[Federal Register Volume 83, Number 164 (Thursday, August 23, 2018)]
[Notices]
[Pages 42741-42743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18156]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83868; File No. SR-FINRA-2018-030]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
FINRA Rule 7730 (Trade Reporting and Compliance Engine (TRACE)) To
Remove Computer-to-Computer Interface as a Technological Option for
TRACE Reporting
August 17, 2018.
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 August 15, 2018, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by FINRA. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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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 Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 7730 to modify the
technological connectivity options available to members for reporting
transactions to TRACE.
The text of the proposed rule change is available on FINRA's
website 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA is proposing to amend Rule 7730 (Trade Reporting and
Compliance Engine (TRACE)) to remove Computer-to-Computer Interface
(``CTCI'') as a technological means of connectivity for use in
reporting transactions to TRACE.
Technology and connectivity options have evolved since the
inception of the TRACE system (at which time CTCI, rather than
Financial Information eXchange (``FIX''), was made available for TRACE
reporting purposes).\3\ FINRA has determined that it is now appropriate
to remove CTCI--a Nasdaq proprietary protocol--as a means of
connectivity. Accordingly, firms would be required to report
transactions to TRACE using one of the remaining currently available
options: (i) Web browser access; (ii) FIX line access; or (iii)
indirectly via third-party intermediaries (e.g., service bureaus).\4\
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\3\ See Securities Exchange Act Release No. 42201 (December 3,
1999), 64 FR 69305 (December 10, 1999) (Notice of Filing of File No.
SR-NASD-99-65).
\4\ See Rule 7730.
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FINRA notes that FIX--an industry standard protocol--is an
immediately available and viable alternative to CTCI that already is
widely used by members. Since adding FIX as a protocol for transaction
reporting to TRACE in 2011 for Securitized Products (and for corporates
and Agency Debt Securities in 2012), approximately two thirds of firms
with direct connections, and half of the service bureaus, have opted to
migrate from CTCI to FIX. In fact, the majority of members that report
trades to TRACE currently connect via FIX,\5\ and FINRA believes that
an increasing amount of firms and service bureaus will continue to
migrate to FIX.\6\ FINRA also believes that removing CTCI as a means of
connectivity will reduce operational overhead and risk for FINRA.
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\5\ Currently, 61 members have direct FIX connections for TRACE
reporting, 32 have direct CTCI connections, and 709 members have web
browser access (the 709 firms with web browser access also may have
CTCI or FIX access for connecting to TRACE). The top five members
that connect through CTCI for reporting transactions to TRACE
represent 63% of all TRACE reports submitted directly using a CTCI
connection. In addition, five service bureaus report to TRACE
through CTCI connections and five report through FIX connections.
The five service bureaus that use CTCI report transactions to TRACE
on behalf of 191 members in aggregate, with over 95% of these
transaction reports received from one service bureau. For all TRACE-
eligible securities, approximately 33% of all transaction reports
are received via CTCI, which consists of 23% submitted by members
with direct CTCI connections and 10% by service bureaus connected
via CTCI.
\6\ For example, members may report trades to the recently
approved second FINRA/Nasdaq Trade Reporting Facility via FIX but
firms will not have the option to report trades via CTCI. See
Securities Exchange Act Release No. 83082 (April 20, 2018), 83 FR
18379 (April 26, 2018) (Notice of Filing of File No. SR-FINRA-2018-
013).
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Accordingly, FINRA is proposing to amend Rule 7730 to remove CTCI
as a means of connectivity for members to report transactions to
TRACE.\7\ FINRA intends to provide ample time, until February 3, 2020,
to allow firms that still use CTCI as a means of connectivity to
migrate, and will permit members to migrate at any point throughout the
implementation period. During that timeframe, FINRA also will engage in
extensive outreach with the industry to assist in migration awareness
and efforts.\8\
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\7\ FINRA will be eliminating CTCI as a means of connectivity
for reporting to all FINRA trade reporting facilities.
\8\ In addition to general outreach (industry-wide calls and a
Technical Notice), FINRA will contact each individual firm that
directly reports to TRACE via CTCI by email and telephone to provide
information and assistance in connection with the migration.
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If the Commission approves the proposed rule change, the effective
date of the proposed rule change will be February 3, 2020.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\9\ 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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\9\ 15 U.S.C. 78o-3(b)(6).
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FINRA is proposing to amend Rule 7730 to remove CTCI as a means of
connectivity for members to report transactions to TRACE. FINRA does
not believe the proposed rule change will have a significant impact, as
a majority of members already use FIX as a means of connectivity to
report trades to TRACE, and FINRA believes that an increasing amount of
members and service providers are migrating to exclusive use of FIX.
