[Federal Register Volume 89, Number 82 (Friday, April 26, 2024)]
[Notices]
[Pages 32475-32480]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-08946]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100006; File No. SR-FINRA-2024-004]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove a Proposed Rule Change To Amend FINRA Rule 6730
(Transaction Reporting) To Reduce the 15-Minute TRACE Reporting
Timeframe to One Minute
April 22, 2024.
I. Introduction
On January 11, 2024, 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 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend FINRA Rule 6730 to
reduce the 15-minute reporting timeframe for transactions reported to
FINRA's Trade Reporting and Compliance Engine (``TRACE'') system to one
minute, with exceptions for FINRA member firms with de minimis
reporting activity and for manual trades. The proposed rule change was
published for comment in the Federal Register on January 25, 2024.\3\
The Commission received comments in response to the proposal.\4\ On
February 29, 2024, the Commission extended until April 24, 2024, the
time period within which to approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to disapprove the proposed rule change.\5\ This order
institutes proceedings pursuant to Section 19(b)(2)(B) of the Exchange
Act \6\ to determine whether to approve or disapprove 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. 99404 (January 19,
2024), 89 FR 5034 (January 25, 2024) (``Notice'').
\4\ Comments received on the proposed rule change are available
at: https://www.sec.gov/comments/sr-finra-2024-004/srfinra2024004.htm.
\5\ See Securities Exchange Act Release No. 99640 (February 29,
2024), 89 FR 16042 (March 6, 2024).
\6\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change
As described in more detail in the Notice, FINRA rules currently
specify the applicable outer-limit reporting timeframe for different
types of TRACE-Eligible Securities.\7\ Most transactions in corporate
bonds, agency debt securities,\8\ asset-backed securities (``ABS''),\9\
and agency pass-through mortgage-backed securities (``MBS'') traded to-
be-announced (``TBA'') for good delivery (``GD'') \10\ must be reported
within 15 minutes.\11\ The 15-
[[Page 32476]]
minute reporting timeframe has been in place for corporate bonds since
2005 \12\ and was implemented later for agency debt (2010),\13\ ABS
(2015),\14\ and MBS TBA GD (2013).\15\ In 2015, the Commission approved
FINRA rule amendments generally requiring firms to report transactions
in these TRACE-Eligible Securities as soon as practicable but no later
than 15 minutes from the time of execution,\16\ and FINRA publicly
disseminates information on these transactions immediately upon
receipt. According to FINRA, 82.9 percent of trades in the TRACE-
Eligible Securities that are currently subject to the 15-minute outer-
limit reporting timeframe are reported within one minute of
execution.\17\
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\7\ ``TRACE-Eligible Security'' means a debt security that is
United States (``U.S.'') dollar-denominated and is: (1) issued by a
U.S. or foreign private issuer, and, if a ``restricted security'' as
defined in Rule 144(a)(3) under the Securities Act of 1933
(``Securities Act''), sold pursuant to Securities Act Rule 144A; (2)
issued or guaranteed by an Agency as defined in Rule 6710(k) or a
Government-Sponsored Enterprise as defined in Rule 6710(n); (3) a
U.S. Treasury Security as defined in Rule 6710(p); or (4) a Foreign
Sovereign Debt Security as defined in Rule 6710(kk). ``TRACE-
Eligible Security'' does not include a debt security that is a Money
Market Instrument as defined in Rule 6710(o). See Rule 6710(a).
\8\ ``Agency Debt Security'' means a debt security (i) issued or
guaranteed by an Agency as defined in Rule 6710(k); (ii) issued or
guaranteed by a Government-Sponsored Enterprise as defined in Rule
6710(n); or (iii) issued by a trust or other entity that was
established or sponsored by a Government-Sponsored Enterprise for
the purpose of issuing debt securities, where such enterprise
provides collateral to the trust or other entity or retains a
material net economic interest in the reference tranches associated
with the securities issued by the trust or other entity. The term
excludes a U.S. Treasury Security as defined in Rule 6710(p) and a
Securitized Product as defined in Rule 6710(m), where an Agency or a
Government-Sponsored Enterprise is the Securitizer as defined in
Rule 6710(s) (or similar person), or the guarantor of the
Securitized Product. See Rule 6710(l).
