Document ID: SEC-2018-0654-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2018-04-26T04:00Z

[Federal Register Volume 83, Number 81 (Thursday, April 26, 2018)]
[Notices]
[Pages 18379-18384]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08731]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83082; File No. SR-FINRA-2018-013]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To 
Establish a Second Trade Reporting Facility in Conjunction With Nasdaq, 
Inc.

April 20, 2018.
    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 April 19, 2018, 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, 
II, and III below, which Items have been prepared by FINRA. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt rules relating to the establishment of 
a second Trade Reporting Facility or ``TRF'' to be operated in 
conjunction with Nasdaq, Inc. (``Nasdaq''). The second FINRA/Nasdaq 
Trade Reporting Facility (``FINRA/Nasdaq TRF Chicago'') would provide 
FINRA members with another mechanism for reporting over-the-counter 
(``OTC'') trades in NMS stocks and complying with FINRA's requirements 
with respect to back-up trade reporting arrangements. The FINRA/Nasdaq 
TRF Chicago would be governed by the rules applicable to the existing 
FINRA/Nasdaq Trade Reporting Facility (``FINRA/Nasdaq TRF Carteret''), 
which were subject to notice and comment and approved by the 
Commission.\3\
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    \3\ See Securities Exchange Act Release No. 54084 (June 30, 
2006), 71 FR 38935 (July 10, 2006) (order approving SR-NASD-2005-
087); and Securities Exchange Act Release No. 54798 (November 21, 
2006), 71 FR 69156 (November 29, 2006) (order approving SR-NASD-
2006-104).
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    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
    FINRA currently has three facilities that allow its members to 
report OTC

[[Page 18380]]

