Document ID: SEC-2018-1272-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2018-08-15T04:00Z

[Federal Register Volume 83, Number 158 (Wednesday, August 15, 2018)]
[Notices]
[Pages 40601-40605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17496]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83815; File No. SR-FINRA-2018-023]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change Relating to ATS 
Reporting to TRACE of Transactions in U.S. Treasury Securities

August 9, 2018.

I. Introduction

    On June 5, 2018, 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 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend FINRA Rule 6730 to require certain 
alternative trading systems (``ATSs'') that report transactions in U.S. 
Treasury Securities to the Transaction Reporting and Compliance Engine 
(``TRACE'') to identify non-FINRA-member subscribers on those 
transaction reports. The proposed rule change was published for

[[Page 40602]]

comment in the Federal Register on June 13, 2018.\3\ The Commission 
received three comment letters regarding the proposed rule change.\4\ 
On July 26, 2018, the Commission extended until September 11, 2018, 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\ FINRA 
submitted a response to the comments on August 6, 2018.\6\ This order 
approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 83393 (June 7, 
2018), 83 FR 27643 (``Notice'').
    \4\ See letter to Secretary, Commission, from Stephen John 
Berger, Managing Director, Government and Regulatory Policy, 
Citadel, dated July 5, 2018 (``Citadel Letter''); letter to Robert 
W. Errett, Deputy Secretary, Commission, from Theodore Bragg, Chief 
Executive Officer, Execution Access, LLC, dated July 3, 2018 
(``Execution Access Letter''); letter to Brent J. Fields, Secretary, 
Commission, from Tyler Gellasch, Executive Director, The Healthy 
Markets Association, dated July 5, 2018 (``Healthy Markets 
Letter'').
    \5\ See Securities Exchange Act Release No. 83722 (July 26, 
2018), 83 FR 37544 (Aug. 1, 2018).
    \6\ See letter to Brent J. Fields, Secretary, Commission, from 
Racquel L. Russell, FINRA, dated August 6, 2018 (``FINRA 
Response'').
---------------------------------------------------------------------------

II. Description of Proposed Rule Change

    As described in further detail below, FINRA has proposed to add 
Supplementary Material .07 to existing FINRA Rule 6730 to require an 
ATS, as defined in Rule 300(a) of Regulation ATS,\7\ that effects 
transactions in U.S. Treasury Securities above a certain volume 
threshold to identify in its TRACE reports any counterparty to a 
Treasury transaction that is a non-FINRA member, using a market 
participant identifier (``MPID'') assigned by FINRA.\8\
---------------------------------------------------------------------------

    \7\ 17 CFR 242.300(a).
    \8\ FINRA Rule 6710(p) defines ``U.S. Treasury Security'' to 
mean ``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.''
---------------------------------------------------------------------------

A. Background

    On October 18, 2016, the Commission approved a proposed rule change 
that required FINRA members to report secondary market transactions in 
U.S. Treasury Securities to TRACE.\9\ FINRA members began reporting 
such transactions to TRACE on July 10, 2017.\10\ Information in TRACE 
regarding transactions in U.S. Treasury Securities is for regulatory 
purposes only and is not disseminated publicly.\11\
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 79116 (October 18, 
2016), 81 FR 73167 (October 24, 2016) (SR-FINRA-2016-027) (``2016 
Order'').
    \10\ See Notice, 83 FR at 27644; FINRA Regulatory Notice 16-39 
(October 2016).
    \11\ See FINRA Rule 6750(c)(5) (providing that FINRA will not 
disseminate information on a transaction in a U.S. Treasury 
Security). See also Notice, 83 FR at 27644.
---------------------------------------------------------------------------

    Under FINRA's rules, each FINRA member that is a Party to a 
Transaction in a TRACE-Eligible Security must report the 
transaction.\12\ A TRACE transaction report must include, among other 
things, the contra-party's identifier (i.e., MPID, customer, or a non-
member affiliate, as applicable).\13\ Transactions in U.S. Treasury 
Securities that occur on an ATS generally must be reported to TRACE by 
the counterparties, if they are FINRA members, and by the ATS 
itself.\14\ On a TRACE report, an ATS must identify a FINRA member 
counterparty by that counterparty's MPID.\15\ However, for a 
transaction involving a non-FINRA-member customer, the ATS must report 
the trade utilizing a generic customer identifier (``C'').\16\
---------------------------------------------------------------------------

