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

    Some commenters provided suggestions with regard to the proposed
measurement methodology for the thresholds.\135\ A few commenters
argued that the proposed time period measurement of ``at least four of
the preceding six calendar months'' is cumbersome to apply in practice
and believed that the time period should be over a longer term.\136\
For example, two commenters stated that the rule should utilize a 12-
month measurement period.\137\ Conversely, another commenter generally
opposed the thresholds stating that all ATSs should be subject to the
rule, but noted that if the rule includes a trading volume metric, the
measurement period should be much shorter (such as two to four
weeks).\138\ In addition, one commenter stated that the measurement
should be based on number of shares traded rather than dollar
value.\139\
---------------------------------------------------------------------------

    \135\ See, e.g., BIDS Letter at 6; KCG Letter at 19; SIFMA
Letter at 7; and Lauer Letter at 4-5.
    \136\ See, e.g., BIDS Letter at 6; and KCG Letter at 19.
    \137\ See BIDS Letter at 6; and KCG Letter at 19.
    \138\ See Lauer Letter at 4-5.
    \139\ See BIDS Letter at 6.
---------------------------------------------------------------------------

    Two commenters also suggested that ATSs should be given six months
after meeting the given threshold in the definition of SCI ATS to come
into compliance with Regulation SCI.\140\
---------------------------------------------------------------------------

    \140\ See KCG Letter at 19; and SIFMA Letter at 7.
---------------------------------------------------------------------------

    The Commission is adopting the thresholds for ATSs that trade NMS
stocks and non-NMSs stock as proposed. In setting the thresholds for
Regulation SCI, the Commission believes it is establishing an
appropriate and reasonable scope for the application of the regulation.
Although commenters provided various suggestions for different
thresholds, nothing persuaded the Commission that these suggestions
would better accomplish the goals of Regulation SCI than the thresholds
the Commission is adopting. As discussed below, the Commission has
analyzed the number of entities it believes are likely to be covered by
the thresholds it is establishing. The Commission recognizes that these
thresholds ultimately represent a matter of judgment by the Commission
as it takes the step of promulgating Regulation SCI, and the Commission
intends to monitor these thresholds to determine whether they continue
to be appropriate.
    With regard to the threshold for ATSs trading NMS stocks, the
Commission has determined to adopt this threshold as proposed. After
careful consideration of the comments, the Commission continues to
believe that this threshold is an appropriate measure of when a market
is of sufficient significance so as to warrant the protections and
requirements of Regulation SCI.\141\ The

Commission is, however, making one technical modification in response
to a commenter to clarify that the threshold will be calculated based
on all NMS volume, rather than on a per plan basis.\142\ The Commission
agrees with the commenter that the proposed language should be
clarified and, as such, the threshold language within the definition of
``SCI ATS'' in Rule 1000 is being revised to refer to ``applicable
effective transaction reporting plans,'' rather than ``an effective
transaction reporting plan.'' \143\
---------------------------------------------------------------------------

    \141\ The numerical thresholds in the definition of SCI ATS
reflect an informed assessment by the Commission, based on
qualitative and quantitative analysis, of the likely economic
consequences of the specific numerical thresholds included in the
definition. In making such assessment and, in turn, selecting the
numerical thresholds, in addition to considering the views of
commenters, the Commission has reviewed relevant data. See infra
notes 150 and 175 and accompanying text.
    \142\ See supra note 134 and accompanying text. As noted above,
this commenter asked the Commission for clarification on this aspect
of the rule.
    \143\ Because the threshold has two prongs, one of which is
based on all NMS volume, it is necessary to specify that there is
more than one transaction reporting plan that would be applicable in
calculating all NMS stock trading volume. At the same time, since
the other prong of the threshold is based on the trading volume of
single NMS stocks, it is necessary to also add the term
``applicable'' before the term ``transaction reporting plans'' as
only one transaction reporting plan would be applicable per
security. The definition of ``eligible securities'' in each of the
transaction reporting plans are mutually exclusive, ensuring that
each security is subject to only one transaction reporting plan. See
CTA Plan, available at: http://www.nyxdata.com/cta; and Nasdaq UTP
Plan, available at: http://www.utpplan.com.
---------------------------------------------------------------------------

    Under the adopted definition of SCI ATS, with regard to NMS stocks,
an ATS will be subject to Regulation SCI if, during at least four of
the preceding six calendar months, it had: (i) Five percent or more in
any single NMS stock, and 0.25 percent or more in all NMS stocks, of
the average daily dollar volume reported by applicable effective
transaction reporting plans, or (ii) one percent or more, in all NMS
stocks, of the average daily dollar volume reported by applicable
effective transaction reporting plans.\144\ The Commission continues to
believe that this threshold will identify those ATSs that could have a
significant impact on the overall market or that could have a
significant impact on a single NMS stock and some impact on the market
as a whole at the same time.\145\
---------------------------------------------------------------------------

    \144\ But see infra notes 169-170 and accompanying text
(discussing a six-month compliance period for SCI entities
satisfying the thresholds for the first time).
    \145\ Under the adopted thresholds, because of the requirement
to meet the threshold for at least four of the preceding six
calendar months, inactive and newly operating ATSs would not be
included in the definition of SCI ATS. See infra note 152.
---------------------------------------------------------------------------

    While some commenters advocated for thresholds higher than those
proposed and/or retaining the 20 percent threshold in Regulation
ATS,\146\ as the Commission discussed in the SCI Proposal, the
securities markets have significantly evolved since the time of the
adoption of Regulation ATS, resulting in trading activity in stocks
being more dispersed among a variety of trading centers. For example,
in today's markets, national securities exchanges, once the predominant
type of venue for trading stocks, each account for no more than
approximately 19 percent of volume in NMS stocks.\147\ By way of
contrast, based on data collected from ATSs pursuant to FINRA Rule 4552
for 18 weeks of trading in 2014, the trading volume of ATSs accounted
for approximately 18 percent of the total dollar volume in NMS stocks,
with no individual ATS executing more than five percent.\148\ Given
this dispersal of trading volume among an increasing number of trading
venues, the increasingly interconnected nature of the markets, and the
increasing reliance on a variety of automated systems, the Commission
believes that there is a heightened potential for systems issues
originating from a number of sources to significantly affect the
market. Due to these developments, the Commission believes that the 20
percent threshold as adopted in Regulation ATS is no longer an
appropriate measure for determining those entities that can have a
significant impact on the market and thus should be subject to the
protections of Regulation SCI. Rather, the Commission believes that
lower volume thresholds are appropriate, and as noted in the SCI
Proposal, the Commission believes that the adopted thresholds would
include ATSs having NMS stock dollar volume comparable to or in excess
of the NMS stock dollar volume of certain national securities exchanges
subject to Regulation SCI.\149\
---------------------------------------------------------------------------

    \146\ See supra note 128 and accompanying text.
    \147\ See supra note 106.
    \148\ See infra note 150.
    \149\ See Proposing Release, supra note 13, at 18094.
---------------------------------------------------------------------------

    Based on data collected from ATSs pursuant to FINRA Rule 4552 for
18 weeks of trading in 2014,\150\ the Commission believes that
approximately 12 ATSs trading NMS stocks would exceed the adopted
thresholds and fall within the definition of SCI entity, accounting for
approximately 66 percent of the dollar volume market share of all ATSs
trading NMS stocks.\151\ The Commission acknowledges that its analysis
of the FINRA ATS data did not reveal an obvious threshold level above
which a particular subset of ATSs may be considered to have a
significant impact on individual NMS stocks or the overall market, as
compared to another subset of ATSs. However, for the following reasons,
the Commission continues to believe that the adopted thresholds for
ATSs trading NMS stock are an appropriate measure to identify those
ATSs that should be subject to the requirements of Regulations SCI.
First, by imposing both a single NMS stock threshold and an all NMS
stocks threshold in the first prong of the definition, the thresholds
will help to ensure that Regulation SCI will not apply to an ATS that
has a large volume in a small NMS stock and little volume in all other
NMS stocks. At the same time, the Commission believes that inclusion of
the dual-prong dollar volume thresholds is appropriate. Specifically,
it will require not only that ATSs that have significant trading volume
in all NMS stocks are subject to the requirements of Regulation SCI,
but also that ATSs that have large trading volume in a single NMS stock
and could significantly affect the market for that stock are also
covered by the safeguards of Regulation SCI provided they have levels
of trading in all NMS stocks that could allow such ATSs to also have
some impact on the market as a whole. The Commission also believes
that, as discussed further below, the adopted thresholds will also
appropriately capture not only ATSs that have significant trading
volume in active stocks, but also those that have significant trading
volume in less active stocks. The Commission believes that a systems
issue at an ATS that is a significant market for the trading of a less
actively traded stock could similarly impose significant risks to the
market for such securities, because a systems outage at such a venue
could significantly impede the ability to trade

such securities, thereby having a significant impact on the market for
such less-actively traded securities. In addition, the Commission
continues to believe that thresholds that account for 66 percent of the
dollar volume market share of all ATSs trading NMS stocks is a
reasonable level that would not exclude new entrants to the ATS
market.\152\ Further, as noted above, the thresholds would include ATSs
having NMS stock dollar value comparable to the NMS stock dollar volume
of the equity exchanges subject to Regulation SCI. Finally, the
Commission believes that the adopted thresholds are appropriate to help
ensure that entities that have determined to participate (in more than
a limited manner) in the national market system as markets that bring
buyers and sellers together, are subject to the requirements of
Regulation SCI.
---------------------------------------------------------------------------

    \150\ See Securities Exchange Act Release No. 71341 (January 17,
2014), 79 FR 4213 (January 24, 2014) (approving FINRA Rule 4552
requiring each ATS to report to FINRA weekly volume information and
number of securities transactions). Commission staff analyzed FINRA
ATS data for the period of May 19, 2014 through September 19, 2014.
The recently available FINRA ATS data is consistent with the OATS
data used in the SCI Proposal. In addition, the analysis of FINRA
ATS data examines a threshold of trading volume over four out of six
time periods, each period defined as a period of three consecutive
weeks as a rough approximation of the threshold test on four out of
the preceding six calendar months as prescribed in the definition of
SCI ATS. The Commission noted in the SCI Proposal that the staff
analysis of OATS data may overestimate the number of ATSs that may
meet the proposed thresholds. While the calculation based on FINRA
ATS data may not overestimate the number of ATSs as much as the data
analysis in the proposal, it could still overestimate the number of
ATSs that would meet the thresholds. Nevertheless, the Commission
believes the analysis of FINRA ATS data offers useful insights. See
Proposing Release, supra note 13, at 18094.
    \151\ According to the FINRA ATS data, during this time period,
a total of 44 ATSs traded NMS stocks. The Commission notes that the
number of ATSs exceeding the adopted thresholds, and the percentage
of volume of trading in NMS stocks that they represent, may change
over time in response to market and competitive forces.
    \152\ Consistent with the Commission's statement in the SCI
Proposal, the Commission has considered barriers to entry and the
promotion of competition in setting the threshold such that new ATSs
trading NMS stocks would be able to commence operations without, at
least initially, being required to comply with--and thereby not
incurring the costs associated with--Regulation SCI. See Proposing
Release, supra note 13, at n. 102. In particular, a new ATS could
engage in limited trading in any one NMS stock or all NMS stocks,
until it reached an average daily dollar volume of five percent or
more in any one NMS stock and 0.25 percent or more in all NMS
stocks, or one percent in all NMS stocks, over four of the preceding
six months. Because a new ATS could begin trading in NMS stocks for
at least three months (i.e., less than four of the preceding six
months), and conduct such trading at any dollar volume level without
being subject to Regulation SCI, and would have to exceed the
specified volume levels for the requisite period to become so
subject, the Commission believes that these thresholds should not
prevent a new ATS entrant from having the opportunity to initiate
and develop its business. Further, the Commission notes that, as
discussed below, it is adopting an additional six-month compliance
period (in addition to the general nine-month compliance period from
the Effective Date of Regulation SCI afforded to all SCI entities)
for ATSs newly meeting the thresholds, so that once an ATS meets the
threshold, it will have six months from that time to become fully
compliant with Regulation SCI. See infra Section IV.F (discussing
effective dates and compliance periods). The Commission believes
that, for ATSs that have newly entered the market, this additional
compliance period will give such ATSs additional opportunity to
develop and grow their business without incurring the costs of
compliance with Regulation SCI during this time. This additional
compliance period should also provide such ATSs with time to plan on
how they would meet the requirements of Regulation SCI, and could
also potentially allow SCI ATSs to become more equipped to bear the
cost of Regulation SCI once compliance is required, and thus not
significantly discourage new ATSs from entering the market and
growing. See infra Section VI.C.1.c (discussing further barriers to
entry and the potential effects on competition of the adopted
thresholds).
---------------------------------------------------------------------------

