[Federal Register Volume 78, Number 230 (Friday, November 29, 2013)]
[Notices]
[Pages 71695-71700]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-28572]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70924; File No. SR-FINRA-2013-050]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to
Over-the-Counter Equity Trade Reporting and OATS Reporting
November 22, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 12, 2013, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II
and III below, which items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
FINRA is proposing to amend FINRA rules governing the reporting of
(i) over-the-counter (``OTC'') transactions in equity securities to the
FINRA Facilities; \3\ and (ii) orders in NMS stocks and OTC Equity
Securities to the Order Audit Trail System (``OATS'').
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\3\ Specifically, the FINRA Facilities are the Alternative
Display Facility (``ADF'') and the Trade Reporting Facilities
(``TRF''), to which members report OTC transactions in NMS stocks,
as defined in SEC Rule 600(b) of Regulation NMS; and the OTC
Reporting Facility (``ORF''), to which members report 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), as well as transactions in Restricted Equity
Securities, as defined in FINRA Rule 6420, effected pursuant to
Securities Act Rule 144A.
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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 and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and the
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 is proposing amendments to the equity trade reporting rules
relating to reporting (i) an additional time field for specified
trades, (ii) execution time in milliseconds, (iii) reversals, (iv)
trades executed on non-business days and trades that are more than one
year old, and (v) ``step-outs.'' The proposed amendments also reflect
changes in the processing of trades that are submitted to a FINRA
Facility for clearing as well as technical changes to the rules
relating to the OTC Reporting Facility (``ORF''). The proposed
amendments also codify existing OATS guidance regarding reporting order
event times to OATS in milliseconds.
Reporting an Additional Time Field
FINRA rules require that trade reports submitted to the FINRA
Facilities include the time of trade execution, except where another
time is expressly required by rule. For some transactions, there may be
more than one critical time associated with a trade report (for
example, the actual time of execution
[[Page 71696]]
and a reference time on which the trade price may be based); however,
only one time field is currently supported in FINRA trade reports.
FINRA is proposing to require members to report an additional time
field when reporting the following three types of transactions to
FINRA.
With respect to Stop Stock transactions, as defined for purposes of
the FINRA trade reporting rules,\4\ and transactions that reflect an
execution price that is based on a prior reference point in time (``PRP
transactions''), current FINRA rules require that in lieu of the actual
time the trade was executed, members report the time at which the
member and the other party agreed to the Stop Stock price and the prior
reference time, respectively.\5\ For example, for Stop Stock
transactions, if the parties agree to the Stop Stock price at 10:00
a.m. and the trade is executed at 11:00 a.m., the reporting member
would report 10:00 a.m. in the execution time field. Similarly, for PRP
transactions, if a member executes a market-on-open order at 10:30
a.m., the member would report 9:30 a.m. (the time the market opened).
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\4\ ``Stop Stock transaction'' means a transaction resulting
from an order in which a member and another party agree that the
order will be executed at a Stop Stock price or better, which price
is based upon the prices at which the security is trading at the
time the order is received by the member. See Rules 6220, 6320A,
6320B and 6420.
\5\ See paragraphs (F) and (G) of Rules 6282(a)(4), 6380A(a)(5),
6380B(a)(5) and 6622(a)(5).
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FINRA is proposing to require members to include two times when
reporting Stop Stock transactions and PRP transactions: (1) The time
currently required by rule (i.e., the time at which the parties agree
to the Stop Stock price or the prior reference time), and (2) the
actual time of execution.\6\ Thus, in the two examples above, the trade
report would reflect times of 10:00 a.m. and 11:00 a.m. for the Stop
Stock transaction, and 9:30 a.m. and 10:30 a.m. for the PRP
transaction.\7\ FINRA believes that requiring members to report
additional time-related information will ensure a more accurate and
complete audit trail and enhance FINRA's ability to surveil on an
automated basis for compliance with FINRA trade reporting and other
rules.
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\6\ The rules provide that if the trade is executed within 10
seconds of the time the parties agree to the Stop Stock price or
within 10 seconds of the prior reference time, then the designated
modifier should not be used. FINRA also is proposing to amend the
rules to clarify that in this instance, only the actual time of
execution should be reported.
