[Federal Register Volume 85, Number 246 (Tuesday, December 22, 2020)]
[Notices]
[Pages 83634-83637]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28146]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90688]


Order Granting Temporary Conditional Exemptive Relief Pursuant to 
Section 36 of the Securities Exchange Act of 1934 (``Exchange Act'') 
and Rule 608(e) of Regulation NMS Under the Exchange Act, Relating to 
Certain Requirements of the National Market System Plan Governing the 
Consolidated Audit Trail

December 16, 2020.

I. Introduction

    BOX Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., 
Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, 
Inc., Cboe Exchange, Inc., Financial Industry Regulatory Authority, 
Inc., Investors Exchange LLC, MEMX LLC, Miami International Securities 
Exchange LLC, MIAX Emerald, LLC, MIAX PEARL, LLC, NASDAQ BX, LLC, 
Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC, NASDAQ PHLX LLC, 
The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE American 
LLC, NYSE Arca, Inc., NYSE Chicago, Inc., NYSE National, Inc., and Long 
Term Stock Exchange, Inc. (collectively, the ``Participants'' or 
``SROs'') are responsible for implementing the National Market System 
Plan Governing the Consolidated Audit Trail (``CAT NMS Plan'').\1\ When 
fully implemented, the consolidated audit trail (``CAT'') is designed 
to capture customer and order event information for Eligible Securities 
\2\ across all markets, from the time of order inception through 
routing, cancellation, modification, or execution in a single, 
consolidated data source.
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    \1\ The CAT NMS Plan was approved by the Commission, as 
modified, on November 15, 2016. See Securities Exchange Act Release 
No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016) 
(``CAT NMS Plan Approval Order'').
    \2\ Unless otherwise noted, capitalized terms are used as 
defined in the CAT NMS Plan.
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    Section 36 of the Exchange Act grants the Commission the authority, 
with certain limitations, to ``conditionally or unconditionally exempt 
any person, security, or transaction . . . from any provision or 
provisions of [the Exchange Act] or of any rule or regulation 
thereunder, to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.'' \3\ Under Rule 608(e) of Regulation NMS, the 
Commission may ``exempt from [Rule 608], either unconditionally or on 
specified terms and conditions, any self-regulatory organization, 
member thereof, or specified security, if the Commission determines 
that such exemption is consistent with the public interest, the 
protection of investors, the maintenance of fair and orderly markets 
and the removal of impediments to, and perfection of the mechanism of, 
a national market system.'' \4\
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    \3\ 15 U.S.C. 78mm(a)(1).
    \4\ 17 CFR 242.608(e).
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    For the reasons set forth below, this Order grants the Participants 
temporary conditional exemptive relief from certain requirements of the 
CAT NMS Plan, until the dates specified below. The Commission is 
granting temporary conditional exemptive relief from certain CAT NMS 
Plan requirements in order to allow Participants more time to meet such 
requirements and to allow Participants to prioritize and focus 
resources on implementation of other outstanding CAT NMS Plan 
requirements.