    As noted above, several commenters provided specific suggestions
for alternative standards for determining which ATSs should be included
within the scope of Regulation SCI.\153\ While the Commission
recognizes that some of the suggested alternatives could have certain
benefits, it also believes that each recommended standard also has
corresponding limitations, and thus believes that the adopted
thresholds are an appropriate measure for identifying those ATSs that
should be subject to Regulation SCI. First, as described above, the
Commission believes that adopting a two-prong standard is necessary to
identify those ATSs that, in the event of a systems issue, could have a
significant impact on the overall market or that could have a
significant impact on a single NMS stock and some impact on the market
as a whole at the same time. The Commission notes that several of the
thresholds suggested by commenters lacked such a dual-prong standard
(and, in particular, the prong relating to individual NMS stocks) and
thus do not provide the advantages associated with the adopted
threshold in protecting the trading venues for a single NMS stock. With
regard to one commenter's suggestion that the first prong of the
threshold should, among other things, consider five NMS stocks, rather
than a single stock, the Commission does not believe the commenter has
provided any clear rationale for this standard.\154\ As discussed, the
purpose of the first prong is to identify significant trading venues
(or markets) for a single security where a systems disruption could
have a significant effect on the market for that security, and setting
the threshold to consider five NMS securities could potentially exclude
trading venues that host large trading activity for a single NMS
security. Additionally, the Commission notes that the suggested
alternative approach would be unlikely to have any significant
practical effect when used in conjunction with the second prong of the
threshold, which looks at trading across all NMS stocks, because the
second prong would likely capture an ATS with five percent or more
volume in five NMS stocks. With regard to one commenter's suggestion to
apply the threshold to only the 500 most active NMS stocks \155\ and
another commenter's suggestion to include only stocks with an aggregate
average daily share volume greater than 500,000,\156\ the Commission
disagrees that the threshold should be structured to capture only ATSs
that have significant trading volume in active stocks. Rather, the
first prong of the adopted threshold is designed to capture any ATS
that has five percent or more of the trading volume of any NMS stock,
irrespective of how actively traded it is, so that Regulation SCI can
effectively address risks relating to the trading of all NMS stocks,
and not only the most active of NMS stocks. If the Commission were to
apply the threshold only to the 500 most active NMS stocks or stocks
only with average daily share volumes greater than 500,000, an ATS
that, for example, served as the primary venue for the trading of less
actively traded NMS stocks, but had negligible market share for more
actively traded NMS stocks, would not be subject to Regulation SCI.
However, an SCI event that resulted in an outage of such an ATS could
have a significant impact on the market for such less actively traded
NMS stocks. As such, failure to include such an ATS within the scope of
Regulation SCI would be contrary to the goals of the regulation.
Finally, with regard to one commenter's suggestion to retain Rule
301(b)(6) as part of Regulation ATS and amend the threshold to 2.5
percent,\157\ as discussed throughout this release, Regulation SCI is
intended to expand upon the requirements of Rule 301(b)(6) and to
supersede and replace such requirements for ATSs that trade NMS
stocks.\158\ For the reasons noted above, the Commission believes it is
appropriate to include ATSs meeting the adopted volume thresholds
within the scope of Regulation SCI, and the Commission does not believe
it is appropriate to retain Rule 301(b)(6) as part of Regulation ATS,
thereby subjecting ATSs to a separate and differing set of regulatory
requirements than other SCI entities with regard to systems capacity,
integrity, resiliency, availability, security, and compliance.\159\ For
all of the reasons discussed above, the Commission does not believe
that any of the alternative standards suggested by commenters would
better capture those entities that

have the potential to pose significant risk to the market.
---------------------------------------------------------------------------

    \153\ See supra notes 127-132 and accompanying text.
    \154\ See supra note 131 and accompanying text. This commenter
argued generally that the thresholds should be revised so as to only
include those entities that would have an ``immediate and
substantial impairment of a functioning marketplace.'' However, the
commenter did not explain why it advocated the use of five NMS
stocks, rather than a single NMS stock. See ITG Letter at 9.
    \155\ See supra note 130 and accompanying text.
    \156\ See supra note 131 and accompanying text.
    \157\ See supra note 132 and accompanying text.
    \158\ But see infra notes 189-192 and accompanying text
(discussing the Commission's determination to retain the
applicability of Rule 301(b)(6) to fixed-income ATSs).
    \159\ The Commission notes that, with regard to the specific
threshold level suggested by this commenter (2.5%), the Commission
believes the adopted thresholds to be an appropriate measure to
identify those ATSs that should be subject to the requirements of
Regulations SCI for the reasons discussed above. See supra note 141.
---------------------------------------------------------------------------

    One commenter urged the Commission to utilize number of shares
traded rather than dollar value, stating that while most of the world
uses value traded, available data for the U.S. equity markets is share-
based.\160\ The Commission disagrees with this commenter and notes that
daily dollar volume is readily available from a number of sources,
including the SIPs.\161\
---------------------------------------------------------------------------

    \160\ See supra note 139 and accompanying text.
    \161\ See also Proposing Release, supra note 13, at 18094
(stating that the use of dollar thresholds may better reflect the
economic impact of trading activity).
---------------------------------------------------------------------------

    The time measurement period for ATSs that trade NMS stocks and non-
NMS stocks is also being adopted as proposed. Thus, ATSs will be
subject to Regulation SCI only if they meet the numerical thresholds
for at least four of the preceding six months.\162\ The Commission
notes that the adopted time measurement period is consistent with the
current standard in Rule 301(b)(6) of Regulation ATS.\163\ The
Commission believes that this time measurement period is an appropriate
time period over which to evaluate the trading volume of an ATS and
should help to ensure that it does not capture ATSs with relatively low
trading volume that may have had an anomalous increase in trading on a
given day or few days. Contrary to concerns raised by some
commenters,\164\ under this time measurement methodology, an ATS would
not qualify as an SCI entity simply by trading a single large block of
an illiquid security during one month (or even two or three months).
While one commenter suggested that the time measurement period be
shorter and recommended a period of two to four weeks,\165\ the
Commission believes that this could cause ATSs to fall within the scope
of the definition solely as a result of an atypical, short-term
increase in trading or a small number of large block trades that is not
reflective of ATSs' general level of trading. Specifically, with such a
short period of measurement, a short-term spike in trading volume
uncharacteristic of an ATS's overall trading volume history could (and
if large enough, likely would) skew the overall trading volume for that
time period, causing an ATS to meet the volume thresholds and thus
become subject to Regulation SCI even though the overall risk posed by
the ATS does not warrant it. Further, the Commission believes that such
a shorter time measurement period could provide more barriers to entry
for ATSs, because new ATSs would not have as long of a time period to
develop their business prior to having to incur the costs of compliance
associated with being subject to the requirements of Regulation
SCI.\166\ This potential to incur such costs almost immediately after
the initial start of operations could act as a barrier to entry for
some new ATSs.
---------------------------------------------------------------------------

    \162\ See adopted Rule 1000 (definition of ``SCI ATS''). The
Commission notes that if an ATS that was not previously subject to
Regulation SCI meets the SCI ATS volume threshold for four
consecutive months, it would become subject to Regulation SCI at the
end that four-month period. However, as discussed further below,
such an ATS would have an additional six months from that time to
comply with the requirements of Regulation SCI. See infra text
accompanying notes 169-170.
    \163\ 17 CFR 242.301(b)(6).
    \164\ See, e.g., BIDS Letter at 6.
    \165\ See supra note 138 and accompanying text.
    \166\ See supra note 152 and accompanying text. See also infra
Section VI.C.1.c (discussing barriers to entry and the effects on
competition of the adopted thresholds and time measurement period
for SCI ATSs).
---------------------------------------------------------------------------

    Other commenters recommended a longer measurement period, such as
12 months.\167\ The Commission does not believe, however, that a longer
time period is necessary or more appropriate to identify those entities
that play a significant role in the market for a particular asset class
and/or that have the potential to significantly impact investors or the
market, warranting inclusion in the scope of Regulation SCI. The
Commission believes that the adopted time measurement period provides
sufficient trading history data so as to indicate an ATS's significance
to the market, and that the structure of the test (i.e., requiring an
ATS to meet the threshold for four out of six months) ensures
sustainability of such trading levels. In addition, modifying the time
measurement period to 12 months (and thus eliminating the four out of
six month measurement period) would make such a measure more
susceptible to capturing ATSs that have a major but isolated spike in
trading during a single month. Specifically, as noted above, a single
anomalous large increase in trading volume during one month (or such a
spike in two or three months) could never result in an ATS becoming
subject to Regulation SCI solely as a result of such a spike in
trading, because the ATS would meet the threshold only for one month,
rather than the four months required by the rule. On the other hand, a
threshold based on an average over 12 months could be skewed by the
occurrence of one large spike in trading that results in the overall
average for the 12-month period being increased to such a level that it
meets the volume threshold levels. Thus, contrary to one commenter's
suggestion that a 12-month period would require ``a sustained trading
level at the threshold,'' \168\ the Commission believes that the
structure of the adopted measurement period test (i.e., four out of six
months) may be a better indicator of actual sustained trading levels at
the threshold warranting the protections of the rule. Further, the
Commission believes that 12 months is a less appropriate time
measurement period than the period adopted because, for example, an ATS
could have significant trading volume early on during such a time
period such that it may pose significant risk to the markets in the
event of a systems issue at such an ATS without being subject to
Regulation SCI for a significant period of time. The Commission
believes that the adopted time period strikes an appropriate balance
between being a long enough period so as to not be triggered by
atypical periods of increased trading or a few occurrences of very
large trades, while also not causing unnecessary delay in requiring
that ATSs playing an important role in the market are subject to
Regulation SCI.
---------------------------------------------------------------------------

    \167\ See supra notes 136-137 and accompanying text. One of
these commenters noted that the ``four out of the preceding six
months'' measurement is cumbersome to apply in practice. See KCG
Letter at 19. The Commission does not believe this measurement
period to be overly cumbersome to apply in practice, as it would
require only that an ATS undertake an assessment once at the end of
each month as to whether the ATSs had exceeded the volume thresholds
set forth in the rule and then make a determination at the end of a
six month period whether the ATS met this threshold for four out of
the six preceding months.
    \168\ See KCG Letter at 19. See also supra notes 136-137 and
accompanying text.
---------------------------------------------------------------------------

    Finally, as discussed further in Section IV.F, the Commission
agrees with commenters that it is appropriate to provide ATSs meeting
the volume thresholds in the definition of SCI ATS for the first time a
period of time before they are required to comply with Regulation
SCI.\169\ Thus, consistent with the recommendation of these commenters,
the Commission is revising the definition of SCI ATS to provide that an
SCI ATS will not be required to comply with the requirements of
Regulation SCI until six months after satisfying any of the applicable
thresholds in the definition of SCI ATS for the first time.\170\
---------------------------------------------------------------------------

    \169\ See supra note 140 and accompanying text.
    \170\ See Rule 1000 (definition of SCI ATS).
---------------------------------------------------------------------------

ATSs Trading Non-NMS Stocks
    Some commenters addressed whether Regulation SCI should apply to
ATSs trading non-NMS stocks.\171\ Specifically,

one commenter stated that the rules should apply only to trading in NMS
securities because non-NMS stock trading--which is dispersed among
broker-dealers--does not have a single point of failure and is
therefore less susceptible to rapid, widespread issues that occur as a
result of a high degree of linkage or inter-dependency.\172\ Another
commenter stated that, with respect to non-NMS stocks (as well as
municipal securities and corporate debt securities), the proposed five
percent threshold was too low and would unnecessarily include ATSs for
these product types that are ``not systemic to maintaining fair,
orderly, and efficient markets'' and asked the Commission to further
study the appropriate threshold for these ATSs.\173\
---------------------------------------------------------------------------

    \171\ See, e.g., OTC Markets Letter at 7; SIFMA Letter at 7; TMC
Letter at 1-3 (asserting that retail fixed-income ATSs should not be
subject to Regulation SCI); and KCG Letter at 3, 10-11.
    \172\ See OTC Markets Letter at 7.
    \173\ See SIFMA Letter at 7.
---------------------------------------------------------------------------

