Document ID: SEC-2017-1082-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2017-06-26T04:00Z

[Federal Register Volume 82, Number 121 (Monday, June 26, 2017)]
[Notices]
[Pages 28917-28919]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-13230]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80975; File No. SR-FINRA-2017-018]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Implementation Date for Trade 
Modifiers When Reporting Transactions in U.S. Treasury Securities

June 20, 2017.
    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 June 12, 2017, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by FINRA. FINRA filed the 
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ 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\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 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 establish an implementation date for certain 
trade modifiers required on trade reports to the Transaction Reporting 
and Compliance Engine (``TRACE'') involving U.S. Treasury Securities. 
The proposed rule change does not make any changes to the text of FINRA 
rules.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On October 18, 2016, the Commission approved a proposed rule change 
to require FINRA members to report certain transactions in U.S. 
Treasury Securities to TRACE.\5\ The new rules included two new trade 
modifiers, which are described below, for use on certain types of 
trades in U.S. Treasury Securities reported to TRACE. On October 19, 
2016, FINRA announced that the reporting requirements would

[[Page 28918]]

be implemented beginning July 10, 2017; however, FINRA noted that, 
although the two new trade modifiers could be used by members when 
reporting trades beginning on July 10, 2017, FINRA would announce at a 
later time when the modifiers would be required.\6\ The current 
proposed rule change establishes February 5, 2018, as the 
implementation date for the two new modifiers.
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    \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) (``Original Filing''). The Original Filing stated that the 
implementation date for the new rules would be no later than 365 
days following Commission approval. FINRA is filing the current 
proposed rule change to extend the implementation date for the trade 
modifiers beyond the 365-day period set forth in the Original 
Filing.
    \6\ See Regulatory Notice 16-39 (October 2016).
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    The Original Filing amended the TRACE rules to require that 
transactions in U.S. Treasury Securities, as defined in Rule 6710, be 
reported to TRACE. To effectuate this requirement, the Original Filing 
amended the definition of ``TRACE-Eligible Security'' to include U.S. 
Treasury Securities and amended the definition of ``U.S. Treasury 
Security'' to exclude savings bonds. The term ``U.S. Treasury 
Securities'' therefore includes Treasury bills, notes, and bonds, as 
well as separate principal and interest components of a U.S. Treasury 
Security separated pursuant to the Separate Trading of Registered 
Interest and Principal of Securities (STRIPS) program operated by the 
Treasury Dept.\7\
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    \7\ The STRIPS program is a program operated by the Treasury 
Dept. under which eligible securities are authorized to be separated 
into principal and interest components and transferred separately. 
See 31 CFR 356.2; see generally 31 CFR 356.31 (providing details on 
how the STRIPS program works).
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    The Original Filing also included amendments to Rule 6730 to 
require the use of two new modifiers, when applicable, to reported 
transactions in U.S. Treasury Securities. When proposing the rule, 
FINRA noted that transactions in U.S. Treasury Securities that are 
executed as part of larger trading strategies can often be priced away 
from the current market for legitimate reasons.\8\ FINRA therefore 
adopted two new modifiers to require members to indicate that 
particular transactions are part of larger trading strategies.
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    \8\ See Securities Exchange Act Release No. 78359 (July 19, 
2016), 81 FR 48465, 48468 (July 25, 2016) (Notice of Filing of SR-
FINRA-2016-027).
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    First, the amendments require that members append a ``.B'' modifier 
to a trade report if the transaction being reported is part of a series 
of transactions where at least one of the transactions involves a 
futures contract (e.g., a ``basis'' trade). Second, the amendments 
require that members append a ``.S'' modifier to a trade report if the 
transaction being reported is part of a series of transactions and may 
not be priced based on the current market (e.g., a fixed price 
transaction in an ``on-the-run'' security as part of a transaction in 
an ``off-the-run'' security).
    FINRA noted that the use of these modifiers on TRACE trade reports 
involving U.S. Treasury Securities will allow FINRA to better 
understand and evaluate execution prices for specific transactions that 
may otherwise appear aberrant if, for example, they are significantly 
outside of the price range for that security at that time. Among other 
things, these modifiers should reduce the number of false positive 
results that could be generated through automated surveillance patterns 
that include the price as part of the pattern.
    As noted above, the new TRACE reporting requirements for U.S. 
Treasury Securities are scheduled to be implemented beginning July 10, 
2017,\9\ and the proposed rule change establishes February 5, 2018, as 
the implementation date for the two new modifiers.
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    \9\ See Regulatory Notice 16-39 (October 2016).
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    FINRA has filed the proposed rule change for immediate 
effectiveness. The implementation date will be February 5, 2018.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\10\ 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. Based on discussions with multiple FINRA members, 
FINRA believes that providing members with an additional six months 
after the implementation of the new TRACE requirements to report 
transactions in U.S. Treasury Securities to report the trade modifiers 
on applicable transactions will give them sufficient time to program 
systems to comply with the requirement.
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    \10\ 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.
    As noted in the Original Filing, the new modifiers may introduce 
additional complexity to the proposed reporting, as traders at FINRA-
member firms must apply the modifiers correctly and consistently to 
ensure meaningful data collection. FINRA noted that, in discussions 
with market participants, larger firms, for example, indicated that 
U.S. Treasury Securities are typically traded across many desks within 
the firm and this increases compliance costs because the new modifiers 
need to be identified by individual traders, as they are uniquely 
situated to know whether a specific trade is associated with a cross-
instrument strategy that would require the modifier.\11\ Some firms 
also suggested that it may be difficult for a trader to know at the 
time of a trade whether it is part of a cross-instrument strategy, thus 
increasing complexity and their regulatory risk. When proposing the 
requirements, FINRA noted that it planned to phase in the modifiers to 
simplify the immediate implementation of the proposed rule change and 
provide firms additional time to make the necessary changes to 
implement the new modifiers.\12\ The proposed rule change is consistent 
with these representations and provides firms with additional time 
after they begin reporting transactions in U.S. Treasury Securities to 
TRACE to implement the requirement to append modifiers if applicable.
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    \11\ See Securities Exchange Act Release No. 78359 (July 19, 
2016), 81 FR 48465, 48471 (July 25, 2016).
    \12\ See id. at 48469, n.25; see also Original Filing, supra 
note 5, at 73170.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    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\ In addition, Rule 19b-4(f)(6)(iii) requires a self-
regulatory organization to provide the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the 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. FINRA 
complied with this requirement.
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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

[[Page 28919]]

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 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-2017-018 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

    All submissions should refer to File Number SR-FINRA-2017-018. 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 Web site (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 Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2017-018, and should 
be submitted on or before July 17, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-13230 Filed 6-23-17; 8:45 am]
 BILLING CODE 8011-01-P