\7\ Upon implementation of the proposed rule change, any Stop
Stock and PRP transactions that are reported more than 10 seconds
following execution will be marked late.
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In addition, FINRA is proposing to require members to include two
times when reporting block transactions using the Intermarket Sweep
Order (``ISO'') exception (outbound) under SEC Rule 611 (``Order
Protection Rule'') of Regulation NMS. Current FINRA guidance requires
members to use the time that all material terms of the transaction are
known as the execution time in the trade report.\8\ The staff is
proposing to adopt Supplementary Material in Rules 6282, 6380A and
6380B to require that trade reports reflect both the time the firm
routed ISOs and the execution time, if different. With this additional
time in the trade report, FINRA will be able to determine better
whether ISOs were properly sent to other trading centers in compliance
with the ISO exception to the Order Protection Rule. The staff notes
that many firms have requested that they be permitted to provide the
additional time to avoid the appearance of non-compliance with the
Order Protection Rule.
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\8\ See NASD Member Alert: Guidance Relating to ``Execution
Time'' for Purposes of Compliance with NASD Trade Reporting Rules
(June 13, 2007).
To comply with the ISO exception simultaneously with execution
of a block transaction, the firm is required to route an ISO to
execute against the full displayed size of any protected quotation
with a price superior to the block transaction price (see question
and answer 13 in NASD Notice to Members 07-23 (May 2007)). Under
certain circumstances, fills received from the execution of routed
ISOs may be reflected in the size of the block transaction that is
reported to FINRA with the ISO exception. Thus, under such
circumstances, the execution time to be reported for the block
transaction may be different than the time the member uses to
determine whether ISOs were properly routed to execute against any
better-priced protected quotations.
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Reporting Time in Milliseconds
FINRA trade reporting rules currently require members to report
execution time to the FINRA Facilities in seconds (i.e., HH:MM:SS),\9\
while the execution time for exchange trades is expressed in
milliseconds (i.e., HH:MM:SS:mmm). Similarly, Rule 7440(a)(2) of the
OATS rules currently requires members to record order event times in
terms of hours, minutes, and seconds.\10\ Because FINRA's audit trails
consolidate exchange and OTC trades for regulatory purposes, sequencing
consolidated transactions by execution time can be difficult with the
different time formats, particularly in active stocks.\11\
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\9\ See, e.g., Rules 6282(c)(2)(H), 6380A(c)(5), 6380B(c)(5) and
6622(c)(5).
\10\ Rule 7450 generally requires all applicable order
information required to be recorded under Rule 7440 to be reported
to OATS. Although Rule 7440(a)(2) requires order event times to be
recorded to the second, FINRA published guidance in 2011 in
connection with the expansion of OATS to all NMS stocks stating that
firms that capture time in milliseconds should report time to OATS
in milliseconds. See Regulatory Notice 11-03 (January 2011); see
also OATS Reporting Technical Specifications, Cover Memo, at iv (May
3, 2011 ed.). The proposed rule change codifies this guidance into
Rule 7440(a)(2).
\11\ FINRA also notes that the Intermarket Surveillance Group
(``ISG'') consolidated audit trail can accommodate execution times
expressed in milliseconds. The ISG consolidated audit trail, which
combines data from all exchange and OTC trades, is used by all self-
regulatory organizations for regulatory purposes.
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To enhance and help bring consistency to FINRA's audit trail, FINRA
is proposing amendments to require members to express time in
milliseconds when reporting trades to the FINRA Facilities or order
information to OATS, if the member's system captures time in
milliseconds.\12\ However, FINRA is not proposing to mandate that
members enhance their systems to capture time in milliseconds.\13\
Members with systems that do not capture milliseconds will be permitted
to continue reporting time in seconds.\14\
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\12\ See proposed Rules 6282.04, 6380A.04, 6380B.04, 6622.04,
7130.01, 7230A.01, 7230B.01, 7330.01, and 7440(a)(2).
