Document ID: SEC-2018-1056-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2018-07-06T04:00Z

[Federal Register Volume 83, Number 130 (Friday, July 6, 2018)]
[Notices]
[Pages 31589-31590]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-14462]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83559; File No. SR-FINRA-2018-013]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by 
Amendment No. 1, To Establish a Second Trade Reporting Facility

June 29, 2018.

I. Introduction

    On April 19, 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 establish a second Trade Reporting Facility 
(``TRF'') to be operated in conjunction with Nasdaq, Inc. (``Nasdaq''). 
The proposed rule change was published for comment in the Federal 
Register on April 26, 2018.\3\ The Commission received no comment 
letters on the proposal. On June 21, 2018, FINRA filed Amendment No. 
1.\4\ This order approves the proposed rule change, as modified by 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 83082 (April 20, 
2018), 83 FR 18379 (``Notice''). See also, Securities Exchange Act 
Release No. 83398 (June 8, 2018), 83 FR 27807 (June 14, 2018) 
extending the time for the Commission to act on the filing.
    \4\ In Amendment No. 1, FINRA states that, if the Commission 
approves the proposed rule change, FINRA anticipates that the FINRA/
Nasdaq TRF Chicago will commence operation in September 2018, but in 
no event later than December 31, 2018. Amendment No. 1 is available 
at: https://www.sec.gov/comments/sr-finra-2018-013/finra2018013-3918682-166985.pdf. Because Amendment No. 1 does not materially 
alter the substance of the proposed rule change or raise unique or 
novel regulatory issues, Amendment No. 1 is not subject to notice 
and comment.
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II. Description of the Proposal

Background

    FINRA currently has three facilities that allow its members to 
report over-the-counter (``OTC'') trades in NMS stocks: \5\ The FINRA/
Nasdaq TRF, the FINRA/NYSE TRF, and the Alternative Display Facility 
(``ADF'') (collectively, the ``FINRA Facilities''). For each TRF, FINRA 
is the SRO Member and, as such, it has sole regulatory responsibility 
for the TRFs, 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 is the ``Business 
Member'' of the FINRA/Nasdaq TRF.\6\ A Business Member is primarily 
responsible for the management of the business affairs of its TRF.\7\ 
Among other things, the Business Member establishes pricing, is 
obligated to pay the cost of regulation and is entitled to the profits 
and responsible for the losses derived from the operation of its 
TRF.\8\
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    \5\ See Rule 600(b) of Regulation NMS under the Act.
    \6\ NYSE is the Business Member of the FINRA/NYSE TRF.
    \7\ See Notice at 18381.
    \8\ See id.
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    In January 2016, FINRA published a Trade Reporting Notice (``Trade 
Reporting Notice'') that provided guidance on the reporting obligations 
of member firms regarding OTC equity trades in the event of a systems 
issue during the trading day that prevents firms from reporting OTC 
trades in NMS stocks in accordance with FINRA rules.\9\ As set forth in 
the Trade Reporting Notice, a firm that routinely reports its OTC 
trades in NMS stocks to one FINRA Facility (``primary facility'') must 
establish and maintain connectivity and report to a second FINRA 
Facility (``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.\10\
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    \9\ See Trade Reporting Notice, January 20, 2016 (OTC Equity 
Trading and Reporting in the Event of Systems Issues).
    \10\ As discussed in the Trade Reporting 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 trades to a FINRA Facility that is 
operational).
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Proposal

    FINRA proposed to establish a second FINRA/Nasdaq TRF (``FINRA/
Nasdaq TRF Chicago''), to provide FINRA members an additional facility 
to which to report trades in compliance with FINRA rules and the Trade 
Reporting Notice. The FINRA/Nasdaq TRF Chicago would be governed by the 
rules applicable to the existing FINRA/Nasdaq Trade Reporting Facility 
(``FINRA/Nasdaq TRF Carteret'').\11\ 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.\12\ FINRA/Nasdaq TRF Chicago trade reports 
would be disseminated with a modifier indicating the source of the 
transactions that would distinguish them from transactions executed on 
an exchange or reported to another FINRA Facility, including the FINRA/
Nasdaq TRF Carteret.
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    \11\ 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).
    \12\ A FINRA member also has the option to report some trades, 
on a primary basis, to the FINRA/Nasdaq TRF Chicago, and some 
trades, on a primary basis, to the FINRA/Nasdaq TRF Carteret.
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    The proposed rule change would establish the FINRA/Nasdaq TRF 
Chicago on the same terms as the FINRA/Nasdaq TRF Carteret. The FINRA/
Nasdaq TRF Chicago would be built with the same technology, provide

[[Page 31590]]

the same features and performance,\13\ 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 TRFs. Moreover, Nasdaq, as the Business 
Member, 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).\14\ The proposed rule 
change would allow firms to aggregate the volume of trades that they 
report to the two TRFs, which will 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. Finally, 
FINRA would amend Rules 6300A, 7200A, and 7600A Series, which govern 
the FINRA/Nasdaq TRF Carteret, to accommodate the establishment of the 
FINRA/Nasdaq TRF Chicago.\15\
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    \13\ Users of the two FINRA/Nasdaq TRFs may experience latency 
differences due to the different locations of the TRFs.
    \14\ 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 more than a 
de minimis transition period.
    \15\ See Notice at 18381-82.
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III. Discussion and Commission Findings

    After careful review, 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.\16\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\17\ which 
requires, among other things, that FINRA 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.
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    \16\ In approving this proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the proposal to establish the FINRA/
Nasdaq TRF Chicago is consistent with the purposes of the Act and with 
FINRA's responsibility to enforce compliance by its members with its 
rules and with the Act. FINRA states that geographic dispersion of 
these TRFs would reduce the risk of a regional outage affecting them 
both simultaneously. By providing members with an alternative FINRA 
facility in a different location than the existing FINRA/Nasdaq TRF 
with which to satisfy their trade reporting obligations, the Commission 
believes that the proposed rule change should enhance the resiliency 
and promote the integrity of the OTC market. Accordingly, for the 
reasons discussed above, the Commission finds that the proposed rule 
change is consistent with Section 15A(b)(6) of the Act.

IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\18\ that the proposed rule change (SR-FINRA-2018-013), as modified by 
Amendment No. 1, be and hereby is approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-14462 Filed 7-5-18; 8:45 am]
 BILLING CODE 8011-01-P