correlate the Customer information across broker-dealers, assign a 
unique Customer identifier to each Customer and use that unique 
Customer identifier consistently across all CAT Data. The 
Participants believe that the Customer-ID approach imposes a 
significant cost burden on market participants and on the Plan 
Processor. According to cost estimates provided by the DAG,\3899\ 
the cost for the top 250 CAT reporters to implement the Customer-ID 
as required in SEC Rule 613 would be at least $195 million. The 
Participants believe that this cost estimate is conservative, since 
it only represents the cost estimate for 11% of the total broker-
dealers that are expected to be CAT Reporters.
---------------------------------------------------------------------------

    \3899\ Cost estimates provided by the DAG on topics where the 
Participants have requested exemptive relief can be found at: http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602494.pdf.
---------------------------------------------------------------------------

    Third, SEC Rule 613(c)(7) requires that a CAT-Reporter-ID be 
reported to the Central Repository for each order and Reportable 
Event, so that regulators can determine which market participant 
took action with respect to an order at each Reportable Event. The 
Participants, however, have proposed to leverage existing business 
practices and identifiers (``Existing Identifier Approach''), rather 
than requiring new identifiers be established, as the former is 
deemed more efficient and cost-effective in implementing the CAT-
Reporter-ID. The Participants believe that the CAT-Reporter-ID 
approach would impose a material cost burden on broker-dealers and 
Participants, as compared to the Existing Identifier Approach, since 
it would require major changes to broker-dealer systems. According 
to cost estimates provided by the DAG, the cost for the 250 largest 
CAT Reporters to implement the CAT-Reporter-ID as required by SEC 
Rule 613 would be $78 million.
    Fourth, Rule 613(c)(7) requires each CAT Reporter to record and 
report the ``the account number for any subaccounts to which the 
execution is allocated (in whole or part)'' if an order is executed. 
The Participants acknowledge that this information is useful to 
regulators to fulfill their obligations to protect investors. 
However, the Participants estimate that meeting the obligations of 
the Rule would be unduly burdensome and costly to achieve given the 
existing allocation practices. As an alternative, the Participants 
proposed that allocations will be reported by CAT Reporters via a 
tool described as an Allocation Report. To create linkages from the 
order execution to the allocation process by means of an order 
identifier, the broker-dealers would be required to perform 
extensive re-engineering of their front, middle, and back office 
systems, and thus incur significant costs. According to cost 
estimates provided by the DAG, the cost for the 250 largest CAT 
Reporters to link allocations to executions would be $525 million.
    Finally, Rule 613(d) requires the recording and reporting of the 
time of certain Reportable Events to the Central Repository with 
time stamps at least to the millisecond. The Participants understand 
that time stamp granularity to the millisecond reflects current 
industry standards with respect to electronically-processed events 
in the order lifecycle. However, due to the lack of precision, the 
industry practice with respect to manual orders is to capture manual 
time stamps with granularity at the level of one second. The 
Participants believe that compliance with the time stamp granularity 
requirements of the Plan for Manual Order Events would result in 
added costs to the industry as there may be a need to upgrade 
databases, internal messaging applications/protocols, data 
warehouses, and reporting applications to enable the reporting of 
such time stamps to the Central Repository. The Participants 
estimate that the total minimum cost to the industry to comply with 
a singular time stamp requirement for all CAT reporting would be 
approximately $10.5 million. This estimate is based on a current 
cost of $1,050 per manual timestamp clock which stamps to the 
second, with approximately 10,000 clocks requiring replacement 
across the industry. Upgrading this to millisecond granularity would 
likely add to the cost to the industry.

Allocation of Costs Across CAT Reporters

    Article XI of the CAT NMS Plan provides the process for 
determining the funding of the Company. In general, the 
Participants' approach to funding of the Company is: (A) to operate 
the Company on a break-even basis, which means having fees imposed 
and collected that cover the Company's costs and an appropriate 
reserve; and (B) to establish a fee structure that is equitable 
based on funding principles.\3900\ Such equitable funding principles 
include: (1) to create transparent, predictable revenue streams 
aligned with anticipated costs; (2) to allocate costs among 
Participants and Industry Members taking into account the timeline 
for implementation of the CAT and the distinctions in the securities 
trading operations of Participants and Industry Members and their 
impact on the Company's resources and operations; (3) to establish a 
tiered fee structure in which there is general comparability in the 
level of fees charged to CAT Reporters with the most CAT-related 
activity as measured by market share for Execution Venues, including 
ATSs, and by message traffic for non-ATS activities of Industry 
Members, where, for these comparability purposes, the tiered fee 
structure takes into consideration affiliations between or among CAT 
Reporters, whether Execution Venues and/or Industry Members; (4) to 
provide ease of administrative functions; (5) to avoid disincentives 
such as burdens on competition and reduction in market quality; and 
(6) to build financial stability for the Company as a going 
concern.\3901\
---------------------------------------------------------------------------

    \3900\ See Section 11.2 of the CAT NMS Plan.
    \3901\ See id.
---------------------------------------------------------------------------

    Based on these principles, the Operating Committee will 
establish the Company's funding, which is expected to arise 
primarily from fees charged to Participants and Industry Members. 
The Participants have sought input from the DAG as to the specific 
types of fees. Accordingly, the Participants propose to include the 
following fee types: (i) fixed fees payable by each Execution Venue 
that trades NMS Securities and OTC Equity Securities based on its 
market share (establishing two to five tiers of fixed fees); (ii) 
fixed fees payable by each Execution Venue that trades Listed 
Options (as defined in Rule 600(b)(35) of Regulation NMS) based

[[Page 85005]]

on its market share (establishing two to five tiers of fixed fees); 
(iii) fixed fees payable by each Industry Member based on message 
traffic generated by such Industry Member (for the avoidance of 
doubt, the fixed fees payable by Industry Members pursuant to this 
paragraph shall, in addition to any other applicable message 
traffic, include message traffic generated by: (i) an ATS that does 
not execute orders that is sponsored by such Industry Member; (ii) 
routing orders to and from any ATS sponsored by such Industry 
Member); and (iii) ancillary fees (e.g., fees for late or inaccurate 
reporting, corrections, and access and use of the CAT for regulatory 
and oversight purposes).\3902\
---------------------------------------------------------------------------

    \3902\ See Section 11.3 (a)-(c) of the CAT NMS Plan.
---------------------------------------------------------------------------

    The Operating Committee will use two different criteria to 
establish fees--market share \3903\ for Execution Venues, including 
ATSs, and message traffic for Industry Members' non-ATS activities--
due to the fundamental differences between the two types of 
entities. While there are multiple factors that contribute to the 
cost of building, maintaining and using the CAT, Bidders stated 
during workshops and in response to specific questions posed by the 
Participants that processing and storage of incoming message traffic 
is one of the most significant cost drivers for the CAT. Thus, the 
Participants believe that basing fees on message traffic for non-
Execution Venue Industry Members is consistent with an equitable 
allocation of the costs of the CAT. On the other hand, message 
traffic would not provide the same degree of differentiation between 
Participants that it does for Industry Members. Because the majority 
of message traffic at the Participants consists of quotations, and 
Participants usually disseminate quotations in all instruments they 
trade, regardless of execution volume, Execution Venues that are 
Participants generally disseminate similar amounts of message 
traffic. In contrast, execution volume more accurately delineates 
the different levels of trading activity of the Participants. For 
these reasons, the Participants believe that market share is the 
appropriate metric to use in establishing fees for Participants. 
Moreover, given the similarity between the activity of exchange 
Participants and ATSs, both of which meet the definition of an 
``exchange'' as set forth in the Exchange Act, the Participants 
believe that ATSs should be treated in the same manner as the 
exchange Participants for the purposes of determining the level of 
fees associated with the CAT.
---------------------------------------------------------------------------

    \3903\ Market share for Execution Venues is defined as the total 
trade volume executed on an individual Execution Venue as a 
percentage of total trades executed across all Venues.
---------------------------------------------------------------------------

    Costs are allocated across the different types of CAT Reporters 
(broker-dealers, Execution Venues) on a tiered basis, in order to 
equitably allocate costs to those CAT Reporters that contribute more 
to the costs of creating, implementing and maintaining the CAT. The 
fees to be assessed at each tier are calculated so as to recoup a 
proportion of costs appropriate to the message traffic from firms in 
each tier. Therefore, larger broker-dealers, generating the majority 
of message traffic, will be in the higher tiers, and therefore be 
charged a higher fee. Smaller broker-dealers with low levels of 
message traffic will be in lower tiers and will be assessed a 
minimal fee for the CAT. The Participants estimate that up to 75% of 
broker-dealers will be in the lower tiers of the Funding Model.
    All fees under Article XI charged directly to Participants and 
indirectly to Industry Members will be reviewed by the Operating 
Committee at least annually.\3904\ All proposed fees to be charged 
to Industry Members by Participants will be filed with the 
Commission pursuant to Section 19(b) of the Exchange Act.\3905\ In 
addition, all disputes with respect to the fees the Company charges 
Participants will be resolved by the Operating Committee or a 
Subcommittee designated by the Operating Committee, subject to the 
right of Participants to seek redress from the Commission pursuant 
to SEC Rule 608 or in any other appropriate forum.\3906\ The 
Participants will adopt rules requiring that disputes with respect 
to fees charged to Industry Members will be resolved by the 
Operating Committee or a Subcommittee, subject to the right of any 
Industry Member to seek redress from the SEC pursuant to SEC Rule 
608 or in any other appropriate forum.\3907\
---------------------------------------------------------------------------

    \3904\ See Section 11.3(d) of the CAT NMS Plan.
    \3905\ See Section 11.1(b) of the CAT NMS Plan.
    \3906\ See Section 4.1 and Section 11.5 of the CAT NMS Plan.
    \3907\ See id.
---------------------------------------------------------------------------

    [Section 8.5 of the CAT NMS Plan addresses the very limited 
situations in which the Company may need to make distributions of 
cash and property of the Company to the Participants. Any 
distribution to the Participants requires approval by a 
Supermajority Vote of the Operating Committee.\3908\ The 
Participants do not expect any distributions to be made to them 
except in two possible situations. One situation is if the 
Participants incur tax liabilities due to their ownership of the 
Company. An example of tax liabilities being incurred would be if 
the Company generates profits. Those profits could be taxable to the 
Participants even if the profits are not distributed to the 
Participants. In such situation, the Participants could be taxed on 
amounts they have not received, in which case the Company would make 
distributions to the Participants, but only to the extent to permit 
each Participant to pay its incurred tax liability. As discussed, 
the Participants do not expect the Company to generate profits and 
rather expect the Company to operate on a break-even basis. The 
other situation that may require distributions to the Participants 
would be if the Company dissolves. In that situation, the Company's 
assets would be distributed first to the Company's creditors such as 
the Plan Processor or other third parties, second to a reserve for 
contingent or future liabilities (such as taxes), and third 
(assuming there are any amounts remaining) to the Participants in 
proportion to their Capital Accounts. Each Participant is expected 
to make a nominal contribution of cash or services to its Capital 
Account at the beginning of the operation of the CAT System. 
Therefore, any distribution to the Participant of an amount equal to 
its Capital Account would be limited to the nominal amount 
contributed. Other than these two limited situations, the 
Participants do not expect the Company to make any distributions.]
---------------------------------------------------------------------------

    \3908\ See Section 8.5(a) of the CAT NMS Plan.
---------------------------------------------------------------------------

    The CAT NMS Plan contemplates that the Plan Processor will be 
responsible for developing and executing administrative processes 
and procedures to effectuate the smooth functioning of the CAT, 
consistent with the principles articulated in Article XI. These 
processes and procedures would include, but are not limited to, 
establishing budget, notice, billing and collection cycles that 
provide transparency, predictability and ease of administrative 
functions to CAT reporters. Criteria and schedules for ancillary 
fees that might be collected pursuant to Article XI are also 
anticipated to be published by the Operating Committee.
    In articulating the funding principles of the CAT NMS Plan, 
Participants have established the need for the CAT NMS Plan to, 
among other things: (1) create transparent, predictable revenue 
streams for the Company that are aligned with the anticipated costs 
to build, operate, and administer the CAT and the other costs of the 
Company; and (2) provide for ease of billing and other 
administrative functions. The funding principles articulated in 
Article XI should also inform the policies and procedures adopted by 
the Operating Committee in executing the associated functions. To 
that end, to promote fairness and transparency with respect to fees, 
the Participants expect that the Operating Committee will adopt 
policies, procedures, and practices around budgeting, assignment of 
tiers, adjudicating disputes, billing, and collection of fees that 
provide appropriate transparency to all CAT Reporters. Participants 
expect that policies or procedures adopted to implement the 
administration of fee allocation and collection among CAT Reporters 
would be subject to comment by impacted parties before adoption.

9. Alternatives Considered

Technical Solution

    SEC Rule 613(a)(1)(xii) directs Participants to discuss 
reasonable alternative approaches to creating, implementing and 
maintaining the CAT. As part of the development of the CAT NMS Plan, 
the Participants considered a variety of alternatives with respect 
to technical and user support considerations. The technical 
considerations include: primary storage, data ingestion format, 
development process, quality assurance staffing and user support 
staffing. The analysis presented in Appendix C, D.12, below, 
describes alternative approaches considered for each technical 
consideration and the ultimate choice of the CAT NMS Plan based on 
factors that consider feasibility, cost and efficiency.
    In addition, the questions included in the Costs to CAT 
Reporters Study described above permitted the Participants to 
evaluate cost considerations to Industry Members associated with two 
different technical formats for reporting audit trail data to the

[[Page 85006]]

Central Repository. One approach might permit broker-dealers to 
submit information data to the Central Repository using their choice 
among existing industry protocols, such as FIX. The second approach 
provided a scenario where CAT Reporters would submit relevant data 
to the Central Repository using a defined or specified format, such 
as an augmented version of OATS.

Funding Model

    As discussed above, Article XI of the CAT NMS Plan sets forth 
the provisions for establishing the funding of the Company and 
recovering the costs of operating the CAT. The Participants 
recognize that there are a number of different approaches to funding 
the CAT and have considered a variety of different funding and cost 
allocation models. Each model has its potential advantages and 
disadvantages. For example, a structure in which all CAT Reporters 
are charged a fixed fee regardless of reportable activity would 
provide CAT Reporters greater certainty regarding their fee 
obligations, but may place undue burden on small CAT Reporters. A 
variable fee structure focused on specific reportable information 
may make it easier for Industry Members to pass fees to their 
customers. However, such fees would be more complex and difficult to 
administer. Participants were particularly sensitive to the 
possibility that the fee structure might create distortions to the 
economic activities of CAT Reporters if not set appropriately.
    The Participants considered alternatives to cost allocation 
ranging from a strict pro-rata distribution, regardless of the type 
or size of the CAT Reporters, to a distribution based purely on CAT 
Reporter activity. Participants also considered a variety of ways to 
measure activity, including notional value of trading (as currently 
used for purposes of Section 31 fees), number of trades or 
quotations, and all message traffic sent. Further, Participants 
considered the comparability of audit trail activity across 
different Eligible Securities. The Participants discussed the 
potential approaches to funding, including the principles 
articulated in Article XI and an illustrative funding model, with 
the DAG multiple times, beginning on September 3, 2014.
    After extensive analysis and taking into consideration feedback 
from the DAG, the Participants determined that a tiered fixed fee 
structure would be fair and relatively uncomplicated. The 
Participants discussed several approaches to developing a tiered 
model, including defining fee tiers based on such factors as size of 
firm, message traffic or trading dollar volume. For example, a 
review of OATS data for a recent month shows the wide range in 
activity among broker-dealers, with a number of broker-dealers 
submitting fewer than 1,000 orders for the month and other broker-
dealers submitting millions and even billions of orders in the same 
period. The Participants also considered a tiered model where CAT 
Reporters would be charged different variable fees based on tier 
assignment. However, the Participants believe a tiered fixed fee 
model is preferable to a variable model because a variable model 
would lack the transparency, predictability, and ease of calculation 
afforded by fixed fees. Such factors are crucial to estimating a 
reliable revenue stream for the Company and to permitting CAT 
Reporters to reasonably predict their obligations. Moreover, the 
Participants believe that the tiered approach would help ensure that 
fees are equitably allocated among similarly situated CAT Reporters 
and would further the goal of the Participants to lessen the impact 
on smaller firms. Irrespective of the approach taken with fees, the 
Participants believe that revenues generated should be aligned to 
the costs of building, implementing and maintaining the CAT, and if 
revenues collected are in excess of costs for any given year, such 
excess should be considered in setting fees for the following year.
    Finally, the Participants believe that it is important to 
establish a simple fee structure that is easy to understand and 
administer. The Participants are committed to establishing and 
billing fees so that Industry Members will have certainty and the 
ability to budget for them. In that regard, the CAT NMS Plan 
expressly provides that the Operating Committee shall not make any 
changes to any fees on more than a semi-annual basis unless, 
pursuant to a Supermajority Vote, the Operating Committee concludes 
that such change is necessary for the adequate funding of the 
Company.\3909\
---------------------------------------------------------------------------

    \3909\ See Section 11.3(d) of the CAT NMS Plan.
---------------------------------------------------------------------------

An Analysis of the Impact on Competition, Efficiency, and Capital 
Formation (SEC Rule 613(a)(1)(viii))

    As required by SEC Rule 613(a)(1)(viii), this section provides 
an analysis of the impact on competition, efficiency and capital 
formation of creating, implementing, and maintaining the CAT NMS 
Plan. In recognition of the complexity of this analysis, the 
Participants have evaluated a variety of sources of information to 
assist in the analysis of the impact of the CAT NMS Plan on 
competition, efficiency and capital formation. Specifically, the 
Participants have evaluated the many comments related to 
competition, efficiency and capital formation received in response 
to the Commission's proposal of SEC Rule 613 and during the CAT NMS 
Plan development process. In addition, the Participants considered 
the input of the DAG. Finally, the Participants used information 
derived from three cost studies described in the prior section on 
costs. Based on a review and analysis of these materials, the 
Participants believe that the CAT NMS Plan, as submitted, is 
justified given its estimated impacts on competition, efficiency and 
capital formation.

[ssquf] Impact on Competition

    Through an analysis of the data and information described above, 
the Participants have evaluated the potential impact of the CAT NMS 
Plan on competition, including the competitive impact on the market 
generally and the competitive impact on each type of Person playing 
a role in the market (e.g., Participants, broker-dealers, vendors, 
investors). Potential negative impacts on competition could arise if 
the CAT NMS Plan were to burden a group or class of CAT Reporters in 
a way that would harm the public's ability to access their services, 
either through increasing costs or decreased provision of those 
services. These impacts may be direct, as in the provision of 
brokerage services to individual investors, or indirect, as in the 
aggregate costs of managing, trading and maintaining a securities 
holding. These impacts should be measured relative to the economic 
baseline, described above.
    The Participants have identified a series of potential impacts 
on competition that may arise as a result of the terms and 
conditions of the CAT NMS Plan. These potential impacts may be 
related to: (1) the technology ultimately used by the CAT and 
differences across CAT Reporters in their efforts necessary to meet 
the CAT NMS Plan's requirements; (2) the method of cost allocation 
across CAT Reporters; and (3) changes in regulatory reporting 
requirements, and their attendant costs, particularly to smaller 
entities, who may previously have benefited from regulatory 
exemptions.
    In general, the Participants believe that the CAT NMS Plan will 
avoid disincentives such as placing an inappropriate burden on 
competition in the U.S. securities markets. The discussion below 
focuses on competition in the Participant and broker-dealer 
communities, where the Participants believe there is the greatest 
potential for impact on competition.

10. Participants

    The Participants already incur significant costs to maintain and 
surveil an audit trail of activity for which they are responsible. 
Each Participant bears these costs whether it expends internal 
resources to monitor relevant activity itself, or whether it 
contracts with others to perform these services on its behalf. The 
CAT NMS Plan, through the funding principles it sets forth in 
Section 11.2, seeks to distribute the regulatory costs associated 
with the development and maintenance of a meaningful and 
comprehensive audit trail in a principled manner. By calibrating the 
CAT NMS Plan's funding according to these principles, the 
Participants sought to avoid placing undue burden on exchanges 
relative to their core characteristics, including market share and 
volume of message traffic. Thus, the Participants do not believe 
that any particular exchange in either the equities or options 
markets would be placed at a competitive disadvantage in a way that 
would materially impact the respective Execution Venue marketplaces 
for either type of security.
    In addition, because the CAT NMS Plan seeks to allocate costs in 
a manner consistent with the Participants' activities, the 
Participants do not believe that it would discourage potential new 
entrants. For instance, an equity ATS--which would already incur 
costs under the CAT NMS Plan as a reporting broker-dealer--should 
not be discouraged from becoming a national securities exchanges 
because of the costs it would incur as a Participant based on its 
business model or pricing structure. As proposed here, the entity 
would be assessed

[[Page 85007]]

exactly the same amount for a given level of activity whether it 
acted as an ATS or as an exchange. Accordingly, the Participants do 
not believe that adoption of the CAT NMS Plan would favor existing 
exchanges or types of exchanges vis-[agrave]-vis potential new 
competitors in a way that would degrade available Execution Venue 
services or pricing. For similar reasons, the Participants also do 
not believe that the costs of the CAT NMS Plan would distort the 
marketplace for existing or potential registered securities 
associations.

11. Broker-Dealers

    Broker-dealer competition may be impacted if the direct and 
indirect costs associated with meeting the CAT NMS Plan's 
requirements materially impact the provision of their services to 
the public. Further, competition may be harmed if a particular class 
or group of broker-dealers bears the costs disproportionately, and 
as a result, investors have more limited choices or increased costs 
for certain types of broker-dealer services.
    For larger broker-dealers, the Participants rely on the 
information obtained from the Costs to CAT Reporters Study and 
discussions with the industry to preliminarily conclude that the CAT 
NMS Plan will not likely have an adverse impact on competition. 
Under the CAT NMS Plan, broker-dealers would be assessed charges, as 
determined by the Operating Committee, for the build and maintenance 
of the CAT. They would also incur costs to build and maintain 
systems and processes necessary to submit and retain their own 
information to the Central Repository. The Participants' efforts to 
align costs with market activity leads to an outcome where dollar 
costs are borne significantly more by larger entities.
    Additionally, large broker-dealers may view themselves as direct 
competitors to large Participants, in that they may provide similar 
execution services. The CAT NMS Plan seeks to mitigate competitive 
impacts by aligning the cost allocation in a manner that seeks 
comparability among the largest CAT Reporters regardless of their 
regulatory status.\3910\
---------------------------------------------------------------------------

    \3910\ There is empirical evidence that firms' order routing 
decisions respond to changes in trading fees. Such evidence finds 
that an increase in the level of an exchange's net fee is associated 
with a decrease in trading volume and market share relative to other 
exchanges. This evidence suggests that there is sufficient 
competition among Execution Venues such that where the Participant's 
costs for the CAT are material it may be difficult for Execution 
Venues to fully pass those costs to broker-dealers. This argument 
holds as long as broker-dealers are not able to pass such costs on 
to their customers. See Cardella et al., Make and Take Fees in the 
U.S. Equity Market (working paper, Apr. 29, 2013), available at 
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2149302.
---------------------------------------------------------------------------

    According to the Costs to CAT Reporters Study, for large broker-
dealers, the average decrease in maintenance costs associated with 
the CAT (i.e., the cost that CAT would impose on firms beyond the 
current economic baseline) would be $651,924, and the average 
decrease in maintenance costs for small firms would be $726,216 
using Approach 1. For Approach 2, large broker-dealers would see a 
decrease in maintenance costs associated with the CAT of $1,170,548, 
and small firms would see a decrease in the same costs of $763,371. 
These averages could suggest that the decreased costs imposed by the 
CAT would represent a benefit to both large and small broker-
dealers' regulatory budgets. The Participants believe that the CAT 
NMS Plan would not materially disadvantage small broker-dealers 
versus large broker-dealers.
    For small broker-dealers, the Participants considered their 
contribution to market activity as an important determinant of the 
amount of the cost of the CAT that they should bear. While this 
allocation of costs may be significant for some small firms, and may 
even impact their business models materially, SEC Rule 613 requires 
these entities to report. The Participants have not identified a way 
to further minimize the costs to these firms within the context of 
the funding principles established as part of the CAT NMS Plan.
    The Participants were particularly sensitive during the 
development of the CAT NMS Plan to the potential burdens it could 
place on small broker-dealers. These broker-dealers may incur 
minimal costs under existing audit trail requirements because they 
are OATS-exempt or excluded broker-dealers or limited purpose 
broker-dealers. The Participants note that the CAT NMS Plan 
contemplates steps to diffuse the potential cost differential 
between large and small firms. For instance, small broker-dealers 
generally will have an additional year before they are required to 
start reporting data under the CAT NMS Plan to the Central 
Repository. This will permit these firms greater time to implement 
the changes to their own systems necessary to comply with the Plan. 
Furthermore, the Participants have sought exemptive relief 
concerning time stamps for recording the time of Manual Order 
Events.
    The Participants are cognizant that the method by which costs 
are allocated to broker-dealers may have implications for their 
business models that might ultimately impact competition. For 
instance, if the method of cost allocation created disincentives to 
quoting activity, certain broker-dealer's business models might be 
affected more greatly than others. The Participants are unable to 
determine whether and how changing these incentives may impact 
competition. Participants intend to monitor changes to overall 
market activity and market quality and consider appropriate changes 
to the cost allocation model where merited.
    The Participants note that if the exemption requests that have 
been submitted to the Commission are not granted, the requirements 
of SEC Rule 613 may impose significantly greater costs that could 
potentially cause small broker-dealers to exit the marketplace, 
discourage new entrants to the small broker-dealer marketplace, or 
impact the broker-dealer landscape in other ways that may dampen 
competitive pressures.