\9\ ``Asset-Backed Security'' means a type of Securitized
Product where the Asset-Backed Security is collateralized by any
type of financial asset, such as a consumer or student loan, a
lease, or a secured or unsecured receivable, and excludes: (i) a
Securitized Product that is backed by residential or commercial
mortgage loans, mortgage-backed securities, or other financial
assets derivative of mortgage-backed securities; (ii) an SBA-Backed
ABS as defined in Rule 6710(bb) traded To Be Announced as defined in
Rule 6710(u) or in a Specified Pool Transaction as defined in Rule
6710(x); and (iii) a collateralized debt obligation. See Rule
6710(cc).
\10\ ``Agency Pass-Through Mortgage-Backed Security'' means a
type of Securitized Product issued in conformity with a program of
an Agency as defined in Rule 6710(k) or a Government-Sponsored
Enterprise (``GSE'') as defined in Rule 6710(n), for which the
timely payment of principal and interest is guaranteed by the Agency
or GSE, representing ownership interest in a pool (or pools) of
mortgage loans structured to ``pass through'' the principal and
interest payments to the holders of the security on a pro rata
basis. See Rule 6710(v). ``To Be Announced'' means a transaction in
an Agency Pass-Through Mortgage-Backed Security or an SBA-Backed ABS
as defined in Rule 6710(bb) where the parties agree that the seller
will deliver to the buyer a pool or pool(s) of a specified face
amount and meeting certain other criteria but the specific pool or
pool(s) to be delivered at settlement is not specified at the Time
of Execution, and includes TBA transactions ``for good delivery''
and TBA transactions ``not for good delivery'' (``NGD''). See Rule
6710(u).
\11\ See Rule 6730(a). However, a ``List or Fixed Offering Price
Transaction,'' as defined in Rule 6710(q), and a ``Takedown
Transaction,'' as defined in Rule 6710(r) are required to be
reported to TRACE by the next business day (T+1). See Rule
6730(a)(2).
\12\ See Securities Exchange Act Release No. 49845 (June 14,
2004), 69 FR 35088 (June 23, 2004) (Order Approving File No. SR-
NASD-2004-057); see also Notice to Members 04-51 (July 2004).
\13\ See Securities Exchange Act Release No. 60726 (September
28, 2009), 74 FR 50991 (October 2, 2009) (Order Approving File No.
SR-FINRA-2009-010); see also Regulatory Notice 09-57 (September
2009).
\14\ See Securities Exchange Act Release No. 71607 (February 24,
2014), 79 FR 11481 (February 28, 2014) (Order Approving File No. SR-
FINRA-2013-046); see also Regulatory Notice 14-34 (August 2014).
\15\ See Securities Exchange Act Release No. 66829 (April 18,
2012), 77 FR 24748 (April 25, 2012) (Order Approving File No. SR-
FINRA-2012-020); see also Regulatory Notice 12-26 (May 2012).
\16\ See Securities Exchange Act Release No. 75782 (August 28,
2015), 80 FR 53375 (September 3, 2015) (Order Approving File No. SR-
FINRA 2015-025).
\17\ See Notice at Table 1.
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According to FINRA, since the implementation of TRACE, fixed income
markets have changed dramatically, including a significant increase in
the use of electronic trading platforms or other electronic
communication protocols to facilitate the execution of transactions. In
light of these advances and consistent with FINRA's goals of increasing
transparency and improving access to timely transaction data, FINRA is
proposing updates to modernize the reporting timeframes and provide
timelier transparency.
A. One-Minute Reporting
FINRA is proposing amendments to Rule 6730 to reduce the reporting
timeframe for securities currently subject to the 15-minute reporting
outer limit to one minute, with exceptions for FINRA member firms with
de minimis reporting activity and for manual trades. FINRA would
continue to make information on the transactions publicly available
immediately upon receipt of the trade reports.