    \12\ See FINRA Rule 6730(a). See also FINRA Rules 6710(a) and 
(e) (defining ``TRACE-Eligible Security'' and ``Party to a 
Transaction,'' respectively).
    \13\ See FINRA Rule 6730(c)(6).
    \14\ See Notice, 83 FR at 27644. See also FINRA's Regulatory 
Notice 14-53 (November 2014) (reminding ATSs and ATS subscribers of 
their reporting obligations in TRACE-Eligible Securities). While 
there are limited exceptions to the reporting requirement that are 
available when all the counterparties are FINRA members, these 
exceptions do not apply to transactions on an ATS involving a non-
FINRA member. See Notice, 83 FR at 27644, n. 6. FINRA has stated 
that, because each current ATS is a FINRA member, each ATS must 
report to TRACE all trading activity in TRACE-Eligible Securities 
that occurs on the ATS. See Notice, 83 FR at 27644.
    \15\ See Notice, 83 FR at 27644.
    \16\ See id. In addition, if the non-FINRA member is an 
affiliate, the ATS must report the trade as a generic trade with a 
non-member affiliate by denoting the counterparty with an ``A'' 
identifier. See FINRA Rule 6730(c)(6).
---------------------------------------------------------------------------

    A significant amount of trading activity in U.S. Treasury 
Securities on ATSs involves market participants that are not registered 
as broker-dealers or are not FINRA members, including hedge funds, 
banks, and principal trading firms (``PTFs'').\17\ The Department of 
the Treasury stated in its October 2017 Capital Markets Report that 
``[t]rading activity [in U.S. Treasury Securities] on the major 
electronic interdealer platforms is dominated by PTFs, . . . and 
collectively they account for over half of all transaction volumes in 
the interdealer broker segment of the [cash Treasury] market.'' \18\ 
The Capital Markets Report stated that ``a significant portion of PTF 
activity is anonymized in the TRACE data.'' \19\ The Treasury 
Department recommended requiring ATSs that facilitate transactions in 
U.S. Treasury Securities to identify customers in their trade 
reports.\20\ FINRA believes that requiring additional counterparty 
information in ATS TRACE reports for transactions in U.S. Treasury 
Securities would improve the effectiveness of FINRA's surveillance 
patterns and help FINRA to identify potentially manipulative activity, 
including wash sales and prearranged trading activity.\21\ FINRA 
further believes that such information would facilitate a better 
understanding of Treasury market structure and liquidity.\22\
---------------------------------------------------------------------------

    \17\ See Notice, 83 FR at 27644.
    \18\ Notice, 83 FR at 27644 (citing Treasury Department, A 
Financial System That Creates Economic Opportunities: Capital 
Markets, Report to President Donald J. Trump, Executive Order 13772 
on Core Principles for Regulating the United States Financial 
System, at 79-80 (October 2017) (``Capital Markets Report''), 
https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf).
    \19\ See id. (citing Capital Markets Report at 80).
    \20\ See id. (citing Capital Markets Report at 80).
    \21\ See id.
    \22\ See id.
---------------------------------------------------------------------------

B. Proposed Changes to ATS Reporting Obligations

    FINRA has proposed to add Supplementary Material .07 to existing 
FINRA Rule 6730 to require each ``covered ATS,'' as described below, to 
provide FINRA with a list of all of its non-FINRA-member subscribers 
and to obtain from FINRA an MPID for each such subscriber. Each covered 
ATS would then be required to identify a non-FINRA-member subscriber in 
the contra-party field of a TRACE report of a U.S. Treasury Security 
transaction using the MPID assigned by FINRA. A covered ATS would no 
longer be permitted to identify a contra-party to such a transaction 
using the ``customer'' or ``non-member affiliate'' identifier. Based on 
the list of non-FINRA-member subscribers that a covered ATS provides to 
FINRA, FINRA will assign each non-FINRA-member subscriber a unique MPID 
(to be used consistently across ATSs) and provide a list of those MPIDs 
to the ATS.\23\ This approach is designed to preserve the 
confidentiality of an individual ATS's subscriber list, because FINRA 
will provide a covered ATS with a list of MPIDs only for its own 
subscribers.\24\
---------------------------------------------------------------------------

