Document ID: SEC-2017-0939-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX LLC
Posted Date: 2017-06-05T04:00Z

[Federal Register Volume 82, Number 106 (Monday, June 5, 2017)]
[Notices]
[Pages 25863-25870]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11506]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80811; File No. SR-Phlx-2017-43]

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

May 30, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 26, 2017, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the Rule 3400 series relating to the 
Order Audit Trail System, Rule 785 relating to Electronic Blue Sheets, 
Rule 1022 relating to account identification, and Rule 1063 and Option 
Floor Procedure Advices and Order and Decorum Regulations C-2 relating 
to the Consolidated Options Audit Trail System to reflect changes to 
these rules once members are effectively reporting to the Consolidated 
Audit Trail (``CAT'') and the CAT's accuracy and reliability meets 
certain standards as described below.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

[[Page 25864]]

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

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

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

1. Purpose
    The Exchange proposes to amend the Rule 3400 series relating to the 
Order Audit Trail System (``OATS''), Rule 785 relating to Electronic 
Blue Sheets (``EBS''), Rule 1022 relating to account identification, 
and Rule 1063 Option Floor Procedure Advices and Order and Decorum 
Regulations C-2 relating to the Consolidated Options Audit Trail System 
(``COATS'') to reflect changes to these rules once members are 
effectively reporting to the CAT, and the CAT's accuracy and 
reliability meets certain standards as described below.\3\
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    \3\ The Exchange initially filed the proposed rule change on May 
15, 2017 (SR-Phlx-2017-38). On May 26, 2017, the Exchange withdrew 
that filing and submitted this filing.
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Background
    Bats BYX Exchange, Inc.; Bats BZX Exchange, Inc.; Bats EDGA 
Exchange, Inc.; Bats EDGX Exchange, Inc.; BOX Options Exchange LLC; C2 
Options Exchange, Incorporated; Chicago Board Options Exchange, 
Incorporated; Chicago Stock Exchange, Inc.; FINRA; International 
Securities Exchange, LLC; Investors' Exchange LLC; ISE Gemini, LLC; ISE 
Mercury, LLC; Miami International Securities Exchange LLC; MIAX PEARL, 
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. (collectively, the ``Participants'') filed 
with the Commission, pursuant to Section 11A of the Exchange Act \4\ 
and Rule 608 of Regulation NMS thereunder,\5\ the National Market 
System Plan Governing the Consolidated Audit Trail (the ``CAT NMS 
Plan'' or ``Plan'').\6\ The Participants filed the Plan to comply with 
Rule 613 of Regulation NMS under the Exchange Act.\7\ The Plan was 
published for comment in the Federal Register on May 17, 2016,\8\ and 
approved by the Commission, as modified, on November 15, 2016.\9\ On 
March 15, 2017, the Commission approved the new Phlx Rule 900A Series 
to implement provisions of the CAT NMS Plan that are applicable to Phlx 
members.\10\
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    \4\ 15 U.S.C. 78k-1.
    \5\ 17 CFR 242.608.
    \6\ See Letter from the Participants to Brent J. Fields, 
Secretary, Commission, dated September 30, 2014; and Letter from 
Participants to Brent J. Fields, Secretary, Commission, dated 
February 27, 2015. On December 24, 2015, the Participants submitted 
an amendment to the CAT NMS Plan. See Letter from Participants to 
Brent J. Fields, Secretary, Commission, dated December 23, 2015.
     ISE Gemini, LLC, ISE Mercury, LLC and International Securities 
Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, 
and Nasdaq ISE, LLC, respectively. See Securities Exchange Act 
Release No. 80248 (March 15, 2017), 82 FR 14547 (March 21, 2017); 
