[Federal Register Volume 81, Number 72 (Thursday, April 14, 2016)]
[Notices]
[Pages 22136-22138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08553]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77565; File No. SR-FINRA-2016-005]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change To Reduce the
Synchronization Tolerance for Computer Clocks That Are Used To Record
Events in NMS Securities and OTC Equity Securities
April 8, 2016.
I. Introduction
On February 9, 2016, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission'') pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to reduce the synchronization tolerance for
computer clocks that are used to record events in NMS Securities,
including standardized options and OTC Equity Securities. The proposed
rule change was published for comment in the Federal Register on
February 25, 2016.\3\ Four comments were received in response to the
proposal.\4\ This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 77196 (Feb. 19,
2016), 81 FR 9550 (``Notice'').
\4\ See Letter from Kermit Kubitz, dated March 18, 2016
(``Kubitz Letter''); Letter from Dave Lauer, Chairman, Healthy
Markets Association, to Brent J. Fields, Secretary, Commission,
dated March 17, 2016 (``Healthy Markets Letter); Letter from Manisha
Kimmel, Chief Regulatory Officer, Wealth Management, Thompson
Reuters, to Brent J. Fields, Secretary, Commission, dated March 17,
2015 (``Reuters Letter''); Letter from Mary Lou Von Kaenel, Managing
Director, Financial Information Forum, to Brent J. Fields,
Secretary, Commission, dated March 22, 2016 (``FIF Letter'').
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II. Description of the Proposed Rule Change
FINRA rules require that firms synchronize their business clocks in
conformity with procedures prescribed by FINRA. Specifically, FINRA
Rule 7430 requires that firms synchronize their business clocks that
are used for purposes of recording the date and time of any event that
must be recorded pursuant to the FINRA By-Laws or other FINRA rules
(i.e., the time a trade was executed or the time an order was received
or routed), with reference to a time source as designated by FINRA.
Current OATS technical specifications provide that all computer system
clocks and mechanical time stamping devices must be synchronized to
within one
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second of the NIST atomic clock.\5\ As stated in the Notice, FINRA
proposed to reduce the synchronization tolerance for members' computer
clocks that are used to record events in NMS securities,\6\ including
standardized options, and OTC Equity Securities.\7\
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\5\ Any time provider may be used for synchronization; however,
all clocks and time stamping devices must remain accurate to within
a one-second tolerance of the NIST clock. This tolerance includes
(1) the difference between the NIST standard and a time provider's
clock, (2) the transmission delay from the source and (3) the amount
of drift of the member firm's clock. The OATS technical
specifications further specify that computer system and mechanical
clocks must be synchronized every business day before market open to
ensure the accuracy of recorded order event timestamps.
\6\ See Rule 600(b)(46) of Regulation NMS; 17 CFR
242.600(b)(46).
\7\ See FINRA Rule 6420(f).
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Given the increasing speed of trading in today's automated markets,
FINRA believes the current one second tolerance is no longer
appropriate for computer system clocks recording events in NMS
securities and OTC Equity Securities, thus FINRA proposed to tighten
the synchronization requirement for computer system clocks that record
events in NMS securities and OTC Equity Securities by reducing the
drift tolerance from one second to 50 milliseconds.\8\
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\8\ The proposal does not change the current clock
synchronization requirement for members' mechanical time stamping
devices or computer clocks that are used to record events for
securities other than NMS securities or OTC Equity Securities.
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Under a combination of Rule 7430 and the OATS technical
specifications, the current one second synchronization standard applies
to the recording of the date and time of any event that must be
recorded under FINRA By-Laws or rules. In this proposal, FINRA proposed
to consolidate and codify the clock synchronization requirements in new
Rule 4590 for clarity and ease of reference. This consolidation
includes the current provision in the OATS technical specifications
that conveys guidance on recordkeeping to demonstrate compliance with
the synchronization standard, which would be codified without material
change as Supplementary Material .01 to Rule 4590.
FINRA proposed a phased implementation for the 50 millisecond
standard.\9\ FINRA would require firms with systems that capture time
in milliseconds to comply with the new 50 millisecond standard within
six months of the effective date; firms that do not have systems that
capture time in milliseconds must comply with the new standard within
18 months of the effective date.