    With regard to equity securities that are not NMS stocks and for
which transactions are reported to a self-regulatory organization, the
adopted thresholds remain unchanged from the SCI Proposal. Thus, for
such securities, an ATS will be subject to the requirements of
Regulation SCI if, during four of the preceding six calendar months, it
had five percent or more of the average daily dollar volume as
calculated by the self-regulatory organization to which such
transactions are reported.\174\ The Commission continues to believe
that this threshold will appropriately identify ATSs that play a
significant role in the market for those securities and, thus, should
be subject to the requirements of Regulation SCI.
---------------------------------------------------------------------------

    \174\ However, as noted above, an ATS meeting the definition of
SCI ATS for the first time will be afforded a six-month compliance
period. See supra notes 169-170 and accompanying text.
---------------------------------------------------------------------------

    Using data from the second quarter of 2014, an ATS executing
transactions in non-NMS stocks at a level exceeding five percent of the
average daily dollar volume traded in the United States would be
executing trades at a level exceeding $45.2 million daily.\175\ Based
on data collected from Form ATS-R for the second quarter of 2014, the
Commission estimates that two ATSs would exceed this threshold and fall
within the definition of SCI entity, accounting for approximately 99
percent of the dollar volume market share of all ATSs trading non-NMS
stocks.\176\ These thresholds reflect an assessment by the Commission,
based on qualitative and quantitative analysis, of the likely
consequences of the specific quantitative thresholds included in the
definition. From this analysis and in conjunction with considering the
views of commenters, the Commission has derived what it believes to be
an appropriate threshold to identify those ATSs that should be subject
to the requirements of Regulation SCI.
---------------------------------------------------------------------------

    \175\ In the Proposing Release, the Commission used data from
the first six months of 2012 to estimate that an ATS executing
transactions in non-NMS stocks at a level exceeding five percent of
the average daily volume traded in the United States would be
executed trades at a level exceeding $31 million daily. See
Proposing Release, supra note 13, at n.111 and accompanying text.
The Commission has updated this estimate using over-the-counter
reporting facility data available from FINRA.
    \176\ The Commission notes that the number of ATSs exceeding the
adopted threshold, and the percentage of volume of trading in non-
NMS stocks that they represent, may change over time in response to
market and competitive forces.
---------------------------------------------------------------------------

    As discussed above, one commenter objected to the inclusion of ATSs
trading non-NMS stocks within the scope of Regulation SCI.\177\ This
commenter argued that non-NMS trading is not susceptible to the issues
that Regulation SCI is designed to address because such trading is
dispersed among broker-dealers and does not create the types of single
points of failure that pose widespread systemic risk.\178\ First, as
noted above, while the Commission is particularly concerned with
systems issues that pose the greatest risk to our markets and have the
potential to cause the most widespread effects and damage (such as
those that are single points of failure), Regulation SCI is intended to
address a broader set of risks of systems issues. Accordingly, the
adopted threshold for non-NMS stock ATSs is designed to identify those
ATSs that play a significant role in the market for such securities.
Further, the Commission disagrees with the commenter's assertion that
trading in non-NMS stocks cannot result in widespread disruptions.\179\
---------------------------------------------------------------------------

    \177\ See supra note 172 and accompanying text.
    \178\ See id.
    \179\ See supra note 33 and accompanying text.
---------------------------------------------------------------------------

    While one commenter stated that the five percent threshold was too
low, this commenter did not provide an alternative threshold but rather
asked the Commission to further study this issue.\180\ As noted above,
based on qualitative and quantitative analysis, the Commission believes
the five percent threshold to be an appropriate measure to determine
which ATSs are of sufficient significance in the current market for
non-NMS stocks to warrant their inclusion within the scope of
Regulation SCI. The Commission notes that it intends to monitor the
level of this threshold, and other thresholds being adopted today, to
ensure that they continue to be appropriate.
---------------------------------------------------------------------------

    \180\ See supra note 173.
---------------------------------------------------------------------------

    The Commission notes that adoption of a higher threshold for non-
NMS stocks than for NMS stocks reflects the Commission's
acknowledgement of certain differences between the two markets. In
particular, as noted in the SCI Proposal, while the Commission believes
that similar concerns about the trading of NMS stocks on ATSs apply to
the trading of non-NMS stocks, the Commission also believes that
certain characteristics of the market for non-NMS stocks, such as the
lower degree of automation, electronic trading, and interconnectedness,
generally result in an overall lower risk to the market in the event of
a systems issue.\181\ In particular, the Commission believes that a
systems issue at an SCI entity that trades non-NMS stocks would not be
as likely to have as significant or widespread an impact as readily as
a systems issue at an SCI entity that trades NMS stocks. Therefore, the
Commission believes that there is less risk of market impact in the
markets for those securities at this time. As such, the Commission has
determined not to adopt the same, more stringent, thresholds that would
trigger the requirements of Regulation SCI that the Commission is
adopting for ATSs trading NMS stocks. The Commission also believes that
imposition of a threshold that is set too low in markets that lack
automation could have the unintended effects of discouraging automation
in these markets and discouraging new entrants into these markets.
Specifically, it could increase the cost of automation in relation to
other methods of executing trades, and thus market participants might
make a determination that the costs associated with becoming subject to
Regulation SCI preclude a shift to automated trading or the development
of a new automated trading system, particularly given the expected
lower trading volume when beginning operations. Further, the Commission
notes that it has traditionally provided special safeguards with regard
to NMS stocks in its rulemaking efforts relating to market
structure.\182\ For these reasons, the Commission believes that it is
appropriate at this time to apply a different threshold to ATSs trading
NMS stocks than those ATSs trading non-NMS stocks.
---------------------------------------------------------------------------

    \181\ See Proposing Release, supra note 13, at 18096.
    \182\ See, e.g., Regulation NMS, 17 CFR 242.600-612; Securities
Exchange Act Release No. 51808 (June 9, 2005), 70 FR 27496 (June 29,
2005) (Regulation NMS Adopting Release).

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

ATSs Trading Fixed-Income Securities
    Several commenters specifically addressed the inclusion of
municipal security and corporate debt security ATSs within the scope of
Regulation SCI, stating that these ATSs should not be subject to
Regulation SCI or that the proposed thresholds should be modified.\183\
These commenters identified differences in the nature of fixed-income
trading as compared to the markets for NMS securities and concluded
that the thresholds were inappropriate and would be detrimental to the
market for these types of securities.\184\ In particular, commenters
stated that inclusion of fixed-income ATSs and/or the adoption of the
proposed thresholds would impose unduly high costs on these entities
given their size, scope of operations, lack of automation, low speed,
and resulting low potential to pose risk to systems.\185\ Further, one
commenter noted that the cost of compliance for these types of entities
would discourage the shift from manual fixed-income trading in the OTC
markets to more transparent and efficient automated trading
venues.\186\
---------------------------------------------------------------------------

    \183\ See, e.g., SIFMA Letter at 7; TMC Letter at 1-3; and KCG
Letter at 2-3, 10-11.
    \184\ See, e.g., SIFMA Letter at 7; TMC Letter at 1-3; and KCG
Letter at 2-3, 10-11.
    \185\ See, e.g., SIFMA Letter at 7; TMC Letter at 1-3; and KCG
Letter at 2-3, 10-11.
    \186\ See KCG Letter at 3, 10-11 (noting that the vast majority
of fixed-income trades are done in the OTC markets and only a few
ATSs for the fixed-income market have emerged in recent years).
---------------------------------------------------------------------------

    In addition, one commenter stated that if retail fixed-income ATSs
are included in the final rule, a better measurement would be to look
at par amount traded rather than volume.\187\ Finally, one commenter
requested that the Commission clarify that ATSs relating to listed-
options are not subject to the obligations of proposed Regulation
SCI.\188\
---------------------------------------------------------------------------

    \187\ See TMC Letter at 1-3.
    \188\ See LiquidPoint Letter at 2-3.
---------------------------------------------------------------------------

    While the adopted definition of SCI ATS remains unchanged from the
proposal for NMS stocks and non-NMS stocks, the Commission, after
considering the views of commenters, has determined to exclude ATSs
that trade only municipal securities or corporate debt securities from
the definition of SCI ATS at this time.\189\ Accordingly, such fixed-
income ATSs will not be subject to the requirements of Regulation SCI.
Rather, fixed-income ATSs will continue to be subject to the existing
requirements in Rule 301(b)(6) of Regulation ATS regarding systems
capacity, integrity and security if they meet the twenty percent
threshold for municipal securities or corporate debt securities
provided by that rule.\190\ The Commission believes that this change is
warranted given the unique nature of the current fixed-income markets,
as noted by several commenters. In particular, fixed-income markets
currently rely much less on automation and electronic trading than
markets that trade NMS stocks or non-NMS stocks.\191\ In addition, the
municipal and corporate fixed-income markets tend to be less liquid
than the equity markets, with slower execution times and less complex
routing strategies.\192\ As such, the Commission believes that a
systems issue at a fixed-income ATS would not have as significant or
widespread an impact as in other markets. Thus, while ensuring the
capacity, integrity and security of the systems of fixed-income ATSs is
important, the benefits of lowering the threshold applicable to fixed-
income ATSs from the current twenty percent threshold in Regulation ATS
and subjecting such ATSs to the safeguards of Regulation SCI would not
be as great as for ATSs that trade NMS stock or non-NMS stock. As
commenters pointed out, the cost of the requirements of Regulation SCI
could be significant for fixed-income ATSs relative to their size,
scope of operations, and more limited potential for systems risk. The
Commission is cognizant that lowering the current threshold applicable
to fixed-income ATSs in Regulation ATS and subjecting such ATSs to the
requirements of Regulation SCI could have the unintended effect of
discouraging automation in these markets and discouraging the entry of
new fixed-income ATSs into the market, which could impede the evolving
transparency and efficiency of these markets and negatively impact
liquidity in these markets.
---------------------------------------------------------------------------

    \189\ See supra notes 183-186.
    \190\ See 17 CFR 242.301(b)(6).
    \191\ See, e.g., supra notes 183-186 and accompanying text
(discussing the unique nature of fixed-income trading). See also
Tracy Alloway and Michael Mackenzie, ``Goldman Retreats from Bond
Platform,'' Fin. Times, February 17, 2014 (noting that, despite
efforts to make the market for bond trades more electronic, large
bond trading continues to occur overwhelmingly by `voice-brokered'
transactions); and Lisa Abramowicz, ``Humans Beat Machines as
Electronic Trading Slows: Credit Markets,'' Bloomberg, February 19,
2014 (stating that a shift in corporate bond transactions to
electronic systems is failing to keep up with total volume).
    \192\ See, e.g., TMC Bonds Letter at 1 (stating that fixed-
income markets have significantly lower volumes and slower execution
times than equity markets and have no meaningful connectivity
between fixed-income ATS participants).
---------------------------------------------------------------------------

    For these reasons, the Commission believes that it is appropriate
to continue to apply the requirements in Rule 301(b)(6) of Regulation
ATS to fixed-income ATSs that meet the volume thresholds of that rule
and to exclude ATSs that trade only municipal securities or corporate
debt securities from the scope of Regulation SCI at this time.
c. Plan Processor
    Under Proposed Rule 1000(a), the term ``plan processor'' had the
meaning set forth in Rule 600(b)(55) of Regulation NMS, which defines
``plan processor'' as ``any self-regulatory organization or securities
information processor acting as an exclusive processor in connection
with the development, implementation and/or operation of any facility
contemplated by an effective national market system plan.'' \193\ The
Commission is adopting the definition of ``plan processor'' as
proposed.\194\
---------------------------------------------------------------------------

    \193\ See 17 CFR 242.600(b)(55).
    \194\ See proposed Rule 1000(a) and Proposing Release supra note
13, at Section III.B.1.
---------------------------------------------------------------------------

    The Commission received no comments on the proposed definition of
``plan processor.'' \195\ As noted in the SCI Proposal, the ARP
Inspection Program included the systems of the plan processors of four
national market system plans--the CTA Plan, CQS Plan, Nasdaq UTP Plan,
and OPRA Plan.\196\