[ssquf] Impact on Efficiency

    Through an analysis of the data and information described above, 
the Participants have evaluated the impact of the CAT NMS Plan on 
efficiency, including the impact on the time, resources and effort 
needed to perform various regulatory and other functions. In 
general, the Participants believe that the CAT NMS Plan should have 
a net positive effect on efficiency.
    Overall, the Participants believe that the CAT NMS Plan could 
improve market efficiency by reducing monitoring costs and 
increasing efficiency in the enforcement of Participant and 
Commission rules. Additionally, the Participants believe that the 
CAT will enable the Participants and the Commission to detect more 
quickly wrongdoing on a cross-market basis, which may deter some 
market participants from taking such actions. For example, FINRA's 
equity cross-market surveillance patterns have already demonstrated 
the value of integrating data from multiple markets. FINRA has found 
that approximately 44 percent of the manipulation-based alerts it 
generated involved conduct on two or more equity markets and 43 
percent of the alerts involved conduct by two or more market 
participants.\3911\ A reduction in prohibited activity, as well as 
faster identification of such activity by regulators, would lead to 
a reduction in losses to investors and increased efficiency.
---------------------------------------------------------------------------

    \3911\ Remarks of Robert Ketchum, Chairman and Chief Executive 
Officer, FINRA (Sept. 17. 2014), available athttp://www.finra.org/Newsroom/Speeches/Ketchum/P600785.
---------------------------------------------------------------------------

    The CAT could also create more focused efficiencies for broker-
dealers and Participants by reducing the redundant and overlapping 
systems and requirements identified above. For all CAT Reporters, 
the standardization of various technology systems will provide, over 
time, improved process efficiencies, including efficiencies gained 
through the replacement of outdated processes and technology with 
cost saving and related staffing reductions. Standardization of 
systems will improve efficiency, for both Participants and broker-
dealers, in the form of resource consolidation, sun-setting of 
systems, consolidated legacy systems and processes and consolidated 
data processing. In addition, more sophisticated monitoring may 
reduce the number of ad hoc information requests, thereby reducing 
the overall burden and increasing the operational efficiency of CAT 
Reporters.
    CAT Reporters may also experience various long term efficiencies 
from the increase in surveillance capabilities, such as greater 
efficiencies related to administrative functions provided by 
enhanced regulatory access, superior system speed and reduced system 
downtime. Moreover, the Commission and the Participants expect to 
have more fulsome access to unprocessed regulatory data and timely 
and accurate information on market activity, thus providing the 
opportunity for improved market surveillance and monitoring.
    Note, however, that uniform reporting of data to the Central 
Repository may require the development of data mapping and data 
dictionaries that will impose burdens in the short term. CAT 
Reporters also may incur

[[Page 85008]]

additional time and direct costs to comply with new encryption 
mechanisms in connection with the transmission of PII data (although 
the quality of the process will improve).
    The Participants are cognizant that the method by which costs 
are allocated to broker-dealers may have implications for their 
business models that might ultimately impact efficiency. For 
instance, if the method of cost allocation created disincentives to 
the provision of liquidity, there may be an impact on the quality of 
the markets and an increase in the costs to investors to transact. 
As a result, the Participants set forth the funding principles that 
will guide the selection of the cost allocation model. The 
Participants have also sought out evidence available to best 
understand how cost allocation models may impact market 
participation, and more importantly, ultimately market 
outcomes.\3912\
---------------------------------------------------------------------------

    \3912\ See, e.g., IIROC's analysis of its market regulation fee 
model, available at http://www.iiroc.ca/Documents/2011/5f95e549-10d1-473e-93cf-3250e026a476_en.pdf[iiroc.ca] and http://www.iiroc.ca/Documents/2012/bf393b26-7bdf-49ff-a1fc-3904d1de3983_en.pdf[iiroc.ca].
---------------------------------------------------------------------------

    The Participants intend to monitor changes to overall market 
activity and market quality and will consider appropriate changes to 
the cost allocation model where merited.

[ssquf] Impact on Capital Formation

    Through an analysis of the data and information described above, 
the Participants also have assessed the impact of the CAT NMS Plan 
on capital formation, including the impact on both investments and 
the formation of additional capital. In general, the Participants 
believe that the CAT NMS Plan will have no deleterious effect on 
capital formation.
    In general the Participants believe that the enhanced 
surveillance of the markets may instill greater investor confidence 
in the markets, which, in turn, may prompt greater participation in 
the markets. It is possible that greater investor participation in 
the markets could bolster capital formation by supporting the 
environment in which companies raise capital.
    Moreover, the Participants believe that the CAT NMS Plan would 
not discourage capital formation. As discussed in greater detail 
above, the Participants have analyzed the degree to which the CAT 
NMS Plan should cover Primary Market Transactions. Based on this 
analysis, the Participants believe that the CAT NMS Plan has been 
appropriately tailored so it does not create an undue burden on the 
primary issuances that companies may use to raise capital.
    In addition, the Participants do not believe that the costs of 
the CAT NMS Plan would come to bear on investors in a way that would 
materially limit their access to or participation in the capital 
markets.
    Finally, the Participants believe that, given the CAT NMS Plan's 
provisions to secure the data collected and stored by the Central 
Repository, the CAT NMS Plan should not discourage participation by 
market participants who are worried about data security and data 
breaches. As described more fully in the CAT NMS Plan and Appendix 
C, The Security and Confidentiality of the Information Reported to 
the Central Repository, and Appendix D, Data Security, the Plan 
Processor will be responsible for ensuring the security and 
confidentiality of data during transmission and processing, as well 
as at rest, and for ensuring that the data is used only for 
permitted purposes. The Plan Processor will be required to provide 
physical security for facilities where data is transmitted or 
stored, and must provide for the security of electronic access to 
data by outside parties, including Participants and the Commission, 
CAT Reporters, or Data Submitters. The Plan Processor must include 
in these measures heightened security for populating, storing, and 
retrieving particularly sensitive data such as PII. Moreover, the 
Plan Processor must develop and maintain this security program with 
a dedicated staff including, among others, a Chief Information 
Security Officer dedicated to monitoring and addressing data 
security issues for the Plan Processor and Central Repository, 
subject to regular review by the Chief Compliance Officer. The Plan 
Processor also will be required to provide regular reports to the 
Operating Committee on a number of items, including any data 
security issues for the Plan Processor and Central Repository.

[ssquf] Impacts of the CAT NMS Plan Governance on Efficiency, 
Competition, and Capital Formation

    Participants considered the impacts of the CAT NMS Plan 
governance on efficiency, competition, and capital formation. 
Participants recognize that without effective governance, it will 
become harder for the CAT NMS Plan to achieve its intended outcome, 
namely, enhanced investor protection, in an efficient manner. 
Participants specifically considered two areas where ineffective 
governance might lead to economic distortions or inefficiencies: (i) 
the voting protocols defined in the CAT NMS Plan both for 
Participants in developing the CAT, and for the Operating Committee 
after the adoption of the CAT NMS Plan; and (ii) the role of 
industry advisors within the context of CAT NMS Plan governance.
    Participants understand that there may be detrimental impacts to 
adopting voting protocols that might impede the effective 
administration of the CAT System. For instance, too high a threshold 
for decision making may limit the ability of the body to adopt 
broadly agreed upon provisions. The extreme form of this would have 
been for the CAT NMS Plan to require unanimity on all matters. In 
such case, one dissenting opinion could effectively derail the 
entire decision-making apparatus. The inability to act in a timely 
way may create consequences for efficiency, competition, and 
capital. Conversely, if Participants set a voting threshold that is 
too low, it might have the impact of not giving sufficient 
opportunity to be heard or value to dissenting opinions and 
alternative approaches. As an example, if Participants were to set 
voting thresholds too low, it might be possible for a set of 
Participants to adopt provisions that might provide them a 
competitive advantage over other Participants. Either forms (a too 
high or too low threshold) could result in negative impacts to 
efficiency, competition, and capital formation. These issues apply 
in the context of efforts of the Participants to develop the CAT NMS 
Plan submitted here or in the context of the Operating Committee's 
responsibilities after approval of the CAT NMS Plan.
    To address these concerns, Participants carefully considered 
which matters should require a Supermajority Vote and which matters 
should require a Majority Vote.\3913\ The decision required 
Participants to balance the protection of rights of all parties with 
the interest of avoiding unnecessary deadlock in the decision making 
process. As a result, Participants have determined that use of a 
Supermajority Vote should be for instances considered by the 
Participants to have a direct and significant impact on the 
functioning, management, and financing of the CAT System. This 
formulation, relying on Majority Vote for routine decisions and 
Supermajority Vote for significant matters, is intended to meet the 
Commission's direction for ``efficient and fair operation of the NMS 
plan governing the consolidated audit trail.'' \3914\
---------------------------------------------------------------------------

    \3913\ Further discussion of the Participants' consideration of 
the use of the Majority Vote and Supermajority Vote is contained in 
Appendix C, 11, Process by Which Participants Solicited Views of 
Members and Other Appropriate Parties Regarding Creation, 
Implementation, and Maintenance of CAT; Summary of Views; and How 
Sponsors Took Views Into Account in Preparing NMS Plan (SEC Rule 
613(a)(1)(xi)).
    \3914\ Adopting Release at 45787.
---------------------------------------------------------------------------

    Participants also considered the role of industry representation 
as part of the governance structure. Participants recognize the 
importance of including industry representation in order to assure 
that all affected parties have a representative in discussing the 
building, implementation, and maintenance of the CAT System. 
Participants actively sought insight and information from the DAG 
and other industry representatives in developing the CAT NMS Plan. 
The CAT NMS Plan also contemplates continued industry representation 
through an Advisory Committee, intended to support the Operating 
Committee and to promote continuing efficiency in meeting the 
objective of the CAT.

Implementation and Milestones of the CAT

9. A Plan to Eliminate Existing Rules and Systems (SEC Rule 
613(a)(1)(ix))

    As required by SEC Rule 613(a)(1)(ix), this section sets forth a 
plan to eliminate rules and systems (or components thereof) that 
will be rendered duplicative by the consolidated audit trail, 
including identification of such rules and systems (or components 
thereof); to the extent that any existing rules or systems related 
to monitoring quotes, orders and executions provide information that 
is not rendered duplicative by the consolidated audit trail, an 
analysis of, among other things, whether the collection of such 
information remains appropriate; if still appropriate whether such 
information should continue to be separately collected or should 
instead be incorporated into the CAT; or if no longer appropriate,

[[Page 85009]]

how the collection of such information could be efficiently 
terminated.

------------------------------------------------------------------------
               Milestone                   [Projected] Completion Date
------------------------------------------------------------------------
             Identification of Duplicative Rules and Systems
------------------------------------------------------------------------
Each Participant will initiate an        [Each Participant has begun
 analysis of its rules and systems to     reviewing its existing
 determine which require information      rulebooks and is waiting for
 that is duplicative of the information   the publication of the final
 available to the Participants through    reporting requirements to the
 the Central Repository. Examples of      Central Repository. Each
 Participants' rules to be reviewed       Participant should complete
 include:                                 its analysis within twelve
 The Participants' rules that     (12) months after Industry
 implement the exchange-wide              Members (other than Small
 Consolidated Options Audit Trail         Industry Members) are required
 System (e.g., CBOE Rule 6.24, etc.)      to begin reporting data to the
 FINRA rules that implement the   Central Repository or, if such
 Order Audit Trail System (OATS)          Participant determines
 including the relevant rules of the      sufficient data is not
 NASDAQ Stock Market, NASDAQ OMX BX,      available to complete such
 NASDAQ OMX PHLX, New York Stock          analysis by such date, a
 Exchange, NYSE MKT, and NYSE ARCA        subsequent date needs to be
 Option exchange rules that       determined by such Participant
 require the reporting of transactions    based on the availability of
 in the equity underlier for options      such data.] The Participants
 products listed on the options           with duplicative systems have
 exchange (e.g., PHLX Rule 1022,          completed gap analyses for
 portions of CBOE Rule 8.9, etc.)         systems and rules identified
                                          for retirement in full,\3915\
                                          and have confirmed that data
                                          that would need to be captured
                                          by the CAT to support
                                          retirement of these systems
                                          will be included in the CAT.
------------------------------------------------------------------------
        Identification of Partially Duplicative Rules and Systems
------------------------------------------------------------------------
Each Participant will initiate an        [Each Participant has begun
 analysis of its rules and systems to     reviewing its existing
 determine which rules and/or systems     rulebooks and is waiting for
 require information that is partially    publication of the final
 duplicative of the information           reporting requirements to the
 available to the Participants through    Central Repository. Upon
 the Central Repository. The analysis     publication of the Technical
 should include a determination as to     Specifications, each
 (1) whether the duplicative              Participant should complete
 information available in the Central     its analysis within eighteen
 Repository should continue to be         (18) months after Industry
 collected by the Participant; (2)        Members (other than Small
 whether the duplicative information      Industry Members) are required
 made available in the Central            to begin reporting data to the
 Repository can be used by the            Central Repository or, if such
 Participant without degrading the        Participant determines
 effectiveness of the Participant's       sufficient data is not
 rules or systems; and (3) whether the    available to complete such
 non-duplicative information should       analysis by such date, a
 continue to be collected by the          subsequent date needs to be
 Participant or, alternatively, should    determined by such Participant
 be added to information collected by     based on the availability of
 the Central Repository.                  such data.]
Examples of Participants' rules to be    The Participants with
 reviewed include:.                       duplicative systems have
                                          completed gap analyses for
                                          systems and rules identified
                                          for retirement in part, and
                                          have confirmed that data that
                                          would need to be captured by
                                          the CAT to support retirement
                                          of these systems will be
                                          included in the CAT.
     Options exchange rules
     that require the reporting of
     large options positions (e.g.,
     CBOE Rule 4.13, etc.)
     NYSE Rule 410B which
     requires the reporting of
     transactions effected in NYSE
     listed securities by NYSE members
     which are not reported to the
     consolidated reporting systems
     Portions of CBOE Rule 8.9
     concerning position reporting
     details.
------------------------------------------------------------------------
 Identification of Non-Duplicative Rules or System related to Monitoring
                      Quotes, Orders and Executions
------------------------------------------------------------------------
Each Participant will initiate an        [Each Participant should
 analysis of its rules and systems to     complete its analysis within
 determine which of the Participant's     eighteen (18) months after
 rules and systems related to             Industry Members (other than
 monitoring quotes, orders, and           Small Industry Members) are
 executions provide information that is   required to begin reporting
 not rendered duplicative by the          data to the Central Repository
 consolidated audit trail. Each           or, if such Participant
 Participant must analyze (1) whether     determines sufficient data is
 collection of such information should    not available to complete such
 continue to be separately collected or   analysis by such date, a
 should instead be incorporated into      subsequent date needs to be
 the consolidated audit trail; (2) if     determined by such Participant
 still appropriate, whether such          based on the availability of
 information should continue to be        such data.]
 separately collected or should instead  The Participants with
 be incorporated into the consolidated    duplicative systems have
 audit trail.; and (3) if no longer       completed gap analyses for
 appropriate, how the collection of       systems and rules identified
 such information could be efficiently    for retirement in full or in
 terminated, the steps the Participants   part, and have confirmed that
 propose to take to seek Commission       data that would need to be
 approval for the elimination of such     captured by the CAT to support
 rules and systems (or components         retirement of these systems
 thereof), and a timetable for such       will be included in the CAT.
 elimination, including a description
 of the phasing-in of the consolidated
 audit trail and phasing-out of such
 existing rules and systems (or
 components thereof).
------------------------------------------------------------------------
Identification of Participant Rule and System Changes Due to Elimination
                      or Modification of SEC Rules
------------------------------------------------------------------------
To the extent the SEC eliminates SEC
 rules that require information that is
 duplicative of information available
 through the Central Repository, each
 Participant will analyze its rules and
 systems to determine whether any
 modifications are necessary (e.g.,
 delete references to outdated SEC
 rules, etc.) to support data requests
 made pursuant to such SEC rules.
 Examples of rules the SEC might
 eliminate or modify as a result of the
 implementation of CAT include:
     SEC Rule 17a-25 which
     requires brokers and dealers to
     submit electronically to the SEC
     information on Customers and firms
     securities trading

[[Page 85010]]

 
     SEC Rule 17h-1 concerning   Each Participant should
     the identification of large          complete its analysis within
     traders and the required reporting   three (3) months after the SEC
     obligations of large traders         approves the deletion or
                                          modification of an SEC rule
                                          related to the information
                                          available through the Central
                                          Repository.
                                         The Participants will
                                          coordinate with the SEC
                                          regarding modification of the
                                          CAT NMS Plan to include
                                          information sufficient to
                                          eliminate or modify those
                                          Exchange Act rules or systems
                                          that the SEC deems
                                          appropriate.
                                         With respect to SEC Rule 17a-
                                          25, such coordination will
                                          include, among other things,
                                          consideration of EBS data
                                          elements and asset classes
                                          that would need to be included
                                          in the Plan, as well as the
                                          timing of when all Industry
                                          Members will be subject to the
                                          Plan.\3916\
                                         Based on preliminary industry
                                          analyses, broker-dealer large
                                          trader reporting requirements
                                          under SEC Rule [17h-1] 13h-1
                                          could be eliminated via the
                                          CAT. The same appears true
                                          with respect to broker-dealer
                                          large trader recordkeeping.
                                          Large trader reporting
                                          responsibilities on Form 13H
                                          and self-identification would
                                          not appear to be covered by
                                          the CAT. \3917\
------------------------------------------------------------------------
    Participant Rule Changes to Modify or Eliminate Participant Rules
------------------------------------------------------------------------
Each Participant will prepare            Each Participant will file [to]
 appropriate rule change filings to       with the SEC the relevant rule
 implement the rule modifications or      change filing to eliminate or
 deletions that can be made based on      modify its duplicative rules
 the Participant's analysis of            within six (6) months of the
 duplicative or partially duplicative     [Participant's determination
 rules. The rule change filing should     that such modification or
 describe the process for phasing out     deletion is appropriate] SEC's
 the requirements under the relevant      approval of the CAT NMS Plan,
 rule.                                    the elimination of such rules
                                          and the retirement of the
                                          related systems to be
                                          effective at such time as CAT
                                          Data meets minimum standards
                                          of accuracy and reliability.
                                          In this filing, each
                                          Participant shall discuss:
                                            (i) 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;
                                            (ii) 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; and
                                            (iii) 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.
                                            Between the Effective Date
                                             and the retirement of the
                                             Participants' duplicative
                                             systems, each Participant,
                                             to the extent practicable,
                                             will attempt to minimize
                                             changes to those
                                             duplicative systems.
------------------------------------------------------------------------
  Elimination (including any Phase-Out) of Relevant Existing Rules and
                                 Systems
------------------------------------------------------------------------
After each Participant completes the     Upon the SEC's approval of
 above analysis of its rules and          relevant rule changes, each
 systems, each Participant will analyze   Participant will implement
 the most appropriate and expeditious     such timeline. One
 timeline and manner for eliminating      consideration in the
 such rules and systems.                  development of these timelines
                                          will be when the quality of
                                          CAT Data will be sufficient to
                                          meet the surveillance needs of
                                          the Participant (i.e., to
                                          sufficiently replace current
                                          reporting data) before
                                          existing rules and systems can
                                          be eliminated.
------------------------------------------------------------------------

     
---------------------------------------------------------------------------

    \3915\ The systems and rules identified for retirement (in full 
or in part) include: FINRA's OATS Rules (7400 Series), the rules of 
other Participants that incorporate FINRA's OATS requirements (e.g. 
NASDAQ Rule 7000A Series, BX Rule 6950 Series, PHLX Rule 3400 
Series, NYSE Rule 7400 Series, NYSE Arca Equities Rule 7400 Series, 
and NYSE MKT Rule 7400 Series), COATS and associated rules, NYSE 
Rule 410(b), PHLX Rule 1022, CBOE Rule 8.9, EBS and associated 
rules, C2 Rule 8.7, and CHX BrokerPlex reporting (Rule 5).
    \3916\ See SEC Rule 613--Consolidated Audit Trail (CAT) 
Preliminary EBS-CAT Gap Analysis, available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p450537.pdf.
    \3917\ See FIF CAT WG: Preliminary Large Trader Rule (Rule 13h-
1)--CAT (Rule 613) Gap Analysis (Feb. 11, 2014), available at 
https://fif.com/fif-working-groups/consolidated-audit-trail/member-resources/current-documents?download=1221:february-11-2014-fif-cat-wg-preliminary-large-trader-rule-rule-13h-1-cat-rule-613-gap-analysis&start=35.
---------------------------------------------------------------------------

Order Audit Trail System (``OATS'')

    The OATS Rules impose obligations on FINRA members 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 relating to 
OTC equity securities \3918\ and NMS Securities.\3919\ OATS captures 
this order information and integrates it with quote and transaction 
information to create a time-sequenced record of orders, quotes, and 
transactions. This information is then used by FINRA staff to 
conduct surveillance and investigations of member firms for 
potential violations of FINRA rules and federal securities laws. In 
general, the OATS Rules apply to any FINRA member that is a 
``Reporting Member,'' which is defined in Rule 7410 as ``a member 
that receives or originates an order and has an obligation to record 
and report information under Rules 7440 and 7450.''
---------------------------------------------------------------------------

    \3918\ See FINRA Rule 7410(l).
    \3919\ Other SROs have rules requiring their members to report 
information pursuant to the OATS Rules. See, e.g., NYSE Rule 7400 
Series; NASDAQ Rule 7400 Series.

---------------------------------------------------------------------------

[[Page 85011]]

    Although FINRA is committed to retiring OATS in as efficient and 
timely a manner as practicable, its ability to retire OATS is 
dependent on a number of events. Most importantly, before OATS can 
be retired, the Central Repository must contain CAT Data sufficient 
to ensure that FINRA can effectively conduct surveillance and 
investigations of its members for potential violations of FINRA 
rules and federal laws and regulations, which includes ensuring that 
the CAT Data is complete and accurate. Consequently, one of the 
first steps taken by the Participants to address the elimination of 
OATS was an analysis of gaps between the informational requirements 
of SEC Rule 613 and current OATS recording and reporting rules. In 
particular, SEC Rule 613(c)(5) and (6) require reporting of data 
only for each NMS Security that is (a) registered or listed for 
trading on a national securities exchange; (b) or admitted to 
unlisted trading privileges on such exchange; or (c) for which 
reports are required to be submitted to the national securities 
association. SEC Rule 613(i) requires the Participants to provide to 
the Commission within six months after the Effective Date a document 
outlining how the Participants could incorporate into the 
consolidated audit trail information with respect to equity 
securities that are not NMS Securities (``OTC Equity Securities'') 
and debt securities (and Primary Market Transactions in such 
securities). Even though SEC Rule 613 does not require reporting of 
OTC Equity Securities, the Participants have agreed to expand the 
reporting requirements to include OTC Equity Securities to 
facilitate the elimination of OATS.\3920\
---------------------------------------------------------------------------

    \3920\ This expansion of the CAT reporting requirements to OTC 
Equity Securities was generally supported by members of the broker-
dealer industry and was discussed with the DAG on July 24, 2013.
---------------------------------------------------------------------------

    Next, the Participants performed a detailed analysis of the 
current OATS requirements and the specific reporting obligations 
under SEC Rule 613 and concluded that there are 42 data elements 
found in both OATS and SEC Rule 613; however, there are 33 data 
elements currently captured in OATS that are not specified in SEC 
Rule 613.\3921\ The Participants believe it is appropriate to 
incorporate data elements into the Central Repository that are 
necessary to retire OATS and the OATS Rules. The Participants 
believe that these additional data elements will increase the 
likelihood that the Central Repository will include sufficient order 
information to ensure FINRA can continue to perform its surveillance 
with CAT Data rather than OATS data and can, thus, more quickly 
eliminate OATS and the OATS Rules.
---------------------------------------------------------------------------

    \3921\ SEC Rule 613(c)(7) lists the minimum order information 
that must be reported to the CAT and specifies the information that 
must be included in the CAT NMS Plan. The Commission noted in the 
Adopting Release that ``the SROs are not prohibited from proposing 
additional data elements not specified in Rule 613 if the SROs 
believe such data elements would further, or more efficiently, 
facilitate the requirements of [SEC Rule 613].'' Adopting Release at 
45750.
---------------------------------------------------------------------------

    The purpose of OATS is to collect data to be used by FINRA staff 
to conduct surveillance and investigations of member firms for 
potential violations of FINRA rules and federal securities laws and 
regulations. SEC Rule 613 requires the Participants to include in 
the CAT NMS Plan a requirement that all Industry Members report 
information to the Central Repository within three years after the 
Effective Date. Consistent with this provision, under the terms of 
Sections 6.4 and 6.7 of the CAT NMS Plan, some Reporting Members 
will not be reporting information to the Central Repository until 
three years after the Effective Date. Because FINRA must continue to 
perform its surveillance obligations without interruption, OATS 
cannot be entirely eliminated until all FINRA members who currently 
report to OATS are reporting CAT Data to the Central Repository. 
However, FINRA will monitor its ability to integrate CAT Data with 
OATS data to determine whether it can continue to perform its 
surveillance obligations. If it is practicable to integrate the data 
in a way that ensures no interruption in FINRA's surveillance 
capabilities, FINRA will consider exempting firms from the OATS 
Rules provided they report data to the Central Repository pursuant 
to the CAT NMS Plan and any implementing rules.
    FINRA's ability to eliminate OATS reporting obligations is 
dependent upon the ability of the Plan Processor and FINRA to work 
together to integrate CAT Data with the data collected by OATS. 
FINRA is committed to working diligently with the Plan Processor to 
ensure this process occurs in a timely manner; however, it is 
anticipated that Reporting Members will have to report to both OATS 
and the Central Repository for some period of time until FINRA can 
verify that the data into the Central Repository is of sufficient 
quality for surveillance purposes and that all reporting 
requirements meet the established steady state Error Rates set forth 
in Section A.3(b). Once this is verified, FINRA's goal is to 
minimize the dual-reporting requirement.
    Finally, the Participants note that, pursuant to Section 19 of 
the Exchange Act, the amendment or elimination of the OATS Rules can 
only be done with Commission approval. Approval of any such filings 
is dependent upon a number of factors, including public notice and 
comment and required findings by the Commission before it can 
approve any amendments; therefore, FINRA cannot speculate how long 
this process may ultimately take.

Objective Milestones to Assess Progress (SEC Rule 613(a)(1)(x))

    As required by SEC Rule 613(a)(1)(x), this section sets forth a 
series of detailed objective milestones, with [projected] required 
completion dates, toward implementation of the consolidated audit 
trail.

[ssquf] Publication and Implementation of the Methods for Providing 
Information to the Customer-ID Database
---------------------------------------------------------------------------

    \3922\ Small broker-dealers are defined SEC Rule 0-10(c).