Under existing Rule 6730(a)(1), transactions in corporate bonds,
agency debt, ABS, and MBS TBA GD generally must be reported as soon as
practicable, but no later than within 15 minutes of execution.\18\
Specifically, transactions executed on a business day at or after
12:00:00 a.m. ET through 7:59:59 a.m. ET must be reported the same day
no later than 15 minutes after the TRACE system opens. Transactions
executed on a business day at or after 8:00:00 a.m. ET through 6:29:59
p.m. ET must be reported no later than within 15 minutes of the Time of
Execution,\19\ except for transactions executed on a business day less
than 15 minutes before 6:30:00 p.m. ET, which must be reported no later
than 15 minutes after the TRACE system opens the next day (and, if
reported on T+1, designated ``as/of'' with the date of execution).
Finally, transactions executed on a business day at or after 6:30:00
p.m. ET through 11:59:59 p.m. ET, or trades executed on a Saturday, a
Sunday, a federal or religious holiday, or other day on which the TRACE
system is not open at any time during that day, must be reported on the
next business day no later than 15 minutes after the TRACE system opens
(and must be designated ``as/of'' and include the date of execution).
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\18\ See supra notes 12-16.
\19\ Under Rule 6710(d), the ``Time of Execution'' generally
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. For transactions involving TRACE-Eligible
Securities that are trading ``when issued'' on a yield basis, the
``Time of Execution'' is when the yield for the transaction has been
agreed to by the parties to the transaction.
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Amended Rule 6730(a)(1) would provide that transactions must be
reported as soon as practicable, but no later than within one minute of
the Time of Execution. Amended Rule 6730(a)(1)(B) would require that a
transaction executed on a business day at or after 8:00:00 a.m. ET
through 6:29:59 p.m. ET must be reported as soon as practicable, but no
later than one minute from the Time of Execution, except that, a
transaction executed on a business day less than one minute before
6:30:00 p.m. ET, must be reported no later than 15 minutes after the
TRACE system opens the next business day (T+1) (and, if reported on
T+1, designated ``as/of'' with the date of execution). Any trades
executed on a business day prior to the open of the TRACE system, on a
business day at or after 6:30:00 p.m. ET through 11:59:59 p.m. ET, or
on a Saturday, a Sunday, a federal or religious holiday or other day on
which the TRACE system is not open at any time during that day would
continue to be reportable as soon as practicable on the next business
day (T+1), but no later than within 15 minutes after the TRACE system
opens (and must be designated ``as/of,'' as appropriate, and include
the date of execution).
B. Exceptions From One-Minute Reporting
FINRA is proposing two exceptions from the one-minute reporting
timeframe for: (1) FINRA member firms with ``limited trading activity''
in the TRACE-Eligible Securities that are subject to one-minute
reporting; and (2) manual trades.\20\
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\20\ FINRA is also proposing a conforming amendment to
Supplementary Material .03 to refer to Rule 6730 generally rather
than ``paragraph (a)'' to reflect that members reporting pursuant to
one of the exceptions in new Supplementary Material .08 and .09 are
still required to report their trades ``as soon as practicable.''
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1. Exception for FINRA Members With ``Limited Trading Activity''
New Supplementary Material .08 would provide an exception to the
one-minute reporting timeframe for FINRA members with ``limited trading
activity.'' A FINRA member with ``limited trading activity'' would be
defined as one that, during one of the prior two calendar years,
reported to TRACE fewer than 4,000 transactions in the TRACE-Eligible
Securities that are subject to paragraphs (a)(1)(A) through (a)(1)(D)
of Rule 6730 (i.e., corporate bonds, agency debt, ABS and MBS TBA GD),
including any manual trades. Supplementary Material .08(b) would
require FINRA members relying on the exception to confirm annually
their qualification for the exception.\21\ As outlined in Supplementary
Material .08(c), qualifying FINRA members would be required to report
these trades as soon as practicable, but no later than within 15
minutes of the Time of Execution.\22\
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\21\ Evidence of this confirmation should be retained as part of
the member's books and records. However, members eligible for the
exception would not need to take other affirmative steps to have
their trade reports processed pursuant to the exception's 15-minute
reporting timeframe, such as submitting a certification of
eligibility to FINRA or adding a modifier or indicator to their
trade reports.
\22\ However, a trade executed outside of TRACE system hours,
less than 15 minutes before 6:30 p.m. ET, or on a Saturday, Sunday,
federal or religious holiday, or other day on which the TRACE system
is not open at any time during that day, would need to be reported
as soon as practicable, but no later than within 15 minutes after
the TRACE system opens the next business day (T+1).
