This PDF is the current document as it appeared on Public Inspection on 05/31/2017 at 08:45 am.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  and Rule 19b-4 thereunder, notice is hereby given that on May 15, 2017, Miami International Securities Exchange, LLC (“MIAX Options” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange is filing a proposal to amend MIAX Options Rule 607, Securities Accounts and Orders of Market Makers (“Rule 607” or the “Position Reporting Rule”) by adding new Interpretation and Policy .01 to Rule 607, and MIAX Options Rule 804, Automated Submission of Trade Data (“Rule 804” or the “EBS Rule” and together with the Position Reporting Rule, the “CAT Duplicative Rules”) by adding new Interpretation and Policy .01 to Rule 804, as the CAT Duplicative Rules provide for the collection of information that is duplicative of the data collection requirements of the consolidated audit trail (“CAT”) adopted pursuant to the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”).
The text of the proposed rule change is available on the Exchange's Web site at http://www.miaxoptions.com/rule-filings, at MIAX's principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change
Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, Inc. (“FINRA”), Investors' Exchange LLC, Miami International Securities Exchange, LLC, MIAX PEARL, LLC, NASDAQ BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC, NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc. and NYSE National, Inc. (collectively, the “Participants”) filed with the Commission, pursuant to Section 11A of the Exchange Act  and Rule 608 of Regulation NMS thereunder, the CAT NMS Plan. The Participants filed the Plan to comply with Rule 613 of Regulation NMS under the Exchange Act. The Plan was published for comment in the Federal Register on May 17, 2016, and approved by the Commission, as modified, on November 15, 2016. The Plan is designed to create, implement and maintain a CAT that would capture customer and order event information for orders in NMS Securities and OTC Equity Securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution in a single consolidated data source. Pursuant to Appendix C of the CAT NMS Plan, each Participant is Start Printed Page 25367required to conduct analyses of which of its existing trade and order data rules and systems require the collection of information that is duplicative of information collected for the CAT. In addition, among other things, Section C.9 of Appendix C to the Plan, as modified by the Commission, requires each Participant to “file with the SEC the relevant rule change filing to eliminate or modify its duplicative rules within six (6) months of the SEC's approval of the CAT NMS Plan.”  The Plan notes that “the elimination of such rules and the retirement of such systems [will] be effective at such time as CAT Data meets minimum standards of accuracy and reliability.”  The Exchange has determined that the Position Reporting Rule and the EBS Rule is affected by the implementation of the CAT and, therefore, is filing this proposed rule change.
(1) The CAT Duplicative Rules
MIAX Options Rule 607, the Position Reporting Rule, is the Exchange's rule requiring Market Makers to (a) keep current and file with the Exchange a list identifying specified accounts in which it may engage in trading activities or over which it exercises investment discretion (“MM account information”) and (b) report to the Exchange every order entered by the Market Maker for the purchase or sale of a security underlying options traded on the Exchange or convertible into or exercisable for such underlying security (“MM order information”), as well as opening and closing positions in all such securities held in each of the aforementioned specified accounts (“MM position information”), in each case in a manner prescribed by the Exchange.
MIAX Options Rule 804, the EBS Rule, is the Exchange's rule requiring Members to submit requested trade data elements (“Member trade data”) to the Exchange in such automated format as may be prescribed by the Exchange from time to time, in regard to a transaction(s) that is the subject of a particular request for information. Rule 804 contemplates using the Electronic Blue Sheet (“EBS”) system for the automated submission of Member trade data as requested by the Exchange, including, among other information, clearing house number or alpha symbol, identifying symbol assigned to the security, options month and/or series, transaction execution date, number of option contracts for transaction and whether opening or closing purchase or sale, transaction price, account number and/or market center where executed.
