[Federal Register Volume 78, Number 29 (Tuesday, February 12, 2013)]
[Notices]
[Pages 9963-9966]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-03101]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68842; File No. SR-FINRA-2013-013]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Require
Members To Report OTC Equity Transactions as Soon As Practicable, But
No Later Than 10 Seconds, Following Execution
February 6, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 1, 2013, Financial Industry Regulatory Authority, Inc.
(``FINRA'') 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 FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA trade reporting rules to require
that members report over-the-counter (``OTC'') transactions in NMS
stocks and OTC Equity Securities,\3\ and cancellations of such
transactions, to FINRA as soon as practicable, but no later than 10
seconds, following execution (or cancellation, as applicable).
---------------------------------------------------------------------------
\3\ OTC transactions in NMS stocks, as defined in SEC Rule
600(b) of Regulation NMS, are reported through the Alternative
Display Facility (``ADF'') or a Trade Reporting Facility (``TRF''),
and transactions in ``OTC Equity Securities,'' as defined in FINRA
Rule 6420 (i.e., non-NMS stocks such as OTC Bulletin Board and OTC
Market securities), are reported through the OTC Reporting Facility
(``ORF''). The ADF, TRFs and ORF are collectively referred to herein
as the ``FINRA Facilities.''
---------------------------------------------------------------------------
The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA, on the
Commission's Web site at http://www.sec.gov, 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, FINRA 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. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA trade reporting rules require that members report OTC
transactions in NMS stocks and OTC Equity Securities that are executed
during the hours that the FINRA Facilities are open within 30 seconds
of execution.\4\ In addition, members must report the cancellation of a
trade within 30 seconds of the time of cancellation if the trade is
both executed and cancelled on the same day during normal market
hours.\5\ Under current FINRA guidance, members are expected to report
transactions as soon as practicable and should not withhold trade
reports, e.g., by programming their systems to delay reporting until
the last permissible second.\6\
---------------------------------------------------------------------------
\4\ See, e.g., FINRA Rules 6282(a), 6380A(a), 6380B(a) and
6622(a).
The TRFs and ORF are open between 8:00 a.m. and 8:00 p.m., and
the ADF is open between 8:00 a.m. and 6:30 p.m.
\5\ See, e.g., FINRA Rules 6282(j)(2)(A), 6380A(g)(2)(A),
6380B(f)(2)(A) and 6622(f)(2)(A).
Members must report all cancellations of previously reported
trades to FINRA; however, where the trade is executed or canceled
outside of normal market hours, the 30-second requirement does not
apply to the reporting of the cancellation.
\6\ See Regulatory Notice 10-24 (April 2010).
---------------------------------------------------------------------------
FINRA is proposing to amend its trade reporting rules to require
members to report OTC trades in NMS stocks and OTC Equity Securities as
soon as practicable, but no later than 10 seconds, following execution
and to report trade cancellations as soon as practicable, but no later
than 10 seconds, after the time of cancellation.\7\ Under the proposed
rule change, all transactions not reported within 10 seconds will be
marked late (unless expressly subject to a different reporting
requirement \8\ or excluded from the trade reporting rules altogether).
FINRA understands that there will be isolated instances where a member
is unable to report trades within the time period prescribed by rule,
and FINRA will continue to look for a pattern and practice \9\ of
unexcused late trade reporting before taking action against a member.
Pursuant to Rules 6181 and 6623, unexcused late reporting occurs when
there are ``repeated reports of executions submitted after the required
time period without reasonable justification or exceptional
circumstances.'' The rules also provide that ``[e]xceptional
circumstances will be determined on a case-by-case basis and may
include instances of system failure by a member or service bureau, or
unusual market conditions, such as extreme volatility in a security, or
in the market as a whole.''
---------------------------------------------------------------------------
\7\ FINRA also is proposing conforming changes to replace the
reference to 30 seconds with 10 seconds in the rules relating to the
reporting of stop stock and ``prior reference price'' transactions.
See FINRA Rules 6282(a)(4), 6380A(a)(5), 6380B(a)(5) and 6622(a)(5).
\8\ For example, the proposed rule change will not amend the
reporting requirements applicable to transactions in Restricted
Equity Securities, as defined in Rule 6420, effected under
Securities Act Rule 144A, which transactions currently are not
subject to the 30-second reporting requirement. See Rule 6622(a)(3).
\9\ The Commission notes that FINRA Rules refer to ``a pattern
or practice.'' See, e.g., FINRA Rule 6282 (emphasis added).