II. Discussion and Exemptive Relief

    Participants and Industry Members have devoted and continue to 
expend substantial resources and efforts in the ongoing development of 
the CAT. The Commission believes that granting the temporary exemptive 
relief until July 31, 2023,\5\ except where otherwise noted below, 
would provide Participants the time to develop the necessary 
technological, system or procedural changes to meet the CAT NMS Plan 
requirements discussed below. The Commission believes that granting 
temporary conditional exemptive relief from specific CAT NMS Plan 
requirements as discussed below is, pursuant to Section 36 of the 
Exchange Act, appropriate in the public interest and consistent with 
the protection of investors, and that pursuant to Rule 608(e), this 
exemptive relief is consistent with the public interest, the protection 
of investors, the maintenance of fair and orderly markets and the 
removal of impediments to, and the perfection of a national market 
system.
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    \5\ This date is approximately one year after the date by which 
the Participants previously estimated that the CAT would be fully 
implemented, July 11, 2022. See Securities Exchange Act Release No. 
88890 (May 15, 2020), 85 FR 31322, 31334 (May 22, 2020).
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    In addition to the conditions specific to the exemptive relief 
described below, the Commission is granting the exemptive relief 
described herein conditioned on the Participants providing information 
in Quarterly Progress Reports \6\ regarding the progress towards 
meeting these CAT NMS Plan requirements. Section 6.6(c)(ii)(B) of the 
CAT NMS Plan requires that for each ``milestone'' still in progress at 
the end of a given calendar quarter, the Participants must submit, 
among other things, a description of ``any other factual indicators 
that demonstrate the current level of completion with respect to the 
milestone.'' As a condition of the exemptive relief granted in this 
Order, the Participants are required to include a description of 
specific factual indicators that demonstrate the current level of 
completion with respect to the ``Full Implementation of CAT NMS Plan 
Requirements'' milestone \7\ within the Quarterly Progress Reports 
required by the CAT NMS Plan. These factual indicators, as they apply 
to each CAT NMS Plan requirement, are discussed in greater detail 
below.
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    \6\ See CAT NMS Plan at Section 6.6(c)(ii) (requiring 
Participants to file quarterly progress reports with the Commission 
tracking progress towards implementing the CAT NMS Plan 
requirements). See also Securities Exchange Act Release No. 88890 
(May 15, 2020), 85 FR 31322 (May 22, 2020).
    \7\ See CAT NMS Plan at Section 1.1 (defining ``Full 
Implementation of CAT NMS Plan Requirements'' milestone). The 
Commission believes that these factual indicators relate to the Full 
Implementation of CAT NMS Plan Requirements milestone because this 
milestone ``means the point at which Participants have satisfied all 
of their obligations to build and implement the CAT, such that all 
CAT system functionality required by Rule 613 and the CAT NMS plan 
has been developed, successfully tested and fully implemented[.]'' 
Id.
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A. Timeframes for Lifecycle Linkages

    The CAT NMS Plan requires specific timeframes for the 
identification, communication and correction of errors from the time an 
order event is received by the processor, including, by Noon Eastern 
Time T+1 (transaction date + one day), ``[i]nitial data validation, 
lifecycle linkages and communication of errors to CAT Reporters.'' \8\ 
This means that by 12pm EST the day after a transaction, the Plan 
Processor must have completed initial data validation, made lifecycle 
linkages (i.e., completed processing and linkage of the initial 
transaction data) and communicated errors to CAT Reporters. However, 
the Commission understands that the Plan Processor is currently unable 
to establish lifecycle linkages by the noon EST T+1 deadline as 
required by the CAT NMS Plan, but the Plan Processor does have the 
ability to provide an interim CAT Order ID and lifecycle linkages by 9 
p.m. EST T+1. To allow

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the Participants more time to make the technological changes necessary 
to meet the requirements of Section 6.1 of Appendix D, the Commission 
believes it is appropriate to grant temporary exemptive relief, until 
July 31, 2023, from the requirement that the Participants make 
lifecycle linkages of transaction data available by noon EST T+1. This 
relief is conditioned on the Participants providing an interim CAT 
Order ID and lifecycle linkages by 9 p.m. EST T+1. Furthermore, as a 
condition of this relief, and for purposes of the Quarterly Progress 
Reports, factual indicators that demonstrate the current level of 
completion with respect to this CAT NMS Plan requirement must include a 
description of any improvements to the time by which the Plan Processor 
is capable of providing an interim CAT Order ID and lifecycle linkages. 
The Commission believes that this condition would allow the Commission 
to monitor the progress made towards meeting this CAT NMS Plan 
requirement prior to the expiration of the exemptive relief.
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    \8\ See CAT NMS Plan at Section 6.1 of Appendix D. Section 6.1 
of Appendix continues to provide the following timelines: (1) ``8:00 
a.m. Eastern Time T+3 (transaction date + three days)--Resubmission 
of corrected data; and'' (2) ``8:00 a.m. Eastern Time T+5 
(transaction date + five days)--Corrected data available to 
Participant regulatory staff and the SEC.''
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B. Re-Processing of Corrections Received After T+5