Although an entity selected as the processor of an SCI Plan acts on
behalf of a committee of SROs, such entity is not required to be an
SRO, nor is it required to be owned or operated by an SRO.\197\ The
Commission believes, however, that the systems of such entities,
because they deal with key market data, are central features of the
national market system \198\ and should be subject to the same systems
standards as SCI SROs. The inclusion of plan processors in the
definition of SCI entity is designed to ensure that the processor for
an SCI Plan, regardless of its identity, is independently subject to
the requirements of Regulation SCI. The Commission believes that it is
important for such plan processors to be subject to the requirements of
Regulation SCI because of the important role they serve in the national
market system: Operating and maintaining computer and communications
facilities for the receipt, processing, validating, and dissemination
of quotation and/or last sale price information generated by the
members of the plan.
---------------------------------------------------------------------------

    \195\ However, some commenters did support the overall scope of
the term ``SCI entity'' or agreed specifically that plan processors
should be included within the definition of that term. See, e.g.,
Lauer Letter at 3 (urging the Commission to expand the scope of
entities covered) and KCG Letter at 5-6 (recommending that
Regulation SCI be targeted to services offered by only one or a few
entities, such as plan processors). In addition, one commenter,
although commenting specifically on the definition of ``SCI
system,'' stated that Regulation SCI should be tailored to focus
only on systems impacting the core functions of the overall market,
which should include the exclusive SIPs that transmit market data.
See OTC Markets Letter at 12-13.
    \196\ See ARP I Release, supra note 1, at n. 8 and n. 17. Each
of the CTA Plan, CQS Plan, Nasdaq UTP Plan, and OPRA Plan, is a
``national market system plan'' (``NMS Plan'') as defined under Rule
600(a)(43) of Regulation NMS under the Exchange Act, 17 CFR
242.600(a)(43). Rule 600(a)(55) of Regulation NMS under the Exchange
Act, 17 CFR 242.600(a)(55), defines a ``plan processor'' as ``any
self-regulatory organization or securities information processor
acting as an exclusive processor in connection with the development,
implementation and/or operation of any facility contemplated by an
effective national market system plan.'' Section 3(a)(22)(B) of the
Exchange Act, 15 U.S.C. 78c(22)(B), defines ``exclusive processor''
to mean ``any securities information processor or self-regulatory
organization which, directly or indirectly, engages on an exclusive
basis on behalf of any national securities exchange or registered
securities association, or any national securities exchange or
registered securities association which engages on an exclusive
basis on its own behalf, in collecting, processing, or preparing for
distribution or publication any information with respect to (i)
transactions or quotations on or effected or made by means of any
facility of such exchange or (ii) quotations distributed or
published by means of any electronic system operated or controlled
by such association.''
    As a processor involved in collecting, processing, and preparing
for distribution transaction and quotation information, the
processor of each of the CTA Plan, CQS Plan, Nasdaq UTP Plan, and
OPRA Plan meets the definition of ``exclusive processor;'' and
because each acts as an exclusive processor in connection with an
NMS Plan, each also meets the definition of ``plan processor'' under
Rule 600(a)(55) of Regulation NMS, as well as Rule 1000(a) of
Regulation SCI. For ease of reference, an NMS Plan having a current
or future ``plan processor'' is referred to herein as an ``SCI
Plan.'' The Commission notes that not every processor of an NMS Plan
would be a ``plan processor'' under Rule 1000, and therefore not
every processor of an NMS Plan would be an SCI entity subject to the
requirements of Regulation SCI. For example, the processor of the
Symbol Reservation System associated with the National Market System
Plan for the Selection and Reservation of Securities Symbols (File
No. 4-533) would not be a ``plan processor'' subject to Regulation
SCI because it does not meet the ``exclusive processor'' statutory
definition, as it is not involved in collecting, processing, and
preparing for distribution transaction and quotation information.
    \197\ Pursuant to Section 11A of the Exchange Act (15 U.S.C.
78k-1), and Rule 609 of Regulation NMS thereunder (17 CFR 242.609),
such entities, as ``exclusive processors,'' are required to register
with the Commission as securities information processors on Form
SIP. See 17 CFR 249.1001 (Form SIP, application for registration as
a securities information processor or to amend such an application
or registration).
    \198\ See Concept Release on Equity Market Structure, supra note
4, at 3594-95.
---------------------------------------------------------------------------

    Recent SIP incidents further highlighted the importance of plan
processors to the U.S. securities markets and the necessity of
including such processors within the scope of Regulation SCI.\199\ As
evidenced by the incidents, the availability of consolidated market
data is central to the functioning of the securities markets. The
unavailability of a system, such as a plan processor, that is a single
point of failure with no backups or alternatives can result in a
significant impact on the entire national market system. Accordingly,
the Commission believes that that it is essential to ensure that the
automated systems of the entities responsible for the consolidation and
processing of important market data, namely, plan processors, have
adequate levels of capacity, integrity, resiliency, availability, and
security.\200\
---------------------------------------------------------------------------

    \199\ As noted above, a disruption of the Nasdaq SIP on August
22, 2013 resulted in a three hour halt in trading in all Nasdaq-
listed securities because of the SIP's inability to process quotes.
See supra note 32 and accompanying text. Also as noted above, on
October 30, 2014, according to the NYSE, a network hardware failure
impacted the Consolidated Tape System, Consolidated Quote System,
and Options Price Reporting Authority data feeds at the primary data
center, and SIAC switched over to the secondary data center for
these data feeds. See id.
    \200\ Systems directly supporting functionality relating to the
provision of consolidated market data are included within the
definition of ``critical SCI systems,'' for which heightened
obligations under Regulation SCI will apply. See adopted Rule 1000.
See also supra Section IV.A.2.c (discussing the definition of
``critical SCI systems'').
---------------------------------------------------------------------------

    Further, pursuant to its terms, each SCI Plan is required to
periodically review its selection of its processor, and may in the
future select a different processor for the SCI Plan than its current
processor.\201\ Thus, the definition of ``plan processor'' covers any
entity selected as the processor for a current or future SCI Plan.\202\
---------------------------------------------------------------------------

    \201\ See CTA Plan Section V(d) and CQS Plan Section V(d),
available at: http://www.nyxdata.com/cta; OPRA Plan Section V,
available at: http://www.opradata.com/pdf/opra_plan.pdf; and Nasdaq
UTP Plan Section V, available at: http://www.utpplan.com.
    \202\ Currently, SIAC is the processor for the CTA Plan, CQS
Plan, and OPRA Plan, and Nasdaq is the processor for the Nasdaq UTP
Plan. SIAC is wholly owned by NYSE Euronext. Both SIAC and Nasdaq
are registered with the Commission as securities information
processors, as required by Section 11A(b)(1) of the Exchange Act, 15
U.S.C. 78k-1(b)(1), and in accordance with Rule 609 of Regulation
NMS, 17 CFR 242.609.
---------------------------------------------------------------------------

d. Exempt Clearing Agency Subject to ARP
    Proposed Rule 1000(a) defined the term ``exempt clearing agency
subject to ARP'' to mean ``an entity that has received from the
Commission an exemption from registration as a clearing agency under
Section 17A of the Act, and whose exemption contains conditions that
relate to the Commission's Automation Review Policies, or any
Commission regulation that supersedes or replaces such policies.'' This
definition is being adopted as proposed.
    As noted in the SCI Proposal, this definition of ``exempt clearing
agency subject to ARP'' currently covers one entity, Omgeo Matching
Services--US, LLC (``Omgeo'').\203\ In its comment letter, Omgeo stated
that it believed its inclusion as an SCI entity was reasonable because
clearing agencies that provide matching services, such as Omgeo,
perform a critical role in the infrastructure of the U.S. financial
markets in handling large amounts of highly confidential proprietary
trade data.\204\ Omgeo requested, however, that the Commission clarify
that other similarly situated clearing agencies would also be subject
to the requirements of Regulation SCI, and further requested that the
Commission expand the definition of SCI entity, as applied to clearing
agencies, to include, without limitation, any entity providing either
matching services or confirmation/affirmation services for depository
eligible securities that settle in the United States, as contemplated
by FINRA Rule 11860.\205\
---------------------------------------------------------------------------

    \203\ On April 17, 2001, the Commission issued an order granting
Omgeo an exemption from registration as a clearing agency subject to
certain conditions and limitations in order that Omgeo might offer
electronic trade confirmation and central matching services. See
Global Joint Venture Matching Services--US, LLC; Order Granting
Exemption from Registration as a Clearing Agency, Securities
Exchange Act Release No. 44188 (April 17, 2001), 66 FR 20494 (April
23, 2001) (File No. 600-32) (``Omgeo Exemption Order''). Because the
Commission granted it an exemption from clearing agency
registration, Omgeo is not a self-regulatory organization.
    \204\ See Omgeo Letter at 2-3.
    \205\ See id.
---------------------------------------------------------------------------

    The Commission notes that the adopted definition of ``exempt
clearing agency subject to ARP'' does provide that any entity that
receives from the Commission an exemption from registration as a
clearing agency under Section 17A of the Act, and whose exemption
contains conditions that relate to the Automation Review Policies or
any Commission regulation that supersedes or replaces the Commission's
Automation Review Policies (such as Regulation SCI) would be included
within the scope of Regulation SCI. Therefore, clearing agencies that
are similarly situated as Omgeo (i.e., those that are subject to an
exemption that contains the relevant conditions) will be subject to
Regulation SCI.\206\ The Commission does not believe, therefore, that
an expansion of the definition as suggested by Omgeo is necessary to
further clarify that

similarly situated entities will be subject to the requirements of
Regulation SCI.
---------------------------------------------------------------------------

    \206\ Any entity seeking an exemption from registration as a
clearing agency is responsible for requesting and obtaining such an
exemption from the Commission.
---------------------------------------------------------------------------

    Among the operational conditions required by the Commission in the
Omgeo Exemption Order were several that directly related to the ARP
policy statements.\207\ For the same reasons that it required Omgeo to
abide by the conditions relating to the ARP policy statements set forth
in the Omgeo Exemption Order, the Commission believes it is appropriate
that Omgeo (or any similarly situated exempt clearing agency) should be
subject to the requirements of Regulation SCI, and thus is including
any ``exempt clearing agency subject to ARP'' within the definition of
SCI entity.
---------------------------------------------------------------------------

    \207\ These conditions require Omgeo to, among other things:
Provide the Commission with an audit report addressing all areas
discussed in the Commission ARP policy statements; provide annual
reports prepared by competent, independent audit personnel in
accordance with the annual risk assessment of the areas set forth in
the ARP policy statements; report all significant systems outages to
the Commission; provide advance notice of any material changes made
to its electronic trade confirmation and central matching services;
and respond and require its service providers to respond to requests
from the Commission for additional information relating to its
electronic trade confirmation and central matching services, and
provide access to the Commission to conduct inspections of its
facilities, records and personnel related to such services. See
supra note 203.
---------------------------------------------------------------------------

2. SCI Systems, Critical SCI Systems, and Indirect SCI Systems
a. Overview
    Regulation SCI, as adopted, distinguishes three categories of
systems of an SCI entity: ``SCI systems;'' ``critical SCI systems,''
and ``indirect SCI systems.'' The SCI Proposal broadly defined SCI
systems to mean ``all computer, network, electronic, technical,
automated, or similar systems of, or operated by or on behalf of, an
SCI entity, whether in production, development, or testing, that
directly support trading, clearance and settlement, order routing,
market data, regulation, or surveillance.'' The SCI Proposal also
defined the term SCI security systems (to which only the provisions of
Regulation SCI relating to security and intrusions would apply) as:
``any systems that share network resources with SCI systems that, if
breached, would be reasonably likely to pose a security threat to SCI
systems.'' \208\
---------------------------------------------------------------------------

    \208\ See proposed Rule 1000(a) and Proposing Release, supra
note 13, at Section III.B.2.
---------------------------------------------------------------------------

    Many commenters stated that the proposed definitions of SCI systems
and SCI security systems were too broad and urged the Commission to
target systems that pose the greatest risk to the market if they
malfunction.\209\ After careful consideration of the comments, and as
discussed more fully below, the Commission agrees that certain types of
systems included in the proposed definition of SCI systems may be
appropriately excluded from the adopted definition. However, because
U.S. securities market infrastructure is highly interconnected and
seemingly minor systems problem at a single entity can spread rapidly
across the national market system, the Commission does not believe it
is appropriate to apply Regulation SCI only to the most critical SCI
systems, as some commenters suggested. Instead, the adopted regulation
applies to a broader set of systems than urged by some commenters, but
a more targeted set of systems than proposed. In addition, the adopted
approach recognizes that some systems pose greater risk than others to
the maintenance of fair and orderly markets if they malfunction. To
this end, adopted Regulation SCI identifies three broad categories of
systems of SCI entities that are subject to the regulation: ``SCI
systems,'' ``critical SCI systems,'' and ``indirect SCI systems,'' with
each category subject to differing requirements under Regulation SCI.
---------------------------------------------------------------------------