trades in NMS stocks, as defined in SEC Rule 600(b) of Regulation NMS. 
These are the FINRA/Nasdaq TRF, the FINRA/NYSE TRF, and the Alternative 
Display Facility (``ADF'') (collectively, the ``FINRA Facilities'').
    On January 20, 2016, FINRA published a Trade Reporting Notice (the 
``Trade Reporting Notice'' or the ``Notice'') with guidance on firms' 
OTC equity trade reporting obligations in the event of a systems issue 
during the trading day that prevents them from reporting OTC trades in 
NMS stocks in accordance with FINRA rules.\4\ As set forth in the 
Notice, a firm that routinely reports its OTC trades in NMS stocks to 
only one FINRA Facility (a firm's ``primary facility'') must establish 
and maintain connectivity and report to a second FINRA Facility (a 
firm's ``secondary facility'') if the firm intends to continue to 
support OTC trading as an executing broker while its primary facility 
is experiencing a widespread systems issue.\5\
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    \4\ See Trade Reporting Notice, January 20, 2016 (OTC Equity 
Trading and Reporting in the Event of Systems Issues).
    \5\ As discussed in the Notice, if a firm chooses not to have 
connectivity to a secondary facility, it should cease executing OTC 
trades altogether when its primary trade reporting facility is 
experiencing a widespread systems issue. In that instance, the firm 
could route orders for execution to an exchange or another FINRA 
member (i.e., a member with connectivity and the ability to report 
to a FINRA Facility that is operational).
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    The proposed FINRA/Nasdaq TRF Chicago would provide FINRA members 
with an additional mechanism to facilitate compliance with FINRA rules 
and the Notice. Specifically, a primary user of the FINRA/Nasdaq TRF 
Carteret could report on a back-up basis to the FINRA/Nasdaq TRF 
Chicago pursuant to the same rules, pricing, features and performance 
to which the firm is accustomed as a user of the FINRA/Nasdaq TRF 
Carteret--and vice versa.
    Like the FINRA/Nasdaq TRF Carteret, the FINRA/Nasdaq TRF Chicago 
will be a facility of FINRA, subject to regulation by FINRA and to 
FINRA's registration as a national securities association. FINRA 
members that match and/or execute orders internally or through 
proprietary systems may submit reports of these trades, with 
appropriate information and modifiers, to the FINRA/Nasdaq TRF Chicago, 
which will then submit them to the appropriate exclusive securities 
information processor (``SIP''). FINRA/Nasdaq TRF Chicago trade reports 
will be disseminated with a modifier indicating the source of the 
transactions that will distinguish them from transactions executed on 
an exchange or reported to other FINRA Facilities, including the FINRA/
Nasdaq TRF Carteret. The FINRA/Nasdaq TRF Chicago will provide FINRA 
with a real-time copy of each trade report for regulatory review 
purposes. At the option of the participant, the FINRA/Nasdaq TRF 
Chicago, like the FINRA/Nasdaq TRF Carteret, may provide the necessary 
clearing information regarding transactions to the National Securities 
Clearing Corporation.
    The proposed rule change would establish the FINRA/Nasdaq TRF 
Chicago on the same terms as the FINRA/Nasdaq TRF Carteret. That is, 
the new FINRA/Nasdaq TRF would be built with the same technology, 
provide the same features and performance,\6\ offer the same pricing 
and be governed by the same substantive rules, policies and procedures. 
A single set of application materials and clearing arrangements will 
provide for access to both FINRA/Nasdaq TRF Carteret and FINRA/Nasdaq 
TRF Chicago. Moreover, Nasdaq, as the ``Business Member'' (defined 
below), has advised FINRA that these two TRFs will evolve in tandem and 
remain the same going forward (for example, because the same fee and 
credit schedule under the Rule 7600A Series will apply to both TRFs, 
any pricing changes would apply to both TRFs).\7\
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    \6\ Users of the two FINRA/Nasdaq TRFs may experience latency 
differences due to their different geographic locations.