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FINRA members exceeding the 4,000-trade threshold for each of two
consecutive calendar years would need to comply with the one-minute
reporting requirements of paragraphs
[[Page 32477]]
(a)(1)(A) through (a)(1)(D) of amended Rule 6730 beginning 90 days
after the firm no longer meets the criteria for the exception (i.e.,
beginning 90 days after January 1 of the next calendar year). If a
FINRA member's reporting activity subsequently dropped below the 4,000-
trade threshold, the member would again be eligible for the
exception.\23\
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\23\ For example, a member that reported 3,000 trades in the
relevant TRACE-Eligible Securities to TRACE in 2022 and then 4,150
trades in 2023 would continue to be eligible for the exception in
2024; however, if the member then reported 4,100 trades in 2024, the
member would be required to comply with the one-minute reporting
requirements starting 90 days after January 1, 2025 (with January 1
being day one of 90). If the member proceeded to report 3,500 trades
in 2025, the member would once again be eligible for the exception
from one-minute reporting for 2026 under the two-year lookback.
FINRA believes the two-year lookback period for eligibility for the
exception will accommodate fluctuations in trading activity that may
be due to unusual market-wide events or unique client demands.
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2. Manual Trades Exception
New Supplementary Material .09 would provide an exception for
manual trades that are not electronic from end to end. Where a trade
qualifies for the manual trades exception, a 15-minute outer limit
would apply for the first year following implementation; a 10-minute
outer limit would apply for the second year; and a five-minute outer
limit would apply thereafter.
The manual trades exception would apply to ``transactions that are
manually executed'' or where a ``[FINRA] member must manually enter any
of the trade details or information necessary for reporting the trade
through the TRAQS website or into a system that facilitates trade
reporting to TRACE.'' \24\ A trade that requires manual intervention at
any point to complete the trade execution or reporting process would
qualify. FINRA provided the following non-exhaustive list of situations
in which trades would be considered to have a manual component:
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\24\ See Supplementary Material .09(a).
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where a FINRA member executes a trade \25\ by manual or
hybrid means, such as by telephone, email, or through a chat/messaging
function,\26\ and subsequently must manually enter into a system that
facilitates trade reporting all or some of the information required to
book the trade and report it to TRACE;
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\25\ As noted above, for purposes of Rule 6730, the reporting
timeframe is measured from the Time of Execution as defined by Rule
6710(d), which generally refers to the time that the parties have
agreed to all of the terms of the transaction sufficient to
calculate the dollar price of the trade (or yield, in the case of
when-issued securities priced to a spread).
\26\ FINRA reminds members of their obligation to retain these
electronic communications as part of their books and records,
consistent with FINRA and Commission recordkeeping requirements.
See, e.g., Notice to Members 03-33 (July 2003).
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where allocations to individual accounts must be manually
input in connection with a trade by a dually-registered broker-dealer/
investment adviser;
where an electronic trade is subject to manual review for
risk management or regulatory compliance purposes and, as part of or
following the review, the trade must be manually approved, amended, or
released before the trade is reported to TRACE (e.g., a firm's risk
management procedures require a secondary approver for trades over a
certain threshold; a firm's best execution procedures require manually
checking another market to confirm that a better price is not available
to the customer);
where a FINRA member trades a bond for the first time and
additional manual steps are necessary to set the bond up in the firm's
systems to book and report the trade (e.g., entering the CUSIP number
and associated bond data into the firm's system); and
where a FINRA member agrees to trade a basket of
securities at a single price and manual action is required to calculate
the price of component securities in the basket or to book and report
the trade in component securities to TRACE.
According to FINRA, the above examples are illustrative of the
types of circumstances in which, due to the manual nature of components
of the trade execution or reporting process, reporting a transaction
within one minute of the Time of Execution may be unfeasible, even
where a FINRA member makes reasonable efforts to report the trade as
soon as practicable (as required). FINRA also would assess FINRA
members' trade reporting in connection with manual trades to determine
whether the five-minute trade reporting timeframe (to become applicable
after two years) is appropriate, and would be prepared to adjust, as
necessary.
FINRA would review use of the manual trades exception for abuse.