Securities Exchange Act Release No. 80326 (March 29, 2017), 82 FR 
16460 (April 4, 2017); and Securities Exchange Act Release No. 80325 
(March 29, 2017), 82 FR 16445 (April 4, 2017).
     National Stock Exchange, Inc. has been renamed NYSE National, 
Inc. See Securities Exchange Act Release No. 79902 (Jan. 30, 2017), 
82 FR 9258 (February 3, 2017).
    \7\ 17 CFR 242.613.
    \8\ Securities Exchange Act Release No. 77724 (April 27, 2016), 
81 FR 30614 (May 17, 2016).
    \9\ Securities Exchange Act Release No. 79318 (November 15, 
2016), 81 FR 84696 (November 23, 2016) (``Approval Order'').
    \10\ See Securities Exchange Act Release No. 80256 (March 15, 
2017), 82 FR 14526 (March 21, 2017) (SR-Phlx-2017-07).
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    The CAT NMS Plan is designed to create, implement, and maintain a 
consolidated audit trail that will capture in a single consolidated 
data source customer and order event information for orders in NMS 
Securities and OTC Equity Securities, across all markets, from the time 
of order inception through routing, cancellation, modification, or 
execution. Among other things, Section C.9. of Appendix C to the Plan, 
as modified by the Commission, requires each Participant to ``file with 
the SEC the relevant rule change filing to eliminate or modify its 
duplicative rules within six (6) months of the SEC's approval of the 
CAT NMS Plan.'' \11\ The Plan notes that ``the elimination of such 
rules and the retirement of such systems [will] be effective at such 
time as CAT Data meets minimum standards of accuracy and reliability.'' 
\12\ Finally, the Plan requires the rule filing to discuss the 
following:
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    \11\ CAT NMS Plan, Appendix C, Section C.9.
    \12\ See id.
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    (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.\13\
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    \13\ See id.
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Changes to OATS
    In response to these requirements, Phlx is proposing to delete the 
Rule 3400 Series (the ``OATS Rules'') from the Phlx rulebook once the 
CAT achieves the specific accuracy and reliability standards described 
below, and Phlx has determined that its usage of the CAT Data has not 
revealed material issues that have not been corrected, confirmed that 
the CAT includes all data necessary to allow Phlx to continue to meet 
its surveillance obligations,\14\ and confirmed that the Plan Processor 
is sufficiently meeting all of its obligations under the CAT NMS 
Plan.\15\
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    \14\ As noted in the Participants' September 23, 2016 response 
to comment letters on the Plan, the Participants ``worked to keep 
[the CAT] 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.'' See Letter from Participants to Brent J. Fields, 
Secretary, Commission, dated September 23, 2016, at 21. The 
Participants noted that they ``will work with the Plan Processor and 
the industry to develop detailed Technical Specifications to 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.'' Id.
    \15\ Phlx notes that the OATS Rules were originally proposed to 
fulfill one of the undertakings contained in an order issued by the 
Commission relating to the settlement of an enforcement action 
against the National Association of Securities Dealers, Inc. for 
failure to adequately enforce its rules. See Securities Exchange Act 
Release No. 39729 (March 6, 1998), 63 FR 12559 (March 13, 1998). In 
approving the OATS Rules, the Commission concluded that OATS 
satisfied the conditions of the SEC's order and was consistent with 
the Exchange Act. See id. at 12566-67.
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Specific Accuracy and Reliability Standards
    The first issue the Plan requires the proposed rule change to 
discuss is ``specific accuracy and reliability