    \23\ See proposed FINRA Rule 6730, Supplementary Material 
.07(a). See also Notice, 83 FR at 27645.
    \24\ See Notice, 83 FR at 27645.
---------------------------------------------------------------------------

    Proposed Supplementary Material .07(b) of FINRA Rule 6730 defines a 
``covered ATS'' as an ATS, as that term is defined in Rule 300 of 
Regulation

[[Page 40603]]

ATS, that executed transactions in U.S. Treasury Securities against 
non-FINRA-member subscribers of $10 billion or more in monthly par 
value, computed by aggregating buy and sell transactions, for any two 
months in the preceding calendar quarter.\25\ FINRA has stated that, 
based on a review of U.S. Treasury Security transaction data reported 
to FINRA during a sample period, six ATSs would currently be considered 
covered ATSs.\26\ According to FINRA, these ATSs currently account for 
over 99% of the trade reports submitted by ATSs to TRACE for 
transactions in U.S. Treasury Securities.\27\ FINRA believes that 
limiting the proposed counterparty identification requirement in this 
manner balances the burdens associated with complying with the proposed 
rule (i.e., providing FINRA a list of all non-FINRA-member subscribers, 
obtaining MPIDs, and using the assigned MPIDs in TRACE reporting) with 
the benefits sought to be achieved (i.e., obtaining additional 
granularity that will enhance the quality of U.S. Treasury Security 
transaction data).\28\ FINRA further believes that the proposal would 
improve the completeness of the information on U.S. Treasury Security 
transactions available to FINRA and the official sector, and that the 
absence of more detailed counterparty information from ATSs with 
activity levels below the proposed threshold would not materially 
affect the completeness of the audit trail.\29\
---------------------------------------------------------------------------

    \25\ FINRA stated that any member that meets the definition of 
``alternative trading system'' set forth in Rule 300(a) of 
Regulation ATS will be required to comply with the new counterparty 
reporting requirements, regardless of whether the member is excepted 
from the requirements applicable to ATSs provided in Rule 301(b) of 
Regulation ATS (e.g., the exception applicable if the ATS limits its 
securities activities to government securities). See Notice, 83 FR 
at 27644, n. 12 (citing 17 CFR 242.301(a)(4)(ii)(A)).
    \26\ See Notice, 83 FR at 27645, n. 13.
    \27\ See id.
    \28\ See Notice, 83 FR at 27645.
    \29\ See id. FINRA also noted that, if the proposal is approved, 
FINRA intends to monitor the continued appropriateness of the $10 
billion threshold, the impact of the exception on its audit trail, 
and potential negative impacts or changes in ATS or non-FINRA-member 
subscriber behavior. See id.
---------------------------------------------------------------------------

    FINRA believes that the proposed rule change would result in an 
improvement to the effectiveness of FINRA's surveillance patterns from 
the standpoint of greater granularity and thus more accurate pattern 
detection, including the increased ability to identify potentially 
manipulative activity.\30\ FINRA has stated that its ability to detect 
wash sales or prearranged trading activity would be improved if the 
audit trail included the identity of the non-FINRA-member counterparty 
rather than the generic customer indicator received today.\31\ The 
identity of the particular ATS subscriber allows the surveillance 
pattern to narrow down the potential universe of matching trades and 
thus more accurately detect instances of potential manipulation.\32\ 
FINRA concluded that the more granular detail that would be added to 
transaction reports by identifying non-FINRA-member counterparties 
would enhance FINRA's surveillance program for U.S. Treasury 
Securities.\33\
---------------------------------------------------------------------------

    \30\ See id., 83 FR at 27644.
    \31\ See id.
    \32\ See id.
    \33\ See id.
---------------------------------------------------------------------------