\13\ Members may, however, need to update their systems for OATS
reporting to reflect the fact that other systems in the firm utilize
milliseconds so that the times used by those systems (if in
milliseconds) are accurately reflected in the member's OATS reports.
As noted above, FINRA is not requiring firms to use milliseconds or
update existing systems to use milliseconds; however, to the extent
a firm's system uses milliseconds, those timestamps should be to the
millisecond when they are reported to OATS.
\14\ FINRA expects members that have systems currently capable
of capturing time in milliseconds to continue to do so and not to
make systems changes to revert to seconds unless they have a
legitimate business reason for doing so (e.g., a member wants to use
the services of a vendor that does not capture time in
milliseconds). FINRA may review any such systems changes in the
course of an inquiry or a member examination.
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FINRA believes that where trades are executed by electronic
systems, such as alternative trading systems and automated execution
systems, that already capture execution time in milliseconds, it should
be relatively straightforward for members to report such trades to the
FINRA Facilities using milliseconds. Thus, FINRA does not believe that
the proposed requirement would be burdensome for members, nor would it
require them to make significant systems changes. FINRA recognizes,
however, that where trades are executed manually, e.g., by instant
messaging or telephone, it would be more difficult for members to
capture milliseconds for purposes of trade reporting. Accordingly,
FINRA believes that it is appropriate not to require that all members
capture and report time in milliseconds at this time.\15\
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\15\ The time fields in trade reports submitted to the FINRA
Facilities currently do not accommodate milliseconds, and therefore,
FINRA does not know the exact number of firms that capture
milliseconds for trade reporting purposes today. However, as noted
above, OATS supports reporting in milliseconds. FINRA reviewed OATS
data from October 11, 2013 through October 22, 2013, and the daily
percentage of OATS execution reports that include time in
milliseconds range from a low of 80.53% to a high of 82.96%. In
addition, 189 firms submitted at least one execution report to OATS
using milliseconds during this period. This suggests that for trade
reporting purposes, a significant number of executing firms have
systems that currently capture execution time in milliseconds and,
as a result, would be subject to the proposed requirement.
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[[Page 71697]]
Reporting Reversals
FINRA rules require that if a trade that was previously reported to
FINRA is cancelled, members must report the cancellation to the same
FINRA Facility to which the trade was originally reported \16\ and must
do so within the time frames set forth in the rules.\17\ Members report
a ``cancellation'' when trades are cancelled on the date of execution
and a ``reversal'' when trades are cancelled on a day after the date of
execution.\18\
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\16\ See Rules 7130(d), 7230A(i), 7230B(h) and 7330(h).
\17\ See, e.g., Rules 6282(j)(2), 6380A(g)(2), 6380B(f)(2), and
6622(f)(2) and (f)(3).
\18\ See, e.g., Trade Reporting FAQ 305.6, available at
www.finra.org/Industry/Regulation/Guidance/p038942#305.
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Today, when a member reports a reversal of a trade that was
previously reported to a FINRA Facility, there is no requirement that
the member provide information in the reversal report to identify the
original trade.\19\ FINRA is proposing to adopt new paragraph (3) in
Rules 6282(j), 6380A(g) and 6380B(f) and new paragraph (4) in Rule
6622(f) to require that members identify the original trade in the
reversal report by including the control number generated by the FINRA
Facility and report date for the original trade report. This
information will enable FINRA to better ``link'' reports of reversals
with the associated previously reported trades and thereby allow FINRA
to recreate more accurately the firm's market activity, as well as
surveil for compliance with FINRA trade reporting rules.\20\ In
addition, paragraph (1) of these Rules, which provides that the member
with the trade reporting obligation is responsible for submitting the
cancellation in accordance with the procedures set forth in paragraph
(2), would be amended to also refer to the proposed new provision.
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\19\ Where the cancel functionality is used on the date of
trade, the cancellation is automatically linked by the system to the
original trade.
\20\ FINRA notes that the FINRA Facilities will retain historic
trade data and the amount of data retained will vary among the
facilities. Members must maintain sufficient records to enable them
to identify the control number and report date for any trades that
they reverse, to the extent such information cannot be obtained from
the data retained by the FINRA Facility.