[[Page 25865]]

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.'' \16\ Phlx believes that relevant error rates are the 
primary, but not the sole, metric by which to determine the CAT's 
accuracy and reliability and will serve as the baseline requirement 
needed before OATS can be retired and requests for trading information 
can be amended to account for information being available in the CAT.
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    \16\ See id. [sic]
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    As discussed in Section A.3.(b) of Appendix C to the CAT NMS Plan, 
the Participants established an initial Error Rate, as defined in the 
Plan, of 5% on initially submitted data (i.e., data as submitted by a 
CAT Reporter before any required corrections are performed). The 
Participants noted in the Plan that their expectation was that ``error 
rates after reprocessing of error corrections will be de minimis.'' 
\17\ The Participants based this Error Rate on their consideration of 
``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.'' \18\
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    \17\ See CAT NMS Plan, Appendix C, Section A.3(b), at n.102.
    \18\ Id.
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    Phlx agrees with the Participants' conclusion that a 5% pre-
correction threshold ``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.'' \19\ However, Phlx believes that, when assessing the 
accuracy and reliability of the data for the purposes of retiring OATS, 
the error thresholds should be measured in more granular ways and 
should also include minimum error rates of post-correction data, which 
represents the data most likely to be used by Phlx to conduct 
surveillance. Although Phlx is proposing to measure the appropriate 
error rates in the aggregate, rather than firm-by-firm, Phlx believes 
that the error rates for equity securities should be measured 
separately from options since options orders are not currently reported 
regularly or included in OATS.
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    \19\ Id.
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    To ensure the CAT's accuracy and reliability, Phlx is proposing 
that, before OATS could be retired, the CAT would generally need to 
achieve a sustained error rate for Industry Member reporting in each of 
the categories below for a period of at least 180 days of 5% or lower, 
measured on a pre-correction or as-submitted basis and 2% or lower on a 
post-correction basis (measured at T+5).\20\ Phlx is proposing to 
measure the 5% pre-correction and 2% post-correction thresholds by 
averaging the error rate across the period, not require a 5% pre-
correction and 2% post-correction maximum each day for 180 consecutive 
days. Phlx believes that measuring each of the thresholds over the 
course of 180 days will ensure that the CAT consistently meets minimum 
accuracy and reliability thresholds for Industry Member reporting while 
also ensuring that single-day measurements do not unduly affect the 
overall measurements.
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    \20\ The Plan requires that the Plan Processor must ensure that 
regulators have access to corrected and linked order and Customer 
data by 8:00 a.m. Eastern Time on T+5. See CAT NMS Plan, Appendix C, 
Section A.2(a).
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    Phlx is proposing to use error rates in each the following 
categories, measured separately for options and for equities, to assess 
whether the threshold pre- and post-correction error rates are being 
met:
     Rejection Rates and Data Validations. Data validations for 
the CAT, while not expected to be designed the same as OATS, must be 
functionally equivalent to OATS in accordance with the CAT NMS Plan 
(i.e., the same types of basic data validations must be performed by 
the Plan Processor to comply with the CAT NMS Plan requirements). 
Appendix D of the Plan, for example, requires that certain file 
validations \21\ and syntax and context checks be performed on all 
submitted records.\22\ If a record does not pass these basic data 
validations, it must be rejected and returned to the CAT Reporter to be 
corrected and resubmitted.\23\ The specific validations can be 
determined only after the Plan Processor has finalized the Industry 
Member Technical Specifications; however, the Plan also requires the 
Plan Processor to provide daily statistics on rejection rates after the 
data has been processed, including the number of files rejected and 
accepted, the number of order events accepted and rejected, and the 
number of each type of report rejected.\24\ Phlx is proposing that, 
over the 180-day period, aggregate rejection rates (measured separately 
for equities and options) must be no more than 5% pre-correction or 2% 
post-correction across all CAT Reporters.
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    \21\ See CAT NMS Plan, Appendix D, Section 7.2. The Plan 
requires the Plan Processor to confirm that file transmission and 
receipt are in the correct formats, including validation of header 
and trailers on the submitted report, confirmation of a valid 
Exhange [sic]-Assigned Market Participant Identifier, and 
verification of the number of records in the file. Id.
    \22\ See id. The Plan notes that syntax and context checks would 
include format checks (i.e., that data is entered in the specified 
format); data type checks (i.e., that the data type of each 
attribute conforms to the specifications); consistency checks (i.e., 
that all attributes for a record of a specified type are 
consistent); range/logic checks (i.e., that each attribute for every 
record has a value within specified limits and the values provided 
are associated with the event type they represent); data validity 
checks (i.e., that each attribute for every record has an acceptable 
value); completeness checks (i.e., that each mandatory attribute for 
every record is not null); and timeliness checks (i.e., that the 
records were submitted within the submission timelines). Id.
    \23\ See id.
    \24\ See id.
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     Intra-Firm Linkages. The Plan requires that ``the Plan 
Processor must be able to link all related order events from all CAT 
Reporters involved in the lifecycle of an order.'' \25\ At a minimum, 
this requirement includes the creation of an order lifecycle between 
``[a]ll order events handled within an individual CAT Reporter, 
including orders routed to internal desks or departments with different 
functions (e.g., an internal ATS).'' \26\ Phlx is proposing that 
aggregate intra-firm linkage rates across all Industry Member Reporters 
must be at least 95% pre-correction and 98% post-correction.
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    \25\ CAT NMS Plan, Appendix D, Section 3.
    \26\ Id.
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     Inter-Firm Linkages. The order linkage requirements in the 
Plan also require that the Plan Processor be able to create the 
lifecycle between orders routed between broker-dealers.\27\ Phlx is 
proposing that at least a 95% pre-correction and 98% post-correction 
aggregate match rate be achieved for orders routed between two Industry 
Member Reporters.\28\
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    \27\ Id.
    \28\ This assumes linkage statistics will include both unlinked 
route reports and new orders where no related route report could be 
found.
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     Order Linkage Rates. In addition to creating linkages 
within and between broker-dealers, the Plan also includes requirements 
that the Plan Processor be able to create lifecycles to link various 
pieces of related orders.\29\ For example, the Plan requires linkages 
between customer orders and ``representative'' orders created in firm 
accounts for the purpose of facilitating a customer order, various legs 
of option/equity complex orders, riskless principal orders, and orders 
worked through average price accounts.\30\ Phlx is proposing that there

[[Page 25866]]

