Document ID: SEC-2020-1852-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2020-11-18T05:00Z

[Federal Register Volume 85, Number 223 (Wednesday, November 18, 2020)]
[Notices]
[Pages 73541-73544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25381]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90396; File No. SR-FINRA-2020-029]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change Relating to 
Granularity of Timestamps in Trade Reports Submitted to FINRA's Equity 
Trade Reporting Facilities

November 12, 2020.

I. Introduction

    On September 17, 2020, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act

[[Page 73542]]

of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to require member firms, in accordance with a Commission order 
granting exemptive relief from certain requirements of the Consolidated 
Audit Trail (``CAT'') NMS Plan,\3\ to report time fields, in trade 
reports submitted to an equity trade reporting facility (``FINRA 
Facility''),\4\ using the same timestamp granularity that they use to 
report to the CAT. The proposed rule change was published for comment 
in the Federal Register on September 29, 2020.\5\ The Commission 
received no comment letters on the proposed rule change. This order 
approves the proposed rule change.
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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. 89051 (June 11, 
2020), 85 FR 36631 (June 17, 2020) (``Facility Data Exemption 
Order'' or ``Order''). The Commission approved the CAT NMS Plan, as 
modified, on November 15, 2016. See Securities Exchange Act Release 
No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016) 
(``CAT NMS Plan Approval Order'').
    \4\ The FINRA Facilities are the Alternative Display Facility 
(``ADF''), the FINRA/Nasdaq Trade Reporting Facilities (``TRFs''), 
the FINRA/NYSE TRF, and the OTC Reporting Facility (``ORF''). Member 
firms use the ORF to report transactions in OTC Equity Securities 
and use the other facilities to report transactions in NMS stocks.
    \5\ See Securities Exchange Act Release No. 88973 (September 23, 
2020), 85 FR 61044 (September 29, 2020) (``Notice'').
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II. Description of the Proposal

