[Federal Register Volume 80, Number 246 (Wednesday, December 23, 2015)]
[Notices]
[Pages 79966-79969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32191]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76677; File No. SR-FINRA-2015-055]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Provide FINRA with Authority To Grant
Exemptions from TRACE Reporting Requirements for Certain ATS
Transactions
December 17, 2015.
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 December 8, 2015, 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 and
II below, which Items have been prepared by FINRA. FINRA has designated
the proposed rule change as constituting a ``non-controversial'' rule
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which
renders the proposal effective upon receipt of this filing by the
Commission. 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.
\3\ 17 CFR 240.19b-4(f)(6).
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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 adopt new FINRA Rule 6732 to provide FINRA
with authority to exempt certain transactions by a member alternative
trading system (``ATS'') that meet specified criteria from the
transaction reporting obligations under FINRA Rule 6730. In addition,
FINRA is proposing a conforming change to FINRA Rule 9610 to specify
that FINRA has exemptive authority under proposed Rule 6732.
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
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
Statutory Basis for, the Proposed Rule Change
1. Purpose
Rule 6730 (Transaction Reporting) generally requires that each
FINRA member that is a party to a transaction in a TRACE-Eligible
Security \4\ report the transaction to TRACE within the period of time
prescribed in the rule. ``Party to a transaction'' means an introducing
broker-dealer, if any, an executing broker-dealer or a customer.\5\
Thus, in transactions in a TRACE-Eligible Security between members,
each member is a party to the transaction and is required to report the
transaction. An ATS is a party to a transaction in a TRACE-Eligible
Security occurring through its system and has a TRACE transaction
reporting obligation, unless an exception or exemption applies.\6\
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\4\ Rule 6710(a) provides that a ``TRACE-Eligible Security'' is
a debt security that is United States dollar-denominated and issued
by a U.S. or foreign private issuer, and, if a ``restricted
security'' as defined in Securities Act Rule 144(a)(3), sold
pursuant to Securities Act Rule 144A; or is a debt security that is
U.S. dollar-denominated and issued or guaranteed by an Agency as
defined in paragraph (k) or a Government-Sponsored Enterprise as
defined in paragraph (n). ``TRACE-Eligible Security'' does not
include a debt security that is: issued by a foreign sovereign, a
U.S. Treasury Security as defined in paragraph (p), or a Money
Market Instrument as defined in paragraph (o).
\5\ ``Customer'' includes a broker-dealer that is not a FINRA
member.
\6\ See Regulatory Notice 14-53 (November 2014) (FINRA Reminds
ATSs and ATS Subscribers of Their Trade Reporting Obligations in
TRACE-Eligible Securities).
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On February 28, 2012, FINRA adopted Rule 6731 (Exemption from Trade
Reporting Obligation for Certain Alternative Trading Systems) to
provide FINRA with authority to exempt ATSs from TRACE trade reporting
obligations under certain circumstances; specifically, where the ATS
demonstrates that: member subscribers are fully disclosed to one
another at all times on the ATS; the system does not permit automatic
execution (and a member subscriber must take affirmative steps beyond
the submission of an order to agree to a trade with another member
subscriber); the trade does not pass through any ATS account (and the
ATS does not in any way hold itself out to be a party to the trade);
and the ATS does not exchange TRACE-Eligible Securities or funds on
behalf of the member subscribers or take either side of the trade for
clearing or settlement purposes (including, but not limited to, at DTC
or otherwise), or in any other way insert itself into the trade.\7\ In
addition, trades on the ATS must be between subscribers that are both
FINRA members. Where a Rule 6731 exemption is granted, the ATS is not
deemed a party to the transactions occurring through its system for
purposes of trade reporting requirements.\8\
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\7\ See Securities Exchange Act Release No. 66513 (March 5,
2012), 77 FR 14454 (March 9, 2012) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2012-016) (``Rule 6731
Proposal'').
\8\ FINRA stated in the Rule 6731 Proposal that an ATS that
satisfies all the conditions of the proposal has a more limited
involvement in the trade execution than the member subscribers and,
therefore, the exemption from trade reporting is appropriate. As a
condition to the proposed [sic] Rule 6731 exemption, the ATS and its
member subscribers must acknowledge and agree in writing that the
ATS is not deemed a party to the trade for purposes of trade
reporting, and that trades shall be reported to FINRA in accordance
with Rule 6730 by each member subscriber that satisfies the
definition of ``party to a transaction,'' as defined in Rule 6710.