---------------------------------------------------------------------------
FINRA also is proposing to adopt Supplementary Material to clarify
the requirement that members report trades and trade cancellations ``as
soon as
[[Page 9964]]
practicable.'' Specifically, the proposed Supplementary Material
provides that members must adopt policies and procedures reasonably
designed to comply with this requirement and must implement systems
that commence the trade reporting process without delay upon execution
(or cancellation, as applicable). Where a member has such reasonably
designed policies, procedures and systems in place, the member
generally will not be viewed as violating the ``as soon as
practicable'' requirement because of delays in trade reporting that are
due to external factors where the member does not purposely intend to
delay the reporting of the trade. The proposed Supplementary Material
also expressly prohibits members from purposely withholding trade
reports, e.g., by programming their systems to delay reporting until
the last permissible second. FINRA notes that members that engage in a
pattern and practice \10\ of unexcused late reporting (i.e., reporting
later than 10 seconds after execution) may be charged with violating
FINRA rules, notwithstanding that they have policies and procedures
that contemplate commencing the trade reporting process without delay.
---------------------------------------------------------------------------
\10\ Id.
---------------------------------------------------------------------------
Timely reporting has become even more critical with the
implementation of the Single Stock Circuit Breaker trading pause rules
and the upcoming implementation of the NMS Plan to Address
Extraordinary Market Volatility (or ``Limit Up/Limit Down'') this year.
For example, the price bands under Limit Up/Limit Down will be a
certain percentage away from a ``reference price,'' which is generally
the average price of regular way, last-sale eligible trades for a
security over the immediately preceding five-minute period. All regular
way, last sale eligible trades reported within the time frame
prescribed by rule (i.e., that are not reported late) will be included
in the calculation of the reference price.\11\ Given how quickly the
price for a security can change, a trade executed and reported in 30
seconds potentially may no longer reflect the current market and could
improperly impact the calculation of reference prices or, at an
extreme, trigger a single stock circuit breaker (which will remain in
effect for certain NMS stocks during the phased implementation of Limit
Up/Limit Down). In addition, trade reports received 30 seconds after
execution are more likely to appear to market participants as
violations of Limit Up/Limit Down (i.e., executions outside of the
price bands), as well as the Regulation NMS Order Protection Rule
(i.e., trading at a price worse than the best displayed bid or offer,
commonly referred to as a ``trade-through'').\12\ Even though the vast
majority of OTC trades are reported within 10 seconds today,\13\ market
participants have no certainty whether a particular trade reflects the
immediate current market. This is because today, when FINRA
disseminates OTC trades to the consolidated ``tapes,'' \14\ it does not
distinguish between a trade reported one second after execution and a
trade reported 30 seconds after execution, as both are considered
timely under FINRA rules.
---------------------------------------------------------------------------
\11\ By its terms, Limit Up/Limit Down will be implemented on a
one-year pilot basis in two phases. Phase I is currently scheduled
to begin on April 8, 2013 in select NMS stocks. Although the
proposed rule change, if approved, will not be in place at the
commencement of Phase I, FINRA believes it ultimately will be
beneficial to the operation of Limit Up/Limit Down.
\12\ For example, if a trade is not disseminated until 30
seconds after execution, the best displayed market could have
changed dramatically between the time of execution and ultimate
dissemination of the trade, giving the appearance of a trade-through
of the then-current market.
\13\ For example, during the period of July 9 through July 13,
2012, 99.96% of last-sale eligible trades were reported within 10
seconds of execution (with a breakdown of 99.97% of OTC trades in
NMS stocks and 99.04% of OTC trades in OTC Equity Securities).
\14\ Trades reported for public dissemination purposes are
transmitted to three ``tapes'' based on the listing venue of the
security: New York Stock Exchange securities (Tape A), NYSE Arca,
NYSE MKT and other regional exchange securities (Tape B), and Nasdaq
Stock Market securities (Tape C). Tape A and Tape B are governed by
the Consolidated Tape Association Plan (CTA Plan) and Tape C is
governed by the Nasdaq Unlisted Trading Privileges Plan (UTP Plan).
---------------------------------------------------------------------------
FINRA believes that reducing the reporting time and codifying
current guidance requiring that members report trades as soon as
practicable and not hold back trade reports is necessary to promote
consistent and timely reporting by all members. In addition, FINRA
believes that the proposed rule change will help ensure that members
are attentive to transaction reporting standards.
FINRA believes that very few members would be unable to comply with
the proposed rule change today. For the one-week period cited in
footnote 11 herein, 288 member firms reported one or more OTC trades to
FINRA. Of these firms, only 12 were unable to report any of their
trades within 10 seconds. Of the 25,251,098 last sale eligible trades
reported during this period, the total number of trades reported by
these 12 firms was 21 (0.0000831% of the total number of trades). In
addition, there were only 22 member firms that were unable to report at
least 50% of their last sale eligible trades within 10 seconds (this
number includes the 12 firms mentioned above). The total number of
trades reported by these 22 firms was 899 (0.0035602% of the total
number of trades). FINRA contacted more than half of the 22 firms to
discuss their trade reporting protocols and the potential impact that
the proposed rule change might have on them. The majority of the firms
that FINRA spoke to indicated that their business model is not to
execute and report trades, but instead to route most of their orders to
other firms for execution,\15\ while a few other firms indicated that,
as a more general matter, they do not trade equities very frequently.