------------------------------------------------------------------------
               Milestone                   [Projected] completion date
------------------------------------------------------------------------
                       Selection of Plan Processor
------------------------------------------------------------------------
Participants jointly select the Initial  No later than 2 months after
 Plan Processor pursuant to the process   Effective Date
 set forth in Article V of the CAT NMS
 Plan.
------------------------------------------------------------------------
       Industry Members (other than Small Industry Members \3922\)
------------------------------------------------------------------------
Plan Processor begins developing the     No later than 15 months before
 procedures, connectivity requirements    Industry Members (other than
 and Technical Specifications for         Small Industry Members) are
 Industry Members to report Customer      required to begin reporting
 Account Information and Customer         data to the Central Repository
 Identifying Information to the Central
 Repository.
Plan Processor publishes iterative       As needed before publishing the
 drafts of the procedures, connectivity   final documents
 requirements and Technical
 Specifications for Industry Members to
 Report Customer Account Information
 and Customer Identifying Information
 to the Central Repository.
Plan Processor publishes the             No later than 6 months before
 procedures, connectivity requirements    Industry Members (other than
 and Technical Specifications for         Small Industry Members) are
 Industry Members to report Customer      required to begin reporting
 Account Information and Customer         data to the Central Repository
 Identifying Information to the Central
 Repository.
Industry Members (other than Small       No later than 3 months before
 Industry Members) begin connectivity     Industry Members (other than
 and acceptance testing with the          Small Industry Members) are
 Central Repository.                      required to begin reporting
                                          data to the Central Repository

[[Page 85012]]

 
Industry Members (other than Small       No later than 1 month before
 Industry Members) begin reporting        Industry Members (other than
 customer/institutional/firm account      Small Industry Members) are
 information to the Central Repository    required to begin reporting
 for processing.                          data to the Central Repository
------------------------------------------------------------------------
                         Small Industry Members
------------------------------------------------------------------------
Small Industry Members begin             No later than 3 months before
 connectivity and acceptance testing      Small Industry Members are
 with the Central Repository.             required to begin reporting
                                          data to the Central Repository
Small Industry Members begin reporting   No later than 1 month before
 customer/institutional/firm account      Small Industry Members are
 information to the Central Repository    required to begin reporting
 for processing.                          data to the Central Repository
------------------------------------------------------------------------

[ssquf] Submission of Order and MM Quote Data to Central Repository

------------------------------------------------------------------------
               Milestone                   [Projected] completion date
------------------------------------------------------------------------
                              Participants
------------------------------------------------------------------------
Plan Processor begins developing         No later than 10 months before
 Technical Specification(s) for           Participants are required to
 Participant submission of order and MM   begin reporting data to the
 Quote data.                              Central Repository
Plan Processor publishes iterative       As needed before publishing of
 drafts of Technical Specification(s).    the final document
Plan Processor publishes Technical       No later than 6 months before
 Specification(s) for Participant         Participants are required to
 submission of order and MM Quote data.   begin reporting data to the
                                          Central Repository
Plan Processor begins connectivity       No later than 3 months before
 testing and accepting order and MM       Participants are required to
 Quote data from Participants for         begin reporting data to the
 testing purposes.                        Central Repository
Plan Processor plans specific testing    No later than [Beginning] 3
 dates for Participant testing of order   months before Participants are
 and MM Quote submission.                 required to begin reporting
                                          data to the Central Repository
------------------------------------------------------------------------
          Industry Members (other than Small Industry Members)
------------------------------------------------------------------------
Plan Processor begins developing         No later than 15 months before
 Technical Specification(s) for           Industry Members (other than
 Industry Members submission of order     Small Industry Members) are
 data.                                    required to begin reporting
                                          data to the Central Repository
Plan Processor publishes iterative       As needed before publishing of
 drafts of Technical Specification(s).    the final document
Plan Processor publishes Technical       No later than 1 year before
 Specification(s) for Industry Member     Industry Members (other than
 submission of order data.                Small Industry Members) are
                                          required to begin reporting
                                          data to the Central Repository
Participant exchanges that support       No later than 6 months before
 options MM quoting publish               Industry Members (other than
 specifications for adding Quote Sent     Small Industry Members) are
 time to Quoting APIs.                    required to begin reporting
                                          data to the Central Repository
Plan Processor makes the testing         No later than 6 months before
 environment available on a voluntary     Industry Members (other than
 basis and begins connectivity testing    Small Industry Members) are
 and accepting order data from Industry   required to begin reporting
 Members (other than Small Industry       data to the Central Repository
 Members) for testing purposes.
Plan Processor and Industry Members      No later than [Beginning] 3
 begin coordinated and structured         months before Industry Members
 [plans specific testing dates for        (other than Small Industry
 Industry Members (other than Small       Members) are required to begin
 Industry Members)] testing of order      reporting data to the Central
 submission.                              Repository
Participant exchanges that support       No later than 1 month before
 options MM quoting begin accepting       Industry Members (other than
 Quote Sent time on Quotes.               Small Industry Members) are
                                          required to begin reporting
                                          data to the Central Repository
------------------------------------------------------------------------
                         Small Industry Members
------------------------------------------------------------------------
Plan Processor makes the testing         No later than 6 months before
 environment available on a voluntary     Small Industry Members are
 basis and begins connectivity testing    required to begin reporting
 and accepting order data from Small      data to the Central Repository
 Industry Members for testing purposes.
Plan Processor and Small Industry        No later than [Beginning] 3
 Members begin coordinated and            months before Small Industry
 structured [Plan Processor plans         Members are required to begin
 specific testing dates for Small         reporting data to the Central
 Industry Members] testing of order       Repository
 submissions.
------------------------------------------------------------------------

[ssquf] Linkage of Lifecycle of Order Events

------------------------------------------------------------------------
               Milestone                   [Projected] completion date
------------------------------------------------------------------------
                              Participants
------------------------------------------------------------------------
Using order and MM Quote data submitted  No later than 3 months before
 during planned testing, Plan Processor   Participants are required to
 creates linkages of the lifecycle of     begin reporting data to the
 order events based on the received       Central Repository
 data.

[[Page 85013]]

 
Participants must synchronize Business   No later than 4 months after
 Clocks in accordance with Section 6.8    effectiveness of the CAT NMS
 of the CAT NMS Plan.                     Plan
------------------------------------------------------------------------
          Industry Members (other than Small Industry Members)
------------------------------------------------------------------------
Using order and MM Quote data submitted  No later than 6 months before
 during planned testing, Plan Processor   Industry Members (other than
 creates linkages of the lifecycle of     Small Industry Members) are
 order events based on the received       required to begin reporting
 data.                                    data to the Central Repository
Industry Members must synchronize        No later than 4 months after
 Business Clocks in accordance with       effectiveness of the CAT NMS
 Section 6.8 of the CAT NMS Plan.         Plan
------------------------------------------------------------------------
                         Small Industry Members
------------------------------------------------------------------------
Using order and MM Quote data submitted  No later than 6 months before
 during planned testing, Plan Processor   Small Industry Members are
 creates linkages of the lifecycle of     required to begin reporting
 order events based on the received       data to the Central Repository
 data.
Industry Members must synchronize        No later than 4 months after
 Business Clocks in accordance with       effectiveness of the CAT NMS
 Section 6.8 of the CAT NMS Plan.         Plan
------------------------------------------------------------------------

[ssquf] Access to the Central Repository for Regulators

------------------------------------------------------------------------
               Milestone                   [Projected] completion date
------------------------------------------------------------------------
Plan Processor publishes a draft         No later than 6 months before
 document detailing methods of access     Participants are required to
 to the Central Repository for            begin reporting data to the
 regulators.                              Central Repository
Plan Processor publishes a finalized     No later than 1 month before
 document detailing methods of access     Participants are required to
 to the Central Repository for            begin reporting data to the
 regulators, including any relevant       Central Repository
 APIs, GUI descriptions, etc. that will
 be supplied for access.
Plan Processor provides (1) test         No later than 1 month before
 information, either from Participant     Participants are required to
 testing or from other test data, for     begin reporting data to the
 regulators to test use of the Central    Central Repository
 Repository and (2) regulators
 connectivity to the Central Repository
 test environment and production
 environments.
Plan Processor provides regulators       No later than 6 months before
 access to test data for Industry         Industry Members (other than
 Members (other than Small Industry       Small Industry Members) are
 Members).                                required to begin reporting
                                          data to the Central Repository
Plan Processor provides regulators       No later than 6 months before
 access to test data for Small Industry   Small Industry Members are
 Members.                                 required to begin reporting
                                          data to the Central Repository
------------------------------------------------------------------------

[ssquf] Integration of Other Data (``Other Data'' includes, but is not 
limited to, SIP quote and trade data, OCC data, trade and quote 
information from Participants and reference data)

------------------------------------------------------------------------
               Milestone                   [Projected] completion date
------------------------------------------------------------------------
Operating Committee finalizes Other      No later than 10 months before
 Data requirements.                       Participants are required to
                                          begin reporting data to the
                                          Central Repository
Plan Processor determines methods and    No later than 3 months before
 requirements for each additional data    Participants are required to
 source and publish applicable            begin reporting data to the
 Technical Specifications, if required.   Central Repository
Plan Processor begins testing with       No later than 1 month before
 Other Data sources.                      Participants are required to
                                          begin reporting data to the
                                          Central Repository
Plan Processor begins accepting Other    No later than [C]concurrently
 Data sources.                            when Participants report to
                                          the Central Repository
------------------------------------------------------------------------

    Process Followed to Develop the NMS Plan: These considerations 
require the CAT NMS Plan to discuss: (i) the views of the 
Participants' Industry Members and other appropriate parties 
regarding the creation, implementation, and maintenance of the CAT; 
and (ii) the alternative approaches to creating, implementing, and 
maintaining the CAT considered and rejected by the Participants.

11. Process by Which Participants Solicited Views of Members and Other 
Appropriate Parties Regarding Creation, Implementation, and Maintenance 
of CAT; Summary of Views; and How Sponsors Took Views Into Account in 
Preparing NMS Plan (SEC Rule 613(a)(1)(xi))

[ssquf] Process Used to Solicit Views:

    When the Participants first began creating a CAT pursuant to SEC 
Rule 613, the Participants developed the following guiding 
principles (the ``Guiding Principles''):
    i. The CAT must meet the specific requirements of SEC Rule 613 
and achieve the primary goal of creating a single, comprehensive 
audit trail to enhance regulators' ability to surveil the U.S. 
markets in an effective and efficient way.
    ii. The reporting requirements and technology infrastructure 
developed must be adaptable to changing market structures and

[[Page 85014]]

reflective of trading practices, as well as scalable to increasing 
market volumes.
    iii. The costs of developing, implementing, and operating the 
CAT should be minimized to the extent possible. To this end, 
existing reporting structures and technology interfaces will be 
utilized where practicable.
    iv. Industry input is a critical component in the creation of 
the CAT. The Participants will consider industry feedback before 
decisions are made with respect to reporting requirements and cost 
allocation models.
    The Participants explicitly recognized in the Guiding Principles 
that meaningful input by the industry was integral to the successful 
creation and implementation of the CAT, and as outlined below, the 
Participants have taken numerous steps throughout this process to 
ensure the industry and the public have a voice in the process.

12. General Industry Solicitation

    SEC Rule 613 was published in the Federal Register on August 1, 
2012, and the following month, the Participants launched the CAT NMS 
Plan Website, which includes a dedicated email address for firms or 
the public to submit views on any aspect of the CAT. The CAT NMS 
Plan Website has been used as a means to communicate information to 
the industry and the public at large since that time. Also beginning 
in September 2012, the Participants hosted several events intended 
to solicit industry input regarding the CAT NMS Plan. A summary of 
the events is provided below: \3923\
---------------------------------------------------------------------------

    \3923\ These events are also described on the CAT NMS Plan 
Website at www.catnmsplan.com. See SEC Rule 613: Consolidated Audit 
Trail (CAT), Past Events and Announcements (last updated Dec. 10, 
2014), available at http://catnmsplan.com/PastEvents/.

CAT Industry Call (September 19, 2012). The Participants provided an 
overview of SEC Rule 613, the steps the Participants were taking to 
develop a CAT NMS Plan as required by SEC Rule 613, and how the 
Participants planned to solicit industry comments and feedback on 
---------------------------------------------------------------------------
key implementation issues.

CAT Industry Events (October 2012). The Participants provided an 
overview of SEC Rule 613 and the steps the Participants were taking 
to develop an NMS Plan as required by SEC Rule 613. The events 
included an open Q & A and feedback session so that Industry Members 
could ask questions of the Participants and share feedback on key 
implementation issues. Two identical sessions were held on October 
15, 2012 from 2:00 p.m. to 4:00 p.m. and on October 16, 2012 from 
10:00 a.m. to 12:00 p.m. A total of 89 Industry Members attended the 
October 15 event in person, and a total of 162 Industry Members 
attended it by phone. A total of 130 Industry Members attended the 
October 16 event in person, and a total of 48 Industry Members 
attended it by phone.
CAT Industry Call and WebEx (November 29, 2012). The Participants 
provided an update on CAT NMS Plan development efforts including the 
process and timeline for issuing the RFP to solicit Bids to build 
and operate the CAT.
CAT Industry Events (February 27, 2014 and April 9, 2014). During 
these two events, the Participants provided an overview of the 
latest progress on the RFP process and the overall development of 
the NMS Plan. A total of 120 Industry Members attended the February 
event in person, and a total of 123 Industry Members attended it by 
phone. A total of 46 Industry Members attended the April event in 
person, and a total of 76 Industry Members attended it by phone.
CAT Cost Study Webinars (June 25, 2014 and July 9, 2014). The 
Participants hosted two Webinars to review and answer questions 
related to the Reporter Cost Study. There were approximately 100 to 
120 Industry Members on each call.
CAT Industry Call and WebEx (December 10, 2014). The Participants 
provided an update on CAT NMS Plan development efforts, including 
filing of the CAT NMS Plan on September 30, 2014, the development of 
a funding model, and the PPR, which documents additional 
requirements for the CAT.

    For the above events, documentation was developed and presented 
to attendees, as well as posted publicly on the CAT NMS Plan 
Website.
    In addition to the above events, some Participants individually 
attended or participated in additional industry events, such as 
SIFMA conferences and FIF working groups, where they provided 
updates on the status of CAT NMS Plan development and discussed 
areas of expected CAT functionality.
    The Participants received general industry feedback from broker-
dealers and software vendors.\3924\ The Participants reviewed such 
feedback in detail, and addressed as appropriate while developing 
the RFP.
---------------------------------------------------------------------------

    \3924\ See generally Industry Feedback on the Consolidated Audit 
Trail (last updated Feb. 17, 2015), available at http://catnmsplan.com/industryFeedback/.
---------------------------------------------------------------------------

    The Participants also received industry feedback in response to 
solicitations by the Participants for industry viewpoints as 
follows:

Proposed RFP Concepts Document (published December 5, 2012, updated 
January 16, 2013). The Participants published via the CAT NMS Plan 
Website this document to solicit feedback on the feasibility and 
cost of implementing the CAT reporting requirements being considered 
by the Participants. Feedback was received from seven organizations, 
including software vendors, industry associations and broker-
dealers, and the Participants discussed and addressed the feedback 
as appropriate in the final RFP document.
Representative Order Scenarios Solicitation for Feedback (February 
1, 2013). The Participants solicited feedback via the CAT NMS Plan 
Website on potential CAT reporting requirements to facilitate the 
reporting of representative orders. Approximately 30 responses were 
received.
CAT Industry Solicitation for Feedback Concerning Selected Topics 
Related to NMS Plan (April 22, 2013). The Participants solicited 
feedback via the CAT NMS Plan Website on four components of the CAT 
NMS Plan: (1) Primary Market Transactions; (2) Advisory Committee; 
(3) Time Stamp Requirement; and (4) Clock Synchronization. 
Approximately 80 Industry Members provided responses. FIF, SIFMA, 
and Thomson Reuters submitted detailed responses to the request for 
comments.
CAT Industry Solicitation for Feedback Concerning Selected Topics 
Related to NMS Plan (June 2013). The Participants solicited feedback 
via the CAT NMS Plan Website concerning Customer identifiers, 
Customer information, CAT-Reporter-IDs, CAT-Order-IDs, CAT intra-
firm order linkages, CAT inter-firm order linkages, broker-dealer 
CAT order-to-exchange order linkages, data transmission, and error 
correction.
CAT Industry Feedback on Clock Drift and Time Stamp Issues 
(September 2013). The Participants solicited feedback via the DAG 
concerning the implementation impact associated with a 50 
millisecond clock drift requirement for electronic orders and 
executions.
Cost Survey on CAT Reporting of Options Market Maker Quotes 
(November 2013). The Participants solicited feedback via the DAG 
concerning the implementation impact and costs associated with 
reporting of quotes by options market makers to the Central 
Repository.
Cost Estimates for CAT Exemptive Relief (December 2014). The 
Participants solicited feedback via the DAG regarding minimum 
additional costs to be expected by Industry Members in the absence 
of the requested Exemptive Relief.
Cost Estimate for Adding Primary Market Transactions in CAT 
(February 2015). The Participants solicited feedback via the DAG 
concerning the feasibility and costs of broker-dealers to report to 
the Central Repository information regarding primary market 
transactions in NMS securities.
Clock Offset Survey (February 2015). The Participants solicited 
further feedback via the DAG concerning current broker-dealer clock 
synchronization practices and expected costs associated with 
complying with a 50ms, 5ms, 1ms, and 100 microsecond clock drift 
requirement for electronic orders and executions.

    Feedback on these topics was received primarily through 
discussion during meetings of the DAG.

13. The Development Advisory Group (DAG)

    In furtherance of Guiding Principle (iv) above, the Participants 
solicited members for the DAG in February 2013 to further facilitate 
input from the industry regarding various topics that are critical 
to the success of the CAT NMS Plan. Initially, the DAG consisted of 
10 firms that represented large, medium, and small broker-dealers, 
the Options Clearing Corporation (OCC), a service bureau and three 
industry associations: the Security Traders Association (STA), 
SIFMA, and FIF.
    In March 2014, the Participants invited additional firms to join 
the DAG in an effort to ensure that it reflected a diversity of 
perspectives. At this time, the Participants increased the 
membership of the DAG to include 12 additional firms. As of January 
2015, the DAG consisted of the Participants and Representatives from 
24 firms and industry associations.

[[Page 85015]]

    The DAG has had 49 meetings since April 2013. Topics discussed 
with the DAG have included:

CAT Plan Feedback. The Participants shared draft versions of the CAT 
NMS Plan, including the PPR, as it was being developed with the DAG, 
who provided feedback to the Participants. The Participants reviewed 
and discussed this feedback with the DAG, and incorporated portions 
of it into the CAT NMS Plan.
Options Market Maker Quotes. The DAG discussed the impact of options 
market maker quotes on the industry. A cost analysis was conducted 
by the industry trade associations to analyze the impact of market 
maker quote reporting, as well as adding a ``quote sent'' time stamp 
to messages sent to exchanges by all options market makers The 
Participants included in the Exemptive Request Letters a request for 
exemptive relief related to option market maker quotes given that 
exchanges will be reporting this data to the CAT.
Customer-ID. The DAG discussed the requirements for capturing 
Customer-ID. The Participants proposed a Customer Information 
Approach in which broker-dealers assign a unique Firm Designated ID 
to each Customer and the Plan Processor creates and stores the 
Customer-ID. This concept was supported by the DAG and the 
Participants included in the Exemptive Request Letters a request for 
exemptive relief related to the Customer-ID to reduce the reporting 
on CAT Reporters.
Time Stamp, Clock Synchronization and Clock Drift. The DAG discussed 
time stamps in regards to potential exemptive relief on the time 
stamp requirements for allocations and Manual Order Events. In 
addition, industry clock synchronization processes were discussed as 
well as the feasibility of specific clock drift requirements (e.g., 
50ms), with the DAG and the FIF conducting an industry survey to 
identify the costs and challenges associated with various levels of 
clock synchronization requirements.\3925\ The Participants included 
in the Exemptive Request Letters a request for exemptive relief 
related to manual time stamps.
---------------------------------------------------------------------------

    \3925\ See FIF, Clock Offset Survey Preliminary Report (last 
updated Feb. 17, 2015), available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602479.pdf (the 
``FIF Clock Offset Survey Preliminary Report'').
---------------------------------------------------------------------------

Exemptive Request Letters. In addition to the specific areas 
detailed above (Options Market Maker Quotes, Customer-ID, and Time 
Stamp, Clock Synchronization, and Clock Drift), the DAG provided 
input and feedback on draft versions of the Exemptive Request 
Letters prior to their filing with the SEC, including cost estimates 
to firms and the Industry as a whole should the exemptive requests 
not be granted. This feedback was discussed by the Participants and 
the DAG and incorporated into the Exemptive Request Letters. The DAG 
also provided input and feedback on the Exemptive Request Letters 
covering Linking Allocations to Executions and Account Effective 
Date submitted on April 3, 2015 and September 2, 2015 respectively.
Primary Markets. At the request of the Participants, the DAG 
discussed with the Participants the feasibility, costs, and benefits 
associated with reporting allocations of NMS Securities in Primary 
Market Transactions. The DAG further provided estimated costs 
associated with reporting allocations of NMS Securities in Primary 
Market Transactions at the top-account and sub-account levels, which 
was incorporated into the CAT NMS Plan.\3926\
---------------------------------------------------------------------------

    \3926\ See DAG, Cost Estimate for Adding Primary Market 
Transactions into CAT (Feb. 17, 2015), available at http://catnmsplan.com/industryFeedback/P602480.
---------------------------------------------------------------------------

Order Handling Scenarios. The DAG discussed potential CAT reporting 
requirements for certain order handling scenarios and additional 
corresponding sub-scenarios (e.g., riskless principal order and sub-
scenarios involving post-execution print-for-print matching, pre-
execution one-to-one matching, pre-execution many-to-one matching, 
complex options and auctions) An Industry Member and Participant 
working group was established to discuss order handling scenarios in 
more detail.
Error Handling and Correction Process. The DAG discussed error 
handling and correction process. Industry Members of the DAG 
provided recommendations for making the CAT error correction 
processes more efficient. The Participants have reviewed and 
analyzed these recommended solutions for error correction processes 
and incorporated them in the requirements for the Plan Processor.
Elimination of Systems. The DAG discussed the gaps between CAT and 
both OATS and EBS. An OATS-EBS-CAT gap analysis was developed and 
published on the CAT NMS Plan Website to identify commonalities and 
redundancies between the systems and the functionality of the CAT. 
Additionally, gaps between LTID and the CAT were also developed. 
Additional examples of systems and rules being analyzed include, but 
are not limited to: CBOE Rule 8.9, PHLX Rule 1022, COATS, Equity 
Cleared Reports, LOPR, and FINRA Rule 4560.
Cost and Funding of the CAT. The DAG helped to develop the cost 
study that was distributed to Industry Members. Additionally, the 
Participants have discussed with the DAG the funding principles for 
the CAT and potential funding models.

    In addition, a subgroup of the DAG has met six times to discuss 
equity and option order handling scenarios, order types, how and 
whether the orders are currently reported and how linkages could be 
created for the orders within the CAT.

[ssquf] Summary of Views Expressed by Members and Other Parties and How 
Participants Took Those Views Into Account in Preparing the CAT NMS 
Plan

    The various perspectives of Industry Members and other 
appropriate parties informed the Participants' consideration of 
operational and technical issues during the development of the CAT 
NMS Plan. In addition to the regular DAG meetings and special 
industry calls and events noted above, the Participants conducted 
multiple group working sessions to discuss the industry's unique 
perspectives on CAT-related operational and technical issues. These 
sessions included discussions of options and equity order scenarios 
and the RFP specifications and requirements.
    Industry feedback was provided to Participants through gap 
analyses, cost studies, comment letters and active discussion in DAG 
meetings and industry outreach events. Specific topics on which the 
industry provided input include:
    Overall Timeline. Industry Members expressed a concern that the 
original timeline for implementation of the CAT is significantly 
shorter than the timeline for other large scale requirements such as 
Large Trader Reporting. The industry requested that, in developing 
the overall timeline for development and implementation of the CAT 
NMS Plan, the Participants account for additional industry comment/
input on specifications in the official timeline and discussed risk 
mitigation strategies for implementation of the Central Repository.
    Request for proposal. The Participants provided relevant 
excerpts of the RFP to DAG members for review and input. These 
sections were discussed by the Participants, and appropriate 
feedback was incorporated prior to publishing the RFP.
    Options Market Maker Quotes. Industry Members expressed the view 
that requiring market makers to provide quote information to the CAT 
will be duplicative of information already being submitted to the 
CAT by the exchanges. Participants worked closely with DAG members 
to develop an alternative approach that will meet the goals of SEC 
Rule 613, and which is detailed in the Exemptive Request Letter that 
the Participants submitted to the Commission related to manual time 
stamps.
    Customer-ID. Extensive DAG discussions reviewed the Customer-ID 
requirements in SEC Rule 613. The industry expressed significant 
concern that the complexities of adding a unique CAT customer 
identifier to order reporting would introduce significant costs and 
effort related to the system modifications and business process 
changes broker-dealers would face in order to implement this 
requirement of SEC Rule 613. Working with Industry Members, the 
Participants proposed a Customer Information Approach in which 
broker-dealers would assign a unique Firm Designated ID to each 
Customer which the Plan Processor would retain. Additional feedback 
was provided by the DAG for the use of the Legal Entity Identifier 
(``LEI'') as a valid unique customer identifier as an alternative to 
Tax Identification Numbers to identify non-natural person accounts. 
This Customer Information Approach is included in the Exemptive 
Request Letters that the Participants submitted to the Commission.
    Error Correction. DAG members discussed the criticality of CAT 
Data quality to market surveillance and reconstruction, as well as 
the need for a robust process for the timely identification and 
correction of errors. Industry Members provided feedback on