    Section 3 of Appendix D of the CAT NMS Plan requires that all CAT 
Data reported to the Central Repository must be processed and assembled 
to create the complete lifecycle of each Reportable Event.\9\ 
Furthermore, Section 6.2 of Appendix D of the CAT NMS Plan states that 
if corrections are received after T+5 (transaction date + 5 days), 
Participants' regulatory staff and the SEC must be notified and 
informed as to how re-processing will be completed. The Commission 
understands that the Participants believe that re-processing data for 
corrections made after T+5 could negatively impact current development 
timelines and thus impede regulatory use of CAT Data, and that Section 
3 of Appendix D does not require the re-processing of all data 
corrections made after T+5, but that the Participants do plan to 
establish procedures to identify when and how such data will be re-
processed. However, under the CAT NMS Plan, corrections received after 
T+5 are required to be re-processed, with the Participants' regulatory 
staff and SEC notified and informed as to how re-processing will be 
completed; it does not provide that re-processing is optional. To 
provide the Participants time to develop the changes necessary to 
handle the re-processing of all corrections received after T+5, the 
Commission believes it is appropriate to grant temporary exemptive 
relief, until July 31, 2021, from the requirement in Section 3 and 
Section 6.2 of Appendix D of the CAT NMS Plan that the Participants 
process and assemble the complete lifecycle for corrected Reportable 
Events received by the Plan Processor after T+5. As a condition of this 
relief, and for purposes of the Quarterly Progress Reports, factual 
indicators that demonstrate the current level of completion with 
respect to this CAT NMS Plan requirement must include a description of 
progress made with respect to the re-processing of all corrections 
received after T+5 prior to the expiration of the exemptive relief on 
July 31, 2021. The Commission believes that this condition would allow 
the Commission to monitor the progress made towards meeting this CAT 
NMS Plan requirement prior to the expiration of the exemptive relief.
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    \9\ See, e.g., CAT NMS Plan, supra note 1, at Section 3 of 
Appendix D. Pursuant to Section 6.1 of Appendix D, the Plan 
Processor is required to made available corrected data to 
Participant regulatory staff and the SEC at 8:00 a.m. EST five days 
after a transaction date.
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C. Linkage of Participant Data and Industry Member Data With SIP Data

    Section 6.5(b)(i) of the CAT NMS Plan requires, among other things, 
that the CAT Data and data from the Securities Information Processor 
(the ``SIP'') that is collected by the Central Repository (``SIP 
Data'') when available to the Participant regulatory staff and the SEC 
``shall be linked,'' such that the Participant and Industry Member Data 
(``Transaction Data'') collected by CAT and the SIP Data collected by 
CAT are part of the lifecycle of a single Order.\10\ However, the 
Commission understands that the CAT Plan Processor is unable to 
``link'' Participant Data and Industry Member Data with SIP Data as 
required by Section 6.5(b)(i) of the CAT NMS Plan. Rather, the 
Commission understands that the CAT Plan Processor is only able to 
provide a regulatory user a side-by-side view of--instead of a linkage 
between--both the transactional data in CAT and SIP Data through an 
online targeted query tool or a user-defined direct query.
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    \10\ Section 3 of Appendix D of the CAT NMS Plan requires that 
``[a]ll CAT Data reported to the Central Repository must be 
processed and assembled to create the complete lifecycle of each 
Reportable Event,'' and ``CAT Data'' explicitly includes ``SIP 
Data.''
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    In order to provide Participants more time to develop the changes 
necessary to meet the requirements of Section 6.5(b)(i), the Commission 
believes it is appropriate to, until July 31, 2023, grant a temporary 
exemption to the Participants from the requirement in Section 6.5(b)(i) 
of the CAT NMS Plan that requires the information collected by the 
Central Repository pursuant to paragraphs (c)(7) and (e)(7) of SEC Rule 
613 to be provided to regulators in a linked manner, insofar as this 
provision applies to linking Participant Data and Industry Member Data 
with SIP Data as required by Section 6.5(b)(i). As a condition of this 
relief, and for purposes of the Quarterly Progress Reports, factual 
indicators that demonstrate the current level of completion with 
respect to this CAT NMS Plan requirement must include the release of 
updated specifications and/or scenarios documents relating to the 
linkage of Participant Data and Industry Member Data with SIP Data, 
such that SIP Data is incorporated in the lifecycle of an order. The 
Commission believes that this condition would allow the Commission to 
monitor the progress made towards meeting this CAT NMS Plan requirement 
prior to the expiration of the exemptive relief.