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[[Page 79967]]
FINRA believes it is appropriate to propose a rule change to
provide FINRA with authority to exempt trades on ATSs not otherwise
falling within the exemption in Rule 6731 from the Rule 6730 trade
reporting obligations. Pursuant to the proposed exemption, an ATS would
not be required to report exempted transactions occurring on the ATS to
TRACE, but rather, would be permitted to provide to FINRA on a monthly
basis, or such other basis as prescribed by FINRA, data relating to
each exempted trade occurring on the ATS. Each side of a trade for
which an ATS is exempted from TRACE reporting pursuant to the proposal
must be reported by a member (other than the ATS) that meets the
definition of a ``Party to a Transaction'' identifying a contra-party
(other than the ATS).
The proposal would permit FINRA to exempt a member ATS from
reporting trades where: (a) The trade is between FINRA members, (b) the
trade does not pass through any ATS account; (c) the ATS does not
exchange TRACE-Eligible Securities or funds on behalf of the
subscribers or take either side of the trade for clearing or settlement
purposes (including, but not limited to, at DTC or otherwise), or in
any other way insert itself into the trade; and (d) the ATS has entered
into a written agreement with each member that is a ``Party to a
Transaction'' with respect to any trade for which the ATS is exempted
under this Rule, specifying that trades must be reported by such party
pursuant to Rule 6730(c)(13) identifying the trade as having occurred
on the ATS (using the ATS's separate MPID obtained in compliance with
Rule 6720(c)).\9\
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\9\ An ATS granted an exemption pursuant to the proposal would
continue to be deemed a ``party'' to the transactions covered by the
exemption, and would be required to remit to FINRA a transaction
reporting fee. Specifically, member ATSs will be assessed a
transaction reporting fee for each exempted transaction occurring
through its system. Such fee will be assessed to the ATS once per
exempt transaction, and will be calculated based upon the fee
schedule set forth in Rule 7730(b)(1) for each exempt sell
transaction.
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Unlike the exemption provided for under Rule 6731 (where, if
granted, all transactions occurring on the ATS are exempted from TRACE
reporting), proposed Rule 6732 would provide FINRA authority to grant
exemptions only for transactions that meet the enumerated criteria,
which provides a greater degree of flexibility to member ATSs seeking
an exemption. In addition, the proposed exemption omits two of the
conditions required for relief under Rule 6731--specifically, that
member subscribers must be fully disclosed to one another at all times
on the ATS, and that the system does not permit automatic execution and
a member subscriber must take affirmative steps beyond the submission
of an order to agree to a trade with another member subscriber. Thus,
proposed Rule 6732 contemplates that an ATS may have a greater degree
of involvement in exempted trades than contemplated by existing Rule
6731.\10\
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\10\ Where an ATS has been granted an exemption under the
proposed rule, the member subscribers will be assessed the Trading
Activity Fee under FINRA By-Laws, Schedule A, Section 1. The ATS
will not be assessed such fees with respect to any exempted trade.
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In lieu of reporting through TRACE, proposed Rule 6732 would
include a similar requirement to that contained in Rule 6731 in that it
would require the periodic reporting of transaction information by any
member ATS granted relief. Specifically, under the proposed exemption,
an ATS would be required to provide FINRA with data relating to each
exempted trade that occurred on its system (on a monthly basis or such
other basis as prescribed by FINRA). FINRA will publish the required
items of trade data information, the frequency of the reporting
requirement, if different than monthly, and mode of transmission in a
separate Regulatory Notice.\11\
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\11\ As is the case with Rule 6731, proposed Rule 6732 also
provides that an ATS's failure to report required data to FINRA
pursuant to Rule 6732, in addition to constituting a violation of
FINRA rules, will result in revocation of any exemption granted
pursuant to proposed Rule 6732. Similar to Rule 6731, volume in
exempted trades occurring through the ATS would be considered volume
of the ATS for purposes of, among other things, the recordkeeping
requirements of Rule 302 of SEC Regulation ATS and determining
whether the ATS triggers the Fair Access requirements under Rule
301(b)(5) of Regulation ATS or the Capacity, Integrity and Security
of Automated Systems requirements of Rule 301(b)(6) of Regulation
ATS, as applicable. See Rule 6731; see also 17 CFR 242.300-303.