    \7\ According to Nasdaq, the FINRA/Nasdaq TRF Chicago will 
include several new components to provide performance improvements 
and operational efficiencies that Nasdaq intends to incorporate into 
the FINRA/Nasdaq TRF Carteret shortly after the launch of FINRA/
Nasdaq TRF Chicago. Nasdaq will provide participants with notice 
prior to re-platforming the FINRA/Nasdaq TRF Carteret. After Nasdaq 
completes this re-platforming, Nasdaq generally intends to perform 
updates, upgrades, fixes or other modifications to the two FINRA/
Nasdaq TRFs in tandem. However, Nasdaq notes that there may be 
instances in which it will be necessary for Nasdaq to act in 
sequence. During such instances, there may be disparities between 
the two TRFs with respect to function or performance. Nasdaq expects 
that any disparity in function or performance between the two TRFs 
that arises during sequential changes will be transitory. Nasdaq 
will provide participants with notice if it anticipates requiring 
more than a de minimis transition period.
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    Nasdaq, as the Business Member, proposes to structure the FINRA/
Nasdaq TRF Chicago to be identical to the FINRA/Nasdaq TRF Carteret (in 
all respects other than its location) to provide FINRA members with a 
convenient and efficient option to fulfill their obligations under the 
Trade Reporting Notice through a set of primary and secondary reporting 
facilities that share the same rules, pricing, features and 
performance. Under the proposal, the FINRA/Nasdaq TRF Chicago will not 
be limited to use as a back-up reporting facility. FINRA members will 
also have the option of using the FINRA/Nasdaq TRF Chicago as their 
primary trade reporting facility. Moreover, members may choose to 
report some of their trades, on a primary basis, to the FINRA/Nasdaq 
TRF Carteret and other trades, also on a primary basis, to the FINRA/
Nasdaq TRF Chicago (or to one of the other FINRA Facilities). Members 
may choose to allocate their trade reports to more than one TRF as a 
means of further increasing resiliency and mitigating their risks, 
including the risks associated with outages.
    The proposed rule change would allow firms to aggregate the volume 
of trades that they report on the FINRA/Nasdaq TRF Carteret and the 
FINRA/Nasdaq TRF Chicago. This would enable firms to continue to 
qualify for any volume-based pricing that they would otherwise qualify 
for if they limited their trade reporting to one of those facilities 
only.
    It is important to note that although the FINRA/Nasdaq TRF Carteret 
and the FINRA/Nasdaq TRF Chicago would be structured identically and 
would allow for aggregated pricing, the two TRFs would physically 
operate as distinct and independent facilities.\8\ For example, to help 
ensure that the FINRA/Nasdaq TRF Chicago could effectively serve as a 
back-up facility for the FINRA/Nasdaq TRF Carteret or vice versa, the 
front-end technology used to operate the FINRA/Nasdaq TRF Chicago would 
reside in Chicago, Illinois while the front-end technology used to 
operate the FINRA/Nasdaq TRF Carteret would continue to reside in 
Carteret, New Jersey. Geographic dispersion of these two TRFs would 
lessen the risk of a regional outage affecting them both 
simultaneously. FINRA also notes that rules that prohibit cross-
facility reporting would apply to the FINRA/Nasdaq TRF Carteret and 
FINRA/Nasdaq TRF Chicago. For example, FINRA rules generally prohibit 
the submission to a FINRA Facility of any non-tape report (including 
clearing reports) associated with a previously executed trade that was 
not reported to the same Facility, except with respect to the second 
leg of a riskless principal or agency transaction.\9\
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    \8\ Trades reported to the FINRA/Nasdaq TRF Carteret or FINRA/
Nasdaq TRF Chicago will be subject to correction or modification 
only on the TRF to which the trades were originally reported.
    \9\ See, e.g., Rule 7230A(i).
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    FINRA's oversight of the proposed FINRA/Nasdaq TRF Chicago would be 
the same as FINRA's current oversight with respect to the two existing 
TRFs.

