Document ID: SEC-2019-0152-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2019-02-19T05:00Z

[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 rule-comments@sec.gov. 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