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FINRA believes that the proposed rule change will simplify
compliance for member ATSs and other members. Specifically, where an
ATS does not exchange TRACE-Eligible Securities or funds on behalf of
the subscribers, take either side of the trade for clearing or
settlement purposes (including, but not limited to, at DTC or
otherwise), or in any other way insert itself into the trade, and where
the trade does not pass through any ATS account, the proposal provides
FINRA with authority to allow ATSs (and member subscribers) to
streamline their trade reporting practices.
In some cases, member subscribers trading on an ATS may prefer to
program their back-end systems automatically to clear against the
contra-party identified on TRACE trade reports. Thus, reporting against
the contra-party member subscriber, rather than the ATS, would simplify
clearance and settlement for such members. However, because, under
FINRA rules, an ATS generally is deemed a party to each trade occurring
through its system, Rule 6730 currently precludes member subscribers
from reflecting a party other than the ATS on TRACE trade reports, even
where the ATS has not inserted itself into the trade.
For example, today, where a member (BD 1) sells a TRACE-Eligible
Security to another member (BD 2) through an ATS, Rule 6730 generally
requires BD 1 to report a sale to the ATS and the ATS to report a buy
from BD 1. The ATS also must report the corresponding sale to BD 2, and
BD 2 must report its buy from the ATS.\12\ Pursuant to the proposed
exemption, where granted, an ATS would not be required to report the
transactions with BD 1 and BD 2 to TRACE. In addition, BD 1 would be
required to report to TRACE a sale to BD 2, identifying the trade as
having occurred on the ATS, and BD 2 would be required to report to
TRACE a buy from BD 1, identifying the trade as having occurred on the
ATS on its TRACE report.
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\12\ In transactions between members, FINRA disseminates only
the sale transaction.
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Therefore, FINRA believes that the proposed rule change will
simplify compliance for these member ATSs and their member subscribers
without compromising public transparency in exempted trades, because
the exempted transaction will continue to be trade reported by members
and disseminated in accordance with existing rules.\13\ In addition,
the requirement that any ATS granted an exemption pursuant to proposed
Rule 6732 enter into a written agreement with each member that is a
``Party to a Transaction'' with respect to exempted trades, ensures
that reporting members are aware that the ATS has been granted a Rule
6732 exemption and that exempted trades on the ATS are subject to
different reporting requirements, specifically, that the reporting
member identify a party other than the ATS as its contra-party and
identify the ATS on which the trade had occurred in its TRACE reports.
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\13\ FINRA also is proposing a conforming change to Rule 9610 to
add proposed Rule 6732 to the list of rules pursuant to which FINRA
has exemptive authority.
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FINRA has filed the proposed rule change for immediate
effectiveness. The implementation date of the proposed rule change will
be July 18, 2016.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions
[[Page 79968]]
of Section 15A(b)(6) of the Act,\14\ 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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\14\ 15 U.S.C. 78o-3(b)(6).
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FINRA believes that the proposed rule change will simplify
compliance for certain ATSs and their member subscribers by permitting
subscribers to trade report with the party against which it will clear
the trade. The proposal also accommodates a broader range of ATS
models. FINRA also notes that public transparency with respect to
exempted trades will not be compromised because such transactions will
continue to be trade reported by members and disseminated in accordance
with existing rules.
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. Any ATS that meets the criteria
set forth in the proposed rule may apply for the exemption with respect
to eligible transactions occurring on its platform. In addition,
irrespective of an ATS's model or whether the ATS is granted an
exemption pursuant to this proposal, all ATSs that are a ``party to a
transaction'' must continue to pay transaction reporting fees with
respect to Rule 6732 exempted transactions. As stated above, any ATS
granted a Rule 6732 exemption would continue to be deemed a ``party''
to the transactions covered by the exemption, and would be required to
remit to FINRA a transaction reporting fee based on the fee schedule
set forth in Rule 7730(b)(1) for each exempted sell transaction
occurring through the ATS.
Economic Impact Assessment
Need for the Rule
As discussed above, an ATS is a party to a transaction in TRACE-
eligible securities occurring on that ATS. As such, an ATS is
responsible to report the transaction to FINRA as provided in Rule
6730, unless an exception or exemption applies.