[[Page 18381]]

In addition to real-time interaction with Business Member staff when 
operational issues arise, FINRA currently executes its SRO oversight 
functions by performing a three-part regularly recurring review of TRF 
operations. First, before initial operation of the TRF can commence, 
the Business Member is required to certify in writing that TRF 
operations will comply with all relevant FINRA rules and federal 
securities laws, and on a quarterly basis thereafter, the Business 
Member must submit its current TRF procedures and a certification of 
compliance with those procedures. Second, FINRA staff conducts monthly 
conference calls with each Business Member to review TRF operations. 
These monthly calls follow an established agenda, which includes, among 
other things, whether there were any system outages or issues since the 
prior monthly conference call (and if so, to confirm that they were 
reported to FINRA and the SEC, as applicable), data latency, the status 
of pending systems changes, TRF market data products and whether the 
Business Member has or is developing any new products that would use 
TRF data. Third, FINRA oversees a regular assessment cycle and 
extensive review of TRF operations, as measured against the TRF 
business requirements document and coding guidelines established by 
FINRA, by an outside independent audit firm. FINRA also requires the 
Business Member to submit on a quarterly basis an attestation that (1) 
identifies all products that use TRF data, and (2) certifies that the 
Business Member has no other products that use TRF data and that any 
future products that use TRF data will be developed in consultation 
with FINRA.
FINRA/Nasdaq TRF Limited Liability Company Agreement
    The Third Amended and Restated Limited Liability Company Agreement 
of FINRA/Nasdaq Trade Reporting Facility LLC (the ``FINRA/Nasdaq TRF 
LLC Agreement'' or the ``Agreement'') will govern the establishment of 
the FINRA/Nasdaq TRF Chicago.
    Under the FINRA/Nasdaq TRF LLC Agreement, FINRA is the ``SRO 
Member'' and has sole regulatory responsibility for both the FINRA/
Nasdaq TRF Carteret and FINRA/Nasdaq TRF Chicago, including real-time 
monitoring and T+1 surveillance, development and enforcement of trade 
reporting rules and submission of proposed rule changes to the 
Commission. Nasdaq, the Business Member under the FINRA/Nasdaq TRF LLC 
Agreement, is primarily responsible for the management of the business 
affairs of both the FINRA/Nasdaq TRF Carteret and FINRA/Nasdaq TRF 
Chicago, which may not be conducted in a manner inconsistent with the 
regulatory and oversight functions of FINRA. Among other things, the 
Business Member will establish pricing for both the FINRA/Nasdaq TRF 
Carteret and FINRA/Nasdaq TRF Chicago, be obligated to pay the cost of 
regulation and be entitled to the profits and losses, if any, derived 
from operation of the FINRA/Nasdaq TRF Carteret and FINRA/Nasdaq TRF 
Chicago. The Business Member will also provide the ``user facing'' 
front-end technology used to operate both the FINRA/Nasdaq TRF Carteret 
and FINRA/Nasdaq TRF Chicago and transmit real-time trade report data 
directly to the SIPs and to FINRA for audit trail purposes.
    The FINRA/Nasdaq TRF LLC Agreement is substantially similar to the 
existing agreement that governs the FINRA/Nasdaq TRF Carteret (the 
Second Amended and Restated FINRA/Nasdaq TRF LLC Agreement), which is 
included in the FINRA Manual. However, it contains several amendments 
that reflect the fact that the FINRA/Nasdaq Trade Reporting Facility 
LLC will now operate through two TRFs: FINRA/Nasdaq TRF Carteret and 
FINRA/Nasdaq TRF Chicago.