[[Page 85016]]

error correction objectives and processes, including the importance 
of those data errors not causing linkage breaks. This feedback was 
incorporated into the RFP and relevant portions of the PPR.
    Industry Members also suggested that CAT Reporters be provided 
access to their submitted data. Participants discussed the data 
security and cost considerations of this request and determined that 
it was not a cost-effective requirement for the CAT.
    Governance of the CAT. Industry Members provided detailed 
recommendation for the integration of Industry Members into the 
governance of the CAT, including an expansion of the proposed 
Advisory Committee to include industry associations such as FIF and 
SIFMA. Industry Members also recommended a three-year term with one-
third turnover per year is recommended to provide improved 
continuity given the complexity of CAT processing.
    The Participants have discussed CAT governance considerations 
with the DAG at several meetings. The Participants incorporated 
industry feedback into the CAT NMS Plan to the extent possible in 
light of the regulatory responsibilities placed solely upon the 
Participants under the provisions of SEC Rule 613. The proposed 
structure and composition of the Advisory Committee in Article 4.12 
was discussed with the DAG in advance of the submission of this 
Plan.
    Role of Operating Committee. The Operating Committee, consisting 
of one voting member representing each Participant, is structured to 
ensure fair and equal representation of the Participants in 
furtherance of SEC Rule 613(b)(1). The overarching role of the 
Operating Committee is to manage the Company and the CAT System 
similar to the manner in which a board of directors manages the 
business and affairs of a corporation. The primary and more specific 
role of the Operating Committee is to make all policy decisions on 
behalf of the Company in furtherance of the functions and objectives 
of the Company under the Exchange Act, any rules thereunder, 
including SEC Rule 613, and the CAT NMS Plan. In connection with its 
role, the Operating Committee has the right, power and authority to 
exercise all of the powers of the Company, to make all decisions, 
and to authorize or otherwise approve all actions by the Company, 
except as otherwise provided by applicable law or as otherwise 
provided in the CAT NMS Plan (Section 4.1 of the CAT NMS Plan). The 
Operating Committee also monitors, supervises and oversees the 
actions of the Plan Processor, the Chief Compliance Officer and the 
Chief Information Security Officer, all of whom are involved with 
the CAT System on a more detailed and day-to-day basis.
    The decisions made by the Operating Committee include matters 
that are typically considered ordinary course for a governing body 
like a board of directors (e.g., approval of compensation of the 
Chief Compliance Officer (Section 6.2(a)(iv) the CAT NMS Plan) and 
approval to hold an executive session of the Operating Committee 
(Section 4.3(a)(v) of the CAT NMS Plan)), in addition to matters 
that are specific to the functioning, management and financing of 
the CAT System (e.g., changes to Technical Specifications (Sections 
4.3(b)(vi)-(vii) of the CAT NMS Plan) and significant changes to the 
CAT System (Section 4.3(b)(v) of the CAT NMS Plan)).
    The CAT NMS Plan sets forth a structure for decisions that the 
Operating Committee may make after approval of the CAT NMS Plan by 
the SEC. These decisions relate to events that may occur in the 
future as a result of the normal operation of any business (e.g., 
additional capital contributions (Section 3.8 of the CAT NMS Plan), 
approval of a loan to the Company (Section 3.9 of the CAT NMS Plan)) 
or that may occur due to the operation of the CAT System (e.g., the 
amount of the Participation Fee to be paid by a prospective 
Participant (Section 3.3(a) of the CAT NMS Plan)). These decisions 
cannot be made at the time of approval of the CAT NMS Plan because 
the Operating Committee will need to make its determination based on 
the facts and circumstances as they exist in the future. For 
example, in determining the appropriate Participation Fee, the 
Operating Committee will apply the factors identified in Section 3.3 
of the CAT NMS Plan (e.g., costs of the Company and previous fees 
paid by other new Participants) to the facts existing at the time 
the prospective Participant is under consideration. Another example 
is the establishment of funding for the Company and fees for 
Participants and Industry Members. Section 11.2 of the CAT NMS Plan 
sets forth factors and principles that the Operating Committee will 
use in determining the funding of the Company. The Operating 
Committee then has the ability to review the annual budget and 
operations and costs of the CAT System to determine the appropriate 
funding and fees at the relevant future time. This approach, which 
sets forth standards at the time the CAT NMS Plan is approved that 
will be applied to future facts and circumstances, provides the 
Operating Committee with guiding principles to aid its decision-
making in the future.
    The Participants also recognize that certain decisions that are 
fundamental and significant to the operation of the Company and the 
CAT System must require the prior approval of the SEC, such as the 
use of new factors in determining a Participation Fee (Section 
3.3(b)(v) of the CAT NMS Plan). In addition, any decision that 
requires an amendment to the CAT NMS Plan, such as termination of a 
Participant (Section 3.7(b) of the CAT NMS Plan), requires prior 
approval of the SEC (Section 12.3 of the CAT NMS Plan).
    The Operating Committee has the authority to delegate 
administrative functions related to the management of the business 
and affairs of the Company to one or more Subcommittees and other 
Persons; however, the CAT NMS Plan expressly states that the 
Operating Committee may not delegate its policy-making functions 
(except to the extent policy-making determinations are already 
delegated as set forth in the CAT NMS Plan, which determinations 
will have been approved by the SEC) (Section 4.1 of the CAT NMS 
Plan). For example, the CAT NMS Plan provides for the formation of a 
Compliance Subcommittee to aid the Chief Compliance Officer in 
performing compliance functions, including (1) the maintenance of 
confidentiality of information submitted to the CAT; (2) the 
timeliness, accuracy and completeness of information; and (3) the 
manner and extent to which each Participant is meeting its 
compliance obligations under SEC Rule 613 and the CAT NMS Plan 
(Section 4.12(b) of the CAT NMS Plan). The Operating Committee also 
has delegated authority to the Plan Processor with respect to the 
normal day-to-day operating function of the Central Repository 
(Section 6.1 of the CAT NMS Plan). Nevertheless, decisions made by 
the Plan Processor that are more significant in nature remain 
subject to approval by the Operating Committee, such as decisions 
related to the implementation of policies and procedures (Section 
6.1(c) of the CAT NMS Plan), appointment of the Chief Compliance 
Officer, Chief Information Officer, and Independent Auditor (Section 
6.1(b) of the CAT NMS Plan), Material System Changes or any system 
changes for regulatory compliance (Sections 6.1(i) and 6.1(j) of the 
CAT NMS Plan). In addition, the Operating Committee will conduct a 
formal review of the Plan Processor's performance under the CAT NMS 
Plan on an annual basis (Section 6.1(n) of the CAT NMS Plan). As to 
Subcommittees that the Operating Committee may form in the future, 
the Participants have determined that the Operating Committee will 
establish a Selection Subcommittee to select a successor Plan 
Processor when the time arises (Section 6.1(t) of the CAT NMS Plan). 
In the future, the Operating Committee will take a similar approach 
when delegating authority by providing Subcommittees or other 
Persons with discretion with respect to administrative functions and 
retaining authority to approve decisions related to policy and other 
significant matters of the Company and the CAT System.
    The role of the Operating Committee, including the delegation of 
its authority to Subcommittees and other limited Persons, as 
provided in the CAT NMS Plan is similar to that of other national 
market system plans, including the Limited Liability Company 
Agreement of the Options Price Reporting Authority, LLC. It also is 
based on rules and regulations under the Exchange Act, and general 
principles with respect to the governance of a limited liability 
company. All decisions made by the Operating Committee will be 
governed by the guiding principles of the CAT NMS Plan and SEC Rule 
613.
    Voting Criteria of the Operating Committee: This section 
describes the voting criteria for decisions made by the Operating 
Committee, which consists of a representative for each Participant, 
and by any Subcommittee of the Operating Committee in the management 
and supervision of the business of the Company and the CAT System.
    A Majority Vote (an affirmative vote of at least a majority of 
all members of the Operating Committee or any Subcommittee 
authorized to vote on a particular matter) is the default standard 
for decisions that are typically considered ordinary course matters 
for a governing body like a board of directors or board of managers 
or that address the general governance and function of the

[[Page 85017]]

Operating Committee and its Subcommittees. All actions of the 
Company requiring a vote by the Operating Committee or any 
Subcommittee requires authorization by a Majority Vote except for 
matters specified in certain sections of the CAT NMS Plan described 
below, which matters require either a Supermajority Vote or a 
unanimous vote. As a general matter, the approach adopted by the 
Operating Committee is consistent with the voting criteria of the 
NASDAQ Unlisted Trading Privileges Plan (the ``NASDAQ UTP Plan''), 
the Limited Liability Company Agreement of the Options Price 
Reporting Authority, LLC, the Consolidated Quotation Plan and the 
Consolidated Tape Association Plan.
    A Supermajority Vote (an affirmative vote of at least two-thirds 
of all of the members of the Operating Committee or any Subcommittee 
authorized to vote on a particular matter) is required to authorize 
decisions on matters that are outside ordinary course of business 
and are considered by the Participants to have a direct and 
significant impact on the functioning, management and financing of 
the CAT System. This approach was informed by similar plans (e.g., 
the NASDAQ UTP Plan, which requires a unanimous vote in many similar 
circumstances); however, the CAT NMS Plan has the lower requirement 
of a Supermajority Vote because overuse of the unanimity requirement 
makes management and oversight difficult. This approach takes into 
account concerns expressed by the Participants regarding management 
of the CAT NMS Plan, and is consistent with suggestions in the 
Adopting Release for the Participants to take into account the need 
for efficient and fair operation of the CAT NMS Plan and to consider 
the appropriateness of a unanimity requirement and the possibility 
of a governance requirement other than unanimity, or even 
supermajority approval, for all but the most important decisions.
    The Participants believe that certain decisions that may 
directly impact the functioning and performance of the CAT System 
should be subject to the heightened standard of a Supermajority 
Vote, such as: selection and removal of the Plan Processor and key 
officers; approval of the initial Technical Specifications; approval 
of Material Amendments to the Technical Specifications proposed by 
the Plan Processor; and direct amendments to the Technical 
Specifications by the Operating Committee. In addition, the 
Participants believe the instances in which the Company enters into 
or modifies a Material Contract, incurs debt, makes distributions or 
tax elections or changes fee schedules should be limited, given that 
the Company is intended to operate on a break-even basis. 
Accordingly, those matters should also require the heightened 
standard of a Supermajority Vote.
    A unanimous vote of all Participants is required in only three 
circumstances. First, a decision to obligate Participants to make a 
loan or capital contribution to the Company requires a unanimous 
vote (Section 3.8(a) of the CAT NMS Plan). Requiring Participants to 
provide additional financing to the Company is an event that imposes 
an additional and direct financial burden on each Participant, thus 
it is important that each Participant's approval is obtained. 
Second, a decision by the Participants to dissolve the Company 
requires unanimity (Section 10.1 of the CAT NMS Plan). The 
dissolution of the Company is an extraordinary event that would have 
a direct impact on each Participant's ability to meet its compliance 
requirements so it is critical that each Participant consents to 
this decision. Third, a unanimous vote is required if Participants 
decide to take an action by written consent in lieu of a meeting 
(Section 4.10 of the CAT NMS Plan). In that case, because 
Participants will not have the opportunity to discuss and exchange 
ideas on the matter under consideration, all Participants must sign 
the written consent. This approach is similar to the unanimity 
requirement under the Delaware General Corporation Law for decisions 
made by written consent of the directors of a corporation in lieu of 
a meeting.
    Voting on Behalf of Affiliated Participants: Each Participant 
has one vote on the Operating Committee to permit equal 
representation among all the Participants. Initially, the Operating 
Committee will have 19 Participants. Of the 19 Participants, there 
are five Participants that are part of the Affiliated Participants 
Group and five Participants without any Affiliated Participants. 
Because of the relationship between the respective Affiliated 
Participants and given the large number of Participants on the 
Operating Committee, the Participants believe an efficient and 
effective way of structuring the Operating Committee in order to 
have an orderly and well-functioning committee is to permit but not 
require one individual to serve as a voting member for multiple 
Affiliated Participants. This approach does not change the standard 
rule that each Participant has one vote. This approach provides 
Affiliated Participants with the flexibility to choose whether to 
have one individual represent one or more of the Affiliated 
Participants or to have each of them represented by a separate 
individual. Affiliated Participants may likely vote on a matter 
similarly, and allowing them to choose the same individual as a 
voting member would be a convenient and practical way of having the 
Affiliated Participants' votes cast. Because there is no requirement 
that the representative of multiple Affiliated Participants cast the 
same vote for all represented Participants, there is no practical 
difference between this approach and an approach that mandates a 
separate representative for each Participant. In addition, the 
Participants considered whether this approach would result in less 
participation because of a reduced number of individuals on the 
Operating Committee. If each group of Affiliated Participants were 
to choose one individual to serve as a voting member, there would be 
still be 10 individuals on the Operating Committee, which the 
Participants do not believe would cause less active representation 
or participation or would otherwise lead to unwanted concentration 
on the Operating Committee.
    Affiliated Participant Groups and Participants without 
Affiliations:

1. New York Stock Exchange LLC; NYSE Arca, Inc.; NYSE MKT LLC
2. The NASDAQ Stock Market LLC; NASDAQ OMX BX, Inc.; NASDAQ OMX PHLX 
LLC
3. BATS Exchange, Inc.; BATS Y-Exchange, Inc.; EDGX Exchange, Inc.; 
EDGA Exchange, Inc.
4. Chicago Board Options Exchange, Incorporated; C2 Options 
Exchange, Incorporated
5. International Securities Exchange, LLC; ISE Gemini, LLC
6. National Stock Exchange, Inc.
7. Chicago Stock Exchange, Inc.
8. BOX Options Exchange LLC
9. Miami International Securities Exchange LLC
10. Financial Industry Regulatory Authority, Inc.

    Conflicts of Interest Definition: The Participants arrived at 
the definition of Conflicts of Interest set forth in Article I of 
the CAT NMS Plan based on a review of existing rules and standards 
of securities exchanges, other plans, including the Selection Plan 
as to qualifications of a Voting Senior Officer of a Bidding 
Participant, and general corporate and governance principles.
    Transparency in the Bidding and Selection Process: DAG members 
requested input into the bidding and selection process for the Plan 
Processor, citing the extensive impact of CAT requirements on the 
industry as well as proposed cost for compliance. Specifically, 
Industry Members requested that non-proprietary aspects of the 
responses to the RFP should be available to the public to inform the 
discussion regarding the costs and benefits of various CAT features 
and the technological feasibility of different solutions. 
Participants, working with counsel, determined that such information 
could be appropriately shared with DAG members pursuant to the 
provisions of a non-disclosure agreement (``NDA'') that was 
consistent with the terms of the NDA executed between the 
Participants and the Bidders. After extensive discussion, DAG 
members declined to sign such an NDA. The Participants continued to 
share non-bid specific information and to solicit the views and 
perspective of DAG members as it developed a Plan approach and 
related solutions.
    Time Stamp Granularity and Clock Synchronization Requirement: 
Industry Members recommended a millisecond time stamp for electronic 
order and execution events and a time stamp in seconds for manual 
order handling. Industry Members suggested a grace period of two 
years after the CAT requirements are finalized to allow broker-
dealers sufficient time to meet the millisecond time stamp 
granularity. In addition, Industry Members recommended maintaining 
the current OATS rule of a one second clock drift tolerance for 
electronic order and execution events, citing a significant burden 
to Industry Members to comply with a change to the current one-
second clock drift.\3927\ Participants

[[Page 85018]]

conducted active discussions with Industry Members on this topic, 
and included in the Exemptive Request Letter a request for exemptive 
relief related to time stamp granularity for Manual Order Events.
---------------------------------------------------------------------------

    \3927\ See FIF Clock Offset Survey Preliminary Report.
---------------------------------------------------------------------------

    Equitable Cost and Funding: Industry Members expressed the view 
that any funding mechanism developed by the Participants should 
provide for equitable funding among all market participants, 
including the Participants. The Participants recognized the 
importance of this viewpoint and have incorporated it within the 
guiding principles that were discussed with the Industry.
    Order ID/Linkages: The DAG formed an order scenarios working 
group to discuss approaches to satisfy the order linkage 
requirements of SEC Rule 613. On the topic of allocations, Industry 
Members provided feedback that the order and execution processes are 
handled via front office systems, while allocation processes are 
conducted in the back office. Industry Members expressed the view 
that creating linkages between these systems, which currently 
operate independently, would require extensive reengineering of 
middle and back office processes not just within a broker-dealer but 
across broker-dealers, imposing significant additional costs on the 
industry as a whole. Given the widespread use of average price 
processing accounts, clearing firms, prime brokers and self-clearing 
firm cannot always determine which specific order results in a given 
allocation or allocations. Industry Members worked closely with 
Participants on a proposed alternative approach which the 
Participants submitted to the Commission in the Exemptive Request 
Letters.
    Elimination of Systems and Rules: The elimination of duplicative 
and redundant systems and rules is a critical aspect of the CAT 
development process. Industry DAG members including SIFMA and FIF 
provided broad based and comprehensive insight on the list of 
existing regulatory systems and Participant rules that they deem to 
be duplicative, including, among others, OATS, the EBS reporting 
system, and Large Trader reporting. In addition, FIF provided a gap 
analysis of CAT requirements against Large Trader transactional 
reporting obligations.
    The Participants discussed feedback from the industry in a 
variety of forums: (i) during DAG meetings; (ii) in relevant 
Subcommittee meetings, depending on the topic; and (iii) at two 
multi-day offsite meetings where Representatives of each Participant 
gathered in a series of in-person workshops to discuss the 
requirements of the Plan Processor, both technical and operational. 
This was in addition to numerous video-conference meetings when 
Participants discussed and developed the RFP document incorporating, 
where appropriate, feedback from the industry.

Discuss Reasonable Alternative Approaches that the Participants 
Considered to Create, Implement, and Maintain the CAT (SEC Rule 
613(a)(1)(xii))

    The Participants, working as a consortium, selected the approach 
reflected in the Plan through a detailed analysis of alternatives, 
relying on both internal and external knowledge and expertise to 
collect and evaluate information related to the CAT. For some of the 
requirements of SEC Rule 613, the Participants' analysis indicated 
that the required approach would be unduly burdensome or complex. In 
these cases, the Participants have requested exemption from these 
requirements in the Exemptive Request Letter, which details the 
analysis performed and alternatives considered for these specific 
requirements.
    The Participants leveraged their own extensive experience with 
regulatory, technical and securities issues in formulating, drafting 
and filing the CAT NMS Plan. Specifically, the nineteen Participants 
formed various Subcommittees to focus on specific critical issues 
during the development of the CAT NMS Plan. The Subcommittees 
included:

a Governance Committee, which developed recommendations for 
decision-making protocols and voting criteria critical to the 
development of the CAT NMS Plan, in addition to developing formal 
governance and operating structures for the CAT NMS Plan;
a Technical Committee, which developed the technical scope 
requirements of the CAT, the CAT RFP documents, and the PPR;
an Industry Outreach Committee, which provided recommendations on 
effective methods for soliciting industry input, in addition to 
facilitating industry involvement in CAT-related public events 
\3928\ and development of the CAT NMS Plan and the Exemptive Request 
Letters;
---------------------------------------------------------------------------

    \3928\ A summary of industry outreach events is included in 
Appendix C, General Industry Solicitation.
---------------------------------------------------------------------------

a Press Committee as a Subcommittee of the Industry Outreach 
Committee, which coordinated interactions with the press;
a Cost and Funding Committee, which drafted a framework for 
determining the costs of the CAT, and provided recommendations on 
revenue/funding of the CAT for both initial development costs and 
ongoing costs; and
an Other Products Committee, which is designed to assist the SEC, as 
necessary, when the SEC is determining whether and how other 
products should be added to the CAT.\3929\
---------------------------------------------------------------------------

    \3929\ When adopting the CAT, the Commission directed the 
Commission staff ``to work with the SROs, the CFTC staff, and other 
regulators and market participants to determine how other asset 
classes, such as futures, might be added to the consolidated audit 
trail.'' Adopting Release at 45744-5 n.241.

    Representatives from all Subcommittees met to discuss the 
overall progress of the CAT initiative in the Operating Committee.
    To support the Participants' internal expertise, the 
Participants also engaged outside experts to assist in formulating 
the CAT NMS Plan. Specifically, the Participants engaged the 
consulting firm Deloitte & Touche LLP as a project manager, and 
engaged the law firm Wilmer Cutler Pickering Hale and Dorr LLP to 
serve as legal counsel in drafting the CAT NMS Plan, both of which 
have extensive experience with issues raised by the CAT. 
Additionally, the Participants engaged the services of the public 
relations firm Peppercomm to assist with public relations and press 
engagement in formulating the CAT NMS Plan.
    Furthermore, as discussed in more detail above in Appendix C, 
Process by Which Participants Solicited Views of Members and Other 
Appropriate Parties Regarding Creation, Implementation, and 
Maintenance of CAT; Summary of Views; and How Sponsors Took Views 
Into Account in Preparing NMS Plan, the Participants engaged in 
meaningful dialogue with Industry Members with respect to the 
development of the CAT through the DAG and other industry outreach 
events.
    Using this internal and external expertise, the Participants 
developed a process to identify, evaluate and resolve issues so as 
to finalize the CAT NMS Plan. As discussed above in Appendix C, the 
Participants have, among other things, developed the Selection Plan 
to describe the process for selecting the Plan Processor, created 
and published an RFP, evaluated Bids, and chosen a shortlist of 
Bids. Contemporaneously, the Participants have drafted the Plan set 
forth herein to reflect the recommendations that have resulted from 
the approach and analysis described above.
    For certain technical considerations for the development and 
maintenance of the CAT that do not materially impact cost, required 
functionality or data security, the Participants did not mandate 
specific approaches, but rather chose to consider solutions proposed 
by the Bidders.

[ssquf] Request for Proposal

    The Participants considered multiple alternatives for the best 
approach to gathering the information necessary to determine how to 
create, implement and maintain the CAT, including issuance of a 
Request for Information (``RFI'') and Request for Proposal 
(``RFP''). After due consideration, with a view to meeting the 
demanding deadline set forth in SEC Rule 613, the Participants 
decided to use their expertise to craft an RFP seeking proposals to 
implement the main requirements to successfully build and operate 
the CAT. This approach was designed to solicit imaginative and 
competitive proposals from the private sector as well as to provide 
an adequate amount of insight into the costs associated with 
creating, implementing, and maintaining the CAT.
    To design the RFP process, the Participants consulted with their 
technology subject matter resources to determine technical 
implications and requirements of the CAT and to develop the RFP. 
Based on these requirements, the Participants developed the Proposed 
RFP Concepts Document,\3930\ which identified the high level 
requirements for which potential Bidders would be expected to design 
a solution, ahead of publishing the full RFP on February 26, 2013. 
The Participants received 31 intents to bid, and then hosted a 
Bidder conference on March 8, 2013 to discuss the requirements

[[Page 85019]]

and provide additional context to the industry and potential 
Bidders. Two additional conference calls to discuss additional 
questions on the RFP were held on April 25, 2013 and May 2, 2013. 
The Participants also established an e-mail box through which 
questions on the RFP were received.
---------------------------------------------------------------------------

    \3930\ See supra note 3692.
---------------------------------------------------------------------------

    Ten competitive proposals were submitted on March 21, 2014. Each 
of the ten proposals was carefully reviewed by the Participants, 
including in-person meetings with each of the ten Bidders. Following 
this review, the Bids were reduced to six proposals in accordance 
with the Selection Plan approved by the Commission in February 2014. 
In accordance with the Selection Plan Amendment approved by the 
Commission on June 23, 2015, the Participants asked the Bidders on 
July 14, 2015 to revise their bids to account for the updated 
requirements included in the CAT NMS Plan as filed on February 27, 
2015, as well as to address specific additional questions and 
considerations. As described more fully throughout this Appendix C, 
the proposals offer a variety of solutions for creating, 
implementing and maintaining the CAT.
    As stated above, the Participants received proposals from ten 
Bidders that were deemed qualified, including many from large and 
well-respected information technology firms. The open ended nature 
of the questions contained in the RFP allowed Bidders to provide 
thoughtful and creative responses with regards to all aspects of the 
implementation and the operation of the CAT. The RFP process also 
resulted in the submission of multiple competitively-priced Bids. 
The six Shortlisted Bids remaining under consideration by the 
Participants, inclusive of the initial system build and the first 
five years of maintenance costs, have ranges between $165 million 
and $556 million, and encompass a number of innovative approaches to 
meeting the requirements of SEC Rule 613, such as use of non-
traditional database architectures and cloud-based infrastructure 
solutions.
    The Participants conducted the RFP process and the review of 
Bids pursuant to the Selection Plan approved by the Commission, 
which was designed to mitigate the conflicts of interest associated 
with Participants that are participating in developing the CAT while 
also seeking to become the Plan Processor and to ensure a level 
playing field for all potential Bidders to be considered on a fair 
and equal basis.

[ssquf] Organizational Structure

    The Participants considered various organizational structures of 
the Bidders to assess whether a particular structure would be a 
material factor in the ability of a Bidder to effectively operate as 
the Plan Processor. Of the Bids submitted, three general 
organizational structures for the Plan Processor emerged: (1) 
consortiums or partnerships (i.e., the Plan Processor would consist 
of more than one unaffiliated entity that would operate the CAT); 
(2) single firms (i.e., one entity would be the Plan Processor and 
that entity would operate the CAT as part of its other ongoing 
business operations); and (3) dedicated legal entities (i.e., CAT 
operations would be conducted in a separate legal entity that would 
perform no other business activities). Each type of organizational 
structure has strengths and limitations, but the Participants did 
not find that a particular organizational structure should be a 
material factor in selecting a Bidder. Accordingly the Participants 
have not mandated a specific organizational structure for the Plan 
Processor.

[ssquf] Primary Storage

    The Bidders proposed two methods of primary data storage: 
traditionally-hosted storage architecture, and infrastructure-as-a-
service. Traditionally-hosted storage architecture is a model in 
which an organization would purchase and maintain proprietary 
servers and other hardware to store CAT Data. Infrastructure-as-a-
service is a provisioning model in which an organization outsources 
the equipment used to support operations, including storage, 
hardware, servers and networking components to a third party who 
charges for the service on a usage basis.
    Each data storage method has a number of considerations that the 
Participants will take into account when evaluating each Bidder's 
proposed solution. Such considerations include the maturity, cost, 
complexity, and reliability of the data storage method as used in 
each Bidder's proposal. The Participants are not mandating a 
specific method for primary data storage provided that the data 
storage solution can meet the security, reliability, and 
accessibility requirements for the CAT, including storage of PII 
data, separately.

[ssquf] Customer and Account Data

    All Bidders proposed solutions consistent with the Customer 
Information Approach in which broker-dealers would report a unique 
Firm Designated ID for each Customer to the Plan Processor and the 
Plan Processor would create and store the CAT Customer-ID without 
passing this information back to the broker-dealer. The use of 
existing unique identifiers (such as internal firm customer 
identifiers) could minimize potentially large overhead in the CAT 
System that otherwise would be required to create and transmit back 
to CAT Reporters a CAT System-generated unique identifiers. Allowing 
multiple identifiers also will be more beneficial to CAT Reporters. 
This approach would still require mapping of identifiers to connect 
all trading associated with a single Customer across multiple 
accounts, but it would also ease the burden on CAT Reporters because 
each CAT Reporter would report information using existing 
identifiers it currently uses in its internal systems. Moreover, 
because the CAT System would not be sending a CAT System-generated 
Customer-ID back to the CAT Reporters, CAT Reporters would not need 
to process CAT Customer-IDs assigned by the Plan Processor. This 
approach would reduce the burden on the CAT Reporters because they 
would not need to build an additional process to receive a Customer-
ID and append that identifier to each order origination, receipt or 
cancellation. This approach may also help alleviate storage and 
processing costs and potentially reduce the security risk of 
transmission of the Customer-ID to the CAT Reporter.
    The Participants support the use of the Customer Information 
Approach and included the approach in the Exemptive Request Letter 
so that the Central Repository could utilize this approach to link 
Customer and Customer Account Information. The Participants believe 
this approach would be the most efficient approach for both the Plan 
Processor and CAT Reporters.