    \209\ See, e.g., NYSE Letter at 10; Joint SROs Letter at 5;
Omgeo Letter at 4; KCG Letter at 3; DTCC Letter at 4; FIF Letter at
3; Liquidnet Letter at 3; and OTC Markets Letter at 12-13.
---------------------------------------------------------------------------

    As discussed more fully below, the adopted definition of ``SCI
systems'' includes those systems that directly support six areas that
have traditionally been considered to be central to the functioning of
the U.S. securities markets, namely trading, clearance and settlement,
order routing, market data, market regulation, and market surveillance.
SCI systems are subject to all provisions of Regulation SCI, except for
certain requirements applicable only to critical SCI systems.
    In addition, the Commission is adopting a definition of ``critical
SCI systems,'' a subset of SCI systems that are subject to certain
heightened resilience and information dissemination provisions of
Regulation SCI. Guided significantly by commenters' views on those
systems that are most critical, the Commission is defining the term
``critical SCI systems'' as SCI systems that: (1) Directly support
functionality relating to: (i) Clearance and settlement systems of
clearing agencies; (ii) openings, reopenings, and closings on primary
trading markets; (iii) trading halts; (iv) initial public offerings;
(v) the provision of consolidated market data (i.e., SIPs); or (vi)
exclusively-listed securities; or (2) provide functionality to the
securities markets for which the availability of alternatives is
significantly limited or nonexistent and without which there would be a
material impact on fair and orderly markets.\210\ As more fully
discussed below, systems in this category are those that, if they were
to experience systems issues, the Commission believes would be most
likely to have a widespread and significant impact on the securities
markets.
---------------------------------------------------------------------------

    \210\ See Rule 1000.
---------------------------------------------------------------------------

    In addition, the Commission is adopting a definition of ``indirect
SCI systems,'' in place of the proposed definition of ``SCI security
systems.'' ``Indirect SCI systems'' are subject only to the provisions
of Regulation SCI relating to security and intrusions. The term
``indirect SCI systems'' is defined to mean ``any systems of, or
operated by or on behalf of, an SCI entity that, if breached, would be
reasonably likely to pose a security threat to SCI systems'' and, if an
SCI entity puts in place appropriate security measures, is intended to
refer to few, if any, systems of the SCI entity.
b. SCI Systems
SCI Systems Generally
    Proposed Rule 1000(a) defined the term ``SCI systems'' to mean
``all computer, network, electronic, technical, automated, or similar
systems of, or operated by or on behalf of, an SCI entity, whether in
production, development, or testing, that directly support trading,
clearance and settlement, order routing, market data, regulation, or
surveillance.'' \211\ After careful consideration of the comments, the
Commission is refining the scope of the systems covered by the
definition of ``SCI systems.'' As adopted, the term ``SCI systems'' in
Rule 1000 means ``all computer, network, electronic, technical,
automated, or similar systems of, or operated by or on behalf of, an
SCI entity that, with respect to securities, directly support trading,
clearance and settlement, order routing, market data, market
regulation, or market surveillance.''
---------------------------------------------------------------------------

    \211\ See proposed Rule 1000(a) and Proposing Release, supra
note 13, at Section III.B.2.
---------------------------------------------------------------------------

    One commenter generally supported the proposed definition of SCI
systems, and stated that the definition should be expanded to include
any technology system that has direct market access.\212\ In response
to this comment, the Commission believes that many systems with direct
market access are captured by the adopted definition. However, as

discussed above, the Commission has determined not to propose to expand
the scope of Regulation SCI to include other broker-dealer entities and
their systems at this time.\213\
---------------------------------------------------------------------------

    \212\ See Lauer Letter at 5.
    \213\ See supra Section IV.A.1 (discussing scope of SCI entities
covered by Regulation SCI) and infra Section IV.E (discussing
comments on the inclusion of broker-dealers generally within the
scope of Regulation SCI).
---------------------------------------------------------------------------

    Contrary to the commenter who urged expansion of the proposed
definition, many commenters believed the term to be too broad and
recommended that it be revised in various ways.\214\ These commenters
argued that the definition was over-inclusive, with some believing that
it could potentially apply to all systems of an SCI entity.
---------------------------------------------------------------------------

    \214\ See, e.g., NYSE Letter at 10-11; Omgeo Letter at 3-6; MSRB
Letter at 7-9; FIF Letter at 3; ICI Letter at 4; BIDS Letter at 15-
16; ITG Letter at 5; Liquidnet Letter at 3; CME Letter at 5; DTCC
Letter at 3-5; OCC Letter at 3-4; Joint SROs Letter at 5; FINRA
Letter at 5-10; SIFMA Letter at 8; Oppenheimer Letter at 3; OTC
Markets Letter at 12; and Direct Edge Letter at 2.
---------------------------------------------------------------------------

    Specifically, several commenters recommended that the definition of
SCI systems be revised to include a more limited set of systems than
proposed.\215\ Commenters advocating this general approach provided
various suggestions for the specific standard that they believed should
apply. For example, among commenters' recommendations were suggestions
that the definition of SCI systems should include only those systems:
whose failure or degradation would reasonably be expected to have an
adverse material impact on the sound operation of financial markets;
\216\ that are highly critical to functioning as an SCI entity; \217\
that have the potential to impact the protection of securities
investors and the maintenance of fair and orderly markets; \218\ that
directly support trading, clearance and settlement, order routing,
market data, regulation, or surveillance in real-time; \219\ that
support the SCI entity's ``core functions . . . which the SCI entity
performs pursuant to applicable Commission regulations;'' \220\ that
are reasonably likely to pose a plausible risk to the markets (namely,
systems that route or execute orders, clear and settle trades, or
transmit required market data); \221\ or that impact the core functions
of the overall market, which, according to the commenter, would include
exclusive SIPs that transmit market data and systems responsible for
primary NMS auction markets that set daily opening and closing
prices.\222\ In addition, one commenter suggested that the term should
be defined as a production system that connects to and is part of the
electronic network that comprises the market.\223\ This commenter also
noted that the definition should distinguish between systems that
connect to the markets and those that are used to run a business.\224\
Another commenter suggested that, if Regulation SCI were to apply only
to exchanges and ATSs, the term should be limited to exchange and ATS
systems operated by the entity and should not include, for example,
brokerage systems.\225\
---------------------------------------------------------------------------

    \215\ See, e.g., NYSE Letter at 10; Joint SROs Letter at 5;
Omgeo Letter at 4; KCG Letter at 3; DTCC Letter at 4; FIF Letter at
3; Liquidnet Letter at 3; and OTC Markets Letter at 12-13. See infra
text accompanying notes 216-225.
    \216\ See Omgeo Letter at 4.
    \217\ See KCG Letter at 3. See also ICI Letter at 3 and
Oppenheimer Letter at 3 (stating generally that the proposed
definitions should be revised to more specifically focus on system
events that are truly disruptive to the markets and the systems
themselves that are likely to pose a risk to the fair and orderly
operation of the markets or participants in the markets).
    \218\ See CME Letter at 5.
    \219\ See Joint SROs Letter at 5. This group of commenters
further stated that non-real-time systems should not be included, as
they do not warrant the level of oversight and added costs that the
regulation imposes.
    \220\ See DTCC Letter at 4.
    \221\ See NYSE Letter at 3, 10. In addition, this commenter
added that the key to whether a proposed ``supporting'' function
should be included is whether or not it is critical to the proper
operation of a core functionality.
    \222\ See OTC Markets Letter at 13.
    \223\ See BIDS Letter at 15-16. Thus, this commenter argued
that, for a venue that does not route orders, the reporting of trade
executions to the tape should not be enough to qualify such a system
as an ``SCI system.''
    \224\ See id.
    \225\ See Liquidnet Letter at 3.
---------------------------------------------------------------------------

    The Commission is further focusing the scope of the definition of
SCI systems in response to these comments.\226\ The Commission is
replacing the proposed language referring to ``systems . . . whether in
production, development, or testing that directly support trading,
clearance and settlement, order routing, market data, regulation, or
surveillance'' with the following language: ``systems, with respect to
securities, that directly support trading, clearance and settlement,
order routing, market data, market regulation, or market
surveillance.'' As such, the adopted definition has been limited to
apply to production systems that relate to securities market functions,
and in particular to those six functions--trading, clearance and
settlement, order routing, market data, market regulation, or market
surveillance--that traditionally have been considered to be central to
the functioning of the U.S. securities markets, as urged by several
commenters.\227\ The Commission believes that systems providing these
six functions may pose a significant risk to the maintenance of fair
and orderly markets if their capacity, integrity, reliability,
availability or security is compromised, and therefore that they should
be covered by the definition of ``SCI systems.''
---------------------------------------------------------------------------

    \226\ See supra notes 215-218, 220-222, and 224-225, and
accompanying text. The definition is not limited strictly to real-
time systems, however, or those that ``connect to'' and are ``part
of the electronic network that comprises the market,'' because those
limitations could exclude relevant systems, such as certain market
regulation or market surveillance systems operated by or on behalf
of an SCI entity, which the Commission views as integral to one or
more of the six functions identified in the definition. In response
to the commenter requesting that ``brokerage'' systems be excluded
from the definition of SCI systems, the Commission notes that the
adopted definition of SCI systems applies to systems that directly
support the enumerated six functions, operated by or on behalf of an
SCI entity. The definition therefore would exclude systems,
including brokerage systems, that are not operated by or on behalf
of an SCI entity. See, respectively, supra notes 219 and 223 and
accompanying text.
    \227\ See supra notes 219-221 and accompanying text.
---------------------------------------------------------------------------

    Although some commenters pointed to the phrase ``directly support''
in the proposed rule as vague and overbroad,\228\ the Commission has
retained this phrase in the adopted definition. The term ``directly
support,'' is retained to acknowledge that systems of SCI entities are
complex and highly interconnected and that the definition of SCI
systems should not exclude functionality or supporting systems on which
the six identified categories of systems rely to remain
operational.\229\ In response to comment that the definition of SCI
systems should distinguish between systems that connect to the markets
and those that are used to run a business,\230\ the Commission notes
that the adopted definition would not include systems ``used to run a
business'' if they are not within the six identified categories of
market-related production systems and not necessary to their continued
functioning. Further, the adopted definition clarifies that SCI systems
encompass only those systems that, with respect to securities, directly
support trading, clearance and settlement, order routing, market data,
market regulation, or market surveillance. The Commission believes

that this change appropriately responds to one commenter's concerns
that the proposed definition would capture systems operated by an SCI
entity that have ``practically no relevance or relation to SEC
markets'' and suggested that the definition should be revised to
include only those systems that would directly impact a market that was
subject to the Commission's jurisdiction. \231\ As a result of this
modification, if an SCI SRO does not use its systems to conduct
business with respect to securities, its systems would not fall within
the definition of ``SCI systems.'' Further, if an SCI entity operates
systems for the trading of both futures and securities, only its
trading systems for securities would be subject to the requirements of
Regulation SCI.\232\
---------------------------------------------------------------------------

    \228\ See OCC Letter at 3; and NYSE Letter at 10.
    \229\ The Commission notes that it believes that specifying that
the definition applies to those systems that ``directly support''
these core functions is necessary so as to not result in a
definition that is overly broad and would capture systems that only
peripherally or indirectly support these functions. See generally
supra notes 214-225 and accompanying text (discussing comments that
urged revisions to the definition of SCI systems). See also infra
Section IV.A.2.d (discussing the definition of ``indirect SCI
systems'').
    \230\ See supra note 224 and accompanying text.
    \231\ See CME Letter at 5.
    \232\ However, the Commission notes that, if an SCI entity has
systems that do not relate to securities, and that have not been
properly walled off from its SCI systems for securities, they may be
captured by the definition of ``indirect SCI systems'' (as discussed
below) and subject to certain requirements of the rule including
those relating to security and intrusions standards. See infra
Section IV.A.2.d (discussing definition of ``indirect SCI
systems'').
---------------------------------------------------------------------------

    In addition, one commenter urged that the Commission should
initially limit the scope of SCI systems to those systems covered by
the ARP Policy Statements (trading, clearance and settlement, and order
routing) and phase in other types of systems later.\233\ The Commission
believes that the adopted definition of SCI systems obviates the need
for such an approach, as many systems for which the commenter urged a
delay in compliance will not be covered by the regulation, as adopted.
---------------------------------------------------------------------------

