Document ID: SEC-2018-1334-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2018-08-23T04:00Z

[Federal Register Volume 83, Number 164 (Thursday, August 23, 2018)]
[Notices]
[Pages 42741-42743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18156]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83868; File No. SR-FINRA-2018-030]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rule 7730 (Trade Reporting and Compliance Engine (TRACE)) To 
Remove Computer-to-Computer Interface as a Technological Option for 
TRACE Reporting

August 17, 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 August 15, 2018, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``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 amend FINRA Rule 7730 to modify the 
technological connectivity options available to members for reporting 
transactions to TRACE.
    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA is proposing to amend Rule 7730 (Trade Reporting and 
Compliance Engine (TRACE)) to remove Computer-to-Computer Interface 
(``CTCI'') as a technological means of connectivity for use in 
reporting transactions to TRACE.
    Technology and connectivity options have evolved since the 
inception of the TRACE system (at which time CTCI, rather than 
Financial Information eXchange (``FIX''), was made available for TRACE 
reporting purposes).\3\ FINRA has determined that it is now appropriate 
to remove CTCI--a Nasdaq proprietary protocol--as a means of 
connectivity. Accordingly, firms would be required to report 
transactions to TRACE using one of the remaining currently available 
options: (i) Web browser access; (ii) FIX line access; or (iii) 
indirectly via third-party intermediaries (e.g., service bureaus).\4\
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    \3\ See Securities Exchange Act Release No. 42201 (December 3, 
1999), 64 FR 69305 (December 10, 1999) (Notice of Filing of File No. 
SR-NASD-99-65).
    \4\ See Rule 7730.
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    FINRA notes that FIX--an industry standard protocol--is an 
immediately available and viable alternative to CTCI that already is 
widely used by members. Since adding FIX as a protocol for transaction 
reporting to TRACE in 2011 for Securitized Products (and for corporates 
and Agency Debt Securities in 2012), approximately two thirds of firms 
with direct connections, and half of the service bureaus, have opted to 
migrate from CTCI to FIX. In fact, the majority of members that report 
trades to TRACE currently connect via FIX,\5\ and FINRA believes that 
an increasing amount of firms and service bureaus will continue to 
migrate to FIX.\6\ FINRA also believes that removing CTCI as a means of 
connectivity will reduce operational overhead and risk for FINRA.
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    \5\ Currently, 61 members have direct FIX connections for TRACE 
reporting, 32 have direct CTCI connections, and 709 members have web 
browser access (the 709 firms with web browser access also may have 
CTCI or FIX access for connecting to TRACE). The top five members 
that connect through CTCI for reporting transactions to TRACE 
represent 63% of all TRACE reports submitted directly using a CTCI 
connection. In addition, five service bureaus report to TRACE 
through CTCI connections and five report through FIX connections. 
The five service bureaus that use CTCI report transactions to TRACE 
on behalf of 191 members in aggregate, with over 95% of these 
transaction reports received from one service bureau. For all TRACE-
eligible securities, approximately 33% of all transaction reports 
are received via CTCI, which consists of 23% submitted by members 
with direct CTCI connections and 10% by service bureaus connected 
via CTCI.
    \6\ For example, members may report trades to the recently 
approved second FINRA/Nasdaq Trade Reporting Facility via FIX but 
firms will not have the option to report trades via CTCI. See 
Securities Exchange Act Release No. 83082 (April 20, 2018), 83 FR 
18379 (April 26, 2018) (Notice of Filing of File No. SR-FINRA-2018-
013).
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    Accordingly, FINRA is proposing to amend Rule 7730 to remove CTCI 
as a means of connectivity for members to report transactions to 
TRACE.\7\ FINRA intends to provide ample time, until February 3, 2020, 
to allow firms that still use CTCI as a means of connectivity to 
migrate, and will permit members to migrate at any point throughout the 
implementation period. During that timeframe, FINRA also will engage in 
extensive outreach with the industry to assist in migration awareness 
and efforts.\8\
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    \7\ FINRA will be eliminating CTCI as a means of connectivity 
for reporting to all FINRA trade reporting facilities.
    \8\ In addition to general outreach (industry-wide calls and a 
Technical Notice), FINRA will contact each individual firm that 
directly reports to TRACE via CTCI by email and telephone to provide 
information and assistance in connection with the migration.
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    If the Commission approves the proposed rule change, the effective 
date of the proposed rule change will be February 3, 2020.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ 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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    \9\ 15 U.S.C. 78o-3(b)(6).
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    FINRA is proposing to amend Rule 7730 to remove CTCI as a means of 
connectivity for members to report transactions to TRACE. FINRA does 
not believe the proposed rule change will have a significant impact, as 
a majority of members already use FIX as a means of connectivity to 
report trades to TRACE, and FINRA believes that an increasing amount of 
members and service providers are migrating to exclusive use of FIX. 
FIX is an industry standard protocol that is an immediately available 
and viable alternative for the minority of members who directly use 
CTCI as a means of connectivity to report transactions to TRACE.