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FINRA is proposing several additional conforming amendments to the
rules relating to trade cancellations.\21\
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\21\ First, FINRA is proposing to expressly refer to
``reversals'' and ``reversed trades,'' as applicable, in Rules
6282(j), 6380A(g), 6380B(f), 6622(f), 7230A(f), 7230B(e) and
7330(f). Second, FINRA is proposing to amend Rules 7230A(f)(2),
7230B(e)(2) and 7330(f)(2) to clarify that members must comply with
the deadlines ``and other requirements'' (i.e., the proposed new
requirement to include the control number and report date of the
original trade) set forth in the rules. Third, to bring consistency
to the trade reporting rules, FINRA is proposing conforming changes
to the ADF rules to (1) add the language ``with the exception of
trades cancelled in accordance with the Rule 11890 Series'' in Rule
6282(j)(1), which is identical to the language in Rules 6380A(g)(1),
6380B(f)(1) and 6622(f)(1) relating to the other FINRA Facilities;
(2) refer in Rule 6282(j)(1) to the member with the trade reporting
obligation under ``Rule 6282'' (rather than the more general
reference to the Rule 6280 Series); and (3) adopt new paragraph (e)
in Rule 7130, which is identical to Rules 7230A(f), 7230B(e) and
7330(f), as amended herein, relating to the other FINRA Facilities.
Finally, FINRA is proposing to include a reference to paragraph
(f)(3) in Rule 6622(f)(1), which currently provides that members
must comply with the requirements of paragraph (f)(2) when
submitting cancellations and reversals. FINRA inadvertently did not
add this reference when paragraph (f)(3) was originally adopted.
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Reporting Non-Business Day Trades and T+365 Trades
Due to current systems limitations, trades executed on non-business
days (i.e., weekends and holidays) and trades reported more than 365
days after trade date (T+365) cannot be reported to a FINRA Facility.
Instead, these trades must be reported on ``Form T'' through FINRA's
Firm Gateway.\22\ Because these trades are not reported to a FINRA
Facility, they are not captured for purposes of FINRA's automated
surveillance systems, and regulatory fees under Section 3 of Schedule A
to the FINRA By-Laws (``Section 3'') \23\ must be assessed manually.
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\22\ Under FINRA rules, ``Form T'' is to be used for trade
reporting only where electronic submission to a FINRA Facility is
not possible. See Rules 6282(a)(5), 6380A(a)(8), 6380B(a)(8) and
6622(a)(8); see also Trade Reporting Notice 6/3/2011 (FINRA Reminds
Firms of Their Trade Reporting Obligations and Announces New
Submission Process for Form T).
\23\ Pursuant to Section 31 of the Act, FINRA and the national
securities exchanges are required to pay transaction fees and
assessments to the SEC that are designed to recover the costs
related to the government's supervision and regulation of the
securities markets and securities professionals. FINRA obtains its
Section 31 fees and assessments from its membership in accordance
with Section 3.
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FINRA is making systems enhancements to enable members to submit
reports of non-business day trades and T+365 trades electronically to
the FINRA Facilities rather than using ``Form T'' to report such
trades. As is the case today, non-business day trades and T+365 trades
will not be submitted to clearing by the FINRA Facility \24\ or
disseminated. FINRA also is proposing to amend the rules to require
that members report non-business day trades on an ``as/of'' basis by
8:15 a.m. the next business day following execution with the unique
trade report modifier to denote their execution outside normal market
hours; trades not reported by 8:15 a.m. will be marked late.\25\ Thus,
for example, a trade executed on Saturday must be reported by 8:15 a.m.
the following Monday (since the FINRA Facilities are not open on
Saturday to accept the trade report), and if the trade is not reported
by that time, it will be marked late. This requirement will ensure that
non-business day trades are properly sequenced for audit trail
purposes. All T+365 trades will be reported on an ``as/of'' basis and
will be marked late.
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\24\ FINRA is proposing to expressly provide that these trades
will not be submitted to clearing in Rules 7140(b), 7240A(b),
7240B(b) and 7340(b).