Once broker-dealer reporting to the CAT has begun, the CAT will contain certain of the data the Participants would otherwise have requested via the Position Reporting Rule or via the EBS system for purposes of NMS Securities and OTC Equity Securities. Consequently, the Exchange will not need to use the Position Reporting Rule to obtain MM account information or MM order information (although Exchange still anticipates the need to obtain MM position information pursuant to Rule 607 because the CAT does not currently address position reporting) or use the EBS system to obtain Member trade data or request information pursuant to the CAT Duplicative Rules for NMS Securities or OTC Equity Securities for time periods after CAT reporting has begun if the appropriate accuracy and reliability thresholds are achieved, including an acceptable accuracy rate for customer and account information. However, the Position Reporting Rule cannot be completely eliminated immediately upon the CAT achieving the appropriate thresholds because Exchange staff will still need to request information pursuant to the Position Reporting Rule regarding MM position information (because the CAT does not currently address position reporting), and Exchange staff may still need to request information pursuant to the Position Reporting Rule for MM account information and MM order information before a Market Maker was reporting to the CAT. Further, the EBS Rule cannot be completely eliminated immediately upon the CAT achieving the appropriate thresholds because Exchange staff may still need to request information pursuant to the EBS Rule for trading activity occurring before a Member was reporting to the CAT.
The proposed rule change proposes to: (1) Add new Interpretation and Policy .01 to the Position Reporting Rule to clarify how the Exchange will request Market Maker account, order and position data under Rule 607 after MIAX Options Market Makers are reporting to the CAT, and (2) add new Interpretation and Policy .01 to the EBS Rule to clarify how the Exchange will request trade data under Rule 804 after MIAX Options Members are reporting to the CAT.
With respect to the Position Reporting Rule, proposed Interpretation and Policy .01 to Rule 607 will specifically permit the Exchange to request information under such rule only if the information is not available in the CAT because, for example, the transactions in question occurred before the Market Maker was reporting information to the CAT or relates to position information because the CAT does not currently address position reporting. In essence, under the new Interpretation and Policy .01 to Rule 607, the Exchange will make requests under Rule 607 if and only if the information is not otherwise available through the CAT.
With respect to the EBS Rule, proposed Interpretation and Policy .01 to Rule 804 will specifically permit the Exchange to request information under such rule only if the information is not available in the CAT because, for example, the transactions in question occurred before the Member was reporting information to the CAT. In essence, under the new Interpretation and Policy .01 to Rule 804, the Exchange will make requests under Rule 804 if and only if the information is not otherwise available through the CAT.
The CAT NMS Plan states, however, that the elimination of rules that are duplicative of the requirements of the CAT and the retirement of the related systems should be effective at such time as CAT Data meets minimum standards of accuracy and reliability. Accordingly, as discussed in more detail below, the Exchange believes that MM account information and MM order information (but not MM position information) may be replaced by CAT Data at a date after all Industry Members are reporting to the CAT when the proposed error rate thresholds have been met, and MIAX Options has determined that its usage of the CAT Data has not revealed material issues that have not been corrected, confirmed that the CAT includes all data necessary to allow MIAX Options to continue to meet its surveillance obligations, and confirmed that the Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan.
The Exchange further believes, as discussed in more detail below, that the EBS data may be replaced by CAT Data at a date after all Industry Members are reporting to the CAT when the proposed error rate thresholds have been met, and MIAX Options has determined that its usage of the CAT Data has not revealed material issues that have not been Start Printed Page 25368corrected, confirmed that the CAT includes all data necessary to allow MIAX Options to continue to meet its surveillance obligations, and confirmed that the Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan.
MIAX Options believes CAT Data should not be used in place of MM account information and MM order information or EBS data until all Participants and Industry Members are reporting data to CAT. In this way, MIAX Options will continue to have access to the necessary data to perform its regulatory duties.
The CAT NMS Plan requires that a rule filing to eliminate a duplicative rule address whether “the availability of certain data from Small Industry Members two years after the Effective Date would facilitate a more expeditious retirement of duplicative systems.”  The Exchange believes that MM account information and MM order information reporting should not be eliminated until all Participants and Industry Members that report such information are reporting comparable data to the CAT. The Exchange further believes that the EBS system should not be retired until all Participants and Industry Members that report EBS data to the EBS system are reporting comparable data to the CAT. While the early submission of data to the CAT by Small Industry Members could expedite the replacement of MM account information, MM order information and EBS data with CAT Data, the Exchange believes that it is premature to consider such a change and that additional analysis would be necessary to determine whether such early reporting by Small Industry Members would be feasible.