[[Page 42742]]

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.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to further analyze the regulatory need for the proposed rule 
change, the economic baseline, the economic impact, and the 
alternatives considered.
Regulatory Need
    Rule 7730 provides that members may report transactions to TRACE 
via CTCI protocol. Due to technological advances, FINRA is proposing to 
discontinue supporting CTCI as means of connectivity for members to 
report transactions. Therefore, FINRA is proposing to amend Rule 7730 
to reflect this change.
Economic Baseline
    The baseline for the proposed amendment is current Rule 7730, which 
allows members to report to TRACE via (1) CTCI, (2) FIX, (3) web 
browser, or (4) indirectly via a third party intermediary. Presently, 
32 members directly report transactions to TRACE via CTCI and 61 
members directly report transactions to TRACE via FIX. In addition, 
five service bureaus report transactions to TRACE via FIX (on behalf of 
25 members), and five service bureaus report transactions to TRACE via 
CTCI (on behalf of 191 members).\10\ Firms reporting via either CTCI or 
FIX are charged $25/month to do so. Firms that report via a web browser 
are charged $20/month per user ID. For all TRACE-eligible securities, 
approximately 33% of all transaction reports are received via CTCI, 
which consists of 23% submitted by members with direct CTCI connections 
and 10% by service bureaus connected via CTCI.
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    \10\ See supra note 5.
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Economic Impact
    The proposal would apply equally to all members who report 
transactions to TRACE. However, there is no impact to firms that 
currently report via FIX or a web browser. Only firms reporting via 
CTCI would incur additional costs as a result of the proposed rule 
change.
    There are 223 members that use CTCI (either directly or indirectly) 
for TRACE reporting purposes.\11\ However, the majority of these 
members (191) are indirectly impacted--i.e., those who report through a 
service bureau--since most of the work to migrate to the FIX protocol 
will be performed by the service bureaus. Although the service bureaus 
may choose to pass some or all of the cost of reprogramming on to the 
member firms, the costs would be spread across these firms.
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    \11\ At the time of this filing, 309 members report to TRACE via 
CTCI or FIX (either directly or indirectly).
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    The 32 members reporting directly via their own CTCI connection 
would incur costs associated with reporting via a new method. These 
members would face a tradeoff between greater upfront costs and on-
going efficiencies. The development of a compliant FIX submission 
protocol would require up-front investment, but could provide cost-
saving efficiency over time.\12\ A firm that chooses not to replace 
CTCI with FIX, but instead chooses to submit their trades via web 
browser access, will require a more limited initial investment, but 
relatively more on-going cost. Presumably, firms will choose a new 
reporting method that minimizes their overall costs or maximizes their 
efficiency. Anecdotally, FINRA understands that some firms are 
contemplating discontinuing use of CTCI and migrating to FIX. For these 
firms, however, the proposal may result in them incurring certain costs 
sooner than planned.
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    \12\ The programming costs that these firms incur would vary due 
to a number of factors, including existing expertise.
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    For FINRA, each protocol type requires maintenance and support, and 
maintaining two protocols increases operational risk.\13\ There is 
inherent risk associated with supporting any information technology 
system, including risk of an operational failure. Since CTCI currently 
is used to collect transaction information, an operational event could 
negatively impact any market stakeholder that uses disseminated 
transaction information. Thus, a benefit of this proposal would be to 
eliminate risk associated with supporting CTCI. Since an operational 
event could harm the integrity of the market (by resulting in 
information asymmetry), this benefit should accrue to all market 
stakeholders. Thus, it is FINRA's view that the benefits of the 
amendment outweigh any associated cost.
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    \13\ FINRA also should realize cost savings as a result of the 
proposal, since it no longer would need to maintain a CTCI protocol.
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Alternatives Considered
    FINRA considered maintaining the status quo and continuing to 
support CTCI. However, given the decreased reliance on the protocol and 
that the owner of the protocol does not intend to support it for its 
new facility,\14\ FINRA determined that it is now appropriate to retire 
the protocol for the purpose of reporting transactions to FINRA 
facilities.
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    \14\ See supra note 6.
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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

    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-2018-030 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-2018-030. 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

[[Page 42743]]

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-2018-
030, and should be submitted on or before September 13, 2018.

    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. 2018-18156 Filed 8-22-18; 8:45 am]
 BILLING CODE 8011-01-P