\25\ See Rules 6282(a)(2), 6380A(a)(2), 6380B(a)(2) and
6622(a)(2). FINRA also is proposing to delete the reference to
``T+1'' in subparagraph (D) of these rules because, e.g., the next
business day would be greater than T+1 for a trade that is executed
on a Saturday.`
FINRA also is proposing a conforming change to Rule 6622(a)(3)
to provide that any Securities Act Rule 144A transaction in a
Restricted Equity Security that is executed on a non-business day
must be reported by the time the ORF closes the next business day.
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Reporting Step-Outs
Today, members can effectuate a ``step-out'' \26\ by submitting a
clearing-only report to a FINRA Facility. FINRA rules prohibit members
from submitting to a FINRA Facility any non-tape report (including but
not limited to reports of step-outs) associated with a previously
executed trade that was not reported to that FINRA Facility.\27\ For
every step-
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out, one member is stepping out of (or transferring) the position and
the other member is stepping into (or receiving) the position. Where
both members are submitting a clearing-only report to a FINRA Facility,
each member currently must use the ``step-out'' indicator.
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\26\ A step-out allows a member firm to allocate all or part of
a client's position from a previously executed trade to the client's
account at another firm. In other words, a step-out functions as a
client's position transfer, rather than a trade; there is no
exchange of shares and funds and no change in beneficial ownership.
The step-out function was designed and implemented as a service to
facilitate the clearing process for members involved in these types
of transfers. See Trade Reporting FAQ 301.1, available at
www.finra.org/Industry/Regulation/Guidance/p038942#301.
Each firm is required to report its side to effectuate a step-
out; however, if the two firms have the proper agreements in place
(i.e., an Automatic Give-Up (``AGU'') or Qualified Special
Representative (``QSR'') agreement), the step-out can be effectuated
with only one submission. The proposed rule change will not affect
the process for effectuating a step-out with a single submission via
AGU or QSR.
\27\ See Rules 7130(d), 7230A(i), 7230B(h) and 7330(h). Thus,
for example, a member cannot use one TRF to step out of an OTC trade
that was originally reported to another TRF.
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Some clearing firms have requested the ability to see whether their
correspondents are stepping out or stepping in with respect to such
transfers. Accordingly, FINRA is proposing to amend Rules 7130(d),
7230A(i), 7230B(h) and 7330(h) to provide that where both sides are
submitting a clearing-only report to effectuate a step-out, the member
transferring out of the position must report a step-out and the member
receiving the position must report a step-in.\28\
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\28\ FINRA notes that the step-out and step-in indicators should
not be used when reporting a riskless principal or agency ``flip,''
both of which entail a change in beneficial ownership and must be
reported to FINRA where specified by rule.
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Trade Processing
Rules 7140, 7240A and 7340 address the trade acceptance and
comparison process for locking in trades submitted for clearing through
the ADF, FINRA/Nasdaq TRF and ORF, respectively. When firms use the
trade acceptance and comparison functionality, the reporting party
reports the trade and the contra party subsequently either accepts or
declines the trade.\29\ Today, any trade that has been declined by the
contra party is purged from the system at the end of trade date
processing.\30\
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\29\ Alternatively, one member may submit a locked-in trade on
behalf of the other member, if the members have the requisite
agreements in place. In that instance, the trade acceptance and
comparison functionality would not be used.
FINRA notes that the FINRA/NYSE TRF currently does not offer
trade acceptance and comparison, and as such, all trades must be
locked-in prior to submission to this facility. See Rule 7240B.
\30\ See Rules 7140(a), 7240A(b) and 7340(b).
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FINRA is proposing to amend the rules to provide that rather than
being purged, declined trades will be carried over and remain available
for cancellation or correction by the reporting party or acceptance by
the contra party. Declined trades that are carried over will not be
available for the automatic lock-in process described in the rules and
will not be sent to clearing unless the parties take action. FINRA also
is proposing to amend paragraph (a) of Rules 7140, 7240A and 7340 to
codify the existing requirement that the reporting member must cancel a
declined trade that was previously reported for dissemination purposes
to have the trade removed from the tape, i.e., the system does not
remove the trade automatically from the tape.
