[Federal Register Volume 84, Number 33 (Tuesday, February 19, 2019)]
[Notices]
[Pages 4868-4871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-02609]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85112; File No. SR-FINRA-2019-002]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Provide Temporary Relief To Permit Member
Alternative Trading Systems (ATSs) and ATS Subscribers Additional
Flexibility in Transitioning To Disaggregated Reporting for Certain
Transactions in U.S. Treasury Securities
February 12, 2019.
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 January 28, 2019, 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
[[Page 4869]]
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 permit member alternative trading systems
(ATSs) and ATS subscribers additional flexibility in transitioning to
disaggregated reporting by April 12, 2019 for certain transactions in
U.S. Treasury Securities.
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
Statutory Basis for, the Proposed Rule Change
1. Purpose
Beginning on July 10, 2017, amendments to FINRA Rule 6730 took
effect that required members to report transactions in U.S. Treasury
Securities \4\ to TRACE.\5\ In advance of the effective date, FINRA
engaged in extensive discussions with members regarding U.S. Treasury
Security reporting and, as part of those conversations, understood that
certain member ATSs and their member subscribers would not be ready to
report accurately U.S. Treasury Securities to TRACE in circumstances
where trades are executed in matching sessions known as ``trading'' or
``workup'' sessions. A trading session generally 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.\6\ In the
context of trading sessions, FINRA understood that ATSs typically
provided each subscriber a trade message at the end of the session that
aggregated each subscriber's activity during the session (including,
for example, an aggregate size and average price). FINRA also
understood that these aggregated trade messages were used
systematically for TRACE reporting both by the ATS and its member
subscribers. As a result, ATSs and ATS subscribers would be required to
make systems changes to comply with Rule 6730, which requires all
members to report trades individually.
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\4\ Rule 6710(p) defines 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).
\5\ 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).
\6\ For detailed descriptions of trading sessions and trade
reporting in the context of trading sessions, see Securities
Exchange Act Release No. 81018 (June 26, 2017), 82 FR 29956 (June
30, 2017) (Notice of Filing and Immediate Effectiveness of File No.
SR-FINRA-2017-023) (``Original Filing'').
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In light of these concerns regarding readiness prior to the
effective date of the U.S. Treasury Security reporting requirement,
FINRA filed a proposed rule change to, on a temporary basis, provide an
exception to permit ATSs and ATS subscribers to aggregate transactions
that occurred during a trading session.\7\ Specifically, FINRA adopted
Supplementary Material .06 (Temporary Exception for Aggregate
Transaction Reporting of U.S. Treasury Securities Executed in ATS
Trading Sessions) to permit members to report aggregate transaction
information reflecting the aggregate size and average price of such
transactions, and to permit trade reports to use a Time of Execution
\8\ communicated by the ATS to each Party to a Transaction \9\ (the
``Aggregation Exception''). The Aggregation Exception was intended to
provide members with additional time to complete the systems changes
necessary to accurately report each individual transaction in a U.S.
Treasury Security executed in a trading session, as required by Rule
6730, and was scheduled to sunset on July 10, 2018.
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\7\ See Original Filing.
\8\ Rule 6710(d) provides, among other things, that the ``Time
of Execution'' for a transaction in a 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.
\9\ Rule 6710(e) defines ``Party to a Transaction'' as an
introducing broker-dealer, if any, an executing broker-dealer, or a
customer. ``Customer'' includes a broker-dealer that is not a FINRA
member.
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On April 16, 2018, prior to the expiration of the relief provided
by the Aggregation Exception and in response to continued readiness
concerns expressed by members regarding the substantial systems changes
necessary to disaggregate transaction reporting for trades executed in
ATS trading sessions, FINRA extended the Aggregation Exception for an
additional nine months, until April 12, 2019.\10\ As stated in the
Extension Filing, FINRA understood from discussions with multiple
member ATSs that are active in the market for U.S. Treasury Securities
that the systems changes necessary to comply with Rule 6730 required
substantial development and testing to complete and that, further, the
systems changes required by subscriber members also are significant and
could not be completed by July 10, 2018. FINRA also noted that, while
we understood that member ATSs had begun the development work necessary
to report individual execution information, additional time was
necessary (including to develop an additional data feed to deliver
execution level information to subscribers and vendors), and that
member subscribers required additional time to update their systems to
consume the new execution information to be provided by the ATSs and to
systematically incorporate this information in their TRACE reporting to
FINRA. The Extension Filing provided that the Aggregation Exception
would continue until April 12, 2019. In the Extension Filing, FINRA
also stated that necessary testing of new required functionality should
commence well in advance of the extended deadline of April 12, 2019,
but at a minimum, no later than January 12, 2019.
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\10\ See Securities Exchange Act Release No. 83098 (April 24,
2018), 83 FR 18866 (April 30, 2018) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2018-014) (``Extension Filing'').
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Since the effectiveness of the Extension Filing, FINRA has
continued to engage in conversations with member ATSs and ATS
subscribers to remind them of the April 12, 2019 date and to remain
updated on industry efforts towards readiness. In this context, FINRA
has become aware of scenarios where members, as part of their
transition efforts, are reporting on a partially disaggregated basis.