A. Background

    Currently, FINRA's equity trade reporting rules require a member to 
report all time fields--including time of trade execution and, if 
applicable, time of trade cancellation--to a FINRA Facility in 
milliseconds, if the member's system captures time in milliseconds; 
otherwise a report in seconds is permissible.\6\ However, FINRA's CAT 
Compliance Rule \7\ requires an Industry Member \8\ to report a 
timestamp for a Reportable Event,\9\ including a trade execution, to 
the CAT's Central Repository \10\ in milliseconds and, if the member's 
system captures time in finer increments, to report in such finer 
increments up to nanoseconds (except as otherwise provided under FINRA 
Rule 6860 for Manual Order Events).\11\ Thus, currently there is a 
difference between the timestamp granularity requirements applicable to 
member firms reporting to the FINRA Facilities (up to milliseconds) and 
to the CAT (up to nanoseconds).
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    \6\ See FINRA Rules 6282.04 and 7130.01 (relating to the ADF); 
6380A.04 and 7230A.01 (relating to the FINRA/Nasdaq TRFs); 6380B.04 
and 7230B.01 (relating to the FINRA/NYSE TRF); 6622.04 and 7330.01 
(relating to the ORF).
    \7\ See FINRA Rule 6860(a). ``Compliance Rule'' is defined under 
Section 1.1 of the CAT NMS Plan to mean ``with respect to a 
Participant, the rule(s) promulgated by such Participant as 
contemplated by Section 3.11.'' FINRA's CAT Compliance Rule is the 
FINRA Rule 6800 Series (Consolidated Audit Trail Compliance Rule).
    \8\ ``Industry Member'' is defined under FINRA Rule 6810(s) to 
mean a ``member of a national securities exchange or a member of a 
national securities association that is required to record and 
report information pursuant to the CAT NMS Plan and [the FINRA] Rule 
6800 Series.''
    \9\ ``Reportable Event'' is defined under Section 1.1 of the CAT 
NMS Plan and FINRA Rule 6810(kk) to include, ``but is not limited 
to, the original receipt or origination, modification, routing, 
execution (in whole or in part) and allocation of an order, and 
receipt of a routed order.''
    \10\ ``Central Repository'' is defined under Section 1.1 of the 
CAT NMS Plan and FINRA Rule 6810(j) to mean ``the repository 
responsible for the receipt, consolidation, and retention of all 
information reported to the CAT'' pursuant to Rule 613 of Regulation 
NMS and the CAT NMS Plan.
    \11\ ``Manual Order Event'' is defined under FINRA Rule 6810(x) 
to mean ``a non-electronic communication of order related 
information for which Industry Members must record and report the 
time of the event.''
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    On June 11, 2020, the Commission granted the CAT NMS Plan 
Participants (``Participants'') exemptive relief from, in pertinent 
part, Section 6.4(d)(ii)(B) of the CAT NMS Plan, which states that each 
Participant, through its CAT Compliance Rule, must require its Industry 
Members to record and report to the Central Repository a cancelled 
trade indicator for any trade that is cancelled. In their request for 
exemptive relief, the Participants explained that the FINRA Facility 
Data,\12\ which would contain cancelled trade indicators, are required 
to be reported to the Central Repository in each instance currently 
required under the CAT NMS Plan. Industry Members would continue to be 
required to submit either a trade report or a trade cancellation with 
the requisite information to a FINRA Facility, in accordance with 
existing rules set by each Participant for its members. For a cancelled 
trade, an Industry Member would continue to be required to submit a 
trade cancellation to a FINRA Facility.
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    \12\ ``FINRA Facility Data'' was defined by the Participants in 
their request for exemptive relief to include the clearing number of 
the clearing broker and the canceled trade indicator. See Facility 
Data Exemption Order, 85 FR at 36631.
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    The Participants stated in their request for exemptive relief that 
they would require the Plan Processor \13\ to link the FINRA Facility 
Data to Industry Member execution reports submitted to the Central 
Repository beginning on October 26, 2020. The Participants explained 
that the Compliance Rules would require an Industry Member to submit to 
the Central Repository an execution report submitted to a FINRA 
Facility for the corresponding trade report or trade cancellation, 
beginning on June 22, 2020. Industry Members would be required to 
report a unique trade identifier, beginning on October 26, 2020, that 
would be used by the Plan Processor to link the data, including the 
number of the clearing broker and cancelled trade information, with the 
Industry Member's execution report.\14\
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    \13\ ``Plan Processor'' is defined under Section 1.1 of the CAT 
NMS Plan as ``the Initial Plan Processor or any other Person 
selected by the Operating Committee pursuant to SEC Rule 613 and 
Sections 4.3(b)(i) and 6.1, and with regard to the Initial Plan 
Processor, the Selection Plan, to perform the CAT processing 
functions required by SEC Rule 613'' and set forth in the CAT NMS 
Plan.
    \14\ See Facility Data Exemption Order, 85 FR at 36632.
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    Noting the current difference in the timestamp granularity 
requirements for Industry Members reporting to a FINRA Facility and 
Industry Members reporting to the Central Repository, the Participants 
stated in the request for exemptive relief that FINRA would seek to 
amend its rules and technical specifications to require the FINRA 
Facilities to accept timestamps to same level of granularity required 
by the CAT NMS Plan (which, as noted above, is nanoseconds) and to 
implement such changes by December 15, 2021, for the TRFs and ADF and 
by December 15, 2022, for the ORF.\15\ FINRA explained in the Notice 
that, given the difference in timestamp granularity requirements 
between firms reporting to the FINRA Facilities and to the CAT, it is 
possible that the CAT could receive the time of trade cancellation in 
milliseconds from FINRA, while the time of trade cancellation for the 
same event might have been expressed in increments finer than 
milliseconds, had the firm reported such information directly to the 
CAT. In such instances, the CAT would not receive the same data that it 
would have received absent the exemptive relief.\16\
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    \15\ See id.
    \16\ For example, assume that a firm cancels a trade at 
10:30:00.123456 and reports the cancellation to a FINRA Facility 
with a trade cancellation time of 10:30:00.123 (the timestamp is 
truncated at the millisecond level for reporting to the FINRA 
Facility). As a consequence of the Facility Data Exemption Order, 
the data in the CAT reflects the time of cancellation as 
10:30:00.123, which is the time submitted in the FINRA Facility 
Data. Had the firm reported the trade cancellation directly to the 
CAT, the data in the CAT would reflect the time of cancellation as 
10:30:00.123456. See Notice, 85 FR at 61045.
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B. Proposed Amendments to FINRA Facility Rules

