[Federal Register Volume 82, Number 125 (Friday, June 30, 2017)]
[Notices]
[Pages 29956-29960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-13703]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81018; File No. SR-FINRA-2017-023]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of
Proposed Rule Change Relating to Reporting of Certain ATS Transactions
in U.S. Treasury Securities
June 26, 2017.
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 June 23, 2017, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``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 Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 6730 (Transaction Reporting)
to provide a temporary exception to permit member alternative trading
systems (``ATSs'') and member subscribers to report aggregate trade
information to TRACE for certain transactions in U.S. Treasury
Securities.
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,
[[Page 29957]]
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 to amend Rule 6730 to add new Supplementary
Material .06 (Temporary Exception for Aggregate Transaction Reporting
of U.S. Treasury Securities Executed in ATS Trading Sessions) to
provide members additional time to report individual transactions in
U.S. Treasury Securities, as required by Rule 6730 (Transaction
Reporting), that occur on member ATSs as part of a trading session, as
described below.
Background
FINRA Rule 6730 sets forth a member's trade reporting obligations
with regard to transactions in TRACE-Eligible Securities, which,
beginning July 10, 2017,\4\ will include U.S. Treasury Securities.\5\
Pursuant to Rule 6730, each FINRA member that is a ``Party to a
Transaction'' \6\ in a TRACE-Eligible Security is obligated to report
the transaction to TRACE within the prescribed period of time. The term
``Party to a Transaction'' means an introducing broker-dealer, if any,
an executing broker-dealer, or a customer.\7\ Thus, in a transaction in
a TRACE-Eligible Security executed through an ATS between members, each
member (and the ATS itself) is considered a Party to a Transaction and
is required to report the trade.\8\ Specifically, the ATS is required
to report two transactions to TRACE: (1) The purchase of the security
from one counterparty and (2) the sale of the security to the other
counterparty. In addition, each FINRA member counterparty is required
to report a buy or a sell, as applicable, identifying the ATS as the
counterparty to each trade.\9\
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\4\ See Securities Exchange Act Release No. 79116 (October 18,
2016), 81 FR 73167 (October 24, 2016) (Notice of Filing of Amendment
No. 1 and Order Granting Accelerated Approval of File No. SR-FINRA-
2016-027). See also Regulatory Notice 16-39 (October 2016).
\5\ Rule 6710(p) will define a ``U.S. Treasury Security'' as ``a
security, other than a savings bond, issued by the U.S. Department
of the Treasury to fund the operations of the federal government or
to retire such outstanding securities.'' The term ``U.S. Treasury
Security'' also includes separate principal and interest components
of a U.S. Treasury Security that has been separated pursuant to the
Separate Trading of Registered Interest and Principal of Securities
(``STRIPS'') program operated by the U.S. Department of Treasury.
See Rule 6710(p).
\6\ See Rule 6710(e).
\7\ See supra note 6.
\8\ See Question 7.4 in FINRA's Reporting of Corporate and
Agencies Debt Frequently Asked Questions: Who reports trades
executed through electronic trading systems that are themselves
broker-dealers? All FINRA members that are ``parties to a
transaction'' have a trade reporting obligation under TRACE Rules.
Where two FINRA members effect/execute a transaction through an
electronic trading system that is registered as a broker-dealer,
both members, as well as the electronic trading system would have a
trade reporting obligation. See Reporting of Corporate and Agencies
Debt Frequently Asked Questions, available at http://www.finra.org/industry/faq-reporting-corporate-and-agencies-debt-frequently-asked-questions-faq#7-4. See also Regulatory Notice 14-53 (November 2014).
\9\ Whether the ATS is involved in the clearance and settlement
of a transaction does not change the TRACE trade reporting
obligation for trades occurring through its system. Regulatory
Notice 14-53 (November 2014).
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FINRA understands that ATSs that permit subscribers to trade U.S.