FIX is an industry standard protocol that is an immediately available
and viable alternative for the minority of members who directly use
CTCI as a means of connectivity to report transactions to TRACE.
[[Page 42742]]
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.
Economic Impact Assessment
FINRA has undertaken an economic impact assessment, as set forth
below, to further analyze the regulatory need for the proposed rule
change, the economic baseline, the economic impact, and the
alternatives considered.
Regulatory Need
Rule 7730 provides that members may report transactions to TRACE
via CTCI protocol. Due to technological advances, FINRA is proposing to
discontinue supporting CTCI as means of connectivity for members to
report transactions. Therefore, FINRA is proposing to amend Rule 7730
to reflect this change.
Economic Baseline
The baseline for the proposed amendment is current Rule 7730, which
allows members to report to TRACE via (1) CTCI, (2) FIX, (3) web
browser, or (4) indirectly via a third party intermediary. Presently,
32 members directly report transactions to TRACE via CTCI and 61
members directly report transactions to TRACE via FIX. In addition,
five service bureaus report transactions to TRACE via FIX (on behalf of
25 members), and five service bureaus report transactions to TRACE via
CTCI (on behalf of 191 members).\10\ Firms reporting via either CTCI or
FIX are charged $25/month to do so. Firms that report via a web browser
are charged $20/month per user ID. For all TRACE-eligible securities,
approximately 33% of all transaction reports are received via CTCI,
which consists of 23% submitted by members with direct CTCI connections
and 10% by service bureaus connected via CTCI.
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\10\ See supra note 5.
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Economic Impact
The proposal would apply equally to all members who report
transactions to TRACE. However, there is no impact to firms that
currently report via FIX or a web browser. Only firms reporting via
CTCI would incur additional costs as a result of the proposed rule
change.
There are 223 members that use CTCI (either directly or indirectly)
for TRACE reporting purposes.\11\ However, the majority of these
members (191) are indirectly impacted--i.e., those who report through a
service bureau--since most of the work to migrate to the FIX protocol
will be performed by the service bureaus. Although the service bureaus
may choose to pass some or all of the cost of reprogramming on to the
member firms, the costs would be spread across these firms.
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\11\ At the time of this filing, 309 members report to TRACE via
CTCI or FIX (either directly or indirectly).
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The 32 members reporting directly via their own CTCI connection
would incur costs associated with reporting via a new method. These
members would face a tradeoff between greater upfront costs and on-
going efficiencies. The development of a compliant FIX submission
protocol would require up-front investment, but could provide cost-
saving efficiency over time.\12\ A firm that chooses not to replace
CTCI with FIX, but instead chooses to submit their trades via web
browser access, will require a more limited initial investment, but
relatively more on-going cost. Presumably, firms will choose a new
reporting method that minimizes their overall costs or maximizes their
efficiency. Anecdotally, FINRA understands that some firms are
contemplating discontinuing use of CTCI and migrating to FIX. For these
firms, however, the proposal may result in them incurring certain costs
sooner than planned.
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\12\ The programming costs that these firms incur would vary due
to a number of factors, including existing expertise.
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For FINRA, each protocol type requires maintenance and support, and
maintaining two protocols increases operational risk.\13\ There is
inherent risk associated with supporting any information technology
system, including risk of an operational failure. Since CTCI currently
is used to collect transaction information, an operational event could
negatively impact any market stakeholder that uses disseminated
transaction information. Thus, a benefit of this proposal would be to
eliminate risk associated with supporting CTCI. Since an operational
event could harm the integrity of the market (by resulting in
information asymmetry), this benefit should accrue to all market
stakeholders. Thus, it is FINRA's view that the benefits of the
amendment outweigh any associated cost.
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\13\ FINRA also should realize cost savings as a result of the
proposal, since it no longer would need to maintain a CTCI protocol.
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Alternatives Considered
FINRA considered maintaining the status quo and continuing to
support CTCI. However, given the decreased reliance on the protocol and
that the owner of the protocol does not intend to support it for its
new facility,\14\ FINRA determined that it is now appropriate to retire
the protocol for the purpose of reporting transactions to FINRA
facilities.
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\14\ See supra note 6.
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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-2018-030 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 Number SR-FINRA-2018-030. 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 website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule
[[Page 42743]]
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 website 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. Persons submitting comments are cautioned that we do not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-FINRA-2018-
030, and should be submitted on or before September 13, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18156 Filed 8-22-18; 8:45 am]
BILLING CODE 8011-01-P