    To comply with the conditions set forth in the Facility Data 
Exemption Order, FINRA has proposed identical amendments to FINRA 
Facility rules \17\ that will require an Industry Member with an 
obligation to report an order

[[Page 73543]]

execution event to the Central Repository pursuant to FINRA's CAT 
Compliance Rule to report the time field (including time of execution 
and time of cancellation, if applicable) in the trade report submitted 
to a FINRA Facility using the same timestamp granularity, as set forth 
in FINRA Rule 6860 (nanoseconds), that the member would use to report 
to the CAT.
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    \17\ See FINRA Rules 6282.04, 6380A.04, 6380B.04, 6622.04, 
7130.01, 7230A.01, 7230B.01 and 7330.01.
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    Because almost all trades that must be reported to a FINRA Facility 
also must be reported to the CAT,\18\ a member firm with a trade 
reporting obligation under the FINRA Facility rules also has a CAT 
reporting obligation, and is therefore already subject to the timestamp 
granularity requirements of the CAT Compliance Rule. Given that a CAT 
Reporter \19\ must have systems that capture time in at least 
milliseconds to comply with CAT requirements, FINRA expects that firm 
to report to the appropriate FINRA Facility in milliseconds under 
FINRA's current trade reporting rules.\20\ Once the proposed rule 
change is implemented, any firm capturing and reporting time to the CAT 
in increments finer than milliseconds would be required to report time 
to the FINRA Facilities in such finer increments, up to 
nanoseconds.\21\
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    \18\ In the Facility Data Exemption Order, the Commission 
described four limited instances, outlined by the Participants, in 
which an Industry Member would be unable to provide a link between 
the execution reported to the Central Repository and the related 
FINRA Facility trade report. See Facility Data Exemption Order, 85 
FR at 36632.
    \19\ ``CAT Reporter'' is defined under Section 1.1 of the CAT 
NMS Plan to mean ``each national securities exchange, national 
securities association and Industry Member that is required to 
record and report information to the Central Repository pursuant to 
SEC Rule 613(c).''
    \20\ See Notice, 85 FR at 61045. Small Industry Members that do 
not currently report to OATS are not required to begin reporting to 
the CAT until December 13, 2021. See FINRA Rule 6830(a)(2)(E). 
Accordingly, FINRA would not require these non-OATS reporters to 
report to a FINRA Facility in milliseconds until December 13, 2021, 
unless their systems currently capture milliseconds.
    \21\ Because the FINRA Facilities do not currently accept 
timestamps more granular than milliseconds, FINRA is unable to 
estimate, based on trade report information, how many firms capture 
or have the ability to report trade events in increments more 
granular than milliseconds. In the Notice, FINRA provided statistics 
with respect to the number and percentage of order execution events 
reported with a timestamp granularity finer than milliseconds. See 
Notice, 85 FR at 61045.
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    In accordance with the conditions of the Facility Data Exemption 
Order,\22\ FINRA has stated that the implementation date of the 
proposed rule change relating to the TRFs and ADF will be no later than 
December 15, 2021, and the implementation date of the proposed rule 
change relating to the ORF will be no later than December 15, 2022. 
FINRA has represented that it will provide advance notice of the 
implementation dates, including publication of a Regulatory Notice, as 
well as updated technical specifications and testing schedule, at least 
120 days prior to the implementation dates.
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    \22\ See 85 FR at 36632.
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III. Discussion and Commission Findings