Treasury Securities on their platforms may permit subscribers to
initiate a ``trading session,'' which is a discrete or timed order-
matching event during which one or more additional subscribers can
interact with the original order on the opposite side of the market or
add to the initial order on the same side of the market.\10\ Although
it is possible that some trading sessions involve a single transaction
between two counterparties like a typical trade, FINRA understands that
most trading sessions include multiple participants on one or both
sides of the market during the time period the trading session is open.
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\10\ Different members use varying nomenclature to describe
trading sessions. For example, one member ATS refers to these
sessions as ``workups'' or ``workup sessions.'' In addition, the
length of time a session remains open and other characteristics of
how a session is structured may change from member to member. As
used in the proposed rule change, the term ``trading session'' is
meant to capture all variations of such types of sessions that
member ATSs may use.
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For example, suppose Subscriber A initiates a trading session to
sell $25 million of a particular U.S. Treasury Security at a specific
price. In a typical crossing scenario involving an ATS, the ATS would
match the incoming sell order with a buy order from Subscriber B thus
executing some or all of the original order. In this scenario, under
TRACE rules, Subscriber A is required to report a sell to the ATS for
the amount crossed, and Subscriber B would report a purchase from the
ATS for that same amount.\11\ The ATS would report two trades: A
purchase from Subscriber A and a sell to Subscriber B. Under current
rules, all of the reports are required to reflect the same terms of the
trade and the same Time of Execution.\12\
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\11\ Examples assume that each subscriber is a FINRA member.
\12\ Under Rule 6710(d), the ``Time of Execution'' for a
transaction in any TRACE-Eligible Security means ``the time when the
Parties to a Transaction agree to all of the terms of the
transaction that are sufficient to calculate the dollar price of the
trade.''
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FINRA understands that trading sessions involving U.S. Treasury
Securities can, and often do, work in very different ways. Using the
above example, Subscriber A may initiate a trading session to sell $25
million in a particular U.S. Treasury Security at a specific price.
Subscriber B, however, may only wish to purchase $10 million. In this
case, although there will be a sell from Subscriber A to the ATS and a
subsequent sell from the ATS to Subscriber B (and offsetting trades for
the purchase from the ATS by Subscriber B and the purchase from
Subscriber A by the ATS), there may be further activity during the
trading session. To continue the example, after Subscriber B agrees to
purchase $10 million, Subscriber C agrees to purchase $15 million at
the same price (meaning that, at this point, Subscriber A has sold all
$25 million of the initial order). Subscriber D then joins the trading
session and offers to sell $10 million of the same U.S. Treasury
Security at the same price. Subscriber E purchases $5 million, and
Subscriber B decides to purchase an additional $5 million. If, after
the period of time defined by the ATS, no further interest is
indicated, the trading session closes.
Reporting Obligations Under Rule 6730
Using the above example, at the end of the trading session, the
individual trades are as follows:
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Amount (in
Trade No. Time Subscriber Buy/Sell millions)
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11:34:02.000 Subscriber A......... Sell................. $25
1................................. 11:34:03.155 Subscriber B......... Buy.................. 10
2................................. 11:34:03.483 Subscriber C......... Buy.................. 15
11:34:04.003 Subscriber D......... Sell................. 10
3................................. 11:34:05.002 Subscriber E......... Buy.................. 5
[[Page 29958]]
4................................. 11:34:05.877 Subscriber B......... Buy.................. 5
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11:34:07.877 Trading Session Closes
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FINRA understand that, under current practices, after the close of
the trading session an ATS will provide each subscriber with a single
trade message indicating the subscriber's aggregate activity during the
trading session (including, for example, an aggregate size and average
price), and that the execution time provided to a subscriber can vary
depending upon the convention used by the particular ATS. FINRA also
understands that, although information on the individual transactions
within the trading session is generally available on a real-time basis
to the subscribers during the trading session to track the status of
the order, this information is not included on the final trade message,
which FINRA understands currently is the message that would be used
systematically by the member ATS and its subscribers for transaction
reporting purposes.