In addition, FINRA is proposing technical changes to Rules 7140,
7240A and 7340 to reorganize and clarify the provisions relating to
locking in trades for clearing in paragraph (a) and the processing of
T+N (also referred to ``as/of'') trades in paragraph (b).\31\
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\31\ Specifically, FINRA is proposing to relocate the provision
relating to carrying over and automatically locking in trades that
is currently in paragraph (b) of Rules 7140, 7240A and 7340 to new
paragraph (a)(2) of Rule 7140 and new paragraph (a)(3) of Rules
7240A and 7340. The process for automatically locking in trades for
clearing will remain essentially the same: Any T to T+21 trade that
has not been declined and remains open (i.e., unmatched or
unaccepted) at the end of its entry day will be carried over and
will be automatically locked in and submitted to DTCC if it remains
open as of 2:30 p.m. the next business day. Trades that are T+22 or
older that remain open will be carried over, but will not be subject
to the automatic lock-in process (today such T+22 trades are not
subject to the automatic lock-in process and are purged from the
FINRA Facilities, but members may subsequently resubmit them).
FINRA also is proposing to include language in new Rule
7240B(b) clarifying that T+N (or ``as/of'') entries may be submitted
until the FINRA/NYSE TRF closes for the day, i.e., 8:00 p.m. This
language conforms to the language of Rules 7140(b), 7240A(c) and
7340(c) (as renumbered herein) relating to the other FINRA
Facilities.
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FINRA notes that the proposed changes to Rules 7140, 7240A, 7240B
and 7340 will not impact the way members report to FINRA and will not
require members to make changes to their systems.\32\
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\32\ FINRA also is proposing several non-substantive technical
changes to rules that are otherwise being amended by this proposed
rule change. First, FINRA is proposing to delete or replace
references to ``TRACS'' with ``the ADF'' in Rule 6282 and to delete
or replace references to ``TRACS'' or the ``TRACS trade comparison
feature'' with ``the System'' in the Rule 7100 Series heading and
Rule 7140. FINRA intends to submit a separate proposed rule change
proposing this technical change throughout the Rule 6200, 7100 and
7500 Series. In addition, FINRA is proposing to (1) amend Rules
6380A(g)(1), 6380B(f)(1), 6622(f)(1), 7230A(f)(1), 7230B(e)(1) and
7330(f)(1) to insert ``the'' before the reference to the Rule 11890
Series; (2) delete the unnecessary reference to ``or cancellation''
in Rule 6282(j)(2)(G); (3) capitalize the term ``Rule'' in Rule
6380A(g)(2)(G); and (4) capitalize ``Eastern Time'' in Rule
6622(a)(5)(H).
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ORF Technical Amendments
FINRA is proposing several additional technical amendments to the
ORF rules. First, FINRA is proposing to close the ORF at 6:30 p.m.
Eastern Time rather than 8:00 p.m. Thus, the ORF rules (i.e., the Rule
6620 and 7300 Series) will be amended to replace all references to 8:00
p.m. with 6:30 p.m. Members will be required to report trades executed
after 6:30 p.m. on an ``as/of'' basis by 8:15 a.m. the next business
day.\33\ In addition, FINRA is proposing to delete the language in Rule
7320 that states ``unless the member has an alternative electronic
mechanism pursuant to FINRA rules for reporting and clearing such
transaction.'' This language is unnecessary, given that the ORF is the
only electronic mechanism for reporting OTC transactions in OTC Equity
Securities and transactions in Restricted Equity Securities effected
under Rule 144A. FINRA also is proposing a minor change in terminology
to delete the term and references to ``Browse'' from Rules 7310 and
7330. While the functionality remains available, the term itself does
not apply to the ORF.
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\33\ FINRA reviewed the volume of trades reported to the ORF
between 6:30 p.m. and 8:00 p.m. and determined that they represent
only a very small percentage of reported trades. For example, for
all trades reported to the ORF between January 1, 2012 and February
6, 2013, the percentage of tape reports submitted between 6:30 p.m.
and 8:00 p.m. compared to the overall number of trades range from a
low of 0% to a high of 0.5% (on a single day), while non-tape
reports range from a low of 0.0% to a high of 3.0% (on a single
day).