    After careful consideration, 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.\23\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\24\ 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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    \23\ 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).
    \24\ 15 U.S.C. 78o-3(b)(6).
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    On June 11, 2020, the Commission issued the Facility Data Exemption 
Order, which among other things granted an exemption from certain 
provisions of the CAT NMS Plan relating to the reporting of cancelled 
trade indicators.\25\ As a result of that Order, FINRA Facility Data 
submitted to the Central Repository can be the source of canceled trade 
indicators rather than records submitted to the Central Repository 
directly by Industry Members. However, the granularity of timestamps 
that the Industry Members are required to report to the Central 
Repository differs from the granularity that FINRA members are 
currently required to report to the FINRA Facilities. Therefore, the 
Commission conditioned the Order on FINRA amending the FINRA Facility 
rules to accept timestamps up to the granularity required by the CAT 
NMS Plan.\26\
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    \25\ See Facility Data Exemption Order, 85 FR 36631.
    \26\ The Commission imposed other conditions in the Facility 
Data Exemption Order that are not germane to this proposed rule 
change.
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    The Commission previously has found that the CAT NMS Plan is 
consistent with the Act because, among other things, it will help 
ensure that regulators can sequence order and execution events with a 
reasonable degree of accuracy.\27\ When approving the CAT NMS Plan, the 
Commission stated that, given the speed with which the industry 
currently handles orders and executes trades, it is important that the 
CAT utilize a timestamp that will enable regulators to reasonably 
sequence the order in which Reportable Events occur.\28\ The Commission 
believed that timestamps in increments greater than a millisecond would 
undermine the improved ability to sequence events with any reasonable 
degree of reliability.\29\ The Commission concluded that this approach 
will improve the accuracy of order event records, particularly those 
occurring rapidly across multiple markets, without imposing undue 
burdens on market participants.\30\
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    \27\ See CAT NMS Plan Approval Order, 81 FR at 84787-88.
    \28\ For example, the ability to reconstruct market activity, 
perform other detailed market analyses, or determine whether a 
series of orders rapidly entered by a particular market participant 
is manipulative or otherwise violates SRO rules or federal 
securities laws requires the audit trail to sequence each order and 
event accurately. See id., 81 FR at 84788, n. 1632.
    \29\ See id., 81 FR at 84788.
    \30\ See id. The Commission recognizes that, as stated on 
Appendix C-25 of the CAT NMS Plan, an accurately-sequenced record of 
orders cannot be based solely on the timestamps provided by CAT 
Reporters.
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    The Commission finds that the proposed rule change is consistent 
with the Act because it satisfies a condition that the Commission 
imposed in the Facility Data Exemption Order. As a result of the 
proposed rule change, the granularity of time stamps reported to the 
FINRA Facilities will match the granularity of time stamps reported by 
Industry Members directly to the CAT. Thus, the proposed rule change 
will facilitate the sequencing event reports in the CAT, thereby 
improving the ability of SROs and the Commission to utilize the CAT to 
oversee the securities markets. By supporting the efficient 
implementation of the CAT NMS Plan, the proposed rule change furthers 
the principles of the Act identified by the Commission when approving 
the CAT NMS Plan.\31\
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    \31\ See, e.g., id., 81 FR at 84698 (describing the background 
and impetus behind the Commission's adoption of Rule 613 of 
Regulation NMS).
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    The proposal also is consistent with the Act because the 
implementation schedule proposed by FINRA complies with Facility Data 
Exemption Order.\32\ Pursuant to the terms of that Order, FINRA has 
represented that the implementation date of the proposed rule change 
relating to the TRFs and ADF will be no later than December 15, 2021, 
and the implementation date relating to the ORF will be no later than 
December 15, 2022. Moreover, FINRA has represented that it will provide 
advance notice of the implementation date at least 120 days prior to 
the

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implementation date. This schedule appears reasonably designed to 
afford members sufficient time to come into compliance with the 
proposed rule change while adhering to the conditions set forth in the 
Facility Data Exemption Order.
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    \32\ See Facility Data Exemption Order, 85 FR at 36632.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\33\ that the proposed rule change (SR-FINRA-2020-029) is approved.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-25381 Filed 11-17-20; 8:45 am]
BILLING CODE 8011-01-P