Accordingly, FINRA believes that the burden of the proposed rule change
should be minimal, particularly since, as noted above, FINRA looks to a
pattern and practice \16\ of late trade reporting and typically does
not charge a member for isolated instances of late reporting.
---------------------------------------------------------------------------
\15\ FINRA notes that members, particularly smaller members,
that route their orders to another member for handling or execution
do not have the trade reporting obligation under FINRA rules. For
transactions between members, the ``executing party'' (which is
defined as the member that receives an order for handling or
execution or is presented an order against its quote, does not
subsequently re-route the order, and executes the transaction) has
the obligation to report the trade to FINRA. See Rules 6282(b),
6380A(b), 6380B(b) and 6622(b); see also Regulatory Notice 09-08
(January 2009).
\16\ See, supra note 9.
---------------------------------------------------------------------------
FINRA originally considered a requirement that members report
transactions ``immediately,'' but no later than 10 seconds, following
execution. FINRA staff discussed the proposed rule change with several
of its industry advisory committees in developing its approach. While
these committees were generally supportive of the proposal, they
indicated the need for (1) a sufficient implementation period so that
members can make any necessary systems changes (as noted above, FINRA
is proposing a 120 to 180 day implementation period following
Commission approval); (2) revision of the standard from ``immediately''
to ``as soon as practicable'' and a request to provide additional
clarity on the interpretation and application of the ``as soon as
practicable'' requirement (FINRA further clarified this as part of the
proposed Supplementary Material); and (3) additional guidance for
situations where delays could result from queuing of data into the
FINRA Facilities (given that the vast majority of trades today are
reported within 10 seconds, FINRA does not believe that the proposed
rule change will cause any queuing issues into the FINRA
[[Page 9965]]
Facilities). Finally, the committees asked for guidance on how the rule
would apply to late reporting during periods of market stress, e.g.,
high volatility days such as the Russell index rebalancing, where
compliance rates could be impacted. As noted above, extraordinary
market volatility is taken into consideration currently, and would
continue to be considered under the proposed reporting time frame, in
determining whether exceptional circumstances exist to excuse late
trade reporting. FINRA also notes that its staff reviewed members'
compliance rates on the date of Russell index rebalancing in 2012 and
determined that there was no appreciable decrease in the percentage of
trades reported within 10 seconds of execution on that day.
FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice. As discussed above, a small number of members
currently are unable to report trades within 10 seconds and may need to
make systems changes to comply with the proposed rule change. While the
vast majority of members have automated their trade reporting systems
and are already reporting within the proposed time frame, even these
members may need to make programming adjustments (e.g., to modify the
trigger for appending the late modifier, as required under FINRA rules,
from 30 seconds to 10 seconds after execution of the trade). To allow
sufficient time to make the necessary systems changes, FINRA is
proposing that the implementation date will be between 120 and 180 days
following the date of Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\17\ which requires, among
other things, that FINRA 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. For the reasons discussed above, FINRA believes that
the proposed rule change will enhance market transparency and price
discovery, promote more consistent trade reporting by members and
facilitate implementation and further the goals of the Single Stock
Circuit Breaker trading pause rules and the NMS Plan to Address
Extraordinary Market Volatility.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA 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 Act. FINRA believes the vast
majority of firms that engage in equities transactions have automated
their trade reporting systems so that the proposed rule change will not
have an economic impact.\18\ Furthermore, FINRA believes that the
proposed rule change will not have a competitive impact on smaller
members that may rarely have a trade reporting obligation, given the
policies and procedures approach to determining compliance with the
``as soon as practicable'' requirement, and the pattern and practice
\19\ nature of FINRA's late trade reporting surveillance and
enforcement. While smaller members will be expected to adopt policies
and procedures that contemplate reporting any trades for which they
have the reporting obligation as soon as practicable, their infrequent
instances of trade reporting likely would never rise to the level of a
pattern and practice \20\ of late reporting.
---------------------------------------------------------------------------
\18\ This is supported by a review of member trade reporting
statistics. As previously noted, during the period of July 9 through
July 13, 2012, 99.96% of last-sale eligible trades were reported
within 10 seconds of execution. For that same period, 99.71% and
94.31% of trades were reported within 5 seconds and 2 seconds of
execution, respectively.
\19\ See, supra note 9.
\20\ Id.
---------------------------------------------------------------------------
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 self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File No. SR-FINRA-2013-013 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-FINRA-2013-013. 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 FINRA. 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 No. SR-FINRA-2013-013 and should be
submitted on or before March 5, 2013.
---------------------------------------------------------------------------
\21\ 17 CFR 200.30-3(a)(12).
[[Page 9966]]
---------------------------------------------------------------------------
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03101 Filed 2-11-13; 8:45 am]
BILLING CODE 8011-01-P