[ssquf] Personally Identifying Information (PII)

    All Bidders proposed encrypting all PII, both at rest and in 
motion. This approach allows for secure storage of PII, even if 
servers should be compromised or data should be leaked. However, 
encryption can be highly complex to implement effectively (e.g., the 
poor choice of password salting or an insecure storage of private 
keys can compromise security, even without knowledge of the system 
administrator).
    All Bidders also proposed imposing a Role Based Access Control 
\3931\ to PII. These controls would allow for varying levels of 
access depending on user needs, and would allow compartmentalizing 
access based on ``need to know.'' However, multiple layers of access 
can add further complexity to the implementation and use of a 
system.
---------------------------------------------------------------------------

    \3931\ Role Based Access Control (RBAC) is a mechanism for 
authentication in which users are assigned to one or many roles, and 
each role is assigned a defined set of permissions. Additional 
details are provided in Appendix D, Data Security.
---------------------------------------------------------------------------

    Some Bidders also proposed implementing multi-factor 
authentication.\3932\ This greatly enhances security and can prevent 
a leak of passwords or keys from completely compromising security. 
However, it increases system overhead, and increases the difficulty 
of accessing data.
---------------------------------------------------------------------------

    \3932\ Multifactor authentication is a mechanism that requires 
the user to provide more than one factor (e.g., biometrics/personal 
information in addition to a password) in order to be validated by 
the system.
---------------------------------------------------------------------------

    The Participants are requiring multi-factor authentication and 
Role Based Access Control for access to PII, separation of PII from 
other CAT Data, restricted access to PII (only those with a ``need 
to know'' will have access), and an auditable record of all access 
to PII data contained in the Central Repository. The Participants 
believe potential increased costs to the Plan Processor and delays 
that this could cause to accessing PII are balanced by the need to 
protect PII.

[ssquf] Data Ingestion Format

    Bidders proposed several approaches for the ingestion format for 
CAT Data: uniform defined format, use of existing messaging 
protocols or a hybrid approach whereby data can be submitted in a 
uniform defined format or using existing message protocols. There 
are benefits to the industry under any of the three formats. A large 
portion of the industry currently reports to OATS in a uniform 
defined format. These firms have invested time and resources to 
develop a process for reporting to OATS. The uniform formats 
recommended by the Bidders would leverage the OATS format and 
enhance it to meet the

[[Page 85020]]

requirements of SEC Rule 613. This uniform format, therefore, may 
reduce the burden on certain CAT Reporters and simplify the process 
for those CAT Reporters to implement the CAT. However, some firms 
use message protocols, like FIX, as a standard point of reference 
with Industry Members that is typically used across the order 
lifecycle and within a firm's order management processes. Leveraging 
existing messaging protocols could result in quicker implementation 
times and simplify data aggregation for Participants, CAT Reporters, 
and the Plan Processor, though it is worth noting that message 
formats may need to be updated to support CAT Data requirements.
    The Participants are not mandating the data ingestion format for 
the CAT. The Participants believe that the nature of the data 
ingestion is key to the architecture of the CAT. A cost study of 
members of the Participants did not reveal a strong cost preference 
for using an existing file format for reporting vs. creating a new 
format.\3933\ However, FIF did indicate there was an industry 
preference among its members for using the FIX protocol.\3934\
---------------------------------------------------------------------------

    \3933\ See Appendix C, Analysis of the CAT NMS Plan, for 
additional details on cost studies.
    \3934\ See FIF Response.
---------------------------------------------------------------------------

[ssquf] Process to Develop the CAT

    Bidders proposed several processes for development of the CAT: 
the agile or iterative development model, the waterfall model, and 
hybrid models that incorporate aspects of both the waterfall and 
agile methodologies. An agile methodology is an iterative model in 
which development is staggered and provides for continuous evolution 
of requirements and solutions. A waterfall model is a sequential 
process of software development with dedicated phases for 
Conception, Initiation, Analysis, Design, Construction, Testing, 
Production/Implementation and Maintenance. The agile or iterative 
model is flexible to changes and facilitates early delivery of 
usable software that can be used for testing and feedback, helping 
to facilitate software that meets users' needs. However, at the 
beginning of an agile or iterative development process, it can be 
difficult to accurately estimate the effort and time required for 
completion. The waterfall model would provide an up-front estimate 
of time and effort and would facilitate longer-term planning and 
coordination among multiple vendors or project streams. However, the 
waterfall model could be less flexible to changes, particularly 
changes that occur between design and delivery (and thereby 
potentially producing software that meets specifications but not 
user needs).
    The Participants are not mandating a development process. The 
Participants believe that either agile or iterative development or 
waterfall method or even a combination of both methods could be 
utilized to manage the development of CAT.

[ssquf] Industry Testing

    Bidders also proposed a range of approaches to industry testing, 
including dedicated environments, re-use of existing environments, 
scheduled testing events, and ongoing testing.
    Dedicated industry test environments could provide the 
possibility of continuous testing by participants, rather than allow 
for testing only on scheduled dates. Use of dedicated industry test 
environments also would not impact other ongoing operations (such as 
disaster recovery sites). However, developing and maintaining 
dedicated test environments would entail additional complexity and 
expense. Such expenses may be highest in hosted architecture systems 
where dedicated hardware would be needed, but potentially rarely 
used.
    The re-use of existing environments, such as disaster recovery 
environment, would provide simplicity and lower administrative 
costs. However, it could impact other ongoing operations, such as 
disaster recovery.
    Scheduled testing events (which might be held, for example, on 
weekends only, or on specific dates throughout the year) could 
provide for more realistic testing by involving multiple market 
participants. This approach also would not require the test 
environment to be available at all times. However, scheduled events 
would not allow users to test on the CAT System until a dedicated 
time window is open.
    Ongoing testing would allow users to test the CAT System as 
often as needed. However, this approach would require the test 
environment to be available at all times. It also may lead to lower 
levels of test participation at any given time, which may lead to 
less realistic testing.
    The Participants are requiring that the CAT provide a dedicated 
test environment that is functionally equivalent to the production 
environment and available on a 24x6 basis. The Participants believe 
that an ongoing testing model will be more helpful to the industry 
because it will provide an environment in which to test any internal 
system changes or updates that may occur in the course of their 
business that may affect reporting to the CAT. Additionally, this 
environment will provide a resource through which the CAT Reporters 
can continually test any CAT System mandated or rule associated 
changes to identify and reduce data errors prior to the changes 
being implemented in the production environment.

[ssquf] Quality Assurance (QA)

    The Participants considered a number of QA approaches and 
methodologies, informed by the Bidder's proposals as well as 
discussions with the Participants' own subject matter resources. 
Some of the approaches considered included ``continuous 
integration,'' where developer working copies are merged into the 
master and tested several times a day, test automation, and various 
industry standards such as ISO 20000/ITIL. The Participants are not 
mandating a single approach to QA beyond the requirements detailed 
in the RFP, for which each Bidder provided a detailed approach.
    One key component of the QA approaches proposed by the Bidders 
was the staffing levels associated with QA. Initial QA proposals 
from Bidders included staffing ranges from between 2 and 90 FTEs, 
although some Bidders indicated that their QA function was directly 
incorporated into their development function. Some Bidders proposed 
allocating QA resources after the third month. A larger number of QA 
resources may facilitate structured, in-depth testing and validation 
of the CAT System. However, a larger set of QA resources could lead 
to higher fixed costs and administrative overhead.
    The Participants are not mandating the size for QA staffing; 
however, the Participants will consider each Bidder's QA staffing 
proposals in the context of the overall Bid, and the selected Bidder 
must ensure that its QA staffing is sufficient to perform the 
activities required by the CAT NMS Plan. The Participants believe 
the QA staffing numbers varied in the Bids because they are largely 
dependent on both the staffing philosophy of the Bidder as well as 
the organizational structure for the proposed Central Repository.

[ssquf] User Support and Help Desk

    The RFP required that the CAT Help Desk be available on a 24x7 
basis, and that it be able to manage 2,500 calls per month. To 
comply with these requirements, Bidders proposed user support 
staffing ranges from five to 36 FTEs. They also proposed dedicated 
support teams and support teams shared with other groups.
    A larger number of FTE user support staff could provide a higher 
level and quality of support. However, a higher number of staff 
would impose additional overhead and administrative costs. 
Additionally, as the support organization grows, it may become less 
closely integrated with the development team, which could decrease 
support effectiveness.
    A dedicated CAT support team would facilitate deep knowledge of 
the CAT System and industry practices. However, it would create 
additional overhead and costs. Additionally, management of support 
teams may not be the managing firm's primary business, which could 
lead to inefficiencies. A support staff shared with non-CAT teams 
could provide for increased efficiency, if the team has greater 
experience in support more broadly. However, support resources may 
not have the depth of knowledge that dedicated support teams could 
be expected to develop.
    The Participants are not requiring specific FTEs for user 
support staffing; however, the Participants will consider each 
Bidder's user support staffing proposals in the context of the 
overall Bid, and the selected Bidder must ensure that its staffing 
is sufficient to perform the activities required by the CAT NMS 
Plan. The Participants believe that the number of FTEs varied in the 
Bids because they are largely dependent on both the staffing 
philosophy of the Bidder as well as the organizational structure for 
the proposed Central Repository.
    Some Bidders proposed a US-based help desk, while others 
proposed basing it offshore. A U.S.-based help desk could facilitate 
a higher level of service, and could provide a greater level of 
security (given the sensitive nature of the CAT). However, a U.S.-
based help desk may have greater labor

[[Page 85021]]

costs. An offshore help desk would potentially have lower labor 
costs, but could provide (actual or perceived) lower level of 
service, and could raise security concerns (particularly where the 
help desk resources are employed by a third-party).
    The Participants are not requiring a specific location for the 
help desk. The Participants believe that as long as the Bidder's 
solution meets the service and security requirements of the CAT, it 
is not necessary to prescribe the location.

[ssquf] CAT User Management

    Bidders proposed several approaches to user management \3935\: 
help desk creation of user accounts, user (e.g., broker-dealer) 
creation of accounts, and multi-role. Help desk creation of accounts 
would allow for greater oversight and validation of user creation. 
However, it would increase administrative costs, particularly in the 
early stages of the CAT (as an FTE must setup each user). User 
creation of accounts would require lower staffing levels but would 
provide less oversight and validation of user creation.
---------------------------------------------------------------------------

    \3935\ User management is a business function that grants, 
controls, and maintains user access to a system.
---------------------------------------------------------------------------

    A multi-role approach would allow for a blended approach in 
which the Plan Processor could, for example, set up an administrator 
at each broker-dealer, and then allow the broker-dealer to set up 
additional accounts as needed. This approach could allow users with 
different levels of access to be provisioned differently, with those 
requiring greater oversight being provisioned manually. However, it 
would add complexity to the user creation system, and would provide 
less oversight and validation than would a fully manual system.
    For CAT Reporters entering information into the CAT, the 
Participants are requiring that each user be validated by the Plan 
Processor to set-up access to the system. However, for staff at 
regulators that will be accessing the information for regulatory 
purposes only, the Plan Processor can establish a set-up 
administrator who has the ability to provide access to other users 
within its organization. However, such administrators cannot set up 
access for PII information. Staff at regulators who need access to 
PII information must go through an authentication process directly 
with the Plan Processor. The Participants believe that this approach 
balances the demand on the staff at the Plan Processor with the need 
to ensure proper oversight and validation for users of the CAT.

[ssquf] Required Reportable Order Events

    The Participants considered multiple order event types for 
inclusion in the Plan. Of the order event types considered, the 
results order event type and the CAT feedback order event were not 
required. The Participants determined that a results order event 
type would not provide additional value over a ``daisy chain'' 
linkage method. A CAT feedback order event can be generated by the 
Plan Processor, thereby removing the reporting burden from reporting 
firms. Therefore the Participants are not requiring CAT Reporters to 
provide data for these two event types to the CAT. The required 
reportable order events are listed in Section 6.3(d).

[ssquf] Data Retention Requirements

    SEC Rule 613(e)(8) requires data to be available and searchable 
for a period of not less than five years. Broker-dealers are 
currently required to retain data for six years under the Exchange 
Act Rule 17a-4(a).
    The Participants support the use of a six year retention 
timeframe as it complies with Exchange Act Rule 17a-4(a). The 
Participants are requiring data for six years to be kept online in 
an easily accessible format to enable regulators to have access to 
six years of audit trail materials for purposes of its regulation.
    The Participants understand that requiring this sixth year of 
data storage may increase the cost to run the CAT; however, they 
believe the incremental cost would be outweighed by the needs of 
regulators to have access to the information. An analysis of the six 
Shortlisted Bidder proposals indicated that the average expected 
year-on-year annual cost increase during years four and five (i.e., 
once all reporters were reporting to the Central Repository) was 
approximately 4%. Extending this increase to another year would 
result in incremental annual costs to the Plan Processor ranging 
from approximately $1.15 million to $4.44 million depending upon the 
Bidder. Based on the assumption that the cumulative annual cost 
increase from year five to year six will also be 4% (including all 
the components provided by the Bidders in their respective cost 
schedules \3936\), the maximum cost increase for data retention for 
an additional year would be 4%.
---------------------------------------------------------------------------

    \3936\ RFP at 57.
---------------------------------------------------------------------------

[ssquf] Data Feed Connectivity

    Bidders proposed either real-time SIP connectivity or end-of-day 
batch SIP connectivity. Real-time SIP connectivity would provide for 
more rapid access to SIP Data, but may require additional processing 
support to deal with out-of-sequence or missing records. End-of-day 
batch SIP connectivity provides the possibility of simpler 
implementation, but data from SIPs would not be available in the CAT 
until after overnight processing. Because CAT Reporters are only 
required to report order information on a next-day basis, the 
Participants are not requiring that the Plan Processor have real-
time SIP connectivity.

[ssquf] Disaster Recovery

    Participants discussed two commonly accepted structures for 
disaster recovery: hot-hot \3937\ and hot-warm.\3938\ While hot-hot 
allows for immediate cutover, the Participants agreed that real-time 
synchronization was not required, but rather that data must be kept 
synchronized to satisfy disaster recovery timing requirements (e.g., 
48 hour cutover). A hot-warm structure meets the requirements of SEC 
Rule 613, and costs for hot-hot were considered to be higher than 
hot-warm. Therefore, the Participants are requiring a hot-warm 
disaster recovery structure, provided it meets the requirements set 
forth in Appendix D, BCP/DR Process.
---------------------------------------------------------------------------

    \3937\ In a hot-hot disaster recovery design, both the 
production site as well as the backup site are live, and the backup 
can be brought online immediately.
    \3938\ In a hot-warm disaster recovery design, the backup site 
is fully equipped with the necessary hardware. In the event of a 
disaster, the software and data would need to be loaded into the 
backup site for it to become operational.
---------------------------------------------------------------------------

[ssquf] Synchronization of Business Clocks

    The Participants considered multiple levels of precision for the 
clock synchronization standard set forth in the plan, ranging from 1 
second (s) to 100 microseconds ([mu]s). The Participants determined 
based on their expertise and feedback from industry that an initial 
clock synchronization of 50 milliseconds (ms) would be the most 
practical and effective choice and represents the current industry 
standard. Pursuant to SEC Rule 613(d), the initial standard of 50ms 
will be subject to annual analysis as to whether or not a more 
stringent clock synchronization tolerance could be implemented 
consistent with changes in industry standards.
    In order to identify the industry standard the Participants and 
Industry Members reviewed their own internal technology around 
Network Time Protocol (``NTP'') and Precision Time Protocol 
(``PTP''),\3939\ potentially used in conjunction with Global 
Positioning System (``GPS'').\3940\ In reviewing internal 
infrastructure, the Participants and Industry Members noted that the 
majority of firms had indicated that they leveraged at least NTP 
clock synchronization technology. In addition, the FIF conducted a 
clock synchronization survey \3941\ (``FIF Clock Offset Survey'') of 
28 firms to identify costs and challenges associated with clock 
synchronization tolerances of 50ms, 5ms, 1ms, and 100[mu]s. The FIF 
Clock Offset Survey indicated that 93% of responding firms leverage 
NTP technology, while fewer than half of responding firms use SNTP, 
PTP, or GPS. In reviewing the standards for NTP technology, the 
Participants determined that this technology can accommodate a 50ms 
tolerance. In addition, the FIF Clock Offset Survey demonstrated 
that 60% of responding firms currently synchronize their clocks with 
an offset of 50ms or greater, with approximately 20% of responding 
firms currently using an offset of 50ms. Only 18% of responding 
firms used a clock offset of 30ms or less. In light of these reviews 
and the survey data, the Participants concluded that a clock offset 
of 50ms represents an aggressive, but achievable, industry standard.
---------------------------------------------------------------------------

    \3939\ NTP and PTP are protocols used to synchronize clocks 
across a computer network.
    \3940\ GPS is a radio navigation system that can be used to 
capture a precise determination of time.
    \3941\ FIF Clock Offset Survey Preliminary Report.
---------------------------------------------------------------------------

    In addition to determining current industry clock offset 
standards used in the industry, the FIF Clock Offset Survey 
indicated that the costs to survey respondents were as follows: 
\3942\
---------------------------------------------------------------------------

    \3942\ The Participants consider the estimates provided to be 
conservative as a majority of the study respondents fell into the 
category of large broker-dealers.

[[Page 85022]]

----------------------------------------------------------------------------------------------------------------
                                                                                               Estimated annual
                 Proposed clock offset                   Estimated implementation cost (per    maintenance cost
                                                                        firm)                     (per firm)
----------------------------------------------------------------------------------------------------------------
50ms...................................................                           $554,348             $313,043
5ms....................................................                           $887,500             $482,609
1ms....................................................                         $1,141,667             $534,783
100[mu]s...............................................                         $1,550,000             $783,333
----------------------------------------------------------------------------------------------------------------

    As indicated in the above table, annual maintenance costs of 
survey respondents for a 50ms standard would be on average 31% 
higher than current costs, and would escalate to 102%, 123%, and 
242% increases over current maintenance costs as clock 
synchronization standards move to 5ms, 1ms, and 100[mu]s 
respectively, indicating that maintenance costs rapidly escalate as 
clock synchronization standards increase beyond 50ms. Survey 
respondents also indicated that increasing clock synchronization 
requirements would require escalating technology changes, including 
significant hardware changes (such as installation of dedicated GPS 
or other hardware clocks and network architecture redesign), 
migration to new time synchronization standards, and widespread 
upgrades of operating systems and databases currently in use. For 
example, to achieve a 5ms clock offset would require firms to 
install GPS clocks in all locations and migrate from NTP to PTP. The 
Participants believe, based on the FIF Clock Offset Survey, that 
fewer than half of firms currently leverage GPS technology or PTP 
for clock synchronization.
    As noted in Article VI, Section 6.8, the Participants, working 
with the Processor's Chief Compliance Officer, shall annually 
evaluate and make recommendations as to whether industry standards 
have evolved such that changes to the clock synchronization 
standards should be changed. It is the belief of the Participants 
that, while setting an initial clock synchronization of 5ms lower 
than 50ms may be achievable, it does not represent current industry 
standard and there may be challenges with small broker-dealers' 
potentially substantial costs. However, once both large and small 
broker-dealers begin reporting data to the Central Repository, and 
as increased time synchronization standards become more mature, the 
Participants will assess the ability to tighten the clock 
synchronization standards to reflect changes in industry standards 
in accordance with SEC Rule 613.

[ssquf] Reportable Securities

    SEC Rule 613(c)(6) requires NMS Securities to be reported the 
Central Repository and SEC Rule 613(i) requires the Participants to 
detail a plan outlining how non-NMS Securities, debt securities, and 
Primary Market Transactions in equity securities that are not NMS 
Securities can be reported to the Central Repository in the future. 
The Participants considered whether to require including OTC Equity 
Securities, non NMS Securities, in a future phase of the CAT NMS 
Plan, as contemplated by the Commission in SEC Rule 613, or 
accelerating their inclusion into the first phase of the Plan. As 
part of this consideration, Participants weighed heavily the 
feedback from the DAG and other market participants of the 
considerations associated with the two alternatives, and made the 
determination to include OTC Equities in the requirements under the 
CAT NMS Plan.

APPENDIX D

CAT NMS Plan Processor Requirements

    Appendix D, CAT NMS Plan Processor Requirements, outlines 
minimum functional and technical requirements established by the 
Participants of the CAT NMS Plan for the Plan Processor. Given the 
technical nature of many of these requirements, it is anticipated, 
as technology evolves, that some may change over time. The 
Participants recognize that effective oversight of, and a 
collaborative working relationship with, the Plan Processor will be 
critical to ensure the CAT achieves its intended purpose, namely 
enhanced investor protection, in an efficient and cost-effective 
manner. The Participants also recognize that maintaining the 
efficiency and cost-effectiveness of the CAT requires flexibility to 
respond to technological innovations and market changes. For 
example, these minimum functional and technical requirements allow 
the Plan Processor flexibility to make certain changes to the 
Technical Specifications, while limiting others to the Operating 
Committee, and anticipate agreement between the Operating Committee 
and the Plan Processor on SLAs relating to, among other things, 
development, change management, and implementation processes and 
timelines. Maintaining such flexibility to adapt in these and other 
areas relating to the development and operation of the CAT is a 
foundational principle of this Appendix D.

Central Repository Requirements

Technical Architecture Requirements

    The Central Repository must be designed and sized to ingest, 
process, and store large volumes of data. The technical 
infrastructure needs to be scalable, adaptable to new requirements 
and operable within a rigorous processing and control environment. 
As a result, the technical infrastructure will require an 
environment with significant throughput capabilities, advanced data 
management services and robust processing architecture.
    The technical architecture must be scalable and able to readily 
expand its capacity to process significant increases in data volumes 
beyond the baseline capacity. The baseline capacity requirements are 
defined in this document. Once the CAT NMS Plan is approved, the 
Operating Committee will define the baseline metrics on an ongoing 
basis. CAT capacity planning must include SIP, OPRA and exchange 
capacity and growth forecasts. The initial baseline capacity 
requirements will be based on twice (2X) the historical peaks for 
the most recent six years, and the Plan Processor must be prepared 
to handle peaks in volume that could exceed this baseline for short 
periods. The SLA(s) will outline details of the technical 
performance and scalability requirements, and will be specifically 
targeted to the selected Bidder's solution.
    The Central Repository must have the capacity and capability to:

Ingest and process throughput to meet baseline capacity requirements 
as well as scalability to meet peak capacity requirements, including 
staging, loading, speed of processing, and linking of data;
Accommodate data storage and query compute, such as:

    [cir] Scalable for growth data storage and expansion capability, 
including but not limited to, resizing of database(s), data 
redistribution across nodes, and resizing of network bandwidth;
    [cir] Robust processes to seamlessly add capacity without 
affecting the online operation and performance of the CAT System; 
and
    [cir] Quantitative methods for measuring, monitoring, and 
reporting of excess capacity of the solution;
Satisfy minimum processing standards as described in the CAT RFP and 
that will be further defined in the SLA(s);
Adapt to support future technology developments and new requirements 
(including considerations for anticipated/potential changes to 
applicable rules and market behavior);
Handle an extensible architecture that is capable of supporting 
asset classes beyond the initial scope of NMS Securities and OTC 
Equity Securities;
Comply with the clock synchronization standards as set forth in 
Article VI, Section 6.8; and
Handle an extensible data model and messaging protocols that are 
able to support future requirements such as, but not limited to:
    [cir] Expansion of trading hours, including capability and 
support for 24-hour markets;
    [cir] Sessions for securities; \3943\ and
---------------------------------------------------------------------------

    \3943\ Equity markets currently have morning, primary, and 
evening sessions. It is possible that over time sessions may cross 
into the next calendar day.
---------------------------------------------------------------------------

    [cir] New asset classes, such as debt securities or derivative 
instruments.

Technical Environments

    The architecture must include environments for production, 
development, quality assurance testing, disaster recovery,

[[Page 85023]]

industry-wide coordinated testing, and individual on-going CAT 
Reporter testing. The building and introduction of environments 
available to CAT Reporters may be phased in to align with the 
following agreed upon implementation milestones:

Development environment--the development environment must be created 
to build, develop, and maintain enhancements and new requirements. 
This environment must be separate from those listed below.
Quality assurance environment--a quality assurance (QA) environment 
must be created to allow simulation and testing of all applications, 
interfaces, and data integration points contained in the CAT System.
    [cir] The QA environment shall be able to simulate end-to-end 
production functionality and perform with the same operational 
characteristics, including processing speed, as the production 
environment.
    [cir] The QA environment shall support varied types of changes, 
such as, but not limited to, the following:
    Application patches;
    Bug fixes;
    Operating system upgrades;
    Introduction of new hardware or software components;
    New functionality;
    Network changes;
    Regression testing of existing functionality;
    Stress or load testing (simulation of production-level usage); 
and
    Recovery and failover.
    [cir] A comprehensive test plan for each build and subsequent 
releases must be documented.
Production environment--fully operational environment that supports 
receipt, ingestion, processing and storage of CAT Data. Backup/
disaster recovery components must be included as part of the 
production environment.
Industry test environment--
    [cir] The Plan Processor must provide an environment supporting 
industry testing (test environment) that is functionally equivalent 
to the production environment, including:
    End-to-end functionality (e.g., data validation, processing, 
linkage, error identification, correction and reporting mechanism) 
from ingestion to output, sized to meet the standards of the 
production SLA;
    Performance metrics that mirror the production environment; and
    Management with the same information security policies 
applicable to the production environment.
    [cir] The industry test environment must also contain 
functionality to support industry testing, including:
    Minimum availability of 24x6;
    Replica of production data when needed for testing;
    Data storage sized to meet varying needs, dependent upon scope 
and test scenarios; and
    Support of two versions of code (current and pending).
    [cir] The industry test environment must support the following 
types of industry testing:
    Technical upgrades made by the Plan Processor;
    CAT code releases that impact CAT Reporters;
    Changes to industry data feeds (e.g., SIP, OPRA, etc.);
    Industry-wide disaster recovery testing;
    Individual CAT Reporter and Data Submitter testing of their 
upgrades against CAT interfaces and functionality; and
    Multiple, simultaneous CAT Reporter testing.
    [cir] The industry test environment must be a discrete 
environment separate from the production environment.
    [cir] The Plan Processor must provide the linkage processing of 
data submitted during coordinated, scheduled, industry-wide testing. 
Results of the linkage processes must be communicated back to 
Participants as well as to the Operating Committee.
    [cir] Data from industry testing must be saved for three months. 
Operational metrics associated with industry testing (including but 
not limited to testing results, firms who participated, and amount 
of data reported and linked) must be stored for the same duration as 
the CAT production data.
    [cir] The Plan Processor must provide support for industry 
testing, including testing procedures, coordination of industry 
testing, publish notifications, and provide help desk support during 
industry testing.
    [cir] The Participants and the SEC must have access to industry 
test data.