FINRA members would not, in any case, be allowed to purposely delay the
execution or reporting of a transaction by handling any aspect of a
trade manually or introducing manual steps following the Time of
Execution. Additionally, considering the overarching obligation to
report trades as soon as practicable, FINRA members would be encouraged
to consider the types of transactions in which they regularly engage
and whether they can reasonably reduce the time between a trade's Time
of Execution and its reporting, and more generally must make a good
faith effort to report their trades as soon as practicable.
Under amended Rule 6730(d)(4), any FINRA member that executes or
reports a trade manually would be required to append a manual trade
indicator to the trade report. The indicator must be included in any
manual trade, regardless of whether the FINRA member reports outside of
the one-minute timeframe in reliance on the manual trades exception.
Application of the indicator would give FINRA greater insight into
manual trading and the use of the exception. The indicator would not be
included in publicly disseminated TRACE data.
Finally, FINRA is proposing to amend Rule 6730(f) to provide that a
pattern or practice of late reporting may be considered conduct
inconsistent with high standards of commercial honor and just and
equitable principles of trade, in violation of Rule 2010, absent
``reasonable justification'' (in addition to the rule's existing
reference to ``exceptional circumstances'').\27\ Recurring issues in
the systems of a FINRA member firm or its vendor would not be
considered a reasonable justification or exceptional circumstance that
excuses a pattern or practice of late trade reporting.\28\
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\27\ See, e.g., Rule 6623 describing ``exceptional
circumstances'' as instances of system failure by a member or
service bureau, or unusual market conditions, such as extreme
volatility in a security, or in the market as a whole.
\28\ See, e.g., FINRA Trade Reporting Frequently Asked
Questions, Q206.21, available at https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq.
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III. Summary of Comments
The Commission received comments on the proposed rule change.\29\
Commenters generally address the one-minute reporting timeframe, the
exceptions to the timeframe (both in general and specifically
discussing the manual trades and de minimis exceptions), the gradual
five-minute decreases in the manual trades exception, consistent
application of reporting requirements, the proposed implementation
period, and the proposed rule's consistency with the Exchange Act.
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\29\ See supra note 4.
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Several commenters support the proposal to shorten the 15-minute
TRACE reporting timeframe to one minute and its aim of increasing
transparency in fixed income markets.\30\
[[Page 32478]]
Some commenters support increasing price transparency in general but
caution restraint and the need for broad exceptions, citing the
potential for reduced liquidity and execution quality.\31\ Some
commenters oppose one minute reporting, questioning the feasibility and
cost of compliance due to technical limitations and the prevalence of
manual processes.\32\
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\30\ See, e.g., Letter to Vanessa Countryman, Secretary,
Commission, from Tyler Gellasch, President and CEO, Healthy Markets
Association (February 15, 2024) (``HMA Letter'') at 7; Letter to
Vanessa Countryman, Secretary, Commission, from Stephen John Berger,
Managing Director, Global Head of Government and Regulatory Policy,
Citadel (February 15, 2024) (``Citadel Letter'') at 1; Letter to
Vanessa Countryman, Secretary, Commission, from Joanna Mallers,
Executive Director, FIA Principal Traders Group (February 15, 2024)
(``FIA PTG Letter'') at 1; Letter to Vanessa Countryman, Secretary,
Commission, from Gerard O'Reilly, Co-Chief Executive Officer and Co-
Chief Investment Officer, Dimensional Fund Advisors LP and David A.
Plecha, Global Head of Fixed Income, Dimensional Fund Advisors LP
(February 15, 2024) (``Dimensional Letter'') at 1.
\31\ See, e.g., Letter to Vanessa Countryman, Secretary,
Commission, from Sarah A. Bessin, Deputy General Counsel, Investment
Company Institute and Kevin Ercoline, Assistant General Counsel,
Investment Company Institute (February 15, 2024) (``ICI Letter'') at
2; Letter to Vanessa Countryman, Secretary, Commission, from Michael
Decker, Senior Vice President, Bond Dealers of America (February 15,
2024) (``BDA Letter'') at 1; Letter to Secretary, Commission, from
Howard Meyerson, Managing Director, Financial Information Forum
(February 15, 2024) (``FIF Letter I'') at 2.