The CAT NMS Plan requires that this rule filing address “whether individual Industry Members can be exempted from reporting to duplicative systems once their CAT reporting meets specified accuracy and reliability standards, including, but not limited to, ways in which establishing cross-system regulatory functionality or integrating data from existing systems and the CAT would facilitate such Individual Industry Member exemptions.”  The Exchange believes that a single cut-over from current reporting systems to CAT is highly preferable to a firm-by-firm approach and is not proposing to exempt Members from the Position Reporting Rule or EBS Rule requirements on a firm-by-firm basis. The Exchange believes that providing such individual exemptions to Industry Members would be inefficient, more costly, and less reliable than the single cut-over. Providing individual exemptions would require the exchanges to create, for a brief temporary period, a cross-system regulatory function and to integrate data from current reporting systems and the CAT to avoid creating any regulatory gaps as a result of such exemptions. Such a function would be costly to create and would give rise to a greater likelihood of data errors or other issues. Given the limited time in which such exemptions would be necessary, the Exchange does not believe that such exemptions would be an appropriate use of limited resources.
The CAT NMS Plan also requires that a rule filing to eliminate a duplicative rule to provide “specific accuracy and reliability standards that will determine when duplicative systems will be retired, including, but not limited to, whether the attainment of a certain Error Rate should determine when a system duplicative of the CAT can be retired.”  The Exchange believes that it is critical that the CAT Data be sufficiently accurate and reliable for the Exchange to perform the regulatory functions that it now performs via current reporting systems. Accordingly, the Exchange believes that the CAT Data should meet specific quantitative error rates, as well as certain qualitative requirements.
The Exchange believes that, before CAT Data may be used in place of MM account information and MM order information or EBS data, the CAT would need to achieve a sustained error rate for a period of at least 180 days of 5% or lower measured on a pre-correction or as-submitted basis, and 2% or lower on a post-correction basis (measured at T+5). The Exchange proposes to measure the 5% pre-correction and 2% post-correction thresholds by averaging the error rate across the period, not require a 5% pre-correction and 2% post-correction maximum each day for 180 consecutive days. The Exchange believes that measuring each of the thresholds over the course of 180 days will ensure that the CAT consistently meets minimum accuracy and reliability thresholds while also ensuring that single-day measurements do not unduly affect the overall measurements. The Exchange proposes to measure the appropriate error rates in the aggregate, rather than firm-by-firm. The 2% and 5% error rates are in line with the proposed retirement threshold for other systems, such as FINRA's Order Audit Trail System (“OATS”) and the consolidated options audit trail system (“COATS”).
In addition to these minimum error rates before using CAT Data instead of MM account information and MM order information or EBS data, the Exchange believes that during the minimum 180-day period during which the thresholds are calculated, the Exchange's use of the data in the CAT must confirm that (i) usage over that time period has not revealed material issues that have not been corrected, (ii) the CAT includes all data necessary to allow the Exchange to continue to meet its surveillance obligations, and (iii) the Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan. The Exchange believes this time period to use the CAT Data is necessary to reveal any errors that may manifest themselves only after surveillance patterns and other queries have been run and to confirm that the Plan Processor is meeting its obligations and performing its functions adequately.
If the Commission approves the proposed rule change, the Exchange will announce the implementation date for the proposed rule change in a Regulatory Circular that will be published once the Exchange concludes the thresholds for accuracy and reliability described above have been met and that the Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Exchange Act, which require, among other things, that the Exchange rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest, and not designed to permit unfair discrimination between customers, issuers, brokers and dealers. The Exchange believes that this proposal is consistent with the Exchange Act because it fulfills the obligation in the CAT NMS Plan for the Exchange to submit a proposed rule change to eliminate or modify duplicative rules. In approving the Plan, the SEC noted that the Plan “is necessary and appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove Start Printed Page 25369impediments to, and perfect the mechanism of a national market system, or is otherwise in furtherance of the purposes of the Act.”  As this proposal implements the Plan, the Exchange believes that this proposal furthers the objectives of the Plan, as identified by the SEC, and is therefore consistent with the Exchange Act.