be at least a 95% pre-correction and 98% post-correction linkage rate 
for multi-legged orders (e.g., related equity/options orders, VWAP 
orders, riskless principal transactions).
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    \29\ See CAT NMS Plan, Appendix D, Section 3.
    \30\ See id.
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     Exchange and TRF/ORF Match Rates. The Plan requires that 
an order lifecycle be created to link ``[o]rders routed from broker-
dealers to exchanges'' and ``[e]xecuted orders and trade reports.'' 
\31\ Phlx is proposing at least a 95% pre-correction and 98% post-
correction aggregate match rate to each equity exchange for orders 
routed from Industry Members to an exchange and, for over-the-counter 
executions, the same match rate for orders linked to trade reports.
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    \31\ Id.
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    In addition to these minimum error rates and matching thresholds 
that generally must be met before OATS can be retired, Phlx believes 
that during the minimum 180-day period during which the thresholds are 
calculated, Phlx's use of the data in the CAT must confirm that (i) 
usage over that time period has not revealed material issues that have 
not been corrected, (ii) the CAT includes all data necessary to allow 
Phlx to continue to meet its surveillance obligations, and (iii) the 
Plan Processor is sufficiently meeting all of its obligations under the 
CAT NMS Plan. Phlx believes this time period to use the CAT Data is 
necessary to reveal any errors that may manifest themselves only after 
surveillance patterns and other queries have been run and to confirm 
that the Plan Processor is meeting its obligations and performing its 
functions adequately.
Small Industry Member Data Availability
    The second issue the Plan requires the proposed rule change to 
address is ``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.''
    Phlx believes that there is no effective way to retire OATS until 
all current OATS reporters are reporting to the CAT. Although Technical 
Specifications for Industry Members are not yet available, PHLX 
believes it would be inefficient, less reliable, and more costly to 
attempt to marry the OATS and CAT databases for a temporary period to 
allow some Phlx members to report to CAT while others continue to 
report to OATS. Consequently, Phlx has concluded at this time that 
having data from those Small Industry Members currently reporting to 
OATS available two years after the Effective Date would substantially 
facilitate a more expeditious retirement of OATS. For this reason, Phlx 
supports an amendment to the Plan that would require current OATS 
Reporters that are ``Small Industry Members'' to report two years after 
the Effective Date (instead of three). Phlx intends to work with the 
other Participants to submit a proposed amendment to the Plan to 
require Small Industry Members that are OATS Reporters to report two 
years after the Effective Date.
    Phlx has identified approximately 300 member firms that currently 
report to OATS and meet the definition of ``Small Industry Member;'' 
however, only ten of these firms submit information to OATS on their 
own behalf, and eight of the ten firms report very few orders to 
OATS.\32\ The vast majority of these 300 firms use third parties to 
fulfill their reporting obligations, and many of these third parties 
will begin reporting to CAT in November 2018. Consequently, Phlx 
believes that the burden on current OATS Reporters that are ``Small 
Industry Members'' would not be significant if those firms are required 
to report to CAT beginning in November 2018 rather than November 2019. 
The burdens, however, are significantly greater for those firms that 
are not reporting to OATS currently; therefore, Phlx does not believe 
it would be necessary or appropriate to accelerate CAT reporting for 
``Small Industry Members'' that are not currently reporting to OATS, 
and PHLX would not support an amendment to the Plan to accelerate CAT 
reporting for ``Small Industry Members'' that are not currently OATS 
Reporters.
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    \32\ For example, in one recent month, eight of the ten firms 
submitted fewer than 100 reports during the month, with four firms 
submitting fewer than 50.
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Individual Industry Member Exemptions
    The final issue the Plan requires the proposed rule change to 
address is ``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.''
    As described above, Phlx believes that a single cut-over from OATS 
to CAT is highly preferable to a firm-by-firm approach and is not 
proposing to exempt members from the OATS requirements on a firm-by-
firm basis. The primary benefit to a firm-by-firm exemptive approach 
would be to reduce the amount of time an individual firm is required to 
report to a legacy system (e.g., OATS) if it is also accurately and 
reliably reporting to the CAT. Phlx believes that the overall accuracy 
and reliability thresholds for the CAT described above would need to be 
met under any conditions before firms could stop reporting to OATS. 
Moreover, as discussed above, Phlx supports amending the Plan to 
accelerate the reporting requirements for Small Industry Members that 
are OATS Reporters to report on the same timeframe as all other OATS 
Reporters. If such an amendment were approved by the Commission, there 
would be no need to exempt members from OATS requirements on a firm-by-
firm basis.
Changes to EBS and Account Identification Rules
    Rule 785 is Phlx's rule regarding the automated submission of 
specific trading data to Phlx upon request using the Electronic Blue 
Sheet (``EBS'') system. Rule 785 requires members to submit certain 
trade information as prescribed by the Exchange, including, for 
proprietary transactions, the clearing house number or alpha symbol of 
the member submitting the data, the identifying symbol assigned to the 
security, and the date the transaction was executed.
    Rule 1022 imposes certain account identification requirements on 
Specialists and Registered Options Traders. Specifically, Rule 1022 
requires those market participants to file with the Exchange upon 
request and keep current a list identifying all accounts for stock, 
Exchange-Traded Fund Shares, option and related securities or foreign 
currencies, physical commodities, physical commodity options, commodity 
futures contracts, options on commodity futures contracts, any other 
derivatives based on such commodity and other related trading in which 
the Specialist or Registered Options Trader may, directly or 
indirectly, engage in trading activities or over which they exercise 
investment discretion. That Rule prohibits a Specialist or Registered 
Options Trader from engaging in trading in any of these instruments in 
an account that has not been reported to the Exchange pursuant to this 
rule.
    Once broker-dealer reporting to the CAT has begun, the CAT will 
contain the data the Participants would otherwise have requested via 
the EBS system for purposes of NMS Securities and OTC Equity 
Securities. Consequently, Phlx will not need to use the EBS system or 
request information

[[Page 25867]]