\32\ See, e.g., Letter to Vanessa Countryman, Secretary,
Commission, from Kenneth E. Bentsen, Jr., President and CEO,
Securities Industry and Financial Markets Association (February 15,
2024) (``SIFMA Letter'') at 2; Letter to Vanessa Countryman,
Secretary, Commission, from Christopher A. Iacovella, President &
Chief Executive Officer, American Securities Association (February
16, 2024) (``ASA Letter'') at 2; Letter to Vanessa Countryman,
Secretary, Commission, from Melissa P. Hoots, CEO/CCO, Falcon Square
Capital (February 15, 2024) (``Falcon Letter'') at 1-2; BDA Letter
at 2.
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Commenters express varied views on the proposed exceptions to one
minute reporting. Some commenters state the exceptions are essential to
the success of the rule.\33\ These commenters cite the burdens of
compliance with one-minute reporting on broker-dealers which rely on
manual processes.\34\ Others state that the exceptions are too narrow
\35\ or too broad.\36\ One commenter that states the exceptions are too
narrow also states that anything less than 15-minute reporting is
infeasible and cites the concern that compliance costs associated with
faster reporting could price small broker-dealers out of fixed income
markets.\37\ Two commenters that state the exceptions are too broad
suggest FINRA withdraw the proposal and instead require market
participants to report trades as soon as practicable but no later than
five minutes after execution.\38\ Another commenter that states the
exceptions are too broad also states that the exceptions ``create
significant risk to the efficacy and legal durability of the entire
rule.'' \39\ Finally, one commenter encourages FINRA to phase out both
exceptions completely over time, which it states would incentivize
firms to modernize their execution processes.\40\
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\33\ See, e.g., BDA Letter at 1; FIF Letter I at 2; SIFMA Letter
at 3-4.
\34\ See BDA Letter at 1; FIF Letter I at 2; SIFMA Letter at 3-
4.
\35\ See, e.g., ASA Letter at 1-2; Falcon Letter at 1.
\36\ See, e.g., Dimensional Letter at 2; HMA Letter at 13;
Citadel Letter at 2-3; FIA PTG Letter at 1-2.
\37\ See ASA Letter at 2; see also Falcon Letter at 4 (``[O]ur
fear is that the Filing will, over time, eliminate smaller fixed-
income brokers like Falcon Square and harm the small and medium-size
institutional clients that we serve due to an inability to
realistically further reduce the time it takes to conduct these
manual trade processes.'').
\38\ See Citadel at 4; FIA PTG at 4.
\39\ HMA Letter at 2.
\40\ See Dimensional Letter at 2.
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Several commenters specifically address the de minimis exception.
Some commenters state support for the de minimis exception.\41\ One of
these commenters states the de minimis exception is appropriately
tailored to protect minority, veteran, and women owned business
enterprises and small dealers from incurring significant costs.\42\ The
commenter also states the proposed two-year look back period will
prevent surprise application of the rule and allow newly impacted
broker-dealers time to comply.\43\ Some commenters state opposition to
the de minimis exception.\44\ One of these commenters supports the
logic behind the de minimis exception but states the proposed 4,000-
trade report threshold is too low and insufficiently justified.\45\
This commenter also requests FINRA expand the threshold or at minimum
provide more analysis to support its proposed limit.\46\ Another
commenter that opposes the de minimis exception states FINRA did not
sufficiently justify the need for the exception, nor its decisions to
set the exception's threshold at 4,000 annual trades and the lookback
period for applicability of the threshold at two years.\47\ This
commenter suggests the de minimis exception be abandoned or more
narrowly tailored.\48\
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\41\ See, e.g., SIFMA Letter at 9; BDA Letter at 2.
\42\ See SIFMA Letter at 9.
\43\ See id.
\44\ See, e.g., Falcon Letter at 2-4; HMA Letter at 9-11, 13.
\45\ See Falcon Letter at 2-3.
\46\ See id.
\47\ See HMA Letter at 11.
\48\ See id. at 9.