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FINRA believes that the amendments proposed herein will enhance
FINRA's audit trail and automated surveillance program, promote more
consistent trade reporting by members and detect violations of FINRA
trade reporting and other rules.
FINRA staff discussed the proposed rule change with several of
FINRA's industry advisory committees in developing its approach. The
committees supported the proposed amendments and did not believe that
compliance would be particularly burdensome for firms. However, the
committees noted the following specific comments and questions: (1)
Several committee members requested that members be provided sufficient
time to implement the necessary systems changes (FINRA has proposed an
extended implementation period herein); (2) one committee member raised
the possibility that members that currently capture execution time in
milliseconds could revert their systems to seconds and still be in
compliance with the rule (see note 14 herein); (3) one committee member
asked if there would be instances where the control number for the
original trade might not be available for purposes of reporting a
reversal (see note 20 herein); (4) one committee member asked whether
FINRA intends to mandate that firms capture execution time in
milliseconds (FINRA notes that there is currently no intention to adopt
such a requirement; moreover, any such proposal would be subject to a
separate rule filing and notice and comment); and (5) with respect to
the proposal to close the ORF at 6:30 p.m., a committee member asked
whether FINRA would grant an extension beyond 6:30 in the event of
[[Page 71699]]
market-wide systems problems or trading halts where members may need
additional time to report (FINRA typically does not extend operating
hours for the FINRA Facilities in such circumstances; however, FINRA
takes unusual market conditions, such as extreme volatility in a
security, or in the market as a whole, into consideration in
determining whether a pattern or practice of late trade reporting
exists).
FINRA believes that the proposed amendments reflect the least
burdensome approach to obtaining the additional trade report
information that FINRA needs for its audit trail and automated
surveillance program. For example, with respect to the proposed
additional time field, a possible alternative would be to retain a
single time field in trade reports and require that members report the
actual execution time for Stop Stock transactions and PRP transactions.
In that instance, however, a number of false positives could
potentially be generated (i.e., members would appear to have violated
FINRA and other rules), requiring members to respond to FINRA inquiries
and investigations. The current approach of requiring members to report
the reference time instead of the actual execution time is cumbersome
for FINRA staff and members alike, because the actual execution time
must be reviewed during member examinations. Having both times
reflected in the trade report will streamline member reviews and
facilitate members' ability to demonstrate compliance with FINRA and
other rules.
Furthermore, with respect to the millisecond requirement, requiring
only those members with systems that capture time in milliseconds to
report in milliseconds is less burdensome for members than mandating
that all members capture and report time in milliseconds. With respect
to the linking requirement, FINRA does not believe that there is a
viable alternative to requiring that members include the control number
and report date for the original trade. The member that reports the
trade is also required to report the reversal, and as such, should have
this information available for reporting purposes. FINRA also believes
that requiring members to report trades executed on non-business days
and T+365 trades to the FINRA Facilities is more efficient for members
than retaining the current ``Form T'' reporting process.
FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice. FINRA proposes that the effective date of the
proposed rule changes to the trade reporting rules will be no earlier
than April 15, 2014, and no later than September 30, 2014, and the
effective date of the proposed rule change to the OATS rules will be no
later than 45 days after 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,\34\ 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.
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\34\ 15 U.S.C. 78o-3(b)(6).
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FINRA believes that the proposed change to require members to
report additional time-related information for Stop Stock transactions,
PRP transactions and block transactions using the ISO (outbound)
exception under Regulation NMS is consistent with the Act because it
will ensure a more accurate and complete audit trail and enhance
FINRA's ability to surveil on an automated basis for compliance with
FINRA trade reporting and other rules.
FINRA believes that the proposed change to require members to
report to OATS and the FINRA Facilities in milliseconds if their
systems capture time in milliseconds is consistent with the Act because
it will enhance and help bring consistency to FINRA's audit trail.