    For example, the FINRA/Nasdaq TRF LLC Agreement provides for 
separate termination provisions, in Section 20, for each FINRA/Nasdaq 
TRF. The termination provision applicable to the FINRA/Nasdaq TRF 
Carteret is substantially the same as under the current agreement, 
except as noted below. The termination provision applicable to the 
FINRA/Nasdaq TRF Chicago permits a Member of the LLC to terminate the 
FINRA/Nasdaq TRF Chicago upon at least one year's written notice; it 
also permits the SRO Member to terminate the FINRA/Nasdaq TRF Chicago 
for any reason that the SRO Member, in its sole discretion, determines 
could have a negative impact on the maintenance of its status as a 
preeminent SRO. In addition, the FINRA/Nasdaq TRF LLC Agreement 
includes a provision in Section 20 that permits either Member of the 
LLC to terminate either of the TRFs or the entire Agreement due to a 
material breach by the other Member, if such breach is not cured within 
60 days of notification thereof, or if the other Member becomes 
bankrupt or insolvent, upon 30 days' written notice.
    Finally, the FINRA/Nasdaq TRF LLC Agreement includes a provision, 
in Section 21, that clarifies that if either FINRA/Nasdaq TRF 
terminates, the LLC will continue to operate and the terms of the 
Agreement relating to the remaining FINRA/Nasdaq TRF will remain in 
full force and effect. It also clarifies that the LLC will dissolve 
upon an action by either LLC Member to terminate both FINRA/Nasdaq TRFs 
or to terminate the last remaining FINRA/Nasdaq TRF.
Rules Applicable to the FINRA/Nasdaq TRF Carteret and FINRA/Nasdaq TRF 
Chicago
    FINRA proposes to amend the Rule 6300A, 7200A and 7600A Series, 
which govern the FINRA/Nasdaq TRF Carteret, to accommodate the 
establishment of the FINRA/Nasdaq TRF Chicago. That is, FINRA proposes 
to preface each of these Rule Series by noting that within them, any 
use of the term ``FINRA/Nasdaq Trade Reporting Facility'' shall mean 
the FINRA/Nasdaq TRF Carteret or the FINRA/Nasdaq TRF Chicago, as 
applicable, depending on the facility to which the participant elects 
to report.
    FINRA proposes to amend Rule 6300A to provide that the forms of 
agreements required under the Rule 6300A Series, including the 
agreement to allow a Participant to report and lock-in trades on a 
member's behalf required under Rule 6380A(h), will be identical for 
both FINRA/Nasdaq TRFs and a single agreement can be used for purposes 
of both FINRA/Nasdaq TRFs. Members that elect to participate in both 
FINRA/Nasdaq TRFs must amend any existing agreements under the Rule 
6300A Series to reflect their application to both facilities.
    In addition, FINRA proposes to amend Rule 7200A to clarify that 
application procedures and access requirements for the FINRA/Nasdaq TRF 
Carteret would also be applicable to the FINRA/Nasdaq TRF Chicago, 
meaning that an application for access to one of the FINRA/Nasdaq TRFs 
would provide for access to both of them, and that the requirements for 
continuing access apply to both TRFs. Members that elect to participate 
in both FINRA/Nasdaq TRFs must provide written notice to the FINRA/
Nasdaq TRFs and FINRA of such election, in the form prescribed by 
FINRA, and amend any existing agreements under the Rule 7200A Series to 
reflect their application to both Facilities. Moreover, FINRA proposes 
to state, in Rules 6300A, 6360A, 6370A, 7200A and 7280A, that any 
determination to suspend, terminate, restore, reinstate, limit or 
prohibit access to or participation in one FINRA/Nasdaq TRF with 
respect to a TRF participant will apply equally to the other FINRA/
Nasdaq TRF with respect to that participant.