Moreover, the purpose of the proposed rule change is to amend rules that require the submission of duplicative data to the Exchange. The elimination of such duplicative requirements will reduce unnecessary costs and other compliance burdens for the Exchange and its Members, and therefore, will enhance the efficiency of the securities markets. Furthermore, the Exchange believes that the approach set forth in the proposed rule change strikes the appropriate balance between ensuring that the Exchange is able to continue to fulfill its statutory obligation to protect investors and the public interest by ensuring its surveillance of market activity remains accurate and effective while also establishing a reasonable timeframe for elimination or modification of its rules that will be rendered duplicative after implementation of the CAT.
B. Self-Regulatory Organization's Statement on Burden on Competition
Section 6(b)(8) of the Exchange Act  requires that Exchange rules not impose any burden on competition that is not necessary or appropriate. The Exchange does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The Exchange notes that the proposed rule change implements the requirements of the CAT NMS Plan approved by the Commission regarding the elimination of rules and systems that are duplicative the CAT, and is designed to assist the Exchange in meeting its regulatory obligations pursuant to the Plan. Similarly, all exchanges and FINRA are proposing the elimination of their EBS and other CAT duplicative rules to implement the requirements of the CAT NMS Plan. Therefore, this is not a competitive rule filing and, therefore, it does not raise competition issues between and among the self-regulatory organizations and/or their members.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission shall: (a) By order approve or disapprove such proposed rule change, or (b) institute proceedings to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
- Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
- Send an email to email@example.com. Please include File Number SR-MIAX-2017-20 on the subject line.
- Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-MIAX-2017-20. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-MIAX-2017-20, and should be submitted on or before June 22, 2017.Start Signature
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Eduardo A. Aleman,
3. Unless otherwise specified, capitalized terms used in this rule filing are defined as set forth herein, or in the CAT Compliance Rule Series or in the CAT NMS Plan.Back to Citation
4. ISE Gemini, LLC, ISE Mercury, LLC and International Securities Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, and Nasdaq ISE, LLC, respectively. See Securities Exchange Act Rel. No. 80248 (Mar. 15, 2017), 82 FR 14547 (Mar. 21, 2017); Securities Exchange Act Rel. No. 80326 (Mar. 29, 2017), 82 FR 16460 (Apr. 4, 2017); and Securities Exchange Act Rel. No. 80325 (Mar. 29, 2017), 82 FR 16445 (Apr. 4, 2017).Back to Citation
5. National Stock Exchange, Inc. has been renamed NYSE National, Inc. See Securities Exchange Act Rel. No. 79902 (Jan. 30, 2017), 82 FR 9258 (Feb. 3, 2017).Back to Citation
8. See Letter from the Participants to Brent J. Fields, Secretary, Commission, dated September 30, 2014; and Letter from Participants to Brent J. Fields, Secretary, Commission, dated February 27, 2015. On December 24, 2015, the Participants submitted an amendment to the CAT NMS Plan. See Letter from Participants to Brent J. Fields, Secretary, Commission, dated December 23, 2015.Back to Citation
9. See Securities Exchange Act Release No. 77724 (Apr. 27, 2016), 81 FR 30614 (May 17, 2016).Back to Citation
10. See Securities Exchange Act Rel. No. 79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016) (“Approval Order”).Back to Citation
11. Appendix C of CAT NMS Plan, Approval Order at 85010.Back to Citation
12. Id.Back to Citation
13. Id.Back to Citation
14. Firms are required to maintain the trade information for pre-CAT transactions in equities and options pursuant to applicable rules, such as books and records retention requirements, for the relevant time period, which is generally three or six years depending upon the record. See 17 CFR 240.17a-3(a), 240.17a-4.Back to Citation
15. Id. [sic].Back to Citation
16. Id.Back to Citation
17. Id.Back to Citation
18. Id.Back to Citation
19. The Plan requires that the Plan Processor must ensure that regulators have access to corrected and linked order and Customer data by 8:00 a.m. Eastern Time on T+5. See CAT NMS Plan, at C-15.Back to Citation
21. Approval Order at 84697.Back to Citation
[FR Doc. 2017-11366 Filed 5-31-17; 8:45 am]
BILLING CODE 8011-01-P