pursuant to these rules for NMS Securities or OTC Equity Securities for 
time periods after CAT reporting has begun if the appropriate accuracy 
and reliability thresholds are achieved, including an acceptable 
accuracy rate for customer and account information. However, these 
rules cannot be completely eliminated immediately upon the CAT 
achieving the appropriate thresholds because Exchange staff may still 
need to request information pursuant to these rules for trading 
activity occurring before a member was reporting to the CAT.\33\ In 
addition, these rules apply to information regarding transactions 
involving securities that will not be reportable to the CAT, such as 
fixed-income securities; thus, these rules must remain in effect with 
respect to those transactions indefinitely or until those transactions 
are captured in the CAT.
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    \33\ Firms are required to maintain the trade information for 
pre-CAT transactions in equities and options pursuant to applicable 
rules, such as books and records retention requirements, for the 
relevant time period, which is generally three or six years 
depending upon the record. See 17 CFR 240.17a-3(a), 240.17a-4.
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    The proposed rule change proposes to add new Supplementary Material 
to Rule 785 and Rule 1022 to clarify how Phlx will request data under 
these rules after members are reporting to the CAT. Specifically, the 
proposed Supplementary Material to these rules will note that the 
Exchange will request information under these rules only if the 
information is not available in the CAT because, for example, the 
transactions in question occurred before the firm was reporting 
information to the CAT or involved securities that are not reportable 
to the CAT. In essence, under the new Supplementary Material, the 
Exchange will make requests under these rules if and only if the 
information is not otherwise available through the CAT.
    The CAT NMS Plan states, however, that the elimination of rules 
that are duplicative of the requirements of the CAT and the retirement 
of the related systems should be effective at such time as CAT Data 
meets minimum standards of accuracy and reliability.\34\ Accordingly, 
as discussed in more detail below, Phlx believes that the EBS data may 
be replaced by CAT Data at a date after all Industry Members are 
reporting to the CAT when the proposed error rate thresholds have been 
met, and Phlx has determined that its usage of the CAT Data has not 
revealed material issues that have not been corrected, confirmed that 
the CAT includes all data necessary to allow Phlx to continue to meet 
its surveillance obligations, and confirmed that the Plan Processor is 
sufficiently meeting all of its obligations under the CAT NMS Plan.
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    \34\ Id. [sic]
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    Phlx believes CAT Data should not be used in place of EBS data 
until all Participants and Industry Members are reporting data to CAT. 
In this way, Phlx will continue to have access to the necessary data to 
perform its regulatory duties.
    The CAT NMS Plan requires that a rule filing to eliminate a 
duplicative rule address whether ``the availability of certain data 
from Small Industry Members two years after the Effective Date would 
facilitate a more expeditious retirement of duplicative systems.'' \35\ 
Phlx believes that the submission of data to the CAT by Small Industry 
Members a year earlier than is required in the CAT NMS Plan, at the 
same time as the other Industry Members, would expedite the replacement 
of EBS data with CAT Data, as Phlx believes that the CAT would then 
have all necessary data from the Industry Members for Phlx to perform 
the regulatory surveillance that currently is performed via EBS. For 
this reason, Phlx supports amending the CAT NMS Plan to require Small 
Industry Members to report data to the CAT two years after the 
Effective Date (instead of three), and intends to work with other 
Participants toward that end.
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    \35\ Id.
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    The CAT NMS Plan requires that this rule filing address ``whether 
individual Industry Members can be exempted from reporting to 
duplicative systems once their CAT reporting meets specified accuracy 
and reliability standards, including, but not limited to, ways in which 
establishing cross-system regulatory functionality or integrating data 
from existing systems and the CAT would facilitate such Individual 
Industry Member exemptions.'' \36\ Phlx believes that a single cut-over 
from EBS to CAT is highly preferable to a firm-by-firm approach and is 
not proposing to exempt members from the EBS requirements on a firm-by-
firm basis. Phlx believes that providing such individual exemptions to 
Industry Members would be inefficient, more costly, and less reliable 
than the single cut-over. Providing individual exemptions would require 
the exchanges to create, for a brief temporary period, a cross-system 
regulatory function and to integrate data from EBS and the CAT to avoid 
creating any regulatory gaps as a result of such exemptions. Such a 
function would be costly to create and would give rise to a greater 
likelihood of data errors or other issues. Given the limited time in 
which such exemptions would be necessary, Phlx does not believe that 
such exemptions would be an appropriate use of limited resources. 
Moreover, the primary benefit to a firm-by-firm exemptive approach 
would be to reduce the amount of time an individual firm is required to 
comply with EBS if it is also accurately and reliably reporting to the 
CAT. Phlx believes that the overall accuracy and reliability thresholds 
for the CAT described above would need to be met under any conditions 
before firms could stop reporting to EBS, and as discussed above, by 
accelerating Small Industry Members to report on the same timeframe as 
all other Industry Members, there is no need to exempt members from EBS 
requirements on a firm-by-firm basis.
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    \36\ Id.
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    The CAT NMS Plan also requires that a rule filing to eliminate a 
duplicative rule to provide ``specific accuracy and reliability 
standards that will determine when duplicative systems will be retired, 
including, but not limited to, whether the attainment of a certain 
Error Rate should determine when a system duplicative of the CAT can be 
retired.'' \37\ Phlx believes that it is critical that the CAT Data be 
sufficiently accurate and reliable for Phlx to perform the regulatory 
functions that it now performs via EBS. Accordingly, Phlx believes that 
the CAT Data should meet specific quantitative error rates, as well as 
certain qualitative requirements.
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    \37\ Id.
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    Phlx believes that, before CAT Data may be used in place of EBS 
data, the CAT would need to achieve a sustained error rate for a period 
of at least 180 days of 5% or lower measured on a pre-correction or as-
submitted basis, and 2% or lower on a post-correction basis (measured 
at T+5).\38\ Phlx proposes to measure the 5% pre-correction and 2% 
post-correction thresholds by averaging the error rate across the 
period, not require a 5% pre-correction and 2% post-correction maximum 
each day for 180 consecutive days. Phlx believes that measuring each of 
the thresholds over the course of 180 days will ensure that the CAT 
consistently meets minimum accuracy and reliability thresholds while 
also ensuring that single-day measurements do not unduly affect the 
overall measurements. Phlx proposes to measure the appropriate error 
rates in the aggregate, rather than firm-by-firm. The 2% and 5% error 
rates are in line