[[Page 18382]]

    The proposed rule change would also amend the Rule 7600A Series to 
state that its schedules of credits and fees will apply to reporting 
activity that occurs on either or both of the FINRA/Nasdaq TRFs and 
that a participant's eligibility for any volume-based credits or fee 
caps will be determined based upon its aggregate reporting volume 
between the two FINRA/Nasdaq TRFs.\10\ That is, Rule 7610A would be 
amended to state that if a FINRA member reports trades in a given 
quarter to both the FINRA/Nasdaq TRF Carteret and the FINRA/Nasdaq TRF 
Chicago, then the amount of the member's Securities Transaction Credits 
for that quarter will be calculated with respect to the member's 
combined transactions on both TRFs. Similarly, Rule 7620A would be 
amended to provide that if a participant reports trades to both the 
FINRA/Nasdaq TRF Carteret and the FINRA/Nasdaq TRF Chicago during a 
given month, then the participant's aggregate reporting volume on the 
FINRA/Nasdaq TRF Carteret and the FINRA/Nasdaq TRF Chicago will be 
considered for the purpose of determining whether and to what extent 
charges or caps apply to the participant during that month.\11\
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    \10\ FINRA notes that Nasdaq, in its capacity as the Business 
Member and operator of the FINRA/Nasdaq TRFs on behalf of FINRA, 
will continue to administer the Rule 7600A Series and will collect 
all fees and issue all credits on behalf of the FINRA/Nasdaq TRF 
Chicago, as well as the FINRA/Nasdaq TRF Carteret. FINRA's oversight 
of this function performed by the Business Member will be conducted 
through the aforementioned assessment and review of TRF operations 
by an outside independent audit firm.
    \11\ FINRA notes that members will be able to report trades to 
the FINRA/Nasdaq TRF Chicago via Nasdaq's ACT Workstation, a 
Financial Information eXchange (``FIX'') line or indirectly via 
third party intermediaries (e.g., service bureaus) and will be 
required to pay the associated fees under Nasdaq rules. For example, 
firms that report to the FINRA/Nasdaq TRF Chicago via FIX--either 
directly or indirectly through third party intermediaries--would pay 
Nasdaq charges associated with FIX ports to connect to the FINRA/
Nasdaq TRF Chicago data center. See, e.g., Nasdaq Rule 7015. Firms 
will not have the option of connecting to the FINRA/Nasdaq TRF 
Chicago via a computer-to-computer interface (``CTCI'').
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    Rule 7630A would be amended to reflect a technical change that 
certification of affiliate status for aggregation of activity for 
purposes of fees and credits will be made to, and subsequent 
determinations regarding aggregation will be made by, the FINRA/Nasdaq 
TRFs, not FINRA. FINRA members currently submit their requests for 
aggregation to the FINRA/Nasdaq TRF Carteret rather than to FINRA, and, 
as such, the proposed change will better align the rule with current 
practice.\12\
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    \12\ As noted above, Nasdaq, as the TRF Business Member, 
administers this Rule and receives the certifications of affiliate 
status and makes the aggregation determinations thereunder.
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    The proposed rule change would amend Rule 7640A to state that 
Nasdaq's license to use, distribute and sell FINRA/Nasdaq TRF Carteret 
market data to third parties, and to sell such data for fees that 
Nasdaq charges under its rules, would also extend to FINRA/Nasdaq TRF 
Chicago market data. In addition, the proposed rule change would amend 
the rule to state that the list of Nasdaq data products that 
incorporate FINRA/Nasdaq TRF Carteret market data would also 
incorporate FINRA/Nasdaq TRF Chicago market data.\13\
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    \13\ Prior to the date when the FINRA/Nasdaq TRF Chicago becomes 
operational, Nasdaq intends to file with the Commission a proposal 
to amend Nasdaq's rules governing its proprietary data products to 
provide for the inclusion therein of FINRA/Nasdaq TRF Chicago data.
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    Finally, Rule 6184 (Transactions in Exchange-Traded Managed Fund 
Shares (``NextShares'')) would be amended to provide for the reporting 
of transactions in NextShares to the FINRA/Nasdaq TRF Chicago in the 
same manner that such transactions currently are reported to the FINRA/
Nasdaq TRF Carteret.
    If the Commission approves the proposed rule change, the effective 
date of the proposed rule change will be the date upon which the FINRA/
Nasdaq TRF Chicago commences operation, which is currently anticipated 
to be no earlier than August 1, 2018. FINRA will provide notice of that 
date upon successful completion of system testing and certification.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\14\ 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.
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    \14\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that the proposed rule change is consistent with the 
Act because it provides members with an alternative for meeting their 
trade reporting obligations under FINRA rules and will allow members 
that wish to connect to a secondary FINRA Facility in accordance with 
the Trade Reporting Notice to continue executing OTC trades in NMS 
stocks in the event their primary facility is experiencing a widespread 
systems issue. FINRA believes that an additional facility for the 
reporting of OTC transactions in NMS stocks in the event a member's 
primary facility is experiencing systems issues will enhance the 
resiliency and promote the integrity of the OTC market.
    In addition, FINRA believes that the proposed rule change provides 
for the equitable allocation of reasonable dues, fees and other charges 
because the charges and credits that would apply to the FINRA/Nasdaq 
TRF Chicago are the same as those that apply to the FINRA/Nasdaq TRF 
Carteret under current FINRA rules. The proposed rule change would also 
provide for the equitable allocation of reasonable dues, fees and other 
charges in that it would allow firms that choose to concurrently report 
trades to the FINRA/Nasdaq TRF Carteret and the FINRA/Nasdaq TRF 
Chicago to aggregate their reporting volumes on the two TRFs so that 
they could continue to qualify for volume-based pricing to the extent 
that they would have otherwise qualified had they reported their trades 
only to one of those TRFs. As discussed above, Nasdaq, as the Business 
Member, has advised FINRA that the FINRA/Nasdaq TRF Carteret and the 
FINRA/Nasdaq TRF Chicago will be subject to identical fees under the 
amended Rule 7600A Series, thereby allowing members to use either TRF 
freely in terms of the volume reported to each TRF without providing a 
disincentive to use one over the other for the sole purpose of 
maintaining eligibility for any fee caps.