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Several commenters offer specific views about the manual trades
exception. Some commenters characterize the manual trades exception as
essential to ensuring compliance with the rule.\49\ Some commenters
state it would be more operationally feasible to flag trades subject to
one-minute reporting, rather than flagging all manual trades.\50\ One
commenter states that the exception should be expanded to include
certain fully electronic transactions that cannot feasibly be reported
within one minute, such as large post-trade allocations, batch-
processed trades, and trades involving multiple systems in trade
workflow.\51\ This commenter states that post-trade allocations are
especially difficult to report within one minute for broker-dealers
also registered as investment advisers.\52\ Another commenter states
support for FINRA's proposal to apply the exception to a scenario where
a firm has not previously traded a bond.\53\ This commenter also notes
a similar proposal by the Municipal Securities Rulemaking Board
(``MSRB'') that would apply to transactions in municipal securities and
states that FINRA and MSRB should harmonize the scope of the manual
trades exceptions.\54\ Finally, the commenter describes certain
scenarios that could be experienced by a reporting firm, questioning
whether the manual trades exception would apply, and suggesting a
dialogue with industry about such scenarios.\55\
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\49\ See BDA Letter at 1; FIF Letter I at 2; SIFMA Letter at 6.
\50\ See BDA Letter at 3; SIFMA Letter at 9.
\51\ See SIFMA Letter at 7-9.
\52\ See id. at 7; see also BDA Letter at 3-4; FIF Letter I at 3
(``FIF members request that FINRA and the MSRB provide an additional
exception for the scenario where an entity dually-registered as a
broker-dealer and investment adviser . . . is required to report a
large number of allocations for a block trade that the dual
registrant executes, allocates and reports automatically.'').
\53\ See FIF Letter I at 4.
\54\ See id. at 3.
\55\ See Letter to Secretary, Commission, from Howard Meyerson,
Managing Director, Financial Information Forum (February 26, 2024)
at 2-4; FIF Letter I at 3-4.
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Several comments address the gradual phase-in of five-minute
reporting written into the proposed rule for manual trades.\56\ One
commenter requests FINRA propose for notice and comment each time it
seeks to reduce the timeframe.\57\ The commenter also states FINRA must
consider that the proposed rule will be implemented
[[Page 32479]]
alongside other regulatory initiatives.\58\ Another commenter states
support for the phase-in approach, but asks FINRA to maintain close
communication with industry during the phase-in period and to remain
sensitive to operational roadblocks that market participants could
confront.\59\
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\56\ See, e.g., ICI Letter at 3-4; Falcon Letter at 4; SIFMA
Letter at 6; BDA Letter at 2-3.
\57\ See ICI Letter at 3; see also Falcon Letter at 4 (stating
that FINRA must produce supporting data before proposing a mandatory
phase-in period for the manual trades exception); SIFMA Letter at 6
(stating that FINRA should conduct an impact assessment before
reducing the reporting window for manual trades to five minutes).
\58\ See ICI Letter at 3-4.
\59\ See BDA at 3.
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Several commenters state the manual trades exception is too
broad.\60\ Two of these commenters question the lack of estimates in
the proposal of the number of transactions expected to qualify for the
manual trades exception.\61\ These commenters raise the concern that a
large proportion of the total number of trades currently reported
outside of one minute could fall within the proposed rule's manual
trades exception, undermining the goal of increasing post-trade
transparency.\62\ These commenters also raise concerns that firms could
build manual steps into the trade execution process as a means of
qualifying for the longer manual trades reporting window.\63\
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\60\ See, e.g., HMA Letter at 11-12; Citadel Letter at 2-3; FIA
PTG Letter at 2-4.
\61\ See Citadel Letter at 2-3; FIA PTG Letter at 2.
\62\ See Citadel Letter at 2-3; FIA PTG Letter at 2.
\63\ See Citadel Letter at 3; FIA PTG at 3; see also HMA Letter
at 12 (``[T]he Proposal . . . does not assuage our concerns that
firms may intentionally add a `manual' component to their post-
execution processes so as to avoid timely reporting (and
dissemination) of their trading activity.'').
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Several commenters raise concerns related to consistent application
of reporting requirements. One commenter describes the potential
negative consequences of applying different levels of post-trade
transparency depending on a trade's mode of execution.\64\ Another
commenter raises concern about different reporting requirements under
the proposal depending on a trade's time of execution.\65\ The
commenter states that under the current rule, trades executed when
TRACE is closed must be reported within 15 minutes of TRACE being open,
mirroring the deadline for reporting of trades executed when TRACE is
open.\66\ But, the commenter continues, under the proposal, trades
executed outside of the hours when TRACE is open will still be subject
to the deadline to report within 15 minutes of TRACE being open while
trades executed when TRACE is open will be subject to the new one
minute requirement.\67\ The commenter urges consistent reporting times
in this scenario.\68\
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\64\ See Citadel Letter at 1-3.