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\9\ FINRA will announce the effective date of the proposed rule
change in a Regulatory Notice to be published no later than 90 days
following Commission approval. See Notice, 81 FR at 9553.
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III. Comment Letters
The Commission received four comment letters on the proposal.\10\
Healthy Markets supports the proposal noting: ``[s]ub-second clock
synchronization standards are an important element of market data and
audit trail reliability, and most market technology is already
synchronized at tolerances far more precise than the fifty milliseconds
proposed.'' Further, it states that ``[c]lock synchronization is a
critical component of today's market structure and is long overdue for
reform,'' and notes that ``[t]ighter synchronization standards would
enhance regulators' abilities to surveil for manipulative trading
practices.'' The commenter suggests that FINRA recognize the
differences between ``extremely time-sensitive trading firms and other
market participants'' by imposing a higher standard on the firms it
labels ``extremely time-sensitive.'' \11\ A second commenter urges
``higher time synchronization requirements than proposed.'' \12\ FIF
indicates that its members ``generally agree the 50 millisecond clock
synchronization requirement is appropriate for order and execution
events'' \13\ and acknowledges the ``compelling regulatory need for
fine precision time stamps on order and execution events,'' \14\
however, FIF expresses concern about FINRA proposing this rule given
the pending implementation of the CAT NMS Plan.\15\ The fourth
commenter requests that ``FINRA provide a list of impacted events to
ensure that firms are appropriately implementing reduced clock
synchronization across all relevant systems,'' \16\ and states that
nine months is a more reasonable timeframe within which to implement
the requirement.\17\
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\10\ See supra, note 4.
\11\ See Healthy Markets letter at 1-2.
\12\ See Kubitz letter.
\13\ See FIF letter at 1.
\14\ See FIF letter at 2.
\15\ See FIF letter at 1. FIF also raises concerns about
applying the synchronization requirement to post-trade activities.
See pages 1-3. The National Market System Plan governing the
Consolidated Audit Trail (``CAT NMS Plan'') was required by Rule 613
under the Act, which directed FINRA and the national securities
exchanges to submit a national market systems plan to govern the
creation, implementation, and maintenance of a consolidated audit
trail and central repository. See Securities Exchange Act Release
No. 67457 (July 17, 2012), 77 FR 45722 (August 1, 2012) (``Rule 613
Adopting Release''). The CAT NMS Plan submitted by the national
securities exchanges and FINRA on February 27, 2015 is available at
http://www.catnmsplan.com/.
\16\ See Thomson Reuters letter at 1.
\17\ See id. at 2.
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With respect to the scope of events covered under the proposal,
FINRA stated in the filing that through a combination of FINRA Rule
7430 and the OATS technical specifications, the current clock
synchronization standard already applies to the recording of the date
and time of any event that must be recorded under FINRA By-Laws or
rules.\18\ For instance, FINRA stated that Rule 7430 requires that
firms synchronize business clocks used for purposes of recording the
date and time of any event that must be recorded pursuant to the FINRA
By-Laws or other FINRA Rules (e.g., the time a trade was executed or
the time an order was received or routed), with reference to a time
source as designated by FINRA.\19\ Under existing OATS technical
specifications, all computer system clocks and mechanical stamping
devices must be synchronized to within one second of the NITS atomic
clock.\20\ FINRA stated that this proposal consolidates and codifies
its clock synchronization requirements, including the new 50
millisecond standard, in a new Rule 4590 for clarity and ease of
reference, so as to make clear that the requirements apply to the
recording of the date and time of any event that must be recorded under
FINRA By-Laws or rules.\21\
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\18\ See Notice, 81 FR at 9551.
\19\ See Notice, 81 FR at 9550.
\20\ See id.
\21\ See Notice, 81 FR at 9551.
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With respect to implementation, in the proposal FINRA stated that
it has accommodated such concerns in two ways. First, FINRA tailored
the proposal so that the 50 millisecond standard would apply only to
NMS Securities and OTC Equity Securities and not to fixed income
securities.\22\ Second, FINRA proposed a phased implementation schedule
for the 50 millisecond standard that allows firms that capture time in
milliseconds to comply with the 50 millisecond standard within six
months of the effective date of the rule and firms that do not capture
time in milliseconds to comply with the standard within 18 months of
the effective date of the rule.\23\
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\22\ See Notice, 81 FR at 9553.