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.
    The proposed rule change would apply only to members that have a 
trade reporting obligation under the FINRA rules \15\ and elect to 
report to the FINRA/Nasdaq TRF Chicago. As noted above, there currently 
are three FINRA Facilities that allow members to report OTC trades in 
NMS stocks. There are only several hundred firms that execute and 
report OTC trades in NMS stocks to the FINRA Facilities on a regular 
basis. Many firms, including smaller firms, route their order flow to 
another firm, e.g., their clearing firm, for execution,

[[Page 18383]]

and as the routing firm, they do not have the trade reporting 
obligation. Thus, the proposed rule change will have no impact on many 
members.
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    \15\ FINRA rules for reporting OTC transactions in equity 
securities require that for transactions between members, the 
``executing party'' report the trade to a FINRA facility. For 
transactions between a member and a non-member or customer, the 
member must report the trade. ``Executing party'' is defined under 
FINRA Rule 6380A(b) as the member that receives an order for 
handling or execution or is presented an order against its quote, 
does not subsequently re-route the order, and executes the 
transaction.
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    As explained above, the proposed rule change provides members with 
an alternative for meeting their trade reporting obligations under 
FINRA rules and will allow members that wish to connect to a secondary 
facility for trade reporting in accordance with the Trade Reporting 
Notice to continue executing OTC trades in NMS stocks in the event 
their primary facility is experiencing a widespread systems issue.
    The proposed FINRA/Nasdaq TRF Chicago should provide benefits, in 
particular, for those members that currently report trades to the 
FINRA/Nasdaq TRF Carteret, as such members would have the opportunity 
to aggregate their reporting volumes if they choose to concurrently 
report trades to both FINRA/Nasdaq TRFs. Thus, under the proposed fee 
structure, if a member chooses to connect to the FINRA/Nasdaq TRF 
Carteret and FINRA/Nasdaq TRF Chicago as primary and backup trade 
reporting facilities, then the member will receive credit for the 
shares reported to the backup facility. This may create an incentive 
for members to jointly utilize the two FINRA/Nasdaq TRFs as primary and 
back-up reporting facilities.
    FINRA staff analyzed participation agreements and reporting 
activity to FINRA/Nasdaq TRF Carteret, FINRA/NYSE TRF and ADF, and 
found that 430 member firms reported to at least one FINRA Facility in 
2017. While 84 firms had participation agreements with at least two 
FINRA Facilities, only 20 of those firms reported to both the FINRA/
Nasdaq TRF Carteret and another FINRA Facility. Based on this one-year 
sample, FINRA expects the proposal to potentially benefit at least 
those firms that report to two or more FINRA Facilities; however, more 
firms can potentially benefit from volume-based pricing in the long-
run, provided that reporting trades to more than one FINRA Facility 
becomes necessary or preferred.
    To the extent that members choose to satisfy their reporting 
obligations via the FINRA/Nasdaq TRF Carteret and FINRA/Nasdaq TRF 
Chicago, and cease to maintain connectivity to the FINRA/NYSE TRF or 
ADF as a back-up FINRA Facility to report trades, the latter two may 
experience a reduction in reporting activity and hence revenue. Thus, 
the impact on FINRA Facilities may effectively be an economic transfer 
between them.
    The proposed FINRA/Nasdaq TRF Chicago provides an alternative that 
may provide costs savings to those members that choose to report to 
both the FINRA/Nasdaq TRF Carteret and FINRA/Nasdaq TRF Chicago instead 
of spreading trade reporting between the FINRA/Nasdaq TRF Carteret and 
another FINRA Facility. Members can effectively satisfy the requirement 
under the Trade Reporting Notice to establish connectivity to a second 
FINRA Facility to maintain reporting in the event that their primary 
facility experiences a widespread systems issue during the trading day. 
As such, members can use one FINRA/Nasdaq TRF as the primary reporting 
facility and the other FINRA/Nasdaq TRF as the back-up facility. This 
could mitigate the risks associated with a regional outage that could 
simultaneously affect them both, as the front-end technology used to 
operate the FINRA/Nasdaq TRF Chicago would reside in Chicago, Illinois 
while the front-end technology used to operate the FINRA/Nasdaq TRF 
Carteret would continue to reside in Carteret, New Jersey.
    However, the two FINRA/Nasdaq TRFs would have common technology, 
computer code and features. As such, a member firm's decision to rely 
upon the FINRA/Nasdaq TRFs to satisfy both its primary and back-up 
requirements may not fully mitigate risks if these common technologies, 
code or features contemporaneously experience problems or otherwise 
fail. Thus, when member firms consider how they will meet their 
reporting obligations going forward, they will need to weigh the 
potential costs if both the FINRA/Nasdaq TRF Carteret and FINRA/Nasdaq 
TRF Chicago experience common problems or become unavailable 
simultaneously against the costs of maintaining connectivity to 
unrelated FINRA Facilities with fewer efficiencies and less attractive 
aggregate pricing.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2018-013 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-2018-013. 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 the 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-

[[Page 18384]]

2018-013, and should be submitted on or before May 17, 2018.

    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 A. Aleman,
Assistant Secretary.
[FR Doc. 2018-08731 Filed 4-25-18; 8:45 am]
 BILLING CODE 8011-01-P