Capacity Requirements

    System capacity must have the following characteristics.\3944\
---------------------------------------------------------------------------

    \3944\ References to data sizing refer to raw, uncompressed data 
and do not account for benefits of compression, overhead of data 
storage or indices. Data sizing estimates do not include meta-data 
and are based on delimited, fixed length data sets. The Plan 
Processor is responsible for calculating its platform capacity 
capabilities based on its proposed solution. Three years after the 
finalization of the CAT NMS Plan, when all CAT Reporters submit 
their data to the Central Repository, the Central Repository must be 
sized to receive process and load more than 58 billion records per 
day.
---------------------------------------------------------------------------

    The Central Repository must be:

Designed such that additional capacity can be quickly and seamlessly 
integrated while maintaining system access and availability 
requirements;
Able to efficiently and effectively handle data ingestion on days 
with peak and above-peak data submission volumes; and
Required to maintain and store data for a 6-year sliding window of 
data. System access and availability requirements must be maintained 
during the maintenance of the sliding window. It is expected that 
the Central Repository will grow to more than 29 petabytes of raw, 
uncompressed data.

    The Plan Processor must:

Define a capacity planning process to be approved by the Operating 
Committee, with such process incorporating industry utility capacity 
metrics; and
Develop a robust process to add capacity, including both the ability 
to scale the environment to meet the expected annual increases as 
well as to rapidly expand the environment should unexpected peaks in 
data volumes breach the defined capacity baseline. Capacity 
forecasts from systems, including OPRA, UTP, and CTA, must also be 
included for capacity planning purposes. This capacity planning 
process must be approved by the Operating Committee.

Monitoring Capacity Utilization and Performance Optimization

    In order to manage the data volume, operational capacity 
planning must be conducted on a periodic basis. The Plan Processor 
must submit capacity-planning metrics to the Operating Committee for 
review to ensure that all parties are aware of the system processing 
capabilities and changes to assumptions. Changes to assumptions 
could lead to positive or negative adjustments in the costs charged 
to CAT Reporters. Reports that capture daily disk space, processing 
time, amount of data received and linkage completion times must be 
provided by the Plan Processor to the Operating Committee.

Data Retention Requirements

    The Plan Processor must develop a formal record retention policy 
and program for the CAT, to be approved by the Operating Committee, 
which will, at a minimum:

Contain requirements associated with data retention, maintenance, 
destruction, and holds;
Comply with applicable SEC record-keeping requirements;
Have a record hold program where specific CAT Data can be archived 
offline for as long as necessary;
Store and retain both raw data submitted by CAT Reporters and 
processed data; and
Make data directly available and searchable electronically without 
manual intervention for at least six years.

Data Management

    The Plan Processor must develop data management policies and 
procedures to govern and manage CAT Data, reference data, and 
metadata contained in and used by the Central Repository.
    The CAT must capture, store, and maintain current and historical 
reference data information. This master/reference database will 
include data elements such as, but not limited to, SRO-assigned 
market participant identifiers, product type, trading unit size, 
trade/quote minimum price variation, corporate actions, symbology 
changes, and changes in listings market center. The Plan Processor 
must support bi-temporal milestones (e.g., Effective Date and as-of-
date) of the reference data.
    CAT Reporters will submit data to the Central Repository with 
the listing exchange symbology format. The Central Repository must 
use the listing exchange symbology format for output of the linked 
data. Instrument validation must be included in

[[Page 85024]]

the processing of data submitted by CAT Reporters.
    The Central Repository must be able to link instrument data 
across any time period so that data can be properly displayed and 
linked regardless of changes to issue symbols or market class. The 
Plan Processor is required to create and maintain a symbol history 
and mapping table, as well as to provide a tool that will display a 
complete issue symbol history that will be accessible to CAT 
Reporters, Participants and the SEC. In addition, the Plan Processor 
will be required to create a start-of-day (``SOD'') and end-of-day 
(``EOD'') CAT reportable list of securities for use by CAT 
Reporters. This list must be available online and in a machine 
readable (e.g., .csv) format by 6 a.m. on each Trading Day.
    Queries, reports, and searches for data that span dates where 
there are changes to reference data must automatically include data 
within the requested date range. For example, if a query is run for 
a symbol that had three issue symbol changes during the time window 
of the query parameters, the result set must automatically include 
data for all three symbols that were in use during the time window 
of the query.
    The Plan Processor must also develop an end-to-end process and 
framework for technical, business and operational metadata.

Data Types and Sources

    The Plan Processor will be responsible for developing detailed 
data and interface specifications for data to be submitted by CAT 
Reporters. These specifications will be contained in the Technical 
Specifications, the initial version of which will be presented to 
the Operating Committee for approval. The Technical Specifications 
must be designed to capture all of the data elements required by SEC 
Rule 613, as well as other information the Participants determine 
necessary to facilitate elimination of reporting systems that the 
CAT may cause to be redundant, such as EBS and OATS. In the future, 
new data sources such as public news may be added to the 
specifications.
    CAT Reporters and Data Submitters will transmit data in an 
electronic data format(s) that will be defined by the Plan 
Processor. The Technical Specifications must include details for 
connectivity and electronic submission, transmission, retransmission 
and processing. It is possible that more than one format will be 
defined to support the various senders throughout the industry.
    The Participants anticipate that some broker-dealers will not 
directly report to the CAT but will rely on other organizations to 
report on their behalf. However, the CAT will need to have the 
flexibility to adapt on a timely basis to changes in the number of 
entities that report CAT Data.

Data Feed Management

    The Plan Processor must monitor and manage incoming and outgoing 
data feeds for, at a minimum, the following:

Data files from each CAT Reporter and Data Submitter;
Files that cover multiple trade dates (e.g., to account for clearing 
and changes);
Full and partial file submissions that contain corrections from 
previously rejected files;
Full and partial file submissions based on CAT Reporter; and
Receipt and processing of market data feeds (SIP, OPRA, OCC).

    The Plan Processor must also develop a process for detecting, 
managing, and mitigating duplicate file submissions. It must create 
and store operational logs of transmissions, success, and failure 
reasons in order to create reports for CAT Reporters, Participants, 
and the SEC. Outgoing data feeds must be logged and corresponding 
metadata elements must be monitored and captured.

Managing connectivity for data feeds (e.g., SIPs, broker-dealers and 
regulators)

    The Plan Processor will be required to ensure that it provides 
all CAT Reporters with the ability to transmit CAT Data to the 
Central Repository as required to meet the reporting requirements. 
The Plan Processer is required to have a robust managed file 
transfer (``MFT'') tool, including full monitoring, permissioning, 
auditing, security, high availability,\3945\ file integrity checks, 
identification of data transmission failures/errors, transmission 
performance metrics, multiple transmission protocols, Latency/
network bottlenecks or delays, key management, etc. CAT Reporters 
must also have the ability to conduct manual data entry via a GUI 
interface or the uploading of a file, subject to a maximum record 
capacity, which will be defined by the Plan Processor in 
consultation with the Operating Committee.
---------------------------------------------------------------------------

    \3945\ To be defined in the SLAs to be agreed to between the 
Participants and the Plan Processor, as detailed in Appendix D, 
Functionality of the CAT System.
---------------------------------------------------------------------------

Reporting and Linkage Requirements

    All CAT Data reported to the Central Repository must be 
processed and assembled to create the complete lifecycle of each 
Reportable Event. Reportable Events must contain data elements 
sufficient to ensure the same regulatory coverage currently provided 
by existing regulatory reporting systems that have been identified 
as candidates for retirement.
    Additionally, the Central Repository must be able to:

Assign a unique CAT-Reporter-ID to all reports submitted to the 
system based on sub-identifiers, (e.g., MPIDs, ETPID, trading 
mnemonic) currently used by CAT Reporters in their order handling 
and trading processes.
Handle duplicate sub-identifiers used by members of different 
Participants to be properly associated with each Participant.
Generate and associate one or more Customer-IDs with all Reportable 
Events representing new orders received from a Customer(s) of a CAT 
Reporter. The Customer-ID(s) will be generated from a Firm 
Designated ID provided by the CAT Reporter for each such event, 
which will be included on all new order events.
Accept time stamps on order events handled electronically to the 
finest level of granularity captured by CAT Reporters. Additionally, 
the CAT must be able to expand the time stamp field to accept time 
stamps to an even finer granularity as trading systems expand to 
capture time stamps in ever finer granularity. The Plan Processor 
must normalize all processed date/time CAT Data into a standard time 
zone/format.

    In addition, the data required from CAT Reporters will include 
all events and data elements required by the Plan Processor in the 
Technical Specifications to build the:

Life cycle of an order for defined events within a CAT Reporter;
Life cycle of an order for defined events intra-CAT Reporter; and
State of all orders across all CAT Reporters at any point in time.

    The Plan Processor must use the ``daisy chain approach'' to link 
and create the order lifecycle. In the daisy chain approach, a 
series of unique order identifiers, assigned to all order events 
handled by CAT Reporters are linked together by the Central 
Repository and assigned a single CAT-generated CAT-Order-ID that is 
associated with each individual order event and used to create the 
complete lifecycle of an order.
    By using the daisy chain approach 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, the Central 
Repository must be able to create the 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);
Customer orders to ``representative'' orders created in firm 
accounts for the purpose of facilitating a customer order (e.g., 
linking a customer order handled on a riskless principal basis to 
the street-side proprietary order);
Orders routed between broker-dealers;
Orders routed from broker-dealers to exchanges;
Orders sent from an exchange to its routing broker-dealer;
Executed orders and trade reports;
Various legs of option/equity complex orders; and
Order events for all equity and option order handling scenarios that 
are currently or may potentially be used by CAT Reporters, 
including:
    [cir] Agency route to another broker-dealer or exchange;
    [cir] Riskless principal route to another broker-dealer or 
exchange capturing within the lifecycle both the customer leg and 
street side principal leg;
    [cir] Orders routed from one exchange through a routing broker-
dealer to a second exchange;
    [cir] Orders worked through an average price account capturing 
both the individual street side execution(s) and the average price 
fill to the Customer;
    [cir] Orders aggregated with other orders for further routing 
and execution capturing both the street side executions for the 
aggregated order and the fills to each customer order;
    [cir] Complex orders involving one or more options legs and an 
equity leg, with a

[[Page 85025]]

linkage between the option and equity legs;
    [cir] Complex orders containing more legs than an exchange's 
order management system can accept, causing the original order to be 
broken into multiple orders;
    [cir] Orders negotiated over the telephone or via a negotiation 
system;
    [cir] Orders routed on an agency basis to a foreign exchange;
    [cir] Execution of customer order via allocation of shares from 
a pre-existing principal order;
    [cir] Market maker quotes; and
    [cir] Complex orders involving two or more options legs.

    Additionally, the Central Repository must be able to:

Link each order lifecycle back to the originating Customer;
Integrate and appropriately link reports representing repairs of 
original submissions that are rejected by the CAT due to a failure 
to meet a particular data validation;
Integrate into the CAT and appropriately link reports representing 
records that are corrected by a CAT Reporter for the purposes of 
correcting data errors not identified in the data validation 
process;
Assign a single CAT-Order-ID to all events contained within the 
lifecycle of an order so that regulators can readily identify all 
events contained therein; and
Process and link Manual Order Events with the remainder of the 
associated order lifecycle.

Timelines for Reporting

    CAT Data for the previous Trading Day must be reported to the 
Central Repository by 8:00 a.m. Eastern Time on the Trading Day 
following the day the Industry Member receives such data; however, 
the Plan Processor must accept data prior to that deadline, 
including intra-day submissions.

Other Items

    The Plan Processor must anticipate and manage order data 
processing over holidays, early market closures and both anticipated 
and unanticipated market closures. The Plan Processor must allow and 
enable entities that are not CAT Reporters (e.g., service bureaus) 
to report on behalf of CAT Reporters only upon being permissioned by 
the CAT Reporter, and must develop appropriate tools to facilitate 
this process.

Required Data Attributes for Order Records Submitted by CAT Reporters

    At a minimum, the Plan Processor must be able to receive the 
data elements as detailed in the CAT NMS Plan.

Data Security

Overview

    SEC Rule 613 requires that the Plan Processor ensure the 
security and confidentiality of all information reported to and 
maintained by the CAT in accordance with the policies, procedures 
and standards in the CAT NMS Plan.
    The Plan Processor must have appropriate solutions and controls 
in place to ensure data confidentiality and security during all 
communication between CAT Reporters and Data Submitters and the Plan 
Processor, data extraction, manipulation and transformation, loading 
to and from the Central Repository and data maintenance by the CAT 
System. The Plan Processor must address security controls for data 
retrieval and query reports by Participant and the SEC. The solution 
must provide appropriate tools, logging, auditing and access 
controls for all components of the CAT System, such as but not 
limited to access to the Central Repository, access for CAT 
Reporters, access to rejected data, processing status and CAT 
Reporter performance and comparison statistics.
    The Plan Processor must provide to the Operating Committee a 
comprehensive security plan that covers all components of the CAT 
System, including physical assets and personnel, and the training of 
all persons who have access to the Central Repository consistent 
with Article VI, Section 6.1(m). The security plan must be updated 
annually. The security plan must include an overview of the Plan 
Processor's network security controls, processes and procedures 
pertaining to the CAT Systems. Details of the security plan must 
document how the Plan Processor will protect, monitor and patch the 
environment; assess it for vulnerabilities as part of a managed 
process, as well as the process for response to security incidents 
and reporting of such incidents. The security plan must address 
physical security controls for corporate, data center, and leased 
facilities where Central Repository data is transmitted or stored. 
The Plan Processor must have documented ``hardening baselines'' for 
systems that will store, process, or transmit CAT Data or PII data.

Connectivity and Data Transfer

    The CAT System(s) must have encrypted internet connectivity. CAT 
Reporters must connect to the CAT infrastructure using secure 
methods such as private lines or (for smaller broker-dealers) 
Virtual Private Network connections over public lines. Remote access 
to the Central Repository must be limited to authorized Plan 
Processor staff and must use secure multi-factor authentication that 
meets or exceeds the Federal Financial Institutions Examination 
Council (``FFIEC'') security guidelines surrounding authentication 
best practices.\3946\
---------------------------------------------------------------------------

    \3946\ Federal Financial Institutions Examination Council, 
Supplement to Authentication in an Internet Banking Environment 
(June 22, 2011), available at http://www.ffiec.gov/pdf/Auth-ITS-Final%206-22-11%20(FFIEC%20Formated).pdf.
---------------------------------------------------------------------------

    The CAT databases must be deployed within the network 
infrastructure so that they are not directly accessible from 
external end-user networks. If public cloud infrastructures are 
used, virtual private networking and firewalls/access control lists 
or equivalent controls such as private network segments or private 
tenant segmentation must be used to isolate CAT Data from 
unauthenticated public access.

Data Encryption

    All CAT Data must be encrypted at rest and in flight using 
industry standard best practices (e.g., SSL/TLS) including archival 
data storage methods such as tape backup. Symmetric key encryption 
must use a minimum key size of 128 bits or greater (e.g., AES-128), 
larger keys are preferable. Asymmetric key encryption (e.g., PGP) 
for exchanging data between Data Submitters and the Central 
Repository is desirable.
    [All PII data must be encrypted both at rest and in flight, 
including archival data storage methods such as tape backup.] 
Storage of unencrypted PII data is not permissible. PII encryption 
methodology must include a secure documented key management strategy 
such as the use of HSM(s). The Plan Processor must describe how PII 
encryption is performed and the key management strategy (e.g., AES-
256, 3DES).
    [CAT Data stored in a public cloud must be encrypted at rest. 
Non-PII CAT Data stored in a Plan Processor private environment is 
not required to be encrypted at rest.]
    If public cloud managed services are used that would inherently 
have access to the data (e.g., BigQuery, S3, Redshift), then the key 
management surrounding the encryption of that data must be 
documented (particularly whether the cloud provider manages the 
keys, or if the Plan Processor maintains that control). Auditing and 
real-time monitoring of the service for when cloud provider 
personnel are able to access/decrypt CAT Data must be documented, as 
well as a response plan to address instances where unauthorized 
access to CAT Data is detected. Key management/rotation/revocation 
strategies and key chain of custody must also be documented in 
detail.

Data Storage and Environment

    Data centers housing CAT Systems (whether public or private) 
must, at a minimum, be AICPA SOC 2 certified by [an independent 
third party auditor] a qualified third-party auditor that is not an 
affiliate of any of the Participants or the CAT Processor. The 
frequency of the audit must be at least once per year.
    CAT compute infrastructure may not be commingled with other non-
regulatory systems (or tenets, in the case of public cloud 
infrastructure). Systems hosting the CAT processing for any 
applications must be segmented from other systems as far as is 
feasible on a network level (firewalls, security groups, ACL's, 
VLAN's, authentication proxies/bastion hosts and similar). In the 
case of systems using inherently shared infrastructure/storage 
(e.g., public cloud storage services), an encryption/key management/
access control strategy that effectively renders the data private 
must be documented.
    The Plan Processor must include penetration testing and an 
application security code audit by a reputable (and named) third 
party prior to launch as well as periodically as defined in the 
SLA(s). Reports of the audit will be provided to the Operating 
Committee as well as remediation plan for identified issues. The 
penetration test reviews of the Central Repository's network, 
firewalls, and development, testing and production systems should 
help the CAT evaluate the system's security and resiliency in the 
face of attempted and successful systems intrusions.

[[Page 85026]]

Data Access

    The Plan Processor must provide an overview of how access to PII 
and other CAT Data by Plan Processor employees and administrators is 
restricted. This overview must include items such as, but not 
limited to, how the Plan Processor will manage access to the 
systems, internal segmentation, multi-factor authentication, 
separation of duties, entitlement management, background checks, 
etc.
    The Plan Processor must develop and maintain policies and 
procedures reasonably designed to prevent, detect, and mitigate the 
impact of unauthorized access or usage of data in the Central 
Repository. Such policies and procedures must be approved by the 
Operating Committee, and should include, at a minimum:

Information barriers governing access to and usage of data in the 
Central Repository;
Monitoring processes to detect unauthorized access to or usage of 
data in the Central Repository; and
Escalation procedures in the event that unauthorized access to or 
usage of data is detected.

    A Role Based Access Control (``RBAC'') model must be used to 
permission user with access to different areas of the CAT System. 
The CAT System must support an arbitrary number of roles with access 
to different types of CAT Data, down to the attribute level. The 
administration and management of roles must be documented. Periodic 
reports detailing the current list of authorized users and the date 
of their most recent access must be provided to Participants, the 
SEC and the Operating Committee. The reports of the Participants and 
the SEC will include only their respective list of users. The 
Participants [and the SEC] must provide a response to the report 
confirming that the list of users is accurate. The required 
frequency of this report will be defined by the Operating Committee. 
The Plan Processor must log every instance of access to Central 
Repository data by users.
    Passwords stored in the CAT System must be stored according to 
industry best practices. Reasonable password complexity rules should 
be documented and enforced, such as, but not limited to, mandatory 
periodic password changes and prohibitions on the reuse of the 
recently used passwords.
    Password recovery mechanisms must provide a secure channel for 
password reset, such as emailing a one-time, time-limited login 
token to a pre-determined email address associated with that user. 
Password recovery mechanisms that allow in-place changes or email 
the actual forgotten password are not permitted.
    Any login to the system that is able to access PII data must 
follow non-PII password rules and must be further secured via multi-
factor authentication (``MFA''). The implementation of MFA must be 
documented by the Plan Processor. MFA authentication capability for 
all logins [(including non-PII)] is required to be implemented by 
the Plan Processor.

Breach Management

    The Plan Processor must develop policies and procedures 
governing its responses to systems or data breaches. Such policies 
and procedures will include a formal cyber incident response plan, 
and documentation of all information relevant to breaches.
    The cyber incident response plan will provide guidance and 
direction during security incidents. The plan will be subject to 
approval by the Operating Committee. The plan may include items such 
as:

Guidance on crisis communications;
Security and forensic procedures;
Customer notifications;
``Playbook'' or quick reference guides that allow responders quick 
access to key information;
Insurance against security breaches;
Retention of legal counsel with data privacy and protection 
expertise; and
Retention of a Public Relations firm to manage media coverage.

    Documentation of information relevant to breaches should 
include:

A chronological timeline of events from the breach throughout the 
duration of the investigation;
Relevant information related to the breach (e.g., date discovered, 
who made the discovery, and details of the breach);
Response efforts, involvement of third parties, summary of meetings/
conference calls, and communication; and
The impact of the breach, including an assessment of data accessed 
during the breach and impact on CAT Reporters.

PII Data Requirements

    PII data must not be included in the result set(s) from online 
or direct query tools, reports or bulk data extraction. Instead, 
results will display existing non-PII unique identifiers (e.g., 
Customer-ID or Firm Designated ID). The PII corresponding to these 
identifiers can be gathered using the PII workflow described in 
Appendix D, Data Security, PII Data Requirements. By default, users 
entitled to query CAT Data are not authorized for PII access. The 
process by which someone becomes entitled for PII access, and how 
they then go about accessing PII data, must be documented by the 
Plan Processor. The chief regulatory officer, or other such 
designated officer or employee at each Participant [and the 
Commission] must, at least annually, review and certify that people 
with PII access have the appropriate level of access for their role.
    Using the RBAC model described above, access to PII data shall 
be configured at the PII attribute level, following the ``least 
privileged'' practice of limiting access as much as possible.
    PII data must be stored separately from other CAT Data. It 
cannot be stored with the transactional CAT Data, and it must not be 
accessible from public internet connectivity. A full audit trail of 
PII access (who accessed what data, and when) must be maintained. 
The Chief Compliance Officer and the Chief Information Security 
Officer shall have access to daily PII reports that list all users 
who are entitled for PII access, as well as the audit trail of all 
PII access that has occurred for the day being reported on.

Industry Standards

    The following industry standards [, at a minimum,]--which is not 
intended to be an exclusive list--must be followed as such standards 
and requirements may be replaced by successor publications, or 
modified, amended, or supplemented and as approved by the Operating 
Committee (in the event of a conflict between standards, the more 
stringent standard shall apply, subject to the approval of the 
Operating Committee):

National Institute of Standards and Technology:
    [cir] 800-23--Guidelines to Federal Organizations on Security 
Assurance and Acquisition/Use of Test/Evaluated Products
    [cir] 800-53--Security and Privacy Controls for Federal 
Information Systems and Organizations
    [cir] 800-115--Technical Guide to Information Security Testing 
and Assessment
    [cir] 800-118--Guide to Enterprise Password Management
    [cir] 800-133--Recommendation for Cryptographic Key Generation
    [cir] 800-137--Information Security Continuous Monitoring for 
Federal Information Systems and Organizations
    [cir] To the extent not specified above, all other provisions of 
the NIST Cyber Security Framework
Federal Financial Institutions Examination Council:
    [cir] Authentication Best Practices
International Organization for Standardization:
    [cir] ISO/IEC 27001--Information Security Management

    The Company shall endeavor to join the FS-ISAC and comparable 
bodies as the Operating Committee may determine. The FS-ISAC 
provides real time security updates, industry best practices, threat 
conference calls, xml data feeds and a member contact directory. The 
FS-ISAC provides the Company with the ability to work with the 
entire financial industry to collaborate for the purposes of staying 
up to date with the latest information security activities.

BCP/DR Process

Overview

    The Plan Processor must develop and implement disaster recovery 
(``DR'') and business continuity plans (``BCP'') that are tailored 
to the specific requirements of the CAT environment, and which must 
be approved and regularly reviewed by the Operating Committee. The 
BCP must address the protection of data, service for the data 
submissions, processing, data access, support functions and 
operations. In the context of this document, BCP generally refers to 
how the business activities will continue in the event of a 
widespread disruption and the DR requirements refer to how the CAT 
infrastructure will be designed to support a full data center 
outage. In addition, the Plan Processor must have SLAs in place to 
govern redundancy (i.e., no single point of failure) of critical 
aspects of the CAT System (e.g., electrical feeds, network 
connectivity, redundant processors, storage units, etc.) and

[[Page 85027]]

must have an architecture to support and meet the SLA requirements. 
Any SLAs between the Plan Processor and third parties must be 
approved by the Operating Committee.

Industry Standards

    The following National Institute of Standards and Technology 
standards, at a minimum, must be followed in association with 
Disaster Recovery, in each case as such standards and requirements 
may be replaced by successor publications, or modified, amended, or 
supplemented and as approved by the Operating Committee:

[ssquf] 800-34--Contingency Planning for Federal Information 
Systems; and

    Specifically, the following sections as minimum requirements for 
designing and implementing BCP and DR plans:

[cir] Chapter 3: Information System Contingency Planning Process, 
which identifies seven steps to use when developing contingency 
plans;
[cir] Chapter 4: Information System Contingency Plan Development, 
which outlines the key elements of a contingency plan;
[cir] Chapter 5: Technical Contingency Planning Considerations 
(using the specific sections applicable to the Plan Processor's 
systems) which provides considerations specific to different types 
of technology; and
[cir] Other sections and the appendices should be taken into 
consideration as warranted.

    In addition, the Plan Processor will need to develop a process 
to manage and report all breaches.

Business Continuity Planning

    The Plan Processor will design a BCP that supports a 
continuation of the business activities required of the CAT in the 
event of a widespread disruption.
    With respect to the team supporting CAT business operations, a 
secondary site must be selected that is capable of housing the 
critical staff necessary for CAT business operations. The site must 
be fully equipped to allow for immediate use. The selection of the 
site must take into account diversity in utility and 
telecommunications infrastructure as well as the ability for CAT 
staff to access the site in the event of transit shutdowns, closure 
of major roadways and other significant disruptions that may affect 
staff. Planning should consider operational disruption involving 
significant unavailability of staff.
    A bi-annual test of CAT operations where CAT staff operates the 
facility from the secondary site is required. This will ensure that 
phone systems, operational tools and other help desk functions all 
work as expected and the Plan Processor still functions as usual 
even in the event of a disruption.
    CAT operations staff must maintain, and annually test, remote 
access capabilities to ensure smooth operations during a site un-
availability event. Certain critical staff may be required to report 
directly to the secondary office site. However, an effective 
telecommuting solution must be in place for all critical CAT 
operations staff. Furthermore, any telecommuting strategy must 
require a remote desktop style solution where CAT operations and 
data consoles remain at the primary data center and must further 
ensure that CAT Data may not be downloaded to equipment that is not 
CAT-owned and compliant with CAT security requirements.
    The BCP must identify critical third party dependencies. The 
Plan Processor will coordinate with critical suppliers regarding 
their arrangements and involve these parties in tests on an annual 
basis. Critical third party firms may be required to provide 
evidence of their BCP capabilities and testing.
    The Plan Processor must conduct third party risk assessments at 
regular intervals to verify that security controls implemented are 
in accordance with NIST SP 800-53. These risk assessments must 
include assessment scheduling, questionnaire completion and 
reporting. The Plan Processor should provide assessment reports to 
the Operating Committee.
    The Plan Processor will develop and annually test a detailed 
crisis management plan to be invoked following certain agreed 
disruptive circumstances.
    The processing sites for business continuity must adhere to the 
``Interagency Paper on Sound Practices to Strengthen the Resilience 
of the U.S. Financial System.'' \3947\
---------------------------------------------------------------------------

    \3947\ See Interagency Paper on Sound Practices to Strengthen 
the Resilience of the U.S. Financial System (Apr. 8, 2003), 
available at http://www.sec.gov/news/studies/34-47638.htm.
---------------------------------------------------------------------------

    The Plan Processor will conduct an annual Business Continuity 
Audit using an Independent Auditor approved by the Operating 
Committee. The Independent Auditor will document all findings in a 
detailed report provided to the Operating Committee.