    \233\ See MSRB Letter at 9.
---------------------------------------------------------------------------

SCI Systems: Inclusions and Exclusions
    Various commenters objected to specific categories proposed to be
included in the definition of SCI systems. First, many commenters
opposed the proposed inclusion of development and testing systems in
the definition, noting that issues in development and testing systems
would have little or no impact on the operations of SCI entities and
that such systems are designed to identify and address problems before
they are introduced into production systems.\234\ Some commenters
argued that inclusion of development and testing systems in the
definition of SCI systems would subject such systems to more
requirements under Regulation SCI than was necessary and noted that
certain other provisions of Regulation SCI would necessarily include
reporting information to the Commission on such systems, even without
their inclusion in the definition of SCI systems.\235\ For example, one
commenter stated that application of most provisions of Regulation SCI
to testing and development systems would provide little benefit, and
noted that updates regarding systems in development and material new
features of existing systems could instead be done through the semi-
annual reports to the Commission under proposed Rule 1000(b)(8).\236\
Similarly, one commenter noted that information regarding the status of
systems that are in development and testing would be captured in the
notices regarding material systems changes under proposed Rule
1000(b)(6) and in the updates under proposed Rule 1000(b)(8).\237\
Alternatively, this commenter suggested that the Commission could
require that any testing errors be corrected (and such corrections be
retested) prior to implementation of those changes in production.\238\
---------------------------------------------------------------------------

    \234\ See NYSE Letter at 11; FINRA Letter at 10-11; Omgeo Letter
at 5; DTCC Letter at 4; SIFMA Letter at 8; BIDS Letter at 16; MSRB
Letter at 7-8; OCC Letter at 5; CME Letter at 6; Joint SROs Letter
at 5; and Direct Edge Letter at 2. One commenter qualified this
position by stating that, to the extent that a systems issue in a
development and testing environment were to give rise to an issue
affecting an SCI system, the proposal should apply to that
development and testing environment. See OCC Letter at 5.
    \235\ See MSRB Letter at 7; and DTCC Letter at 4.
    \236\ See MSRB Letter at 7.
    \237\ See DTCC Letter at 4.
    \238\ See id.
---------------------------------------------------------------------------

    The Commission believes that certain modifications to the elements
of the proposed definition of SCI systems are appropriate. First, in
response to comments, the reference to development and testing systems
in the proposed definition of SCI systems has been deleted.\239\ As
commenters pointed out, development and testing systems are generally
designed to identify and address problems before new systems or systems
changes are introduced into production systems and, by their nature,
can often experience issues, both intentional and unplanned, during the
testing process. The Commission believes that systems issues that occur
with respect to such systems are less likely to have a significant
impact on the operations of an SCI entity or on the securities markets
as a whole than issues occurring with respect to production systems.
Further, subjecting these systems to the Commission notification
requirements in adopted Rule 1002(b) could have the unintended effect
of deterring SCI entities from fully utilizing the testing and
development processes to test new systems and systems changes and
develop solutions to issues prior to implementation of such systems or
changes in production. At the same time, the Commission notes that, in
order to have policies and procedures reasonably designed to achieve
capacity, integrity, resiliency, availability, and security for SCI
systems in accordance with adopted Rule 1001(a), an SCI entity will be
required to have policies and procedures that include a program to
review and keep current systems development and testing methodology for
SCI systems.\240\ Accordingly, review of programs relating to systems
development and testing for SCI systems is within the scope of
Regulation SCI, and an SCI entity should reasonably expect Commission
staff to review such processes and systems during the course of its
exams and inspections. In addition, the Commission notes that the
definition of SCI review in adopted Rule 1000 and corresponding
requirements for an annual SCI review in adopted Rule 1003(b) require
an assessment of internal control design and effectiveness, which
includes development processes.\241\ Further, if development and
testing systems are not appropriately walled off from production
systems, such systems could be captured under the definition of
indirect SCI systems as discussed below and be subject to the
requirements of Regulation SCI. If an SCI entity's development and
testing systems are not walled off from production systems, the SCI
entity should consider whether its policies and procedures should
specify safeguards to ensure that its personnel can clearly distinguish
the development and testing systems from the production systems, in
order to avoid inadvertent errors that may result in an SCI event.
---------------------------------------------------------------------------

    \239\ Because the Commission is removing development and testing
systems from the definition of SCI systems, the reference to
production systems in the definition of SCI systems is also being
deleted as it is unnecessary to distinguish between development,
testing and production systems within the definition. See adopted
Rule 1000 (definition of ``SCI systems'').
    \240\ See adopted Rule 1001(a) and discussion in infra Section
IV.B.1 (discussing the policies and procedures requirement under
adopted Rule 1001(a)).
    \241\ See adopted Rule 1000 and 1003(b) and discussion in infra
Section IV.B.5 (discussing the SCI review requirement). The
Commission also notes that development processes include testing
processes.
---------------------------------------------------------------------------

    Some commenters also opposed the proposed inclusion of regulatory
and surveillance systems within the definition of SCI systems or
suggested that the Commission refine or clarify the scope of such
systems.\242\ Some of these

commenters argued that inclusion of such systems was not necessary
because these systems do not operate on a real-time basis or have a
real-time impact on trading.\243\ Further, one commenter suggested that
periodic reporting of material outages or delays in the operation of
regulatory and surveillance systems, pursuant to appropriate policies
and procedures, would support the goals of Regulation SCI without
imposing undue burdens on SCI entities or raising the risk that market
participants would purposefully direct order flow to SCI entities
experiencing regulatory or surveillance systems issues.\244\ Another
commenter advocated for replacing the terms ``regulation'' and
``surveillance'' with ``market regulation'' and ``market
surveillance,'' respectively, and asked the Commission to clarify the
difference between ``regulatory'' and ``surveillance'' systems.\245\
---------------------------------------------------------------------------

    \242\ See NYSE Letter at 11; BATS Letter at 5; MSRB Letter at 8-
9; and FINRA Letter at 7-8.
    \243\ See NYSE Letter at 11; and Joint SROs Letter at 5.
    \244\ See NYSE Letter at 11 (citing concerns regarding the
potential that dissemination of information regarding issues with
regulatory or surveillance systems to members or participants could
provide a ``roadmap for violative market behavior'').
    \245\ See FINRA Letter at 7-8.
---------------------------------------------------------------------------

    In consideration of these comments, the Commission has determined
to limit SCI systems to those systems relating to market regulation and
market surveillance rather than including all regulation and
surveillance systems. As proposed, the definition contained no such
limitations and could potentially be interpreted to cover systems used
for member regulation and member surveillance. The Commission does not
believe that inclusion of member regulation or member surveillance
systems such as those, for example, relating to member registration,
capital requirements, or dispute resolution, would advance the goals of
Regulation SCI. Issues relating to such systems are unlikely to have
the same level of impact on the maintenance of fair and orderly markets
or an SCI entity's operational capability as those systems identified
in the definition of SCI systems. The Commission believes that this
change will more appropriately capture only those regulatory and
surveillance systems that are related to core market functions, such as
trading, clearance and settlement, order routing, and market data.\246\
Another element of the proposed definition of ``SCI systems'' that some
commenters addressed was the inclusion of market data systems.
Specifically, one commenter believed that the inclusion of all market
data systems was too broad, and argued that only ``systems that
directly support `the transmission of market data as required by the
Exchange Act''' should be included, thus limiting the types of market
data systems to those relating to consolidated data and excluding those
that transmit proprietary market data.\247\ Although the term ``market
data'' is not defined in Regulation SCI, that term generally refers to
price information for securities, both pre-trade and post-trade, such
as quotations and transaction reports.\248\ In response to the
commenter urging that only market data systems relating to consolidated
data be included, the term ``market data'' does not refer exclusively
to consolidated market data, but includes proprietary market data
generated by SCI entities as well. The Commission notes that both
consolidated and proprietary market data systems are widely used and
relied upon by a broad array of market participants, including
institutional investors, to make trading decisions, and that if a
consolidated or a proprietary market data feed became unavailable or
otherwise unreliable, it could have a significant impact on the trading
of the securities to which it pertains, and could interfere with the
maintenance of fair and orderly markets. Therefore, systems of an SCI
entity directly supporting proprietary market data or consolidated
market data are both within the scope of the definition of SCI systems
and subject to Regulation SCI. However, the Commission has repeatedly
emphasized the importance of consolidated market data to the national
market system and the protection of investors \249\ and the severe
impact of its unavailability was evidenced by the SIP outage in August
2013.\250\ Thus, as discussed below, systems directly supporting
functionality related to the provision of consolidated market data are
distinguished by their inclusion in the definition of ``critical SCI
systems.'' \251\
---------------------------------------------------------------------------

    \246\ The Commission notes that Rule 613 of Regulation NMS
requires the creation of an NMS plan to govern the creation,
implementation, and maintenance of a consolidated audit trail and
central repository. See 17 CFR 242.613. See also Securities Exchange
Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012)
(``Consolidated Audit Trail Adopting Release''). Although the
consolidated audit trail central repository has not yet been
created, the Commission believes that the consolidated audit trail
repository will be a market regulation system that falls within the
definition of SCI systems, and further that it will be an SCI system
of each SCI SRO that is a member of an approved NMS plan under Rule
613, because it will be a facility of each SCI SRO that is a member
of such plan. See Consolidated Audit Trail Adopting Release, 77 FR
at 45774 (stating, ``[T]he central repository will be jointly owned
by, and be a facility of, each SRO that is a sponsor of the NMS
plan.''). See also SCI Proposing Release, supra note 13, at 18099
(contemplating inclusion of the consolidated audit trail central
repository as an SCI system).
    \247\ See NYSE Letter at 10-11.
    \248\ See Exchange Act Section 11A (15 U.S.C. 78K-
1(a)(1)(C)(iii)), granting the Commission authority to assure the
availability to brokers, dealers, and investors of ``information
with respect to quotations for and transactions in securities'').
See also Regulation of Market Information Fees and Revenues,
Securities Exchange Act Release No. 42208, 64 FR 70613 (December 17,
1999) (describing ``market information'' as information concerning
quotations for and transactions in equity securities and options
that are actively traded in the U.S. markets).
    \249\ See, e.g., Concept Release on Equity Market Structure,
supra note 198; and Regulation NMS Adopting Release, supra note 182,
at 37503-04.
    \250\ See supra note 32 and accompanying text.
    \251\ See infra Section IV.A.2.c (discussing definition of
``critical SCI systems'').
---------------------------------------------------------------------------

    Further, one commenter questioned whether the phrase ``market data
systems'' was intended to be limited to data-driven systems devoted to
price transparency or whether the Commission also intended to include
document-based systems devoted to public disclosure.\252\ In response
to this comment, the Commission notes that systems providing or
directly supporting price transparency are within the scope of SCI
systems.\253\ However, systems solely providing or directly supporting
other types of data, such as systems used by market participants to
submit disclosure documents, or systems used by SCI entities to make
disclosure documents publicly available, are not within the scope of
SCI systems, so long as they do not also directly support price
transparency.
---------------------------------------------------------------------------

    \252\ See MSRB Letter at 8-9 (citing its EMMA Primary Market
Disclosure Service and EMMA Continuing Disclosure Service system as
an example of a document-based system devoted to public disclosure).
    \253\ With regard to this particular comment, the Commission
notes that the specific systems referenced--the RTRS, EMMA Primary
Market Disclosure Service, EMMA Continuing Disclosure Service and
SHORT System--all include pricing information for securities, and
thus would fall within the definition of ``SCI systems.''
---------------------------------------------------------------------------

    Several commenters also argued that the term SCI systems should not
include systems operated on behalf of an SCI entity by a third
party.\254\ Some of these commenters pointed to potential difficulties
with meeting the requirements of Regulation SCI with regard to third
party systems.\255\ One

commenter specifically suggested that the proposal should be limited to
those systems under the control of the SCI entity.\256\ Another
commenter noted that the SCI entity should instead be responsible for
managing these relationships through due diligence, contract terms, and
monitoring of third party performance.\257\ One commenter also
requested that the Commission clarify how SCI entities should comply
with the oversight of vendor systems as part of Regulation SCI.\258\
---------------------------------------------------------------------------