    FINRA has stated that it will announce the effective date of the 
proposed rule change in a Regulatory Notice to be published no later 
than 60 days following Commission approval of the proposal, and that 
the effective date will be no later than 180 days following publication 
of that Regulatory Notice.\34\ Covered ATSs will be required to submit 
a list of their non-FINRA-member subscribers to FINRA at least 60 days 
in advance of the effective date.\35\ An ATS that becomes a covered ATS 
in the future would be required to begin complying with the 
requirements of Supplementary Material .07 of FINRA Rule 6730 within 60 
calendar days of the end of the calendar quarter in which it becomes a 
covered ATS.\36\ This 60-day period is designed to provide sufficient 
time for a newly covered ATS to provide FINRA with a list of, and 
obtain MPIDs for, its non-FINRA-member subscribers, and perform any 
necessary programming changes.\37\ Once an ATS is deemed a covered ATS, 
it must continue complying with the new counterparty reporting 
requirements even if its volume of executed transactions in U.S. 
Treasury Securities against non-FINRA-member subscribers falls below 
the threshold.\38\
---------------------------------------------------------------------------

    \34\ See id., 83 FR at 27645.
    \35\ See id.
    \36\ See proposed FINRA Rule 6730, Supplementary Material 
.07(c).
    \37\ See Notice, 83 FR at 27645.
    \38\ See proposed FINRA Rule 6730, Supplementary Material 
.07(d).
---------------------------------------------------------------------------

III. Summary of Comments and FINRA's Response

    The Commission received three comment letters regarding the 
proposal.\39\ Two commenters strongly supported the proposal.\40\ One 
of these commenters noted that making more Treasury market data readily 
available to the official sector would improve general monitoring and 
surveillance capabilities, including those designed to detect 
prohibited trading practices and potential risks to market 
stability.\41\ Similarly, the second commenter noted that the absence 
of information regarding the identity of non-FINRA-member 
counterparties is ``a significant limitation for effective surveillance 
and oversight.'' \42\
---------------------------------------------------------------------------

    \39\ See supra note 4.
    \40\ See Citadel Letter; Healthy Markets Letter.
    \41\ See Citadel Letter at 1.
    \42\ Healthy Markets Letter at 3.
---------------------------------------------------------------------------

    The third commenter generally supported the goal of increased 
transparency in the U.S. Treasury market but did not think that the 
proposal ``is sufficient or even necessarily an appropriate means of 
facilitating transparency among non-FINRA member participants in the 
Treasury market.'' \43\ This commenter warned that the proposal ``may 
actually result in reduced transparency'' because it might cause non-
FINRA members to shift their trading in U.S. Treasury Securities ``from 
FINRA member firms to non-FINRA member and bank affiliates that have no 
reporting responsibilities.'' \44\ The commenter concluded that 
``Congress or the SEC should consider requiring PTFs to register as 
broker-dealers such that FINRA, in turn, may require them to centrally 
clear their transactions and report their transactions to TRACE. Until 
such a requirement exists, the problem of market opacity will 
persist.'' \45\
---------------------------------------------------------------------------

    \43\ Execution Access Letter at 2.
    \44\ Id. Another commenter agreed that banks should be subject 
to reporting requirements, but expressed the view that the 
``important effort'' represented by the proposal should not be 
delayed or limited pending action with respect to the establishment 
of reporting obligations for banks. See Heathy Markets at 3.
    \45\ Execution Access Letter at 3.
---------------------------------------------------------------------------

    In its response letter, FINRA acknowledged that reporting by non-
FINRA members would provide a more complete picture of Treasury market 
activity, but believes that the proposal represents an appropriate next 
step to improve the usefulness of the Treasury transaction data 
currently reported through TRACE, given the limits of its 
jurisdictional authority.\46\ FINRA further noted that the Department 
of the Treasury, the Commission, the Federal Reserve Bank of New York, 
and the CFTC have stated that they are assessing effective means to 
ensure the collection of data regarding Treasury cash securities market 
transactions is comprehensive and includes information from 
institutions that are