For example, some members have made systems changes to phase out work-
up sessions and are reporting many of the
[[Page 4870]]
trades executed on the ATS on an individual basis, but are not yet able
to transition fully to disaggregated trade reporting (for example,
continue to aggregate reporting in instances where a single ATS
subscriber matches against multiple ATS subscriber counterparties in a
trade). FINRA believes this type of interim approach is beneficial,
provides improved audit trail information and is an effective way to
transition to disaggregated reporting, but notes that it does not fall
squarely within the scope of the relief provided by Rule 6730.06
because the trading no longer is occurring in the context of a trading
session. However, FINRA believes this type of partial disaggregation
should be a permissible transitional approach (until April 12, 2019)
and demonstrates positive efforts by ATSs and their member subscribers
to meet the April 12, 2019 date.
In recognition of the fact that ATSs may take a variety of
approaches towards full disaggregation of TRACE trade reports for
transactions in U.S. Treasury Securities, FINRA is filing the instant
rule change to provide member ATSs and ATS subscribers with an
appropriate degree of flexibility as they transition. Specifically,
member ATSs and affected member subscribers temporarily are permitted
to submit reports to TRACE that reflect the aggregate size of two or
more orders or transactions executed on an ATS that is transitioning
away or recently transitioned from matching orders in trading sessions,
consistent with the trade messages generated by the ATS and used for
TRACE reporting by the ATS and its subscribers, until April 12, 2019.
Thus, for example, where an ATS sends confirmation messages that
aggregate the quantity of trades when a single ATS subscriber matches
against multiple counterparties, the ATS and its subscribers may
continue to use the aggregated confirmation message (with the size,
price and Time of Execution used by the ATS's system for that message)
until April 12, 2019. However, FINRA stresses that ATSs and their
subscribers relying on this relief during the transition period (which
must end by April 12, 2019) may not submit reports to TRACE that are
less granular or accurate than that provided to date pursuant to the
Rule 6730.06 relief (i.e., interim reporting must be incrementally
better).\11\ The purpose of this relief is temporarily to permit a
degree of aggregation in cases where the ATS no longer formally uses
workup sessions, not to permit a degradation in the accuracy of the
information reported to TRACE. As a condition of this relief, ATSs must
provide to FINRA upon request individual transaction information for
each trade in a U.S. Treasury Security. Finally, FINRA reminds member
ATSs and subscribers that their TRACE trade reporting must be fully
disaggregated by April 12, 2019.
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\11\ The relief provided by the instant filing is only available
in connection with trades on an ATS where the ATS has recently
relied on Rule 6730.06 in connection with the aggregation of
transactions in U.S. Treasury Securities executed in trading
sessions, and is not available to members for TRACE reporting in any
other context.
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FINRA has filed the proposed rule change for immediate
effectiveness and has requested that the Commission waive the 30-day
operative delay. If the Commission waives the 30-day operative delay,
the operative date of the proposed rule change will be the date of
filing and it will sunset on April 12, 2019.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\12\ 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. The proposed rule change is designed to provide
members an appropriate degree of flexibility in TRACE reporting for
U.S. Treasury Securities on a temporary basis as they work towards
fully disaggregated reporting by April 12, 2019. FINRA notes that
reports received pursuant to this relief may not be less granular or
accurate than that provided to date in reliance on the relief provided
by Rule 6730.06. Therefore, the instant proposal does not degrade the
quality of the information reported to TRACE. 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 public dissemination.
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\12\ 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. FINRA believes the proposed
rule change is appropriate to provide members with flexibility as they
make the technological changes necessary to comply with Rule 6730 and
such accommodation will be limited in duration. Moreover, FINRA retains
the right to require a member ATS availing itself of this relief to
provide individual transaction information for each trade in a U.S.
Treasury Security upon request.
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 \13\ and Rule 19b-
4(f)(6) thereunder.\14\
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 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 pre-filing notice requirement
in this case.
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FINRA has asked the Commission to waive the 30-day operative delay
so that the proposal may become operative immediately upon filing. The
Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest
because such action will provide members a reasonable degree of
flexibility in TRACE reporting for U.S. Treasury Securities on a
temporary basis until fully disaggregated reporting is required by
April 12, 2019. The proposed rule change will permit a degree of
aggregation of reported trade information in cases where an ATS no
longer formally uses workup sessions in the trading of U.S. Treasury
Securities, but the proposal will not permit degradation of the
accuracy of the information reported to TRACE. In other words, an ATS
that is required to report transactions in U.S. Treasury Securities may
not, under this proposed rule change, submit reports to TRACE that are
less granular or accurate than that provided to date pursuant to the
Rule 6730.06 relief. In addition, the Commission notes that
transparency in the U.S. Treasury market will not be impacted by the
proposal because transaction information in U.S. Treasury
[[Page 4871]]
Securities is not disseminated publicly. For these reasons, the
Commission hereby waives the 30-day operative delay requirement and
designates the proposed rule change as operative upon filing.\15\
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\15\ For purposes only of waiving the 30-day operative delay,
the Commission also has 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 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 change 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-2019-002 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-2019-002. 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 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-2019-002 and should be submitted
on or before March 12, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Eduardo Aleman,
Deputy Secretary.
[FR Doc. 2019-02609 Filed 2-15-19; 8:45 am]
BILLING CODE 8011-01-P