FINRA believes that it is appropriate not to require that all members
capture and express time in milliseconds, in light of the difficulty
that members may face in capturing time for certain order events and
trades in milliseconds, such as manually executed trades. FINRA does
not believe that the proposed change would be burdensome or require
members with execution systems that capture time in milliseconds to
make significant systems changes to comply, and FINRA's industry
advisory committees did not raise concerns about the proposed
requirement.
FINRA believes that the proposed change to require members to
provide information to identify the original trade when reporting
reversals to FINRA is consistent with the Act because it will enable
FINRA to recreate more accurately members' market activity and surveil
for compliance with FINRA trade reporting rules.
FINRA believes that the proposed changes relating to reporting
trades executed on non-business days and T+365 trades are consistent
with the Act because these trades are required to be reported today,
and the changes would make the reporting process more efficient for
members. In addition, the proposed change to require that non-business
day trades be reported by 8:15 a.m. the next business day following
execution is consistent with the Act because it is consistent with the
existing reporting requirements for trades that are executed on
business days during the hours that the FINRA Facilities are closed and
also will ensure that the trades are properly sequenced for audit trail
purposes.
FINRA believes that the proposed change to require members to use a
new ``step-in'' indicator is consistent with the Act because it will
more accurately reflect the transfer (in that only one member steps out
of, and one member steps into, the position) and will provide greater
transparency for clearing firms whose correspondents effect these
transfers.
FINRA believes that the proposed changes to Rules 7140, 7240A,
7240B and 7340 are consistent with the Act because they will update the
rules to reflect changes in the processing of trades by the FINRA
Facilities and will not impact the way members report to FINRA or
require them to make changes to their systems.
Similarly, FINRA believes that the proposed technical changes to
the ORF rules (i.e., to reflect the closing at 6:30 p.m., and to delete
terms and language that are inapplicable to the ORF) are consistent
with the Act because they will ensure that the rules accurately reflect
the operation of the ORF.
Finally, FINRA believes that those aspects of the proposed rule
change that make technical or conforming changes to the rules are
consistent with the Act because they are non-substantive and are
designed to bring clarity and, to the extent practicable, uniformity to
the trade reporting rules relating to the FINRA Facilities.
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. Not all of the proposed
amendments will impact the way members report to FINRA or require
members to make systems changes. For example, the changes to trade
processing will not require members to change the way they report to
FINRA, and the proposed millisecond requirement will not require
members to begin capturing time in milliseconds.
[[Page 71700]]
To the extent that the proposed amendments will change the way
members report to FINRA, they will affect only those members that
execute and report OTC equity trades to FINRA.\35\ For example, many
firms, including smaller firms, route their order flow to another firm,
e.g., their clearing firm, for execution, and as the routing firm, they
do not have the trade reporting obligation. Today, on average, only
several hundred members regularly report trades to the FINRA
Facilities. For example, for the eight-month period from August 2012
through April 2013, 456 firms reported at least one trade, and of those
firms, 186 reported fewer than 10 trades. Thus, the amendments will
have no impact on many members.
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\35\ FINRA trade reporting rules require that for transactions
between members, the ``executing party'' report the trade to FINRA.
For transactions between a member and a non-member or customer, the
member must report the trade. ``Executing party'' is defined under
FINRA rules 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. See
Rules 6282(b), 6380A(b), 6380B(b) and 6622(b).
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Nonetheless, some members will need to make systems programming
changes to comply with the proposed amendments (e.g., members that
execute the types of transactions for which two times will be required,
members that execute trades on non-business days, etc.). FINRA believes
these changes will enhance FINRA's audit trail and surveillance
capabilities and will not significantly burden competition as all firms
that report OTC trades to FINRA will be subject to the same standard.
The staff proposes to provide members a sufficient implementation
period to accommodate such changes and may phase in implementation, if
appropriate, to lessen the impact on members, as well as any potential
burden on competition.
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 Number SR-FINRA-2013-050 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 Number SR-FINRA-2013-050. 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 on official business days between
the hours of 10:00 a.m. and 3:00 p.m., located at 100 F Street NE.,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal offices 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-FINRA-2013-050, and should
be submitted on or before December 20, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-28572 Filed 11-27-13; 8:45 am]
BILLING CODE 8011-01-P