[[Page 40604]]

not FINRA members.\47\ FINRA also noted that the Federal Reserve Board 
has announced that it plans to collect data from banks for secondary 
market transactions in U.S. Treasury Securities and is discussing with 
FINRA whether TRACE could be leveraged to potentially serve as the 
Board's collection agent for the data.\48\
---------------------------------------------------------------------------

    \46\ See FINRA Response at 1-2.
    \47\ See id. at 2 (citing Joint Press Release, Department of the 
Treasury, et al., Statement Regarding Progress on the Review of the 
U.S. Treasury Market Structure since the July 2015 Joint Staff 
Report (August 2, 2016), https://www.sec.gov/news/pressrelease/2016-155.html; Joint Press Release, U.S. Department of the Treasury, et 
al., Statement on Trade Reporting in the U.S. Treasury Market (May 
16, 2016), https://www.sec.gov/news/pressrelease/2016-90.html).
    \48\ See id. at 2 (citing Press Release, Board of Governors of 
the Federal Reserve System (October 21, 2016), https://www.federalreserve.gov/newsevents/pressreleases/other20161021a.htm).
---------------------------------------------------------------------------

    Similarly, this commenter believed that ``ATS participants whose 
trades are presently reported to TRACE only as `customer' trades--
including banks, hedge funds, and PTFs--may choose to not become an ATS 
subscriber or refrain from trading on ATS's to maintain anonymity and 
avoid regulatory oversight.'' \49\ FINRA acknowledged that the proposal 
could result in a change in behavior by non-FINRA members, but 
reiterated its understanding, expressed in the Notice, that most 
trading in the Treasury cash market is electronic and that member firms 
and non-FINRA venues do not currently have the capability to facilitate 
the volume of orders and trades that FINRA-member ATSs can facilitate 
through electronic systems.\50\ Accordingly, FINRA believes that the 
proposal is designed to apply to the trading venues most likely not to 
see a shift in volume away to other venues.\51\ FINRA also reiterated 
that it would monitor activity in U.S. Treasury Securities with respect 
to the operation of the proposal.\52\
---------------------------------------------------------------------------

    \49\ Execution Access Letter at 2.
    \50\ See FINRA Response at 2.
    \51\ See id.
    \52\ See id. A second commenter who broadly supported the 
proposal also noted that the new counterparty reporting requirements 
``may lead to trading shifting to non-ATS or other venues'' and 
observed that ``it might be valuable to further expand the reporting 
obligations in the future.'' Healthy Markets Letter at 3.
---------------------------------------------------------------------------

    The commenter also argued that the proposal ``unfairly allocates to 
ATSs the significant operational costs and regulatory burdens of trade 
reporting'' \53\ and that ``ATS's will likely need to recoup these 
costs by passing them through to their customers.'' \54\ FINRA 
responded that it is sensitive to the need to balance the regulatory 
objectives of a proposal with the burdens and costs imposed on member 
firms, and sought to narrowly tailor the proposal by establishing a 
minimum volume threshold below which the identification requirements 
would not apply.\55\ FINRA also noted that, because firms currently 
must populate the counterparty field in their TRACE reports, the 
proposal will not require ATSs to undertake programming related to 
populating a new field, but rather will require them to use a FINRA-
assigned MPID in place of the current generic contra-party identifiers 
for ``customer'' or ``non-member affiliate.'' \56\ FINRA further noted 
that it intends to set an effective date for the proposal of 
approximately 180 days from the date of the Regulatory Notice 
announcing a Commission approval of the proposal, which is designed to 
provide ATSs with enough time to determine whether they are covered 
and, if so, to obtain MPIDs for non-FINRA-member subscribers and make 
any necessary programming changes.\57\
---------------------------------------------------------------------------

    \53\ Execution Access Letter at 2-3.
    \54\ Id. at 3.
    \55\ See FINRA Response at 3.
    \56\ See id.
    \57\ See id. In addition, an ATS that becomes a covered ATS in 
the future will have 60 calendar days from the end of the calendar 
quarter in which it becomes covered to begin complying with the 
requirements. See id.
---------------------------------------------------------------------------

