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

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

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,

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

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

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

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

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

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

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

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

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

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

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.
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    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.
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    \1518\ Id. at Appendix C, Section A.3(b).
    \1519\ See id. at Section 6.5(d)(i); Appendix C, Section A.3(b).
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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

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\
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    \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.
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    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\
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    \1524\ Response Letter I at 47.
    \1525\ Id. (referencing CAT NMS Plan Section 6.1(o)(v)).
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    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.
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    \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.
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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\
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    \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.
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    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.
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    \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).
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    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\
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    \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).
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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\
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    \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).
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    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,

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\
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    \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