    \254\ See Omgeo Letter at 5-6; DTCC Letter at 4; SIFMA Letter at
8-9; BIDS Letter at 16; and BATS Letter at 4. See also ITG Letter at
5 (expressing concern about the inclusion of systems of third
parties operated on behalf of an SCI entity and systems that are
unrelated to the trading operations of an ATS).
    \255\ See, e.g., Omgeo Letter at 5-6; and BATS Letter at 4
(arguing that it would be difficult for SCI entities to ensure
compliance by third party vendors absent their willingness to
disclose to SCI entities highly detailed information about their
intellectual property and proprietary systems).
    \256\ See SIFMA Letter at 9.
    \257\ See BIDS Letter at 16.
    \258\ See FIF Letter at 3.
---------------------------------------------------------------------------

    Although several commenters argued that the term SCI systems should
not include third-party systems, the Commission continues to believe
that, if a system is operated on behalf of an SCI entity and directly
supports one of the six key functions listed within the definition of
SCI system, it should be included as an SCI system subject to the
requirements of Regulation SCI. The Commission believes that any system
that directly supports one of the six functions enumerated in the
definition of SCI system is important to the functioning of the U.S.
securities markets, regardless of whether it is operated by the SCI
entity directly or by a third party. The Commission believes that
permitting such systems to be excluded from the requirements of
Regulation SCI would significantly reduce the effectiveness of the
regulation in promoting the national market system by ensuring the
capacity, integrity, resiliency, availability, and security of those
systems important to the functioning of the U.S. securities markets.
Further, if the definition did not include systems operated on behalf
of an SCI entity, the Commission is concerned that some SCI entities
might be inclined to outsource certain of their systems solely to avoid
the requirements of Regulation SCI, which would further undermine the
goals of Regulation SCI. The Commission agrees with the comment that an
SCI entity should be responsible for managing its relationship with
third parties operating systems on behalf of the SCI entity through due
diligence, contract terms, and monitoring of third party performance.
However, the Commission believes that these methods may not be
sufficient in all cases to ensure that the requirements of Regulation
SCI are met for SCI systems operated by third parties. The fact that
they might be sufficient some of the time is therefore not a basis for
excluding these systems from the definition of SCI systems. Instead, if
an SCI entity determines to utilize a third party for an applicable
system, it is responsible for having in place processes and
requirements to ensure that it is able to satisfy the requirements of
Regulation SCI for systems operated on behalf of the SCI entity by a
third party. The Commission believes that it would be appropriate for
an SCI entity to evaluate the challenges associated with oversight of
third-party vendors that provide or support its applicable systems
subject to Regulation SCI. If an SCI entity is uncertain of its ability
to manage a third-party relationship (whether through due diligence,
contract terms, monitoring, or other methods) to satisfy the
requirements of Regulation SCI,\259\ then it would need to reassess its
decision to outsource the applicable system to such third party.\260\
For example, if a third-party vendor is unwilling to disclose to an SCI
entity information regarding the vendor's intellectual property or
proprietary system that the SCI entity believes it needs to satisfy the
requirements of Regulation SCI, as some commenters suggested might be
the case, an SCI entity will need to reassess its relationship with
that vendor, because the vendor's unwillingness to provide necessary
information or other assurances would not exclude the outsourced system
from the definition of SCI systems. Accordingly, the definition of SCI
system, as adopted in Rule 1000, retains the reference to systems
operated ``on behalf of'' SCI entities.
---------------------------------------------------------------------------

    \259\ See BIDS Letter at 16 (suggesting these methods of
managing third-party relationships to comply with the proposed
rule).
    \260\ See FIF Letter at 3 and FINRA Letter at 22-23 (requesting
Commission guidance on how an SCI entity should manage third-party
relationships in the context of adopted Regulation SCI). See also
infra notes 851-852 and accompanying text (discussing comments on
the risk of noncompliance by an SCI entity in connection with
reporting SCI events and material systems changes due to challenges
posed by third-party systems).
---------------------------------------------------------------------------

    Finally, some commenters asked for clarification on miscellaneous
aspects of the definition. For example, one commenter requested that
the Commission clarify that the definition of SCI system for purposes
of Regulation SCI is separate and distinct from the definition of a
facility set forth in Section 3(a)(2) of the Exchange Act.\261\ The
Commission notes that the term ``SCI system'' under Regulation SCI is
distinct from the term ``facility'' in Section 3(a)(2) of the Exchange
Act.\262\ Because a facility of an exchange would only fall within the
definition of ``SCI systems'' if it is a system that directly supports
any one of the six functions provided in the definition of ``SCI
systems,'' not all systems that are facilities of an exchange will be
SCI systems. For example, as noted in the SCI Proposal, the definition
of SCI systems would apply to systems of exchange-affiliated routing
brokers that are facilities of national securities exchanges.\263\ But
a system used for member regulation that may meet the definition of a
facility under the Exchange Act, would not be within the scope of the
definition of ``SCI systems.''
---------------------------------------------------------------------------

    \261\ See NYSE Letter at 10.
    \262\ See 15 U.S.C. 78c3(a)(2).
    \263\ See Proposing Release, supra note 13, at 18099.
---------------------------------------------------------------------------

    Another commenter requested confirmation that internal systems are
excluded from the definition of SCI system.\264\ The Commission notes
that the definition of ``SCI system'' does not differentiate between
``internal systems'' and those systems accessed by market participants
or other outside parties.\265\ The Commission notes that, while some
internal systems of an SCI entity may not meet the definition of SCI
system, it does not believe that that all internal systems (as
described by this commenter) would be outside of the scope of the
definition of SCI system.\266\
---------------------------------------------------------------------------

    \264\ See FINRA Letter at 10.
    \265\ See adopted Rule 1000 (definition of SCI systems).
    \266\ In addition, the Commission notes that, while certain
internal systems may not be ``SCI systems,'' they may instead meet
the definition of ``indirect SCI systems'' under adopted Rule 1000,
if they are not properly walled off from SCI systems. However, as
discussed below, the Commission is clarifying the meaning of this
defined term to note that systems that are effectively physically or
logically separated from SCI systems would be outside of the
definition of indirect SCI systems and thus outside of the scope of
Regulation SCI. See infra Section IV.A.2.d (discussing the
definition of ``indirect SCI systems'').
---------------------------------------------------------------------------

    Other commenters advocated that SCI entities should be permitted to
conduct their own risk-based assessment to determine which of their
systems should be considered SCI systems.\267\ One commenter noted that
SCI entities should be required to develop and maintain an established
methodology for identifying which systems qualify as SCI systems,\268\
while other commenters advocated for coordination with the Commission
in establishing criteria to be used in conducting such risk-based
assessments or review by the Commission of an SCI entity's own risk-
based assessment.\269\ The Commission has carefully considered these
comments and generally agrees that

certain systems pose greater risk to the markets in the event of a
systems issue and are of paramount importance to the functioning of the
U.S. securities markets. Rather than include only those in the
definition of SCI systems, the Commission believes that it is more
prudent to instead identify these systems as ``critical SCI systems''
subject to certain heightened obligations. Further, adopted Rule
1001(a) requiring SCI entities to have policies and procedures
reasonably designed to ensure that their systems have adequate levels
of capacity, integrity, resiliency, availability, and security is
consistent with a risk-based approach.\270\ Specifically, as discussed
in further detail below, an SCI entity may tailor its policies and
procedures based on the relative criticality of a given SCI system to
the SCI entity and to the securities markets generally.\271\
---------------------------------------------------------------------------

    \267\ See DTCC Letter at 3-5; Omgeo Letter at 5-6; and OCC
Letter at 3-4.
    \268\ See Omgeo Letter at 5.
    \269\ See OCC Letter at 3-4; and DTCC Letter at 3-4.
    \270\ See adopted Rule 1001(a). See also infra Section IV.B.1
(discussing policies and procedures for operational capability).
    \271\ See infra Section IV.B.1.a-b (discussing the use of risk-
based considerations to tailor policies and procedures for
operational capability).
---------------------------------------------------------------------------

c. Critical SCI Systems
    As discussed above, in response to comments, the Commission is
incorporating a risk-based approach in certain aspects of Regulation
SCI.\272\ To that end, the Commission is adopting a definition of
``critical SCI systems'' to designate SCI systems that the Commission
believes should be subject to the highest level of requirements. As a
subset of ``SCI systems,'' ``critical SCI systems'' are subject to the
same provisions as ``SCI systems,'' except that critical SCI systems
are subject to certain heightened resilience and information
dissemination provisions of Regulation SCI. In these respects, critical
SCI systems are subject to an increased level of obligation as compared
to other SCI systems.\273\
---------------------------------------------------------------------------

    \272\ See supra notes 53-56 and accompanying text (discussing
comments on a risk-based approach).
    \273\ See infra Sections IV.B.1.b and IV.B.3.d (discussing the
two-hour resumption goal for ``critical SCI systems'' and
information dissemination requirement for ``major SCI events,''
respectively).
---------------------------------------------------------------------------

    Rule 1000 defines ``critical SCI systems'' as ``any SCI systems of,
or operated by or on behalf of, an SCI entity that: (1) Directly
support functionality relating to: (i) Clearance and settlement systems
of clearing agencies; \274\ (ii) openings, reopenings, and closings on
the primary listing market; (iii) trading halts; (iv) initial public
offerings; (v) the provision of consolidated market data; or (vi)
exclusively-listed securities; or (2) provide functionality to the
securities markets for which the availability of alternatives is
significantly limited or nonexistent and without which there would be a
material impact on fair and orderly markets.''
---------------------------------------------------------------------------

    \274\ ``Clearance and settlement systems of clearing agencies''
includes systems of registered clearing agencies and exempt clearing
agencies subject to ARP. See Rule 1000 (definition of ``exempt
clearing agency subject to ARP,'' which by its terms would also
include an entity that has received from the Commission an exemption
from registration as a clearing agency under Section 17A of the Act,
and whose exemption contains conditions that relate to ARP, or any
Commission regulation that supersedes or replaces such policies,
including Regulation SCI).
---------------------------------------------------------------------------

    As noted above, many commenters advocated for a risk-based approach
to Regulation SCI and either suggested that only the entities or
systems that pose the greatest risk to the markets should be within the
scope of the regulation or, alternatively, that the requirements of
Regulation SCI be tailored to the specific risk-profile of a particular
entity or particular system.\275\ While the Commission disagrees with
commenters who suggested that Regulation SCI should apply only to
``critical systems,'' as it believes that these are not the only
systems that could pose a significant risk to the securities markets,
the Commission believes that it is appropriate to hold systems that
pose the greatest risk to the markets if they malfunction to higher
standards and more stringent requirements under Regulation SCI. Recent
events have also demonstrated the importance of certain critical
systems functionality, including those that represent ``single points
of failure'' to the securities markets, and the need for more robust
market infrastructure, particularly with regard to critical market
systems.\276\
---------------------------------------------------------------------------

    \275\ See supra notes 53-56 and 216-222 and accompanying text
(discussing comments on a risk-based approach and limiting SCI
systems to only core or critical systems).
    \276\ See supra Section II.B (describing recent events involving
systems-related issues). In particular, the Nasdaq SIP incident,
which caused a disruption in the dissemination of consolidated
market data in the equity markets and led to a trading halt in all
Nasdaq-listed stocks for several hours, confirmed that disruptions
in systems that represent single points of failure can have a major
and detrimental impact across an entire national market system.
---------------------------------------------------------------------------