Under Rule 6730, each individual trade that occurs during a trading
session is a separate transaction and, as such, must be reported
individually. For example, using the example above, at 11:34:03.155
(``Trade No. 1''), there is a trade agreed to between Subscribers A and
B and all of the terms of the trade that are sufficient to calculate
the dollar price of the trade are known at that time, including the
security, the price, and the parties to the trade (i.e., the Time of
Execution'').\13\ Thus, under current rules and guidance, FINRA would
expect the following trade reports for Trade No. 1:
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\13\ See supra note 12.
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Subscriber A reports a sell to the ATS for $10 million in
the security with a Time of Execution of 11:34:03.155.
Subscriber B reports a purchase from the ATS for $10
million in the security with a Time of Execution of 11:34:03.155.
The ATS submits two reports, a buy from Subscriber A and a
sell to Subscriber B for $10 million in the security, both with a Time
of Execution of 11:34:03.155.
The same analysis would apply for each of the other individual trades
that occurred during the trading session. Thus, under current TRACE
reporting rules, the following reports would be required by all Parties
to a Transaction with respect to the trades during the trading session
in the above example:
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Quantity (in Time of
Trade No. TRACE reports millions) execution
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1.......................................... Subscriber A sell to ATS........... $10 11:34:03.155
ATS buy from Subscriber A.......... 10 11:34:03.155
ATS sell to Subscriber B........... 10 11:34:03.155
Subscriber B buy from ATS.......... 10 11:34:03.155
2.......................................... Subscriber A sell to ATS........... 15 11:34:03.483
ATS buy from Subscriber A.......... 15 11:34:03.483
ATS sell to Subscriber C........... 15 11:34:03.483
Subscriber C buy from ATS.......... 15 11:34:03.483
3.......................................... Subscriber D sell to ATS........... 5 11:34:05.002
ATS buy from Subscriber D.......... 5 11:34:05.002
ATS sell to Subscriber E........... 5 11:34:05.002
Subscriber E buy from ATS.......... 5 11:34:05.002
4.......................................... Subscriber D sell to ATS........... 5 11:34:05.877
ATS buy from Subscriber D.......... 5 11:34:05.877
ATS sell to Subscriber B........... 5 11:34:05.877
Subscriber B buy from ATS.......... 5 11:34:05.877
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Proposed Temporary Relief
The proposed rule change will, until July 10, 2018, permit members
the flexibility to report trades that occurred in a U.S. Treasury
Security executed within discrete ATS trading sessions (sometimes
referred to as ``work-up sessions'') on an aggregate, rather than
individual, basis. The proposed rule change is intended to provide
members with additional time to complete systems changes necessary to
report each individual transaction in the trading session as required
by Rule 6730, as discussed below.
FINRA understands that certain ATSs that are active in the market
for U.S. Treasury Securities currently are set up to deliver aggregate
trading session transaction information to each subscriber that
participated in the trading session through a single trade message
generated at the conclusion of a trading session. The ATSs use this
final trade message for purposes of back office processes (which would
include generating trade reports) and believe their subscribers use the
final trade messages similarly. As a result, FINRA understands that
significant systems changes would be required by the ATSs to create and
generate the individual trade information within a trading session in a
form that could be integrated into the ATSs', as well as their
subscribers', back office processes to enable the reporting of
individual, rather than aggregate, trading session transaction
information to TRACE, and that these changes cannot be made by July 10,
2017. As a result, FINRA is proposing to provide a temporary exception
by adopting Supplementary Material .06 to permit members to report to
TRACE aggregate, rather than individual, transaction information
reflecting the aggregate size and average price of such transactions,
and to permit trade reports to use a Time of Execution communicated by
the ATS to each Party to a Transaction.\14\
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\14\ FINRA notes that, even where aggregation is not necessary
because only the ATS and two subscribers ultimately participated in
a trading session resulting in a single cross, the proposed rule
change permits members the flexibility to report a Time of Execution
that is communicated by the ATS to each party. Thus, even where the
trading session involves only one cross, member TRACE reports may
reflect a Time of Execution that is, for example, the beginning of
the trading session or the end of the trading session.