[[Page 25868]]

with the proposed retirement threshold for other systems, such as OATS 
and COATS.
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    \38\ The Plan requires that the Plan Processor must ensure that 
regulators have access to corrected and linked order and Customer 
data by 8:00 a.m. Eastern Time on T+5. See CAT NMS Plan, at C-15.
---------------------------------------------------------------------------

    In addition to these minimum error rates before using CAT Data 
instead of EBS data, Phlx believes that during the minimum 180-day 
period during which the thresholds are calculated, Phlx's use of the 
data in the CAT must confirm that (i) usage over that time period has 
not revealed material issues that have not been corrected, (ii) the CAT 
includes all data necessary to allow Phlx to continue to meet its 
surveillance obligations, and (iii) the Plan Processor is sufficiently 
meeting all of its obligations under the CAT NMS Plan. Phlx believes 
this time period to use the CAT Data is necessary to reveal any errors 
that may manifest themselves only after surveillance patterns and other 
queries have been run and to confirm that the Plan Processor is meeting 
its obligations and performing its functions adequately.
Changes to COATS
    The options exchanges utilize COATS to collect and review data 
regarding options orders, quotes and transactions. The Participants 
have provided COATS technical specifications to the Plan Processor for 
the CAT for use in developing the Technical Specifications for the CAT, 
and the Participants are working with the Plan Processor to include the 
necessary COATS data elements in the CAT Technical Specifications. 
Accordingly, although the Technical Specifications for the CAT have not 
yet been finalized, Phlx and the other options exchanges propose to 
eliminate COATS in accordance with the proposed timeline discussed 
below.
    Phlx adopted Rule 1063 to implement certain reporting requirements 
related to COATS, and therefore proposes to eliminate the information 
reporting requirements of that rule and replacing those requirements 
with a requirement that members report information pursuant to this 
rule as required by Phlx's CAT Compliance Rule, Rule 900A.\39\ Phlx 
also proposes to make a corresponding change to Option Floor Procedure 
Advices and Order and Decorum Regulations C-2.
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    \39\ COATS was developed to comply with an order of the 
Commission requiring the then-options exchanges to ``design and 
implement'' a consolidated audit trail to ``enable the options 
exchanges to reconstruct markets promptly, effectively surveil them 
and enforce order handling, firm quote, trade reporting and other 
rules.'' See Section IV.B.e.(v) of the Commission's Order 
Instituting Public Administrative Proceedings Pursuant to Sections 
19(h)(1) of the Securities Exchange Act of 1934, Making Findings and 
Imposing Remedial Sanctions (the ``Order''). See Securities Exchange 
Act Release No. 43268 (September 11, 2000) and Administrative 
Proceeding File No. 3-10282. As noted, the Plan is designed to 
create, implement and maintain a CAT that would capture customer and 
order event information for orders in NMS Securities and OTC Equity 
Securities, across all markets, from the time of order inception 
through routing, cancellation, modification, or execution in a 
single consolidated data source. Phlx has already adopted rules to 
enforce compliance by its Industry Members, as applicable, with the 
provisions of the Plan. Once the CAT is fully operational, it will 
be appropriate to delete Phlx's rules implemented to comply with the 
Order as duplicative of the CAT. Accordingly, Phlx believes that it 
would continue to be in compliance with the requirements of the 
Order once the CAT is fully operational and the COATS rules are 
deleted.
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    Rule 1063(e) describes the operations and requirements of the Floor 
Broker Management System, which is designed to create an electronic 
audit trail for equity, equity index and U.S. dollar-settled foreign 
currency options orders represented by Floor Brokers on the Exchange's 
Options Floor. Among other things, Rule 1063(e) requires a Floor Broker 
or that Floor Broker's employees, contemporaneously upon receipt of an 
order and prior to the representation of such an order in the trading 
crowd, to record order information including (i) the order type (i.e., 
customer, firm, broker-dealer, professional) and order receipt time; 
(ii) the option symbol; (iii) buy, sell, cross or cancel; (iv) call, 
put, complex (i.e., spread, straddle), or contingency order; and (v) 
number of contracts.
    Option Floor Procedure Advices and Order and Decorum Regulations C-
2 repeats these requirements, and imposes a schedule of fines for 
violating these requirements.
    The CAT NMS Plan states that the elimination of rules that are 
duplicative of the requirements of the CAT and the retirement of the 
related systems should be effective at such time as CAT Data meets 
minimum standards of accuracy and reliability.\40\ As discussed in more 
detail below, Phlx and the other options exchanges believe that COATS 
may be retired at a date after all Industry Members are reporting to 
the CAT when the proposed error rate thresholds have been met, and Phlx 
has determined that its usage of the CAT Data has not revealed material 
issues that have not been corrected, confirmed that the CAT includes 
all data necessary to allow Phlx to continue to meet its surveillance 
obligations, and confirmed that the Plan Processor is sufficiently 
meeting all of its obligations under the CAT NMS Plan.
---------------------------------------------------------------------------