    The Commission believes that the adoption of the definition of
``critical SCI systems'' and heightened requirements for such systems
recognizes that some systems are critical to the continuous and orderly
functioning of the securities markets more broadly and, as such,
ensuring their capacity, integrity, resiliency, availability, and
security is of the utmost importance. Therefore, as discussed further
below, the Commission believes that it is appropriate for such critical
SCI systems to be held to heightened requirements (as compared to those
for SCI systems) related to capacity, integrity, resiliency,
availability, and security generally; rapid recovery following wide-
scale disruptions; and disclosure of SCI events. The Commission
believes that the definition of critical SCI systems is appropriately
designed to identify those SCI systems whose functions are critical to
the operation of the markets, including those systems that represent
potential single points of failure in the securities markets. Systems
in this category are those that, if they were to experience systems
issues, the Commission believes would be most likely to have a
widespread and significant impact on the securities markets.
    The first prong of the definition identifies six specific
categories of systems that the Commission believes are the most
critical to the securities markets, and the most likely to have
widespread and significant market impact should a systems issue occur.
These are: clearance and settlement systems of clearing agencies;
openings, reopenings, and closings on the primary listing market;
trading halts; initial public offerings; the provision of consolidated
market data (i.e., SIPs); and exclusively-listed securities.
    In the context of suggesting the adoption of a risk-based approach
for Regulation SCI, some commenters identified those functions that
they believed were most critical to the functioning of the markets.
Among those identified were clearance and settlement, opening and
closing auctions, IPO auctions, the provision of consolidated market
data by the SIPs; and trading of exclusively-listed securities.\277\
The Commission agrees with commenters who characterized these
categories of systems as critical. In addition, as discussed below, the
Commission believes that systems that directly support functionality
relating to

trading halts should be included in the definition of critical SCI
systems.
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    \277\ See, e.g., Direct Edge Letter at 2 (citing, among others,
SIPs and clearance and settlement systems as essential to continuous
market-wide operation); KCG Letter at 2-3 (identifying opening and
closing auctions, IPO auctions, trading of exclusively-listed
options, market data consolidators, and settlement and central
clearing as ``single points of failure'' that should be subject to
heightened regulatory requirements); and SIFMA Letter at 4 (stating
that highly critical functions should include primary listing
exchanges, trading exclusively listed securities, SIPs, clearance
and settlement, distribution of unique post-trade transparency
information, and real-time market surveillance). Although these
commenters were urging that Regulation SCI apply only to these
critical systems, as explained above, the Commission believes that
such an approach would be too limited.
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    With respect to ``clearance and settlement systems of clearing
agencies,'' the clearance and settlement of securities is fundamental
to securities market activity.\278\ Clearing agencies perform a variety
of services that help ensure that trades settle on time and at the
agreed upon terms. For example, clearing agencies compare transaction
information (or report to members the results of exchange comparison
operations), calculate settlement obligations (including net
settlement), collect margin (such as initial and variation margin), and
serve as a depository to hold securities as certificates or in
dematerialized form to facilitate automated settlement. Because of
their role, clearing agencies are critical central points in the
financial system. A significant portion of securities activity flows
through one or more clearing agencies. Clearing agencies have direct
links to participants and indirect links to the customers of
participants. Clearing agencies are also linked to each other through
common participants and, in some cases, by operational processes. Safe
and reliable clearing agencies are essential not only to the stability
of the securities markets they serve but often also to payment systems,
which may be used by a clearing agency or may themselves use a clearing
agency to transfer collateral.\279\ The safety of securities settlement
arrangements and post-trade custody arrangements is also critical to
the goal of protecting the assets of investors from claims by creditors
of intermediaries and other entities that perform various functions in
the operation of the clearing agency.\280\ Investors are more likely to
participate in markets when they have confidence in the safety and
reliability of clearing agencies as well as settlement systems.\281\
Accordingly, the Commission believes ``clearance and settlement systems
of clearing agencies'' are appropriate for inclusion in the definition
of critical SCI systems.\282\
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    \278\ See Clearing Agency Standards Release, supra note 76, at
66220, 66264.
    \279\ See Clearing Agency Standards Release, supra note 76, at
66264.
    \280\ See id.
    \281\ See id.
    \282\ The Commission notes that systems of SCI entities other
than clearing agencies that are used in connection with the
clearance and settlement of trades are not captured by the
definition of ``critical SCI systems,'' but rather would fall within
the definition of ``SCI systems,'' as discussed above. See supra
Section IV.2. The Commission believes that such systems of other SCI
entities, such as SROs and ATSs, do not provide the same critical
functions or pose the same level of risk to the market as the
clearance and settlement systems of clearing agencies as discussed
above.
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    Similarly, reliable openings, reopenings, and closings on primary
listing markets are key to the establishment and maintenance of fair
and orderly markets. NYSE and Nasdaq, for example, each have an opening
cross for their listed securities that solicits trading interest and
generates a single auction price that attracts widespread participation
and is relied upon as a benchmark by other markets and market
participants.\283\ Similar processes are used, and heavy levels of
participation typically are generated, at the primary listing markets
in the reopening cross that follows a trading halt.\284\ Closing
auctions at the primary listing markets also attract widespread
participation, and the closing prices they establish are commonly used
as benchmarks, such as to value derivative contracts and generate
mutual fund net asset values. As such, during these critical trading
periods, market participants rely on the processes of the primary
listing markets to effect transactions, and establish benchmark prices
that are used in a wide variety of contexts so that the unavailability
or disruption of systems directly supporting the opening, reopening and
closing processes on the primary listing markets could have widespread
detrimental effects.\285\
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    \283\ See Nasdaq Rule 4752 (Opening Process) and NYSE Rules 115A
(Orders at the Opening) and 123D (Openings and Halts in Trading).
    \284\ See, e.g., Nasdaq Rule 4753 (Nasdaq Halt and Imbalance
Crosses) and NYSE Rules 115A (Orders at the Opening) and 123D
(Openings and Halts in Trading).
    \285\ For example, press reports indicated that the decision to
close the New York Stock Exchange in the wake of Superstorm Sandy,
and the resulting lack of availability of the NYSE opening and
closing prices, was a significant contributing cause of the
unscheduled closure of the U.S. national securities exchanges. See,
e.g., Jenny Strasburg, Jonathan Cheng, and Jacob Bunge, ``Behind
Decision to Close Markets,'' Wall St. J., October 29, 2012. See also
Proposing Release, supra note 13, at 18091 (discussing the effects
of Superstorm Sandy on the securities markets). While other
exchanges outside of the path of Superstorm Sandy did not experience
the same risks to their electronic trading systems as the NYSE and
could have otherwise opened for business, the risk that opening and
closing prices might not be set by NYSE for its listed securities
contributed to the consensus recommendation of market participants
that the markets remain closed. See Jenny Strasburg, Jonathan Cheng,
and Jacob Bunge, ``Behind Decision to Close Markets,'' Wall St. J.,
October 29, 2012.
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    In addition, the Commission believes that systems directly
supporting functionality relating to trading halts \286\ are essential
to the orderly functioning of the securities markets, and therefore
should be included in the definition of critical SCI systems. In the
event a trading halt is necessary, it is essential that the systems
responsible for communicating the trading halt--typically maintained by
the primary listing market--are robust and reliable so that the trading
halt is effective across the U.S. securities markets. For example, when
there is material ``news pending'' with respect to an issuer, it is the
responsibility of the primary listing market to call a regulatory halt
by generating a halt message which, when received by other trading
centers, requires them to cease trading the security.\287\ Similar
responsibilities are placed on the primary listing market with respect
to calling trading halts under the National Market System Plan to
Address Extraordinary Market Volatility, as well as on plan processors
to disseminate this information to the public.\288\ Thus, systems which
communicate information regarding trading halts provide an essential
service in the U.S. markets and, should a systems issue occur affecting
the ability of an SCI entity to provide such notifications, the fair
and orderly functioning of the securities markets may be significantly
impacted.
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    \286\ For purposes of clarity, the Commission notes that the
term ``trading halts'' as used in this context is intended to
capture market-wide halts, such as regulatory halts, rather than a
halt to trading for securities on a particular market (for example,
caused by a systems issue specific to that market).
    \287\ See, e.g., CTA Plan Section IX(a), available at: http://www.nyxdata.com/cta; National Market System Plan To Address
Extraordinary Market Volatility, Section VII (``Limit Up/Limit Down
Plan''); NYSE Arca Rule 7.12, BATS Rule 11.18, and EDGA Rule 11.14.
See also Securities Exchange Act Release No. 67091 (May 31, 2012),
77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving, on a
Pilot Basis, the National Market System Plan To Address
Extraordinary Market Volatility) (``Limit Up/Limit Down Plan
Approval Order'').
    \288\ See Limit Up/Limit Down Plan, supra note 287 and Limit Up/
Limit Down Plan Approval Order, supra note 287.
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    Companies offer shares of capital stock to the general public for
the first time through the IPO process, in which the primary listing
market initiates public trading in a company's shares. The IPO is
conducted exclusively on that exchange, and secondary market trading
cannot commence on any other exchange until the opening trade is
printed on the primary listing market.\289\ As such, the Commission
believes that an exchange's systems that directly support the IPO
process and the initiation of secondary market trading are a critical
element of the capital formation process and the effective functioning
of the securities markets. The Commission believes that these

systems, which are the sole responsibility of the primary listing
market, can adversely affect not only the IPO of a particular issuer,
but may also result in significant monetary losses and harm to
investors if they fail.\290\ As noted in the SCI Proposal, systems
issues affecting the two recent high-profile IPOs highlighted how
disruptions in IPO systems can have a significant impact on the
market.\291\
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    \289\ See Rule 12f-2 under the Exchange Act, 17 CFR 240.12f-2
(providing that a national securities exchange may extend unlisted
trading privileges to a security when at least one transaction in
the security has been effected on the national securities exchange
upon which the security is listed and the transaction has been
reported pursuant to an effective transaction reporting plan).
    \290\ See, e.g., supra note 36 (discussing the losses associated
with Nasdaq's Facebook IPO).
    \291\ Specifically, in March 2012, BATS announced that a
``software bug'' caused BATS to shut down the IPO of its own stock,
and in May 2012, issues with Nasdaq's trading systems delayed the
start of trading in the IPO of Facebook, Inc. and some market
participants experienced delays in notifications of whether orders
had been filled. See Proposing Release, supra note 13, at 18089; and
Securities Exchange Act Release No. 69655, In the Matter of The
NASDAQ Stock Market, LLC and NASDAQ Execution Services, LLC (settled
action: May 29, 2013), available at: http://www.sec.gov/litigation/admin/2013/34-69655.pdf. Nasdaq and Nasdaq Execution Services, LLC
consented to an Order Instituting Administrative and Cease-and-
Desist Proceedings Pursuant to Sections 19(h)(1) and 21C of the
Securities Exchange Act of 1934, Making Findings, and Imposing
Sanctions and a Cease-and-Desist Order.
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    Systems directly supporting the provision of consolidated market
data are also critical to the functioning of U.S. securities markets
and represent potential single points of failure in the delivery of
important market information. When Congress mandated a national market
system in 1975, it emphasized that the systems for collecting and
distributing consolidated market data would be central features of the
national market system.\292\ Further, one of the findings of the recent
report by the staffs of the Commission and the CFTC on the market
events of May 6, 2010 was that ``fair and orderly markets require that
the standards for robust, accessible, and timely market data be set
quite high.'' \293\ Accurate, timely, and efficient collection,
processing, and dissemination of consolidated market data provides the
public with ready access to a comprehensive and reliable source of
information for the prices and volume of any NMS stock at any time
during the trading day.\294\ This information helps to ensure that the
public is aware of the best displayed prices for a stock, no matter
where they may arise in the national market system.\295\ It also
enables investors to monitor the prices at which their orders are
executed and serves as a data point that helps them to assess whether
their orders received best execution.\296\
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    \292\ See H.R. Rep. No. 94-229, 94th Cong., 1st Sess. 93 (1975).
See also Concept Release on Equity Market Structure, supra note 4,
at 3600, and Proposing Release, supra note 13, at 18108 (each
discussing the importance of consolidated market data).
    \293\ See Findings Regarding The Market Events Of May 6, 2010,
Report Of The Staffs Of The CFTC And SEC To The Joint Advisory
Committee On Emerging Regulatory Issues, September 30, 2010, at 8
(``May 6 Staff Report'').
    \294\ See id.
    \295\ See id.
    \296\ See id. Also, as discussed above, the recent Nasdaq SIP
disruption demonstrated that the availability, accuracy, and
reliability of consolidated market data is currently central to the
functioning of the securities markets, and systems issues affecting
such systems can result in major disruptions to the national market
system, undermining the maintenance of fair and orderly markets.
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    Finally, systems directly supporting functionality relating to
exclusively-listed securities represent single points of failure in the
securities markets, because exclusively-listed securities, by
definition, are listed and traded solely on one exchange.\297\ As such,
a trading disruption on the exclusive listing market necessarily will
disrupt trading by all market participants in those securities.\298\
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    \297\ As noted above, commenters identified the systems
supporting the trading of exclusively-listed securities as
representing critical points of failure or critical functionality in
the securities markets. See, e.g., KCG Letter at 2-3; and SIFMA
Letter at 4.
    \298\ For example, as noted above, in April 2013, CBOE delayed
the opening of trading on its exchange for over three hours due to
an internal ``software bug,'' preventing investors from trading in
those products that are singly-listed on CBOE, including options on
the S&P 500 Index and the VIX. See supra note 28 and accompanying
text.
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    The second prong of the definition is a broader catch-all provision
intended to capture any SCI systems, beyond those specifically