D. Reporting of Port-Level Settings Applicable to Orders

    Port-level settings are special handling instructions associated 
with a port connection to another Industry Member or Participant and 
are used by Industry Members and Participants to instruct how to handle 
an Order (e.g., certain routing instructions) that are sent through 
that port connection. The CAT NMS Plan requires Industry Members to 
report the ``Material Terms of an Order,'' including ``any special 
handling instructions'' \11\ to the Central Repository for certain 
events in an Order's lifecycle.\12\ The Commission believes that the 
CAT NMS Plan's requirement to report ``Material Terms of an Order'' 
including ``any special handling instructions'' requires the reporting 
of port-level settings because port-level settings provide instructions 
on how orders should be handled.\13\ Put another way, port-level 
settings are special handling instructions, and therefore these 
settings must be reported, consistent with the two-sided reporting 
obligations of CAT, by both the sender and receiver. For example, an 
instruction that prevents an order from trading with another order from 
the same broker-dealer (self-trade match

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prevention) is reportable as a special handling instruction even if the 
exchange does not need to apply the instruction because there is not 
another order from the same broker-dealer that would trade with the 
incoming order.
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    \11\ See CAT NMS Plan at Section 1.1.
    \12\ See CAT NMS Plan at Sections 1.1 and 6.4(d)(i), (ii), 
(iii), and (iv).
    \13\ CAT NMS FAQ (D34) regarding the requirement to report 
material terms of an order that are communicated via default or 
implicit handling instructions states that generally, the party who 
``applies'' the default or implicit handling instruction to the 
order is required to report any material terms in that instruction 
to CAT. See CAT NMS FAQ D34, available at: https://www.catnmsplan.com/faq.
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    The Commission understands, however, that Participants and/or 
Industry Members would have to make technological changes to ensure the 
accurate and reliable reporting of port-level settings, and therefore, 
the Commission believes it is appropriate to, until July 31, 2023, 
exempt the Participants from requiring that both the CAT Reporter 
sending an Order and the CAT Reporter receiving an Order report port-
level settings as part of the Material Terms of an Order. In order to 
monitor the Participants' progress on compliance with the CAT NMS 
Plan's reporting requirements, this exemptive relief is conditioned on 
the Participants engaging both the Commission and Industry Members on a 
plan to address the reporting of port-level settings on an exchange-by-
exchange basis. Furthermore, as a condition of this relief, and for 
purposes of the Quarterly Progress Reports, factual indicators must 
include the release of updated specifications and/or scenarios 
documents relating to the reporting of port-level settings by both the 
sender and receiver of an Order as a special handling instruction to 
demonstrate the current level of completion with respect to the CAT NMS 
Plan requirement that special handling instructions, including port-
level settings, be reported as Material Terms of an Order. The 
Commission believes that these conditions would allow the Commission to 
monitor the progress made towards meeting this CAT NMS Plan requirement 
prior to the expiration of the exemptive relief.