    Finally, one of the commenters who broadly supported the proposal 
suggested that FINRA ultimately should require identification using the 
legal entity identifiers (``LEIs'') rather than MPIDs.\58\ FINRA 
responded that, at this time, MPIDs are the most appropriate identifier 
for TRACE reports because MPIDs are established and widely used by its 
members for purposes of reporting trade and counterparty information to 
FINRA.\59\
---------------------------------------------------------------------------

    \58\ See Healthy Markets Letter at 3-4.
    \59\ See FINRA Response at 4.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After carefully considering the proposal, the comments submitted, 
and FINRA's response to the comments, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities association.\60\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\61\ which requires, among other things, that FINRA's rules 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.
---------------------------------------------------------------------------

    \60\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \61\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The Commission called FINRA's 2016 proposal to expand TRACE 
reporting to include member transactions in U.S. Treasury Securities 
``an important first step in providing the official sector with more 
comprehensive data about the Treasury cash market.'' \62\ Currently, 
TRACE reports require specific identification only of FINRA member 
counterparties; non-FINRA-member counterparties are reported only as 
``C'' for customer or ``A'' if the counterparty is a non-member 
affiliate. FINRA has now proposed to require covered ATSs to 
specifically identify all non-FINRA-member counterparties in their 
TRACE reports of U.S. Treasury Security transactions. The Commission 
concurs with FINRA's assessment that ``the additional detail that would 
be added to transaction reports by identifying non-FINRA member 
counterparties would enhance FINRA's surveillance program for U.S. 
Treasury Securities.'' \63\ The Commission concludes, therefore, that 
expanding TRACE reporting of Treasury transactions in the manner 
described in the proposal is reasonably designed to help FINRA fulfill 
its mandate in Section 15A(b)(6) of the Act 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.
---------------------------------------------------------------------------

    \62\ 2016 Order, 81 FR at 73174.
    \63\ Notice, 83 FR at 27644.
---------------------------------------------------------------------------

    The Commission further believes that expanded reporting of 
counterparty identities in the manner described in the proposal will 
help to establish a more complete audit trail for transactions in U.S. 
Treasury Securities, thereby assisting regulators in detecting and 
deterring improper trading activity. More complete information 
regarding counterparty identity also will provide the official sector 
with a better understanding of the structure and characteristics of the 
U.S. Treasury cash market. The Commission notes that the proposal is 
consistent with the Treasury Department's recommendation in the Capital 
Markets Report that FINRA members that facilitate transactions in U.S. 
Treasury Securities be required to identify customers in their reports 
of transactions in U.S. Treasury Securities.\64\
---------------------------------------------------------------------------

    \64\ See supra note 18 and accompanying text.
---------------------------------------------------------------------------

    The Commission acknowledges the concerns of one commenter who 
argued that the proposal ``does not do enough to achieve full 
transparency in the Treasury Market and may actually result in reduced 
transparency'' and that some non-FINRA-member market participants

[[Page 40605]]

might elect not to trade on covered ATSs ``to maintain anonymity and 
avoid regulatory oversight.'' \65\ The Commission believes, 
nevertheless, that this comment does not preclude approval of the 
proposal at this time. Although some Treasury transactions will 
continue to be outside the scope of the new requirements, the new 
counterparty information reported by covered ATSs should greatly 
enhance surveillance capabilities and provide additional insights into 
the Treasury cash market. The Commission notes that other public sector 
authorities have expressed their intention to continue to assess 
effective means to ensure that reported data regarding the Treasury 
cash market is comprehensive and includes information from institutions 
that are not FINRA members.\66\ Furthermore, although theoretically 
possible, it might not be practical for non-FINRA members to shift 
their trading activity away from covered ATSs if covered ATSs continue 
to serve as significant pools of liquidity for U.S. Treasury 
Securities. The Commission notes that FINRA ``intends to monitor . . . 
for any potential negative impacts or changes in ATS or non-member 
subscriber behavior.'' \67\
---------------------------------------------------------------------------

    \65\ Execution Access Letter at 2.
    \66\ See supra notes 47-48 and accompanying text.
    \67\ Notice, 83 FR at 27645.
---------------------------------------------------------------------------