\65\ See HMA Letter at 8.
\66\ See id.
\67\ See id.
\68\ See HMA Letter at 9.
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Some comments address the proposed implementation period. Two
commenters request an implementation period of two years from the time
of adoption due to the high cost of compliance.\69\ Another commenter
states the cost of implementing the proposal is anticipated to be
especially high for smaller firms and suggests an implementation period
of at least 18 months from the date of FINRA and MSRB publishing
updated technical specifications and guidance.\70\ The commenter also
requests that FINRA provide an expanded free testing period of 90 days
instead of the standard free testing period of 30 days.\71\
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\69\ See SIFMA Letter at 10; BDA Letter at 4.
\70\ See FIF Letter I at 5.
\71\ See id. at 6-7.
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Several commenters question the proposed rule's consistency with
the Exchange Act. Two commenters state that FINRA failed to meet its
burden to demonstrate consistency with the Exchange Act, particularly
by failing to estimate the number of transactions captured by the
manual trades exception.\72\ These commenters also state that the
differing reporting windows for manual and electronic trades violate
the Exchange Act by discriminating based on the mode of execution and
unduly burdening competition.\73\
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\72\ See Citadel Letter at 3; FIA PTG Letter at 3; see also
Falcon Letter at 1 (stating that FINRA did not adequately justify
the exceptions to the rule).
\73\ See Citadel Letter at 3; FIA PTG Letter at 3-4.
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IV. Proceedings To Determine Whether To Approve or Disapprove the FINRA
Proposal and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2) of the Exchange Act \74\ to determine whether the proposed
rule change should be approved or disapproved. Institution of
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposal. Institution of proceedings does not
indicate, however, that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comments
on the proposed rule change.
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\74\ 15 U.S.C. 78s(b)(2).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act,\75\ the
Commission is providing notice of the grounds for disapproval under
consideration. The Commission is instituting proceedings to allow for
additional analysis of the proposed rule change's consistency with: (1)
Section 15A(b)(6) of the Exchange Act, which requires, among other
things, that FINRA rules promote just and equitable principles of
trade, foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, remove impediments to and
perfect the mechanism of a free and open market, and, in general,
protect investors and the public interest,\76\ and (2) Section
15A(b)(9) of the Exchange Act, which requires that FINRA rules not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.\77\ The Commission
asks that commenters address the sufficiency of FINRA's statements in
support of the proposal, which are set forth in the Notice, in addition
to any other comments they may wish to submit about the proposed rule
change. In particular, the Commission is instituting proceedings to
allow for additional analysis of, and input from commenters with
respect to, the scope and implementation of the proposed exceptions to
the one-minute reporting timeframe.
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\75\ 15 U.S.C. 78s(b)(2)(B).
\76\ 15 U.S.C. 78o-3(b)(6).
\77\ 15 U.S.C. 78o-3(b)(9).
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V. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their data, views, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposed rule change
is consistent with the Exchange Act and the rules and regulations
thereunder.
Although there do not appear to be any issues relevant to approval
or disapproval that would be facilitated by an oral presentation of
data, views, and arguments, the Commission will consider, pursuant to
Rule 19b-4 under the Exchange Act,\78\ any request for an opportunity
to make an oral presentation.\79\
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\78\ 17 CFR 240.19b-4.
\79\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Acts Amendments of 1975, Public Law 94-29 (Jun. 4, 1975),
grants to the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Acts Amendments of
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
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[[Page 32480]]
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by May 17, 2024. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
May 31, 2024.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-FINRA-2024-004 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-2024-004. 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 (https://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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of FINRA. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection. All submissions
should refer to file number SR-FINRA-2024-004 and should be submitted
on or before May 17, 2024. Rebuttal comments should be submitted by May
31, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\80\
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\80\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-08946 Filed 4-25-24; 8:45 am]
BILLING CODE 8011-01-P