E. Lifecycle Linkage Between Customer Orders and ``Representative'' 
Orders

    The CAT NMS Plan requires that the Plan Processor must be able to 
link all related order events from all CAT Reporters involved in the 
lifecycle of an order, and this requirement applies to, among other 
things, ``representative'' orders. Specifically, the CAT NMS Plan 
states that the Central Repository must be able to create the lifecycle 
between customer orders to ``representative'' orders created in firm 
accounts for the purpose of facilitating a customer order (e.g., 
linking a customer order handled on a riskless principal basis to the 
street-side proprietary order).\14\ The Commission understands that the 
Participants do not currently have the ability to create lifecycles in 
certain representative order scenarios, particularly because of the 
difficulty of linking representative orders for Industry Members with 
separate order management systems and execution management systems that 
do not currently have a systematic or direct link between them.\15\ 
While the Commission has granted exemptive relief relating to the 
timing of CAT NMS Plan reporting requirements for Industry Members,\16\ 
including the phased reporting of representative orders, the exemptive 
relief that was granted relates solely to the timing and phasing of 
reporting and not the substantive requirements of the CAT NMS Plan.\17\
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    \14\ See CAT NMS Plan at Section 3, Appendix D. A representative 
order is an order originated in a firm owned or controlled account, 
including principal, agency average price and omnibus accounts, by 
an Industry Member for the purpose of working one or more customer 
or client orders. See Securities Exchange Act Release No. 88702 
(April 20, 2020), 85 FR 23075, 23076 n.26 (April 24, 2020) (``Phased 
Industry Member Reporting Order'').
    \15\ See Industry Member Specifications, FINRA CAT, available 
at: https://www.catnmsplan.com/specifications/im.
    \16\ In the Phased Industry Member Reporting Order, see supra 
note 14, the Commission granted exemptive relief from requirements 
in Sections 6.4, 6.7(a)(v) and 6.7(a)(vi) of the CAT NMS Plan 
related to Industry Member reporting of Industry Member Data to the 
Central Repository.
    \17\ As a condition to the exemptive relief granted in the 
Phased Industry Member Reporting Order, the Participants represented 
that the full scope of CAT Data will be required to be reported to 
the CAT when Phase 2e has been implemented (by July 11, 2022), 
subject to any applicable exemptive relief or amendments to the CAT 
NMS Plan. See id. at 23076, 23079, 23080, 23081, 23083.
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    In order to allow time for Participants and Industry Members to 
develop the capability of meeting CAT NMS Plan requirements relating to 
representative orders, the Commission believes it is appropriate to 
grant temporary exemptive relief, until July 31, 2023, from the CAT NMS 
Plan requirement that the Plan Processor create the lifecycle between 
customer orders to ``representative'' orders created in firm accounts 
for the purpose of facilitating a customer order, conditioned on the 
Participants continuing to require Industry Member reporting of 
representative orders as described in the Phased Industry Member 
Reporting Order. The Commission believes that granting relief until 
July 31, 2023 is appropriate because this would provide Participants 
the time necessary to determine how all representative orders are to be 
reported to CAT and time for Industry Members to make any changes 
necessary to report all representative orders. As a condition of this 
relief, and for purposes of the Quarterly Progress Reports, factual 
indicators that demonstrate the current level of completion with 
respect to this CAT NMS Plan requirement must include a description of 
progress made regarding the release of updated specifications and/or 
scenarios documents relating to the reporting of all representative 
orders. The Commission believes that this condition would allow the 
Commission to monitor the progress made towards meeting this CAT NMS 
Plan requirement prior to the expiration of the exemptive relief.