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[[Page 29959]]
FINRA believes it is appropriate to provide the proposed relief in
recognition of the fact that impacted members are unable to implement
necessary changes by the July 10, 2017 effective date for TRACE
reporting of transactions in U.S. Treasury Securities. FINRA believes
the proposal strikes an appropriate balance in that FINRA will continue
to receive transaction information for purchases and sales that occur
as part of an ATS trading session, albeit aggregated. A member ATS
availing itself of this exception must provide individual transaction
information for each trade in a U.S. Treasury Security occurring in a
trading session to FINRA upon request. In addition, FINRA notes that
transparency will not be impacted by the proposed temporary relief
because transaction information in U.S. Treasury Securities currently
is not subject to dissemination.
FINRA has filed the proposed rule change for immediate
effectiveness. The operative date of the proposed rule change will be
July 10, 2017 and it will sunset on July 10, 2018, which FINRA believes
will provide members with the additional time necessary to complete
necessary systems changes and result in a more orderly implementation
of the TRACE reporting requirements for Treasury securities.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\15\ 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. Based on discussions with multiple member ATSs, FINRA
believes that additional time is necessary to permit members to program
systems to comply with Rule 6730, which, beginning on July 10, 2017,
will require that members report to TRACE each individual transaction
in a U.S. Treasury Security.
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\15\ 15 U.S.C. 78o-3(b)(6).
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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.
The proposed rule change should benefit members whose trades are
executed on member ATSs as part of a trading session, as it provides
members with additional time to build or upgrade systems to enable
reporting of individual transactions in the trading section. While the
proposed rule change will temporarily lessen the requirements on ATSs
and their subscribers as compared to other market participants, FINRA
believes the proposed rule change is appropriate to allow sufficient
time to make the technological changes necessary to comply with the
rule and such accommodation will be limited in duration. Moreover,
FINRA retains the right to require a member ATS availing itself of this
exception to provide individual transaction information for each trade
in a U.S. Treasury Security occurring in a trading session upon
request.
The proposed temporary relief is not expected to undermine the
potential benefits of Rule 6730, as the transaction information
reflecting the aggregate size and average price of such transactions
should still assist the regulators to conduct monitoring and
surveillance of the U.S. Treasury Securities markets, in order to
detect potential disruptive trading practices and risks to market
stability.
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)(iii) of the Act \16\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\17\
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\16\ 15 U.S.C. 78s(b)(3)(A)(iii).
\17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
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.
The Commission has waived the five-day prefiling requirement in this
case.
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FINRA has asked the Commission to waive the 30-day operative delay
so that the proposal will become operative immediately upon filing.
FINRA represents that it only recently was made aware of the
significant technological changes to member systems that will be
necessary to comply with FINRA's requirements to report transactions in
U.S. Treasury Securities to TRACE. FINRA also represented that it was
informed by members that these systems changes cannot be completed by
July 10, 2017, the date on which the new reporting requirements come
into force. The proposed rule change appears to be a reasonable
accommodation for members who are affected by unforeseen difficulties
associated with systems reprogramming because it is of reasonably short
duration and FINRA will still be able to request full transaction
information from an ATS that benefits from the accommodation.
Therefore, to facilitate orderly application of the TRACE reporting
rules on July 10, 2017, the Commission believes that waiving the 30-day
operative delay is consistent with the protection of investors and the
public interest and designates the proposal operative upon filing.\18\
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\18\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) 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 Number SR-FINRA-2017-023 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange
[[Page 29960]]
Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2017-023. 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 the 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 Number SR-FINRA-2017-023 and should be
submitted on or before July 21, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-13703 Filed 6-29-17; 8:45 am]
BILLING CODE 8011-01-P