FINRA recognizes that there are different business models for the
way an ATS may facilitate trading on its platform, and the functional
role of the ATS may differ in each of these models. For instance FINRA
is aware that some ATS's do not pass TRACE-eligible securities or funds
through their own accounts as part of an execution. In instances where
the functional activities of the ATS are more limited with respect to a
transaction, FINRA believes that the ATS, while still party to the
transaction, may benefit from a streamlined reporting regime without
reducing public transparency.
Economic Baseline
By FINRA rule today, all ATSs are parties to transactions in TRACE-
eligible securities occurring on the ATS and are subject to TRACE
reporting. Rule 6731 provides FINRA authority to exempt an ATS from
Rule 6730 TRACE transaction reporting requirements where an ATS meets
the conditions in Rule 6731 described above. Thus, an ATS that does not
meet the conditions of Rule 6731 is required to report transactions
occurring on the ATS to TRACE in accordance with FINRA rules.
Economic Impacts
FINRA estimates that only a small number of ATSs would be eligible
to seek the exemption based on staff understanding of their current
business models, although the proposed exemption would be available to
any current or future ATS that would meet the requirements. Member
subscribers who execute trades on an ATS that seeks and is granted the
proposed exemption also may be impacted. FINRA does not have a reliable
estimate for the number of transactions that might be eligible for the
exemption.
Benefits of the Rule
Any ATS that meets the qualifications proposed in this rule may
request exemption from FINRA. Where granted, the ATS would presumably
reduce its compliance costs by shifting from contemporaneous reporting
of transactions to TRACE in TRACE-eligible securities to periodic
reporting.
Costs of the Rule
An ATS that seeks and is granted an exemption under this proposed
rule may incur costs to modify its systems, and must update its
policies and procedures to reflect reporting consistent with the
periodic regime. Each ATS may determine independently whether or not it
seeks to obtain the exemption, and thus, it is likely that an ATS would
only seek this exemption where it was less costly than meeting its
current reporting requirements.
FINRA understands that a commenter to a related filing indicated
that transactions in TRACE-eligible securities occurring on some ATSs
are ``given up'' to the broker-dealer counterparties for TRACE
reporting.\15\ Notwithstanding this comment, the reporting obligations
to the ATS remain, so any costs to an ATS associated with this proposal
should be measured from the baseline of that obligation.
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\15\ See Securities Exchange Act Release No. 71341 (January 17,
2014), 79 FR 4213 at 4217 (January 24, 2014) (Order Approving File
No. SR-FINRA-2013-042).
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Where an ATS seeks and is granted the exemption, member subscribers
who transact through the ATS also may incur costs associated with
reporting the additional information to FINRA that identifies the ATS
where the trade occurred. These costs may include additional
programming and testing along with updating policies and procedures.
FINRA notes, however, that member subscribers may determine where to
seek executions and would not have to incur the related costs if they
choose to send orders elsewhere for execution.
Both member subscribers and ATSs may incur additional costs
associated with creating and maintaining a written agreement with
respect to the reporting of any trades for which the ATS is exempted
under the proposed rule.
Related Economic Impacts
FINRA also considered the potential impacts of the proposed rule on
investors and other parties that might rely on TRACE reporting. As
proposed, the rule would not negatively impact FINRA's ability to
monitor securities markets. The proposed rule would not substantively
reduce the information collected by FINRA on TRACE-eligible securities
transactions occurring on an ATS. Member subscribers maintain their
obligation to report transactions on the ATS to TRACE within the time
prescribed by FINRA rules. The additional information collected
pursuant to the exemption under the rule would enhance FINRA's ability
to identify all exempted trades occurring on an individual ATS.
Further, the exemption would not impact the quality and completeness of
the information made generally available through TRACE, since TRACE
reporting obligations continue to apply to the member subscribers
transacting on the ATS.
Alternatives Considered
The primary alternative considered was to continue to have ATS
[sic] with business models meeting the proposed exemptive criteria
continue to report as they do today. However, FINRA concluded that the
proposed exemption
[[Page 79969]]
is a reasonable approach that may simplify compliance for some members
without degrading the quality and completeness of information available
to FINRA and the public.
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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-
4(f)(6) thereunder.\17\
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\16\ 15 U.S.C. 78s(b)(3)(A).
\17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
FINRA has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or 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-2015-055 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File No. SR-FINRA-2015-055. 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-2015-055, and should be
submitted on or before January 13, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-32191 Filed 12-22-15; 8:45 am]
BILLING CODE 8011-01-P