F. Participant Reporting of Rejected Orders

    The CAT NMS Plan requires Participants to record and report to the 
Central Repository the receipt of an order and the time at which the 
order is received pursuant to Section 6.3(d) of the CAT NMS Plan. This 
requirement applies to when an order is received, which means that an 
order that a Participant receives, but then rejects (``rejected 
orders'') is a CAT Reportable event, and that the receipt of that order 
and the time at which that order was received also must be reported, 
pursuant to Section 6.3(d). Additionally, similar to all other CAT 
Data, rejected orders that are reported to the Central Repository must 
be processed and assembled to create the complete lifecycle of each 
Reportable Event.\18\ However, the Commission understands that the 
Participants are currently only able to report some but not all 
rejected orders, as required by Section 6.3(d).
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    \18\ See CAT NMS Plan at Appendix D, Section 3.
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    In order to provide Participants more time to develop the changes 
necessary to meet the requirements of Section 6.3(d) of the CAT NMS 
Plan as they relate to rejected orders, the Commission believes it is 
appropriate to, until December 13, 2021, grant a temporary exemption to 
the Participants from the requirement in Section 6.3(d) of the CAT NMS 
Plan that requires the Participants to report rejected orders.\19\ As a 
condition to this relief, and for purposes of the Quarterly Progress 
Reports, factual indicators that demonstrate the current level of 
completion with respect to this CAT NMS Plan requirement must include a 
description of any updates to specifications and/or scenarios documents 
relating to the capture and

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reporting of rejected orders. The Commission believes that this 
condition would allow the Commission to monitor the progress made 
towards meeting this CAT NMS Plan requirement prior to the expiration 
of the exemptive relief.
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    \19\ The Commission understands that Industry Member 
Specifications accommodates the reporting of rejected orders through 
``New Order Event'' reporting, and that if an Industry Member 
receives an order, the Industry Member must report the receipt of 
the order and time of order receipt. See FINRA CAT, Industry Member 
Specifications, available at: https://www.catnmsplan.com/specifications/im; FINRA CAT, FAQ D3, available at: https://www.catnmsplan.com/faq.
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III. Conclusion

    For the reasons discussed above, the Commission believes that 
granting temporary exemptive relief, pursuant to Section 36 of the 
Exchange Act, is appropriate in the public interest and consistent with 
the protection of investors, and that pursuant to Rule 608(e), granting 
temporary exemptive relief is consistent with the public interest, the 
protection of investors, the maintenance of fair and orderly markets 
and the removal of impediments to, and the perfection of a national 
market system.
    Accordingly, it is hereby ordered, pursuant to Section 36(a)(1) of 
the Exchange Act,\20\ and Rule 608(e) of the Exchange Act \21\ that the 
Participants are granted an exemption, from: (1) The requirement in 
Section 6.1 of Appendix D of the CAT NMS Plan that requires 
Participants to make lifecycle linkages of transaction data available 
by noon EST T+1, until July 31, 2023; (2) the requirement in Sections 3 
and 6.2 of Appendix D of the CAT NMS Plan that the Participants process 
and assemble the complete lifecycle for corrected Reportable Events 
received by the Plan Processor made after T+5, until July 31, 2021; (3) 
the requirement in Section 6(b)(i) of the CAT NMS Plan that requires 
the Participants to ensure that information collected pursuant to 
paragraphs (c)(7) and (e)(7) of SEC Rule 613 shall be linked when made 
available to the Participant regulatory staff and the SEC, until July 
31, 2023; (4) the requirement in Sections 6.3(d)(i)(F), (ii)(G), 
(iii)(F), (iv)(E) and 6.4(d)(i) of the CAT NMS Plan that the 
Participants report, and amend their Compliance Rules to require 
Industry Members report the Material Terms of an Order that are 
communicated in port-level settings or instructions, until July 31, 
2023; (5) the requirement in Section 3, Appendix D of the CAT NMS Plan 
that the Participants create the lifecycle between customer orders to 
representative orders created in firm accounts for the purpose of 
facilitating a customer order, until July 31, 2023, and (6) the 
requirement in Section 6.3(d) of the CAT NMS Plan that requires 
Participants to report rejected orders, until December 13, 2021, 
subject to the conditions described above.
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    \20\ 15 U.S.C. 78mm(a)(1).
    \21\ 17 CFR 242.608(e).

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-28146 Filed 12-21-20; 8:45 am]
BILLING CODE 8011-01-P