\23\ See id.
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Finally, in the filing, FINRA stated that it believes that it is
appropriate and necessary to proceed with the 50 millisecond standard
now, rather than forego this proposal in light of the proposed CAT NMS
Plan, because the
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standard is an important element of market data reliability, and it may
be sometime before the clock-synchronization requirements of the CAT
NMS Plan take effect.\24\ FINRA stated that it relies on the accuracy
of market data to fulfill its regulatory obligations as a national
securities association.\25\ Accordingly, FINRA believes it has a
current need to tighten the clock synchronization standard for events
that must be recorded pursuant to the FINRA By-Laws or other FINRA
Rules.\26\
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\24\ In the Notice, FINRA also notes that the proposed clock
synchronization standard is consistent with the 50 millisecond clock
synchronization standard advanced by the CAT NMS Plan. See Notice,
81 FR at 9552.
\25\ See id.
\26\ Id.
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Two commenters suggested that FINRA should consider differentiating
between market participants when setting clock-synchronization
standards.\27\ For instance, one commenter stated that FINRA should
recognize differences between extremely time-sensitive trading firms
and other market participants, and suggested differentiating between
co-located broker-dealers and others.\28\ Similarly, one commenter
suggested that firms that co-locate their equipment to or otherwise
have access to an exchange datacenter should be held to tighter
requirements.\29\
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\27\ See Healthy Markets Letter and Kubitz Letter.
\28\ See Healthy Markets Letter.
\29\ See Kubitz Letter.
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In the filing, FINRA stated that audit trail integrity relies on
the ability to accurately sequence events for a given period of time,
including events generated by firms that do not engage in high-
frequency trading.\30\ FINRA believes it is important to apply the same
standard to all computer-related events, regardless of firm size or
activity type.\31\
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\30\ See Notice, 81 FR at 9552.
\31\ In the Notice, FINRA states that while it does not believe
it is practicable to adopt different standards for market
participants, as some commenters suggested, it is proposing to
provide less automated firms with more time to adjust their systems
to the new proposed standard. See Notice, 81 FR 9552 n.25.
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IV. Discussion and Commission Findings
After carefully considering the proposed rule change and the
comment letters, the Commission finds that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
association.\32\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Act, which
requires, among other things, that FINRA rules 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.\33\
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\32\ In approving the proposed rule change, the Commission has
also considered the rule change's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\33\ 21 U.S.C. 78o-3(b)(6).
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The Commission agrees with the commenter's observation that clock
synchronization is a ``critical component of today's market
structure.'' \34\ Tightening the clock synchronization requirement to
50 milliseconds will bolster FINRA's ability to meet its regulatory
obligations as a national securities association. As the Commission has
noted, time drift away from a universal, synchronized standard is an
important issue to address to enhance the integrity of audit trail
data.\35\ The Commission agrees with the commenter's observation that
updating clock synchronization standards is important to improve
transparency and enhance surveillance and enforcement capabilities.
Further, the Commission believes that FINRA's decision to have a
consistent clock synchronization standard across the industry at this
time is a reasonable decision. The Commission believes it is important
to pursue a 50 millisecond standard at this time so that FINRA can
compile more accurate audit trail data and conduct surveillance with
more precise time-sequenced data, rather than waiting for the issue to
be addressed by the CAT NMS Plan.\36\ Tighter synchronization is
critical to precisely reconstructing market events, as the commenter
noted,\37\ which will facilitate FINRA's efforts to detect and 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. In addition, the Commission notes that the
proposed rule change does not alter the events that are covered by the
clock synchronization requirement.
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\34\ See Healthy Markets letter at 1.
\35\ See Rule 613 Adopting Release, 77 FR at 45774. The
Commission notes that the FINRA proposal is consistent with the
clock-synchronization standard advanced by the CAT NMS Plan.
\36\ See supra, note 24.
\37\ See Healthy Markets letter at 1.
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For the reasons discussed above, the Commission finds that the
proposed rule change is consistent with Section 15A of the Act.
V. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the Act
\38\ that the proposed rule change (SR-FINRA-2016-005) be and hereby is
approved.
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\38\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08553 Filed 4-13-16; 8:45 am]
BILLING CODE 8011-01-P