    The Commission believes that the proposal is reasonably designed to 
minimize burdens on ATSs while still fulfilling the important policy 
objectives discussed above. The new non-FINRA-member identification 
requirements will apply only to ATSs that exceed the $10 billion 
threshold. These ATS currently account for the vast majority of ATS 
transaction reports for transactions in U.S. Treasury Securities 
against non-FINRA members.\68\ Furthermore, the proposal does not 
appear likely to require covered ATSs to undertake significant 
programming work because new reporting fields will not be necessary. 
All ATSs that report to TRACE already utilize fields for counterparty 
identifiers and are familiar with the use of MPIDs for FINRA member 
counterparties. For Treasury transactions on covered ATSs, the proposal 
eliminates use of the generic ``C'' and ``A'' identifiers and instead 
requires the ATS to populate the counterparty identifier field with an 
MPID in all cases, regardless of whether a particular counterparty is a 
FINRA member. Under the new rule, FINRA will assign MPIDs to all non-
FINRA-member subscribers of covered ATSs who engage in Treasury 
transactions without employing a de minimis cut-off. The Commission 
believes that this is a reasonable means of simplifying compliance with 
the rule because covered ATSs will not have to analyze the transaction 
volume of non-FINRA-member subscribers to ascertain whether any of them 
become subject to or subsequently fall outside the scope of the rule. 
In addition, an ATS that reaches the $10 billion threshold will remain 
a covered ATS even if its volume of executed transactions in U.S. 
Treasury Securities subsequently falls below the $10 billion 
threshold.\69\ The Commission believes that this will simplify 
compliance with the new rule because an ATS will not be required to 
continue monitoring its volume of executions in U.S. Treasury 
Securities against non-FINRA-member subscribers once it has reached the 
$10 billion threshold. Finally, the Commission notes that the new rule 
will impose duties only on covered ATSs and not on any of their 
subscribers.
---------------------------------------------------------------------------

    \68\ FINRA stated that, based on a review of TRACE data over a 
sample period, only six ATSs that accounted for 99% of trade reports 
exceeded the proposed threshold. See Notice, 83 FR at 27645, at n. 
13.
    \69\ See FINRA Rule 6730, Supplementary Material .07(d).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(5) of the Act,\70\ the Commission 
consulted with and considered the views of the Treasury Department in 
determining to approve the proposed rule change. The Treasury 
Department supports FINRA's proposal to require covered ATSs to 
identify non-FINRA-member counterparties in their TRACE reports of 
Treasury transactions.\71\ Pursuant to Section 19(b)(6) of the Act,\72\ 
the Commission has considered the sufficiency and appropriateness of 
existing laws and rules applicable to government securities brokers, 
government securities dealers, and their associated persons in 
approving the proposal. As discussed above, ATSs currently report 
Treasury transactions using generic identifiers that do not 
specifically identify non-FINRA-member counterparties. By requiring 
covered ATSs to identify non-FINRA-member counterparties in their TRACE 
reports of Treasury transactions, the new rule will enhance FINRA's 
surveillance program for U.S. Treasury Securities and provide the 
official sector with important additional information concerning 
activity in the U.S. Treasury cash market.
---------------------------------------------------------------------------

    \70\ 15 U.S.C. 78s(b)(5) (providing that the Commission ``shall 
consult with and consider the views of the Secretary of the Treasury 
prior to approving a proposed rule filed by a registered securities 
association that primarily concerns conduct related to transactions 
in government securities, except where the Commission determines 
that an emergency exists requiring expeditious or summary action and 
publishes its reasons therefor'').
    \71\ Telephone conversation with Treasury Department staff and 
Brett Redfearn, Director, Division of Trading and Markets, et al., 
on August 3, 2018.
    \72\ 15 U.S.C. 78s(b)(6).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\73\ that the proposed rule change (SR-FINRA-2018-023) is approved.
---------------------------------------------------------------------------

    \73\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\74\
---------------------------------------------------------------------------

    \74\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-17496 Filed 8-14-18; 8:45 am]
 BILLING CODE 8011-01-P