Disaster Recovery Requirements

    The Plan Processor will implement a DR capability that will 
ensure no loss of data and will support the data availability 
requirements and anticipated volumes of the CAT.
    A secondary processing site must be capable of recovery and 
restoration of services at the secondary site within a minimum of 48 
hours, but with the goal of achieving next day recovery after a 
disaster event. The selection of the secondary site must consider 
sites with geographic diversity that do not rely on the same 
utility, telecom and other critical infrastructure services. The 
processing sites for disaster recovery and business continuity must 
adhere to the ``Interagency Paper on Sound Practices to Strengthen 
the Resilience of the U.S. Financial System.''
    The secondary site must have the same level of availability/
capacity/throughput and security (physical and logical) as the 
primary site. The requirement implies and expects that fully 
redundant connectivity between the primary and secondary processing 
sites be established and fully available. Further, given this 
recovery window, this connectivity must be used to replicate 
repositories between the primary and secondary sites. Finally, CAT 
Reporter and Data Submitter submissions must be replicated to the 
secondary site for possible replay if recent replications are 
incomplete. Replication must occur as deliveries complete to ensure 
that a widespread communications failure will have minimal impact to 
the state of the secondary site.
    On an annual basis, the Plan Processor must execute an industry 
DR test, which must include Plan Participants and a critical mass of 
non-Plan Participant CAT Reporters and Data Submitters. The tests 
must be structured such that all CAT Reporters and other Data 
Submitters can upload to the DR site and the data be ingested by the 
CAT Data loaders. All DR tests are required to realistically reflect 
the worst-case scenario.
    Failover processes must be transparent to CAT Reporters, as well 
as failback. In the event of a site failover, CAT Reporters must be 
able to deliver their daily files without changing configuration. 
This avoids requiring all CAT Reporters to update configurations, 
which is an error-prone effort.
    After a DR event, the primary processing site must be made 
available as quickly as possible. For short duration DR events, the 
primary site must be returned to primary within 48 hours after the 
DR event. Longer duration outages will have differing SLAs. The DR 
plan must include designs that allow the re-introduction of the 
primary site or the introduction of a new primary site as the event 
dictates and an indication of the time required for this re-
introduction.

Data Availability

Data Processing

    CAT order events must be processed within established timeframes 
to ensure data can be made available to Participants' regulatory 
staff and the SEC in a timely manner. The processing timelines start 
on the day the order event is received by the Central Repository for 
processing. Most events must be reported to the CAT by 8:00 a.m. 
Eastern Time the Trading Day after the order event occurred 
(referred to as transaction date). The processing timeframes below 
are presented in this context. All events submitted after T+1 
(either reported late or submitted later because not all of the 
information was available) must be processed within these timeframes 
based on the date they were received.
    The Participants require the following timeframes (Figure A) for 
the identification, communication and correction of errors from the 
time an order event is received by the processor:

Noon Eastern Time T+1 (transaction date + one day)--Initial data 
validation, lifecycle linkages and communication of errors to CAT 
Reporters;
8:00 a.m. Eastern Time T+3 (transaction date + three days)--
Resubmission of corrected data; and
8:00 a.m. Eastern Time T+5 (transaction date + five days)--Corrected 
data available to Participant regulatory staff and the SEC.

    Late submissions or re-submissions (after 8:00 a.m.) may be 
considered to be processed that day if it falls within a given time 
period after the cutoff. This threshold will be determined by the 
Plan Processor and approved by the Operating Committee. In the event 
that a significant portion of the data

[[Page 85028]]

has not been received as monitored by the Plan Processor, the Plan 
Processor may decide to halt processing pending submission of that 
data.
[GRAPHIC] [TIFF OMITTED] TN23NO16.000

Data Availability Requirements

    Prior to 12:00 p.m. Eastern Time on T+1, raw unprocessed data 
that has been ingested by the Plan Processor must be available to 
Participants' regulatory staff and the SEC.
    Between 12:00 p.m. Eastern Time on T+1 and T+5, access to all 
iterations of processed data must be available to Participants' 
regulatory staff and the SEC.
    The Plan Processor must provide reports and notifications to 
Participant regulatory staff and the SEC regularly during the five-
day process, indicating the completeness of the data and errors. 
Notice of major errors or missing data must be reported as early in 
the process as possible. If any data remains un-linked after T+5, it 
must be available and included with all linked data with an 
indication that the data was not linked.
    If corrections are received after T+5, Participants' regulatory 
staff and the SEC must be notified and informed as to how re-
processing will be completed. The Operating Committee will be 
involved with decisions on how to re-process the data; however, this 
does not relieve the Plan Processor of notifying the Participants' 
regulatory staff and the SEC.
[GRAPHIC] [TIFF OMITTED] TN23NO16.001

    CAT PII data must be processed within established timeframes to 
ensure data can be made available to Participants' regulatory staff 
and the SEC in a timely manner. Industry Members submitting new or 
modified Customer information must provide it to the Central 
Repository no later than 8:00 a.m. Eastern Time on T+1. The Central 
Repository must validate the data and generate error reports no 
later than 5:00 p.m. Eastern Time on T+[3]1. The Central Repository 
must process the resubmitted data no later than 5:00 p.m. Eastern 
Time on T+4. Corrected data must be resubmitted no later than 5:00 
p.m. Eastern Time on T+3. The Central Repository must process the 
resubmitted data no later than 5:00 p.m. Eastern Time on T+4. 
Corrected data must be available to regulators no later than 8:00 
a.m. Eastern Time on T+5.
    Customer information that includes PII data must be available to 
regulators immediately upon receipt of initial data and corrected 
data, pursuant to security policies for retrieving PII.

Receipt of Data from Reporters

Receipt of Data Transmission

    Following receipt of data files submitted by the CAT Reporter or 
Data Submitter, the Plan Processor must send an acknowledgement of 
data received to the CAT Reporter and Data Submitter, if applicable. 
Such acknowledgment will enable CAT Reporters to create an audit 
trail of their submissions and allow for tracing of data breakdowns 
when data is not received. At a minimum, the receipt acknowledgement 
will include:

SRO-Assigned Market Participant Identifier;
Date of Receipt;
Time of Receipt;
File Identifier; and
Value signifying the acknowledgement of receipt, but not processing, 
of the file.

Data Validation

    The Plan Processor will implement data validations at the file 
and individual record

[[Page 85029]]

level for data received by the Plan Processor including customer 
data. If a record does not pass basic validations, such as syntax 
rejections, then it must be rejected and sent back to the CAT 
Reporter as soon as possible, so it can repair and resubmit.\3948\ 
The required data validations may be amended based on input from the 
Operating Committee and the Advisory Committee. All identified 
exceptions will be reported back to the CAT Reporter submitting the 
data and/or the CAT Reporter on whose behalf the data was submitted.
---------------------------------------------------------------------------

    \3948\ If needed--data validation may be a process with an 
initial validation phase for data errors and a subsequent validation 
phase later in processing where more time is needed to assess the 
context of the record in relation to data that may be submitted to 
the CAT later in the submission window. The Plan Processor must have 
an additional ``matching'' process for the purposes of linking 
together order data passed between CAT Reporters.
---------------------------------------------------------------------------

    The data validations must include the following categories and 
must be explained in the Technical Specifications document:

File Validations--Confirmation of file transmission and receipt are 
in the correct formats. This includes validation of header and 
trailers on the submitted report, confirmation of a valid SRO-
Assigned Market Participant Identifier, and verification of the 
number of records in the file.
Validation of CAT Data--Syntax and context checks, including:
    [cir] Format checks:
    Check that the data is entered in the specified format
    [cir] Data Type checks:
    Check that the data type of each attribute is as per 
specification
    [cir] Consistency checks:
    Check that all attributes for a record of a specified type are 
consistent
    [cir] Range/logic checks:
    Range check--Validate that each attribute for every record has a 
value within specified limits
    Logic check--Validate that the values provided against each 
attribute are associated with the event type they represent
    [cir] Data validity checks:
    Validate that each attribute for every record has an acceptable 
value
    [cir] Completeness checks:
    Verify that each mandatory attribute for every record is not 
null
    [cir] Timeliness checks:
    Verify that records were submitted within the submission 
timelines

Linkage Validation \3949\--Process by which related CAT Reportable 
Events are in a linked daisy chain method
---------------------------------------------------------------------------

    \3949\ A linkage validation error should only populate for the 
CAT Reporter that the Plan Processor determines to have broken the 
link.

    CAT Reporters must have the ability to correct, replace or 
delete records that have passed initial validations within the CAT.
    After the Central Repository has processed the data, the Plan 
Processor must provide daily statistics, including at a minimum, the 
following information:

SRO-Assigned Market Participant Identifier;
Date of Submission;
Number of files received;
Number of files accepted;
Number of files rejected;
Number of total order events received;
Number of order events accepted;
Number of order events rejected;
Number of each type of report received;
Number of each type of report accepted;
Number of each type of report rejected;
Number of customer records received;
Number of total customer records accepted;
Number of total customer records rejected;
Number of unknown accounts;
Number of late submissions;
Order-IDs rejected;
Reason(s) for rejection;
Number of records attempted to be matched;
Number of records matched; and
Percentage of records matched.

    Individual records contained in files that do not pass the file 
validation process must not be included for further processing. Once 
a file passes the initial validation, individual records contained 
therein may then be processed for further validation. Individual 
records that do not pass the data validation processes will not be 
included in the final audit trail but must be retained. 
Additionally, records not passing the validations will not be 
included for matching processes.

Exception Management

    The Plan Processor must capture rejected records for each CAT 
Reporter and make them available to the CAT Reporter. The 
``rejects'' file must be accessible via an electronic file format 
and the rejections and daily statistics must be available via a web 
interface. The Plan Processor must provide functionality for CAT 
Reporters to amend any exceptions.
    The Plan Processor must support bulk error correction. Rejected 
records can be resubmitted as a new file with appropriate indicators 
to identify the rejection record, which is being repaired. The Plan 
Processor will then reprocess repaired records.
    A GUI must be available for CAT Reporters to make updates to 
individual records or attributes and must include, at a minimum, 
the:

Count of each type of rejection;
Reason for each rejection;
Ability to download the rejections;
Firm assigned order ID of each rejection;
Details of each rejection;
Type of report rejected; and
Repair status.

    The Plan Processor must support bulk replacement of records, and 
reprocess such replaced records. The Plan Processor must provide CAT 
Reporters with documentation that detail the process how to amend 
and upload records that fail the validations that are outlined as 
part of Section 7.4. The Plan Processor must maintain a detailed 
audit trail capturing corrections to and replacements of records.
    The Plan Processor will provide CAT Reporters with their error 
reports as they become available, and daily statistics will be 
provided after data has been uploaded and validated by the Plan 
Processor. The Plan Processor must support a continuous validation 
and feedback model so that CAT Reporters can identify and correct 
rejections on an ongoing basis. The rejected reports will include 
descriptive details, or codes related to descriptive details, as to 
why each data record was rejected by the Plan Processor.
    On a monthly basis, the Plan Processor must produce and publish 
reports detailing performance and comparison statistics for CAT 
Reporters,\3950\ similar to the Report Cards published for OATS 
presently. This will enable CAT Reporters to assess their 
performance in relation to their industry peers and help them assess 
the risk related to their reporting of transmitted data.
---------------------------------------------------------------------------

    \3950\ See Appendix C, Error Communication, Correction, and 
Processing.
---------------------------------------------------------------------------

    Breaks in intermittent lifecycle linkages must not cause the 
entire lifecycle to break nor cause a reject to the CAT Reporter 
that correctly reported.

Error Corrections

    Error corrections must be able to be submitted and processed at 
any time, including timeframes after the standard repair window. 
Additionally, in order to make corrections, CAT Reporters must have 
access to the Central Repository over weekends.
    CAT Reporters must be able to submit error corrections for data 
errors identified by CAT Reporters that passed format validations.
    Additionally, the Plan Processor must:

Provide feedback as to the reason(s) for errors;
Prevent a linkage break between reports from resulting in additional 
events being rejected;
Allow broken linkages to be repaired without having to submit or 
resubmit additional reports;
Allow error corrections to be submitted both via online and bulk 
uploads or via file submission;
Support auto-correction of identified errors and notify reporters of 
any auto-corrections;
Support group repairs (i.e., the wrong issue symbol affecting 
multiple reports).

Data Ingestion

    Data submitted to the Central Repository, including rejections 
and corrections, must be stored in repositories designed to hold 
information based on the classification of the CAT Reporter (i.e., 
whether the CAT Reporter is a Participant, a broker-dealer, or a 
third party Data Submitter). After ingestion by the Central 
Repository, the Raw Data must be transformed into a format 
appropriate for data querying and regulatory output.

Functionality of the CAT System

Regulator Access

    The Plan Processor must provide Participants' regulatory staff 
and the SEC with access to all CAT Data for regulatory purposes 
only. Participants' regulatory staff and the SEC will access CAT 
Data to perform functions, including economic analyses, market 
structure analyses, market surveillance, investigations, and 
examinations.
    The CAT must be able to support, at a minimum, 3,000 regulatory 
users within the

[[Page 85030]]

system. It is estimated that approximately 20% of all users will use 
the system on a daily or weekly basis while approximately 10% of all 
users will require advanced regulator-user access, as described 
below. Furthermore, it is estimated that there may be approximately 
600 concurrent users accessing the CAT at any given point in time. 
These users must be able to access and use the system without an 
unacceptable decline in system performance.\3951\
---------------------------------------------------------------------------

    \3951\ Specific performance requirements will be included in the 
SLA.
---------------------------------------------------------------------------

    As stated in Appendix D, Data Security, the Plan Processor must 
be able to support an arbitrary number of user roles. Defined roles 
must include, at a minimum:

Basic regulator users--Individuals with approved access who plan to 
use the Central Repository to run basic queries (e.g., pulling all 
trades in a single stock by a specific party).
Advanced regulator users--Individuals with approved access who plan 
to use the Central Repository to construct and run their own complex 
queries.

    Regulators will have access to processed CAT Data through two 
different methods, an online-targeted query tool and user-defined 
direct queries and bulk extracts.

Online Targeted Query Tool

    The online targeted query tool will provide authorized users 
with the ability to retrieve processed and/or validated (unlinked) 
data via an online query screen that includes the ability to choose 
from a variety of pre-defined selection criteria. Targeted queries 
must include date(s) and/or time range(s), as well as one or more of 
a variety of fields, including the following:

Instrument(s);
Related instruments (e.g., single stock and all options with for the 
stock);
Data type (executions, orders, cancelations, quotes, etc.);
Product type (equity, option, etc.);
Processed data, unlinked data or both;
Listing market;
Exchange;
CAT-Reporter-ID(s)--CAT assigned and Participant assigned;
Customer-ID(s)--CAT assigned and CAT Reporter assigned;
CAT-Order-ID(s)--CAT assigned and CAT Reporter assigned;
ISO flag;
Put/call;
Strike price (include ability to select range);
Size;
Price;
Side;
Short-sale identifier;
Time-in-force (IOC, GTC, etc.);
Orders, quotes, BBOs or trades above or below a certain size;
Orders, quotes, BBOs or trades within a range of prices;
Canceled orders and/or trades;
CAT Reporters exceeding specified volume or percentage of volume 
thresholds in a single instrument or market-wide during a specified 
period of time;
CAT Reporter correction rate over time;
Audit trail of order linkages;
Corporate action events;
Instrument history; and
Others to be defined.

    The tool must provide a record count of the result set, the date 
and time the query request is submitted, and the date and time the 
result set is provided to the users. In addition, the tool must 
indicate in the search results whether the retrieved data was linked 
or unlinked (e.g., using a flag). In addition, the online targeted 
query tool must not display any PII data. Instead, it will display 
existing non-PII unique identifiers (e.g., Customer-ID or Firm 
Designated ID). The PII corresponding to these identifiers can be 
gathered using the PII workflow described in Appendix D, Data 
Security, PII Data Requirements. The Plan Processor must define the 
maximum number of records that can be viewed in the online tool as 
well as the maximum number of records that can be downloaded. Users 
must have the ability to download the results to .csv, .txt, and 
other formats, as applicable. These files will also need to be 
available in a compressed format (e.g., .zip, .gz). Result sets that 
exceed the maximum viewable or download limits must return to users 
a message informing them of the size of the result set and the 
option to choose to have the result set returned via an alternate 
method.
    The Plan Processor must define a maximum number of records that 
the online targeted query tool is able to process. The minimum 
number of records that the online targeted query tool is able to 
process is 5,000 (if viewed within the online query tool) or 10,000 
(if viewed via a downloadable file).
    Once query results are available for download, users are to be 
given the total file size of the result set and an option to 
download the results in a single or multiple file(s). Users that 
select the multiple file option will be required to define the 
maximum file size of the downloadable files. The application will 
then provide users with the ability to download the files. This 
functionality is provided to address limitations of end-user network 
environment that may occur when downloading large files.
    The tool must log submitted queries and parameters used in the 
query, the user ID of the submitter, the date and time of the 
submission, as well as the delivery of results. The Plan Processor 
will use this logged information to provide monthly reports to each 
Participant and the SEC of its respective metrics on query 
performance and data usage of the online query tool. The Operating 
Committee must receive all monthly reports in order to review items, 
including user usage and system processing performance.

Online Targeted Query Tool Performance Requirements

    For targeted search criteria, the minimum acceptable response 
times will be increments of less than one minute. For the complex 
queries that either scan large volumes of data (e.g., multiple trade 
dates) or return large result sets (>1M records), the response time 
must generally be available within 24 hours of the submission of the 
request. Regardless of the complexity of the criteria used within 
the online query tool, any query request for data within one 
business date of a 12-month period must return results within 3 
hours.
    Performance requirements listed below apply to data:

 Online targeted query tool searches that include equities 
and options trade data only in the search criteria must meet minimum 
requirements, including:
    [cir] Returning results within 1 minute for all trades and 
related lifecycle events for a specific Customer or CAT Reporter 
with the ability to filter by security and time range for a 
specified time window up to and including an entire day;
    [cir] Returning results within 30 minutes for all trades and 
related lifecycle events for a specific Customer or CAT Reporter in 
a specified date range (maximum 1 month);
    [cir] Returning results within 6 hours for all trades and 
related lifecycle events for a specific Customer or CAT Reporter in 
a specified date range (maximum 12-month duration from the most 
recent 24 months); and
    [cir] Returning results for the full 6 years of data for all 
trades and lifecycle events across daily, weekly, and multi-year 
periods.
 Online targeted query tool searches that include equities 
and options order and National Best Bid and National Best Offer data 
in search criteria must meet minimum requirements, including:
    [cir] Returning results within 5 minutes for all orders and 
their complete lifecycles for a single security from a specific 
Participant across all markets (note: a Participant could have 
multiple participant identifiers) in a specified time window not to 
exceed 10 minutes for a single date;
    [cir] Returning results within 5 minutes for all orders, 
cancelations, and the National Best Bid and National Best Offer (or 
the protected best bid and offer) at the time the order is created 
for a single security in a specified time window not to exceed 10 
minutes for a single date;
    [cir] Returning results within 5 minutes for all equity and 
options orders, cancelations, and executions from a specific market 
participant in a single underlying instrument in a specified time 
window not to exceed 10 minutes for a single date;
    [cir] Returning results within 5 minutes for all orders, quotes, 
routes, cancelations and trades (complete life-cycle) for related 
instruments (e.g., single stock and all options series for the same 
stock) in a specified time window not to exceed 10 minutes for a 
single date;
    [cir] Returning results within 5 minutes for all orders and 
quotes entered during a specific time period by a list of specific 
CAT Reporters, with the ability to drill down to show the complete 
life-cycle must return results in a specified time window not to 
exceed 10 minutes for a single date; and
    [cir] Returning results within 5 minutes for all orders and 
quotes entered during a specific time period for a specified list of 
instruments must return results in a specified time window not to 
exceed 10 minutes for a single date.

    The online targeted query tool architecture must include an 
automated application-level

[[Page 85031]]

resource management component. This feature must manage query 
requests to balance the workload to ensure the response times for 
targeted and complex queries meet the defined response times. The 
resource management function will categorize and prioritize query 
requests based on the input parameters, complexity of the query, and 
the volume of data to be parsed in the query. Additionally, the 
source of the query may also be used to prioritize the processing. 
The Plan Processor must provide details on the prioritization plan 
of the defined solution for online query requests.
    The online targeted query tool must support parallel processing 
of queries. At a minimum, the online targeted query tool must be 
able to process up to 300 simultaneous query requests with no 
performance degradation.

Online Targeted Query Tool Access and Administration

    Access to CAT Data is limited to authorized regulatory users 
from the Participants and the SEC. Authorized regulators from the 
Participants and the SEC may access all CAT Data, with the exception 
of PII data. A subset of the authorized regulators from the 
Participants and the SEC will have permission to access and view PII 
data. The Plan Processor must work with the Participants and SEC to 
implement an administrative and authorization process to provide 
regulator access. The Plan Processor must have procedures and a 
process in place to verify the list of active users on a regular 
basis.
    A two-factor authentication is required for access to CAT Data. 
PII data must not be available via the online targeted query tool or 
the user-defined direct query interface.

User-Defined Direct Queries and Bulk Extraction of Data

    The Central Repository must provide for direct queries, bulk 
extraction, and download of data for all regulatory users. Both the 
user-defined direct queries and bulk extracts will be used by 
regulators to deliver large sets of data that can then be used in 
internal surveillance or market analysis applications. The data 
extracts must use common industry formats.
    Direct queries must not return or display PII data. Instead, 
they will return existing non-PII unique identifiers (e.g., 
Customer-ID or Firm Designated ID). The PII corresponding to these 
identifiers can be gathered using the PII workflow described in 
Appendix D, Data Security, PII Data Requirements.
    Participants and regulators must have the ability to create, 
save, and schedule dynamic queries that will run directly against 
processed and/or unlinked CAT Data. The examples below demonstrate 
robust usage of the CAT Data to perform a variety of complex query, 
surveillance, and market analysis use cases. User-defined direct 
queries will be used to perform tasks such as market reconstruction, 
behavioral analysis, and cross-market surveillance.
    The method(s) for providing this capability is dependent upon 
the architecture of the CAT and will be defined by the final 
solution. The CAT cannot be web-based due to the volumes of data 
that could be extracted.
    The Participants are agnostic as to how user-defined direct 
queries or bulk extracts are implemented as long as the solution 
provides an open API that allows regulators to use analytic tools 
(e.g., R, SAS, Python, Tableau) and can use ODBC/JDBC drivers to 
access the CAT Data. Queries invoked through the open API must be 
auditable. The CAT System must contain the same level of control, 
monitoring, logging and reporting as the online targeted query tool. 
The Plan Processor may define a limited set of basic required fields 
(e.g., date and at least one other field such as symbol, CAT-
Reporter ID, or CAT-Customer-ID) that regulators must use in direct 
dynamic queries.
    The Plan Processor must provide procedures and training to 
regulators that will use the direct query feature. The Plan 
Processor may choose to require that user-defined direct query users 
participate in mandatory training sessions.
    The bulk extract feature will replace the current Intermarket 
Surveillance Group (ISG) ECAT and COATS compliance data files that 
are currently processed and provided to Participants for use in 
surveillance applications. These files are used extensively across 
all Participants in a variety of surveillance applications and are a 
critical data input to many surveillance algorithms. With the 
initial implementation of the CAT, opportunities exist to improve 
the content and depth of information available in these data files. 
The Plan Processor will need to work with ISG to define new layouts 
that will include additional data elements that will be available in 
the CAT Data.
    The Plan Processor is responsible for providing data models and 
data dictionaries for all processed and unlinked CAT Data.

User-Defined Direct Query Performance Requirements

    The user-defined direct query tool is a controlled component of 
the production environment made available to allow the Participants' 
regulatory staff and the SEC to conduct queries. The user-defined 
direct query tool must:

Provide industry standard programmatic interface(s) that allows 
Participants' regulatory staff and the SEC with the ability to 
create, save, and run a query;
Provide query results that are extractable/downloadable and can be 
used to refine subsequent queries;
Support complex, multistage queries;
Run at a minimum 3,000 queries on a daily basis. Of these, it is 
anticipated that roughly 60% would be simple queries (e.g., pulling 
of all trades in a given symbol traded during a certain time period) 
and 40% would be complex (e.g., looking for quotes or orders more 
than 5% away from the National Best Bid and National Best Offer);
Process and run approximately 1,800 queries concurrently;
Support SQL 92 as well as recursive queries with common table 
expressions (recursive CTEs), bulk load utility, interface for 
dimension management, windowing functions, JBDC and ODBC, or provide 
another API with equal or greater query capabilities, so long as 
ODBC and JDBC are supported. Support for stored procedures and user-
defined functions are optional;
Include data presentation tools/query tools that support query 
results that produce data sets ranging from less than 1 gigabyte to 
at least 10 terabytes or more of uncompressed data;
Provide query owners with the ability to schedule queries;
Provide query owners with the ability to cancel a query during 
execution or prior to the scheduled running of a query;
Provide Participants with a means to view all saved queries owned by 
the Participants as well as the scheduling of query executions (for 
queries that have been scheduled);
Provide an automated delivery method of scheduled query results to 
the appropriate Participant. Delivery methods must comply with all 
information security guidelines (encryption, etc.);
Provide technical expertise to assist regulators with questions and/
or functionality about the content and structure of the CAT query 
capability;
Include workload balancer to allow prioritization and processing of 
queries and delivery of results; and
Support parallel processing of queries. At a minimum, the user-
defined direct query tool must be able to process up to 300 
simultaneous query requests with no performance degradation.