    \40\ Id. [sic]
---------------------------------------------------------------------------

    Phlx believes COATS should not be retired until all Participants 
and Industry Members that report data to COATS are reporting comparable 
data to the CAT. In this way, Phlx will continue to have access to the 
necessary data to perform its regulatory duties.
    The CAT NMS Plan requires that a rule filing to eliminate a 
duplicative rule address whether ``the availability of certain data 
from Small Industry Members two years after the Effective Date would 
facilitate a more expeditious retirement of duplicative systems.'' \41\ 
The Exchange believes COATS should not be retired until all 
Participants and Industry Members that report data to COATS are 
reporting comparable data to the CAT. While the early submission of 
options data to the CAT by Small Industry Members could expedite the 
retirement of COATS, the Exchange believes that it premature to 
consider such a change and that additional analysis would be necessary 
to determine whether such early reporting by Small Industry Members 
would be feasible.
---------------------------------------------------------------------------

    \41\ Id.
---------------------------------------------------------------------------

    The CAT NMS Plan requires that this rule filing address ``whether 
individual Industry Members can be exempted from reporting to 
duplicative systems once their CAT reporting meets specified accuracy 
and reliability standards, including, but not limited to, ways in which 
establishing cross-system regulatory functionality or integrating data 
from existing systems and the CAT would facilitate such Individual 
Industry Member exemptions.'' \42\ Phlx believes that a single cut-over 
from COATS to CAT is highly preferable to a firm-by-firm approach and 
is not proposing to exempt members from the COATS requirements on a 
firm-by-firm basis. Phlx and the other options exchanges believe that 
providing such individual exemptions to Industry Members would be 
inefficient, more costly, and less reliable than the single cut-over. 
Providing individual exemptions would require the options exchanges to 
create, for a brief temporary period, a cross-system regulatory 
function and to integrate data from COATS and the CAT to avoid creating 
any regulatory gaps as a result of such exemptions. Such a function 
would be costly to create and would give rise to a greater likelihood 
of data errors or other issues. Given the limited time in which such 
exemptions would be necessary, Phlx and the other options exchanges do 
not believe that such exemptions would be an appropriate use of limited 
resources.
---------------------------------------------------------------------------

    \42\ Id.
---------------------------------------------------------------------------

    The CAT NMS Plan also requires that a rule filing to eliminate a 
duplicative rule to provide ``specific accuracy and reliability 
standards that will determine

[[Page 25869]]

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.'' \43\ Phlx 
believes that it is critical that the CAT Data be sufficiently accurate 
and reliable for the Exchange to perform the regulatory functions that 
it now performs via COATS. Accordingly, Phlx believes that the CAT Data 
should meet specific quantitative error rates, as well as certain 
qualitative requirements.
---------------------------------------------------------------------------

    \43\ Id.
---------------------------------------------------------------------------

    Phlx and the other options exchanges believe that, before COATS may 
be retired, the CAT would need to achieve a sustained error rate for a 
period of at least 180 days of 5% or lower measured on a pre-correction 
or as-submitted basis, and 2% or lower on a post-correction basis 
(measured at T+5).\44\ Phlx proposes to measure the 5% pre-correction 
and 2% post-correction thresholds by averaging the error rate across 
the period, not require a 5% pre-correction and 2% post-correction 
maximum each day for 180 consecutive days. Phlx believes that measuring 
each of the thresholds over the course of 180 days will ensure that the 
CAT consistently meets minimum accuracy and reliability thresholds 
while also ensuring that single-day measurements do not unduly affect 
the overall measurements. Phlx proposes to measure the appropriate 
error rates in the aggregate, rather than firm-by-firm. In addition, 
Phlx proposes to measure the error rates for options only, not equity 
securities, as only options are subject to COATS. The 2% and 5% error 
rates are in line with the proposed retirement threshold for OATS.
---------------------------------------------------------------------------

    \44\ The Plan requires that the Plan Processor must ensure that 
regulators have access to corrected and linked order and Customer 
data by 8:00 a.m. Eastern Time on T+5. See CAT NMS Plan, at C-15.
---------------------------------------------------------------------------

    In addition to these minimum error rates before COATS can be 
retired, Phlx believes that during the minimum 180-day period during 
which the thresholds are calculated, Phlx's use of the data in the CAT 
must confirm that (i) usage over that time period has not revealed 
material issues that have not been corrected, (ii) the CAT includes all 
data necessary to allow Phlx to continue to meet its surveillance 
obligations, and (iii) the Plan Processor is sufficiently meeting all 
of its obligations under the CAT NMS Plan. Phlx believes this time 
period to use the CAT Data is necessary to reveal any errors that may 
manifest themselves only after surveillance patterns and other queries 
have been run and to confirm that the Plan Processor is meeting its 
obligations and performing its functions adequately.
    If the Commission approves the proposed rule change, Phlx will 
announce the implementation date of the proposed rule change in a 
Regulatory Notice that will be published once Phlx concludes the 
thresholds for accuracy and reliability described above have been met 
and that the Plan Processor is sufficiently meeting all of its 
obligations under the CAT NMS Plan.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\45\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\46\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78f(b).
    \46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Phlx believes that the proposed rule change fulfills the obligation 
in the CAT NMS Plan for Phlx to submit a proposed rule change to 
eliminate or modify duplicative rules. In approving the Plan, the SEC 
noted that the Plan ``is necessary and appropriate in the public 
interest, for the protection of investors and the maintenance of fair 
and orderly markets, to remove impediments to, and perfect the 
mechanism of a national market system, or is otherwise in furtherance 
of the purposes of the Act.'' \47\ As this proposal implements the 
Plan, Phlx believes that this proposal furthers the objectives of the 
Plan, as identified by the SEC, and is therefore consistent with the 
Exchange Act.
---------------------------------------------------------------------------