Bulk Extract Performance Requirements

    For bulk extracts of an entire day of data, the minimum 
acceptable transfer time of equity and options data is four hours. 
This requirement assumes that there are no limitations within the 
regulator's own network environment that will prevent the Plan 
Processor from meeting this requirement.
    A consideration was made to require an online Report Center that 
would include pre-canned reports that could be delivered to 
regulators or pulled upon request. The reports would be predefined 
based on requirements developed by Participants and the SEC. Due to 
the added complexity and the lack of quantifiable use cases, the 
Participants determined that this was something that may be useful 
in the future but not at the initial implementation and launch of 
the CAT. This will be reassessed when broker-dealers begin 
submitting data to the CAT.
    It is envisioned that non-Participant CAT Reporters will be 
unable to access their data submissions through bulk data exports 
with the initial implementation of CAT. Only Participants and the 
SEC will have access to full lifecycle corrected bulk data exports.
    Extraction of data must be consistently in line with all 
permissioning rights granted by the Plan Processor. Data returned 
must be encrypted, password protected and sent via secure methods of 
transmission. In addition, PII data must be masked unless users have 
permission to view the data that has been requested.
    The Plan Processor must have an automated mechanism in place to 
monitor

[[Page 85032]]

user-defined direct query usage. This monitoring must include 
automated alerts to notify the Plan Processor of potential issues 
with bottlenecks or excessively long queues for queries or data 
extractions. The Plan Processor must provide details as to how the 
monitoring will be accomplished and the metrics that will be used to 
trigger alerts.
    The user-defined direct query and bulk extraction tool must log 
submitted queries and parameters used in the query, the user ID of 
the submitter, the date and time of the submission and the date and 
time of the delivery of results. The Plan Processor will use this 
logged information to provide monthly reports to the Operating 
Committee, Participants and the SEC of their respective usage of the 
online query tool.
    The bulk extract tool must support parallel processing of 
queries. At a minimum, the bulk extract tool must be able to process 
up to 300 simultaneous query requests with no performance 
degradation.

Identifying Latency and Communicating Latency Warnings to CAT Reporters

    The Plan Processor will measure and monitor Latency within the 
CAT network. Thresholds for acceptable levels of Latency will be 
identified and presented to the Operating Committee for approval. 
The Plan Processor will also define policies and procedures for 
handling and the communication of data feed delays to CAT Reporters, 
the SEC, and Participants' regulatory staff that occur in the CAT. 
Any delays will be posted for public consumption, so that CAT 
Reporters may choose to adjust the submission of their data 
appropriately, and the Plan Processor will provide approximate 
timelines for when system processing will be restored to normal 
operations.

Technical Operations

    The Plan Processor will develop policies, procedures, and tools 
to monitor and manage the performance of the Central Repository, to 
be approved by the Operating Committee. Such policies, procedures, 
and tools will include, at a minimum:

Monitoring and management of system availability and performance, to 
include both Online Targeted Query Tool and User-Defined Direct 
Queries;
Monitoring and management of query tool usage (e.g., to identify 
long-running or ``stuck'' queries); and
Segregation of query queues by regulator or Participant (i.e., one 
regulator or Participant's queries should not prevent another 
regulator or Participant's queries from running).

System SLAs

    Service Level Agreements for system and operational performance 
will be established for areas, including the following:

Linkage and order event processing performance;
Query performance and response times;
System availability;
User support/help desk performance;
Application, network, and data security performance; and
Development, change management, and implementation processes and 
timelines.

The actual terms of the SLAs will be negotiated between the Plan 
Participants and the eventual Plan Processor.

CAT Customer and Customer Account Information

Customer and Customer Account Information Storage

    The CAT must capture and store Customer and Customer Account 
Information in a secure database physically separated from the 
transactional database. The Plan Processor will maintain information 
of sufficient detail to uniquely and consistently identify each 
Customer across all CAT Reporters, and associated accounts from each 
CAT Reporter. The following attributes, at a minimum, must be 
captured:

Social security number (SSN) or Individual Taxpayer Identification 
Number (ITIN);
Date of birth;
Current name;
Current address;
Previous name; and
Previous address.

For legal entities, the CAT must capture the following attributes:

 Legal Entity Identifier (LEI) (if available);
 Tax identifier;
 Full legal name; and
 Address.

    The Plan Processor must maintain valid Customer and Customer 
Account Information for each trading day and provide a method for 
Participants' regulatory staff and the SEC to easily obtain 
historical changes to that information (e.g., name changes, address 
changes, etc.).
    The Plan Processor will design and implement a robust data 
validation process for submitted Firm Designated ID, Customer 
Account Information and Customer Identifying Information, and must 
continue to process orders while investigating Customer information 
mismatches. Validations should:

Confirm the number of digits on a SSN,
Confirm date of birth, and
Accommodate the situation where a single SSN is used by more than 
one individual.

    The Plan Processor will use the Customer information submitted 
by all broker-dealer CAT Reporters to assign a unique Customer-ID 
for each Customer. The Customer-ID must be consistent across all 
broker-dealers that have an account associated with that Customer. 
This unique CAT-Customer-ID will not be returned to CAT Reporters 
and will only be used internally by the CAT.
    Broker-Dealers will initially submit full account lists for all 
active accounts to the Plan Processor and subsequently submit 
updates and changes on a daily basis. In addition, the Plan 
Processor must have a process to periodically receive full account 
lists to ensure the completeness and accuracy of the account 
database. The Central Repository must support account structures 
that have multiple account owners and associated Customer 
information (joint accounts, managed accounts, etc.), and must be 
able to link accounts that move from one CAT Reporter to another 
(e.g., due to mergers and acquisitions, divestitures, etc.).

Required Data Attributes for Customer Information Data Submitted by 
Industry Members

    At a minimum, the following Customer information data attributes 
must be accepted by the Central Repository:

Account Owner Name;
Account Owner Mailing Address;
Account Tax Identifier (SSN, TIN, ITIN);
Market Identifiers (Larger Trader ID, LEI);
Type of Account;
Firm Identifier Number;
    [cir] The number that the CAT Reporter will supply on all orders 
generated for the Account;
Prime Broker ID;
Bank Depository ID; and
Clearing Broker.

Customer-ID Tracking

    The Plan Processor will assign a CAT-Customer-ID for each unique 
Customer. The Plan Processor will determine a unique Customer using 
information such as SSN and DOB for natural persons or entity 
identifiers for Customers that are not natural persons and will 
resolve discrepancies. Once a CAT-Customer-ID is assigned, it will 
be added to each linked (or unlinked) order record for that 
Customer.
    Participants and the SEC must be able to use the unique CAT-
Customer-ID to track orders from any Customer or group of Customers, 
regardless of what brokerage account was used to enter the order.

Error Resolution for Customer Data

    The Plan Processor must design and implement procedures and 
mechanisms to handle both minor and material inconsistencies in 
Customer information. The Central Repository needs to be able to 
accommodate minor data discrepancies such as variations in road name 
abbreviations in searches. Material inconsistencies such as two 
different people with the same SSN must be communicated to the 
submitting CAT Reporters and resolved within the established error 
correction timeframe as detailed in Section 8.
    The Central Repository must have an audit trail showing the 
resolution of all errors. The audit trail must, at a minimum, 
include the:

CAT Reporter submitting the data;
Initial submission date and time;
Data in question or the ID of the record in question;
Reason identified as the source of the issue, such as:
    [cir] duplicate SSN, significantly different Name;
    [cir] duplicate SSN, different DOB;
    [cir] discrepancies in LTID; or
    [cir] others as determined by the Plan Processor;
Date and time the issue was transmitted to the CAT Reporter, 
included each time the issue was re-transmitted, if more than once;
Corrected submission date and time, including each corrected 
submission if more than one, or the record ID(s) of the corrected 
data or a flag indicating that the issue was resolved and corrected 
data was not required; and
Corrected data, the record ID, or a link to the

[[Page 85033]]

corrected data.

User Support

CAT Reporter Support

    The Plan Processor will provide technical, operational and 
business support to CAT Reporters for all aspects of reporting. Such 
support will include, at a minimum:

Self-help through a web portal;
Direct support through email and phone;
Support contact information available through the internet; and
Direct interface with Industry Members and Data Submitters via 
industry events and calls, industry group meetings and informational 
and training sessions.
The Plan Processor must develop tools to allow each CAT Reporter to:
Monitor its submissions;
View submitted transactions in a non-bulk format (i.e., non-
downloadable) to facilitate error corrections;
Identify and correct errors;
Manage Customer and Customer Account Information;
Monitor its compliance with CAT reporting requirements; and
Monitor system status.

    The Plan Processor will develop and maintain communication 
protocols (including email messaging) and a secure website to keep 
CAT Reporters informed as to their current reporting status, as well 
as issues with the CAT that may impact CAT Reporters' ability to 
submit or correct data. The website will use user authentication to 
prevent users for seeing information about firms other than their 
own, and will contain:

Daily reporting statistics for each CAT Reporter,\3952\ including 
items such as:
---------------------------------------------------------------------------

    \3952\ Each CAT Reporter or Data Submitter must only be able to 
view its own data and data it submits on behalf of others.
---------------------------------------------------------------------------

    [cir] SRO-Assigned Market Participant Identifier;
    [cir] Date of submission;
    [cir] Number of files received;
    [cir] Number of files accepted;
    [cir] Number of files rejected;
    [cir] Number of total order events received;
    [cir] Number of order events accepted;
    [cir] Number of order events rejected;
    [cir] Number of each type of report received;
    [cir] Number of each type of report accepted;
    [cir] Number of each type of report rejected;
    [cir] Number of total customer records accepted;
    [cir] Number of total customer records rejected;
    [cir] Order-IDs rejected;
    [cir] Reason for rejection;
    [cir] Number of records attempted to be matched;
    [cir] Number of records matched;
    [cir] Percentage of records matched;
    [cir] Number of customer records received;
    [cir] Number of unknown accounts;
    [cir] Latest view of statistics inclusive of re-submissions to 
get a trade-date view of exceptions and correction statistics 
available for CAT Reporters to know when everything for a given 
trade date has been completed; and
    [cir] Most recent CAT Reporter Compliance Report Card, as 
defined in section 12.4;
CAT System status, system notifications, system maintenance, and 
system outages; and
A mechanism for submitting event data and correcting and 
resubmitting rejections or inaccurate data.

    The Plan Processor will develop and maintain a public website 
containing comprehensive CAT reporting information, including:

Technical Specifications;
Reporting guidance (e.g., FAQs);
Pending rule changes affecting CAT reporting;
CAT contact information;
Availability of test systems;
Testing plans;
Proposed changes to the CAT; and
Fee schedule.
    The Plan Processor will develop and maintain a mechanism for 
assigning CAT Reporter-IDs. A mechanism will also be developed and 
maintained to change CAT Reporter-IDs should this be necessary 
(e.g., due to a merger), with the expectations that such changes 
should be infrequent. Changes to CAT-Reporter-IDs must be reviewed 
and approved by the Plan Processor.
    Initially, non-Participant CAT Reporters will not have access to 
their data submissions through bulk data exports with the initial 
implementation of the Central Repository. Only Participants and the 
SEC will have access to full lifecycle corrected bulk data exports. 
Non-Participant CAT Reporters will be able to view their submissions 
online in a read-only, non-exportable format to facilitate error 
identification and correction. Data Submitters will be able to 
export bulk file rejections for repair and error correction 
purposes.
    The Plan Processor will define methods by which it will consult 
with and inform CAT Reporters and industry groups on updates and 
changes to user support.
    The Plan Processor will define pre- and post-production support 
programs to minimize the Error Rate and help CAT Reporters to meet 
their compliance thresholds. Such pre-production support program 
shall include, but are not limited to, the following activities:

Educational programs--Includes the following:
    [cir] Publication and industry-wide communication (including 
FAQs) of the Technical Specifications, including:
    Appropriate definitions/expected usages for each value in field 
format
    [cir] All available attribute values for each field
    [cir] Establishment of a dedicated help desk for Reporters to 
contact;
    [cir] Industry participation in order linkage methodologies;
    Include information on new order/trade types;
    [cir] Hosting of industry educational calls; and
    [cir] Hosting of industry-wide training.
Registration--Requires all firms to:
    [cir] Register and be certified as CAT Reporters;
    [cir] Attend industry-wide training;
    [cir] Establish internal controls to capture potential 
misreporting scenarios; and
    [cir] Work with the Plan Processor to understand scenario-based 
reporting and expected outputs.
Communications Plan--A strong communications plan of the timeline to 
reporting go-live shall:
    [cir] Include communication on how Error Rates and Compliance 
Thresholds are calculated; and
    [cir] Describe how errors will be communicated back to CAT 
Reporters.
Industry-wide testing--Industry-wide test results must be available 
for all CAT Reporters.
    [cir] As mentioned in Appendix C, Objective Milestones to Assess 
Progress, appropriate time must be provided between Technical 
Specification publication and production go-live.
    [cir] Ample testing time must be provided.
    [cir] Appropriate scenario-based testing, including all three 
validation processes, shall be established.
    [cir] A separate test environment for CAT Reporters that mirrors 
the production environment shall be provided.

    Post-production support program activities shall include, but 
are not limited to the following:

Issuing a monthly Report Card on reporting statistics, with 
information on how reporters stand against similar entities;
Publishing daily reporting statistics;
Maintaining Technical Specifications with defined intervals for new 
releases/updates;
Posting FAQs and other informational notices to be updated as 
necessary;
Hosting of industry educational calls;
Hosting of industry-wide training;
Emailing outliers, meaning firms significantly reporting outside of 
industry standards;
Conducting annual assessments of dedicated help desk to determine 
appropriate staffing levels;
Using the test environment prior to releasing new code to 
production; and
Imposing CAT Reporter requirements:
    [cir] Attendance/participation of industry testing sessions;
    [cir] Attendance in industry educational calls; and
    [cir] Attendance in industry-wide training.

CAT User Support

    The Plan Processor will develop a program to provide technical, 
operational and business support to CAT users, including 
Participants' regulatory staff and the SEC. The CAT help desk will 
provide technical expertise to assist regulators with questions and/
or functionality about the content and structure of the CAT query 
capability.
    The Plan Processor will develop tools, including an interface, 
to allow users to monitor the status of their queries and/or 
reports. Such website will show all in-progress queries/reports, as 
well as the current status and estimated completion time of each 
query/report.
    The Plan Processor will develop communication protocols to 
notify regulators of CAT System status, outages and other issues 
that would affect Participants' regulatory staff and the SEC's 
ability to

[[Page 85034]]

access, extract, and use CAT Data. At a minimum, Participants' 
regulatory staff and the SEC must each have access to a secure 
website where they can monitor CAT System status, receive and track 
system notifications, and submit and monitor data requests.
    The Plan Processor will develop and maintain documentation and 
other materials as necessary to train regulators in the use of the 
Central Repository, including documentation on how to build and run 
reporting queries.

CAT Help Desk

    The Plan Processor will implement and maintain a help desk to 
support broker-dealers, third party CAT Reporters, and Participant 
CAT Reporters (the ``CAT Help Desk''). The CAT Help Desk will 
address business questions and issues, as well as technical and 
operational questions and issues. The CAT Help Desk will also assist 
Participants' regulatory staff and the SEC with questions and issues 
regarding obtaining and using CAT Data for regulatory purposes.
    The CAT Help Desk must go live within a mutually agreed upon 
reasonable timeframe after the Plan Processor is selected, and must 
be available on a 24x7 basis, support both email and phone 
communication, and be staffed to handle at minimum 2,500 calls per 
month. Additionally, the CAT Help Desk must be prepared to support 
an increased call volume at least for the first few years. The Plan 
Processor must create and maintain a robust electronic tracking 
system for the CAT Help Desk that must include call logs, incident 
tracking, issue resolution escalation.
    CAT Help Desk support functions must include:
Setting up new CAT Reporters, including the assignment of CAT-
Reporter-IDs and support prior to submitting data to CAT;
Managing CAT Reporter authentication and entitlements;
Managing CAT Reporter and third party Data Submitters testing and 
certification;
Managing Participants and SEC authentication and entitlements;
Supporting CAT Reporters with data submissions and data corrections, 
including submission of Customer and Customer Account Information;
Coordinating and supporting system testing for CAT Reporters;
Responding to questions from CAT Reporters about all aspects of CAT 
reporting, including reporting requirements, technical data 
transmission questions, potential changes to SEC Rule 613 that may 
affect the CAT, software/hardware updates and upgrades, 
entitlements, reporting relationships, and questions about the 
secure and public websites;
Responding to questions from Participants' regulatory staff and the 
SEC about obtaining and using CAT Data for regulatory purposes, 
including the building and running of queries; and
Responding to administrative issues from CAT Reporters, such as 
billing.

CAT Reporter Compliance

    The Plan Processor must include a comprehensive compliance 
program to monitor CAT Reporters' adherence to SEC Rule 613. The 
Chief Compliance Officer will oversee this compliance program, and 
will have responsibility for reporting on compliance by CAT 
Reporters to the Participants. The compliance program covers all CAT 
Reporters, including broker-dealers and Participants.
    As a fundamental component of this program, the Plan Processor 
will identify on a daily basis all CAT Reporters exceeding the 
maximum allowable Error Rate established by the Participants. The 
Error Rate will initially be set by the CAT NMS Plan, and will be 
reviewed and adjusted on an ongoing basis by the Operating 
Committee. Error Rates will be based on timeliness, correctness, and 
linkages.
    The Plan Processor will, on an ongoing basis, analyze reporting 
statistics and Error Rates and recommend to Participants proposed 
changes to the maximum allowable Error Rates established by the 
Participants. All CAT Reporters exceeding this threshold will be 
notified that they have exceeded the maximum allowable Error Rate 
and will be informed of the specific reporting requirements that 
they did not fully meet (e.g., timeliness or rejections).
    The Plan Processor will develop and publish CAT Reporter 
compliance report cards on a periodic basis to assist CAT Reporters 
in monitoring overall compliance with CAT reporting requirements. 
The Plan Processor will also recommend criteria and processes by 
which CAT Reporters will be fined for inaccurate, incomplete, or 
late submissions. The compliance report cards will include the 
following information:

Number of inaccurate transactions submitted;
Number of incomplete transactions submitted; and
Number of transactions submitted later than reporting deadlines.

    The CAT Reporter compliance program will include reviews to 
identify CAT Reporters that may have failed to submit order events 
to the CAT, as well as to ensure CAT Reporters correct all 
identified errors even if such errors do not exceed the maximum 
allowable Compliance Threshold.
    The Plan Processor will, on a monthly basis, produce and provide 
reports containing performance and comparison statistics as needed 
to each Participant on its members' CAT reporting compliance 
thresholds so that Participants can monitor their members' 
compliance with CAT reporting requirements and initiate disciplinary 
action when appropriate. The Plan Processor will also produce and 
provide, upon request from the Participants and the SEC, reports 
containing performance and comparison statistics as needed on each 
CAT Reporter's compliance thresholds so that the Participants or the 
SEC may take appropriate action if a Participant fails to comply 
with its CAT reporting obligations.
    The Plan Processor will produce and make available on a monthly 
basis reports for all CAT Reporters, benchmarking their performance 
and comparison statistics against similar peers. The reports will be 
anonymized such that it will not be possible to determine the 
members of the peer group to which the CAT Reporter was compared.
    The Plan Processor will produce and make available to regulators 
on a monthly basis a report detailing Error Rates, transaction 
volumes, and other metrics as needed to allow regulators to oversee 
the quality and integrity of CAT Reporter reporting to the Central 
Repository.

Upgrade Process and Development of New Functionality

CAT Functional Changes

    The Plan Processor must propose a process governing the 
determination to develop new functionality, which process must be 
reviewed and approved by the Operating Committee. The process must, 
at a minimum:

Contain a mechanism by which changes can be suggested to the 
Operating Committee by Advisory Committee members, the Participants, 
or the SEC;
Contain a defined process for developing impact assessments, 
including implementation timelines, for proposed changes; and
Contain a mechanism by which functional changes which the Plan 
Processor wishes to undertake can be reviewed and approved by the 
Operating Committee.

    The Plan Processor shall not unreasonably withhold, condition, 
or delay implementation of any changes or modifications reasonably 
requested by the Operating Committee.

CAT Infrastructure Changes

    The Plan Processor must implement a process to govern changes to 
CAT. This process must contain provisions for:

Business-as-usual changes (e.g., replacing failed hardware, adding 
capacity to deal with expected increases in transaction volumes) 
that would require the Plan Processor to provide the Operating 
Committee with a summary report (e.g., infrastructure changes, 
acquired costs, etc.); and
Isolated infrastructure changes (e.g., moving components of the 
system from a self-hosted to an Infrastructure-as-a-Service 
provider) that would require the Plan Processor to provide a request 
to the Operating Committee for review and approval before commencing 
any actions.

Testing of New Changes

    The Plan Processor must implement a process governing user 
testing of changes to CAT functionality and infrastructure, which 
process must be reviewed and approved by the Operating Committee. 
The process must:

Define the process by which changes are to be tested by CAT 
Reporters[ and regulators];
Define the criteria by which changes will be approved prior to their 
deployment into the production environment(s); and
Define the environment(s) to be used for user testing.

[[Page 85035]]

EXHIBIT B

KEY TO COMMENT LETTERS CITED IN APPROVAL ORDER

Proposed National Market System Plan Governing the Consolidated Audit 
Trail

(File No. 4-698)

1. Letter from Kathleen Weiss Hanley, Bolton-Perella Chair in 
Finance, Lehigh University, and Jay. R. Ritter, Joseph B. Cordell 
Eminent Scholar Chair, University of Florida, to Brent J. Fields, 
Secretary, Commission, dated July 12, 2016 (``Hanley Letter'').
2. Letter from Courtney D. McGuinn, Operations Director, FIX Trading 
Community, to Commission, dated July 14, 2016 (``FIX Trading 
Letter'').
3. Letter from Kelvin To, Founder and President, Data Boiler 
Technologies, LLC, to Brent J. Fields, Secretary, Commission, dated 
July 15, 2016 (``Data Boiler Letter'').
4. Letter from Richard Foster, Senior Vice President and Senior 
Counsel for Regulatory and Legal Affairs, Financial Services 
Roundtable, to Brent J. Fields, Secretary, Commission, and Marcia E. 
Asquith, Corporate Secretary, Financial Industry Regulatory 
Authority, dated July 15, 2016 (``FSR Letter'').
5. Letter from David T. Bellaire, Esq., Executive Vice President and 
General Counsel, Financial Services Institute, to Brent J. Fields, 
Secretary, Commission, dated, July 18, 2016 (``FSI Letter'')
6. Letter from Stuart J. Kaswell, Executive Vice President and 
Managing Director, General Counsel, Managed Funds Association, to 
Brent J. Fields, Secretary, Commission, dated July 18, 2016 (``MFA 
Letter'').
7. Letter from Bonnie K. Wachtel, Wachtel and Company, Inc., to 
Commission, dated July 18, 2016. (``Wachtel Letter'').
8. Letter from David W. Blass, General Counsel, Investment Company 
Institute, to Brent J. Fields, Secretary, Commission, dated July 18, 
2016 (``ICI Letter'').
9. Letter from Larry E. Thompson, Vice Chairman and General Counsel, 
Depository Trust and Clearing Corporation, to Brent J. Fields, 
Secretary, Commission, dated July 18, 2016 (``DTCC Letter'').
10. Letter from Manisha Kimmel, Chief Regulatory Officer, Wealth 
Management, Thomson Reuters, to Brent J. Fields, Secretary, 
Commission, dated July 18, 2016 (``TR Letter'').
11. Letter from Theodore R. Lazo, Managing Director and Associate 
General Counsel, and Ellen Greene, Managing Director, Financial 
Services Operations, Securities Industry and Financial Markets 
Association, to Brent J. Fields, Secretary, Commission, dated July 
18, 2016 (``SIFMA Letter'').
12. Letter from Anonymous, to Commission, received July 18, 2016 
(``Anonymous Letter I'').
13. Letter from Mary Lou Von Kaenel, Managing Director, Financial 
Information Forum, to Brent J. Fields, Secretary, Commission, dated 
July 18, 2016 (``FIF Letter'').
14. Letter from Marc R. Bryant, Senior Vice President, Deputy 
General Counsel, Fidelity Investments, to Brent J. Fields, 
Secretary, Commission, dated July 18, 2016 (``Fidelity Letter'').
15. Letter from Mark Husler, CEO, UniVista, and Jonathan Jachym, 
Head of North America Regulatory Strategy and Government Relations, 
London Stock Exchange Group, to Brent J. Fields, Secretary, 
Commission, dated July 18, 2016 (``UnaVista Letter'').
16. Letter from Gary Stone, Chief Strategy Officer for Trading 
Solutions and Global Regulatory and Policy Group, Bloomberg, L.P., 
to Brent J. Fields, Secretary, Commission, dated July 18, 2016 
(``Bloomberg Letter'').
17. Letter from Dennis M. Kelleher, President and CEO, Stephen W. 
Hall, Legal Director and Securities Specialist, and Lev Bagramian, 
Senior Securities Policy Advisor, Better Markets, to Brent J. 
Fields, Secretary, Commission, dated July 18, 2016 (``Better Markets 
Letter'').
18. Letter from Industry Members of the Development Advisory Group 
(``DAG'') (including Financial Information Forum, Securities 
Industry and Financial Markets Association and Securities Traders 
Association), to Brent J. Fields, Secretary, Commission, dated July 
20, 2016 (``DAG Letter'').
19. Letter from John A. McCarthy, General Counsel, KCG Holdings, 
Inc., to Brent J. Fields, Secretary, Commission, dated July 20, 2016 
(``KCG Letter'').
20. Letter from Joanne Moffic-Silver, EVP, General Counsel and 
Corporate Secretary, Chicago Board Options Exchange, Inc., to Brent 
J. Fields, Secretary, Commission, dated July 21, 2016 (``CBOE 
Letter'').
21. Letter from Elizabeth K. King, General Counsel and Corporate 
Secretary, NYSE Group, Inc., to Brent J. Fields, Secretary, 
Commission, dated July 21, 2016 (``NYSE Letter'').
22. Letter from John Russell, Chairman of the Board, and James Toes, 
Securities President and CEO, Securities Traders Association, to 
Brent J. Fields, Secretary, Commission, dated July 25, 2016 (``STA 
Letter'').
23. Letter from Anonymous, to Commission, received August 12, 2016 
(``Anonymous Letter II'').
24. Letter from Scott Garrett, Barry Loudermilk, French Hill, Lynn 
Westmoreland, Randy Hultgren, Jody Hice, Lamar Smith, Tom Emmer, 
Bill Huizenga, Sean Duffy, Robert Pittenger, Robert Hurt, and Ann 
Wagner, Members of Congress, to Mary Jo White, Chair, Commission, 
dated October 14, 2016 (``Garrett Letter'').
25. Letter from Participants to Brent J. Fields, Secretary, 
Commission, dated September 2, 2016 (``Response Letter I'').
26. Letter from Participant to Brent J. Fields, Secretary, 
Commission, dated September 23, 2016 (``Response Letter II'').
27. Letter from Participants to Brent J. Fields, Secretary, 
Commission, dated October 7, 2016 (``Response Letter III'').
28. Letter from Participants to Brent J. Fields, Secretary, 
Commission, dated November 2, 2016 (``Participants' Letter I'').
29. Letter from Participants to Brent J. Fields, Secretary, 
Commission, dated November 14, 2016 (``Participants' Letter II'').

[FR Doc. 2016-27919 Filed 11-22-16; 8:45 am]
BILLING CODE 8011-01-P