    \47\ Approval Order at 84697.
---------------------------------------------------------------------------

    Moreover, the purpose of the proposed rule change is to eliminate 
rules that require the submission of duplicative data to the exchange. 
The elimination of such duplicative requirements will reduce 
unnecessary costs and other compliance burdens for Phlx and its 
members, and therefore, will enhance the efficiency of the securities 
markets. Furthermore, Phlx believes that the approach set forth in the 
proposed rule change strikes the appropriate balance between ensuring 
that Phlx is able to continue to fulfill its statutory obligation to 
protect investors and the public interest by ensuring its surveillance 
of market activity remains accurate and effective while also 
establishing a reasonable timeframe for elimination or modification of 
its rules that will be rendered duplicative after implementation of the 
CAT.

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

    Section 6(b)(8) of the Exchange Act \48\ requires that the 
Exchange's rules not impose any burden on competition that is not 
necessary or appropriate. Phlx does not believe that the proposed rule 
change will result in any burden on competition that is not necessary 
or appropriate in furtherance of the purposes of the Exchange Act. Phlx 
notes that the proposed rule change implements the requirements of the 
CAT NMS Plan approved by the Commission regarding the elimination of 
rules and systems that are duplicative the CAT, and is designed to 
assist Phlx in meeting its regulatory obligations pursuant to the Plan. 
Similarly, all exchanges and FINRA are proposing the elimination of 
their rules related to OATS, EBS and COATS to implement the 
requirements of the CAT NMS Plan. Therefore, this is not a competitive 
rule filing and, therefore, it does not raise competition issues 
between and among the self-regulatory organizations and/or their 
members.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

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

    Although written comments on the proposed rule change were not 
solicited, two commenters, the Financial Information Forum (``FIF'') 
and the Securities Industry and Financial Markets Association 
(``SIFMA''), submitted letters to the Participants regarding the 
retirement of systems related to the CAT.\49\ In its comment letter, 
with regard to the retirement of duplicative systems more generally, 
FIF recommends that the Participants continue the effort to incorporate 
current reporting obligations into the CAT in order to replace existing 
reportable systems with the CAT. In addition, FIF further recommends 
that, once a CAT Reporter achieves satisfactory reporting data quality, 
the CAT Reporter should be exempt from reporting to any duplicative 
reporting systems. FIF believes that these recommendations ``would 
serve both an underlying regulatory objective of more

[[Page 25870]]

immediate and accurate access to data as well as an industry objective 
of reduced costs and burdens of regulatory oversight.'' \50\ In its 
comments about EBS specifically, FIF states that the retirement of the 
EBS requirements should be a high priority, and that the CAT should be 
designed to include the requisite data elements to permit the rapid 
retirement of the EBS system.\51\ Similarly, SIFMA states that ``the 
establishment of the CAT must be accompanied by the prompt elimination 
of duplicative systems,'' and ``recommend[ed] that the initial 
technical specifications be designed to facilitate the immediate 
retirement of . . . duplicative reporting systems.'' \52\
---------------------------------------------------------------------------

    \49\ Letter from William H. Hebert, FIF, to Participants re: 
Milestone for Participants' rule change filings to eliminate/modify 
duplicative rules, dated April 12, 2017 (``FIF Letter''); Letter 
from Kenneth E. Bentsen, Jr., SIFMA, to Participants re: Selection 
of Thesys as CAT Processor, dated April 4, 2017 (``SIFMA Letter''), 
at 2.
    \50\ FIF Letter at 2.
    \51\ Id.
    \52\ SIFMA Letter at 2.
---------------------------------------------------------------------------

    As discussed above, Phlx agrees with the commenters that the OATS, 
EBS and COATS reporting requirements should be replaced by the CAT 
reporting requirements as soon as accurate and reliable CAT Data is 
available. To this end, Phlx anticipates that the CAT will be designed 
to collect the data necessary to permit the retirement of OATS, EBS and 
COATS. As discussed above, Phlx disagrees with the recommendation to 
provide individual exemptions to those CAT Reporters who obtain 
satisfactory data reporting quality; however, Phlx supports amendments 
to the CAT NMS Plan that would accelerate reporting for Small Industry 
Members that are currently reporting to OATS to facilitate the 
retirement of that system.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2017-43 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2017-43. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2017-43, and should be 
submitted on or before June 26, 2017.
---------------------------------------------------------------------------

    \53\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-11506 Filed 6-2-17; 8:45 am]
 BILLING CODE 8011-01-P