Document ID: SEC-2016-0640-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-04-14T04:00Z

[Federal Register Volume 81, Number 72 (Thursday, April 14, 2016)]
[Notices]
[Pages 22136-22138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08553]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77565; File No. SR-FINRA-2016-005]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Reduce the 
Synchronization Tolerance for Computer Clocks That Are Used To Record 
Events in NMS Securities and OTC Equity Securities

April 8, 2016.

I. Introduction

    On February 9, 2016, 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 reduce the synchronization tolerance for 
computer clocks that are used to record events in NMS Securities, 
including standardized options and OTC Equity Securities. The proposed 
rule change was published for comment in the Federal Register on 
February 25, 2016.\3\ Four comments were received in response to the 
proposal.\4\ This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 77196 (Feb. 19, 
2016), 81 FR 9550 (``Notice'').
    \4\ See Letter from Kermit Kubitz, dated March 18, 2016 
(``Kubitz Letter''); Letter from Dave Lauer, Chairman, Healthy 
Markets Association, to Brent J. Fields, Secretary, Commission, 
dated March 17, 2016 (``Healthy Markets Letter); Letter from Manisha 
Kimmel, Chief Regulatory Officer, Wealth Management, Thompson 
Reuters, to Brent J. Fields, Secretary, Commission, dated March 17, 
2015 (``Reuters Letter''); Letter from Mary Lou Von Kaenel, Managing 
Director, Financial Information Forum, to Brent J. Fields, 
Secretary, Commission, dated March 22, 2016 (``FIF Letter'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    FINRA rules require that firms synchronize their business clocks in 
conformity with procedures prescribed by FINRA. Specifically, FINRA 
Rule 7430 requires that firms synchronize their business clocks that 
are used for purposes of recording the date and time of any event that 
must be recorded pursuant to the FINRA By-Laws or other FINRA rules 
(i.e., the time a trade was executed or the time an order was received 
or routed), with reference to a time source as designated by FINRA. 
Current OATS technical specifications provide that all computer system 
clocks and mechanical time stamping devices must be synchronized to 
within one

[[Page 22137]]

second of the NIST atomic clock.\5\ As stated in the Notice, FINRA 
proposed to reduce the synchronization tolerance for members' computer 
clocks that are used to record events in NMS securities,\6\ including 
standardized options, and OTC Equity Securities.\7\
---------------------------------------------------------------------------

    \5\ Any time provider may be used for synchronization; however, 
all clocks and time stamping devices must remain accurate to within 
a one-second tolerance of the NIST clock. This tolerance includes 
(1) the difference between the NIST standard and a time provider's 
clock, (2) the transmission delay from the source and (3) the amount 
of drift of the member firm's clock. The OATS technical 
specifications further specify that computer system and mechanical 
clocks must be synchronized every business day before market open to 
ensure the accuracy of recorded order event timestamps.
    \6\ See Rule 600(b)(46) of Regulation NMS; 17 CFR 
242.600(b)(46).
    \7\ See FINRA Rule 6420(f).
---------------------------------------------------------------------------

    Given the increasing speed of trading in today's automated markets, 
FINRA believes the current one second tolerance is no longer 
appropriate for computer system clocks recording events in NMS 
securities and OTC Equity Securities, thus FINRA proposed to tighten 
the synchronization requirement for computer system clocks that record 
events in NMS securities and OTC Equity Securities by reducing the 
drift tolerance from one second to 50 milliseconds.\8\
---------------------------------------------------------------------------

    \8\ The proposal does not change the current clock 
synchronization requirement for members' mechanical time stamping 
devices or computer clocks that are used to record events for 
securities other than NMS securities or OTC Equity Securities.
---------------------------------------------------------------------------

    Under a combination of Rule 7430 and the OATS technical 
specifications, the current one second synchronization standard applies 
to the recording of the date and time of any event that must be 
recorded under FINRA By-Laws or rules. In this proposal, FINRA proposed 
to consolidate and codify the clock synchronization requirements in new 
Rule 4590 for clarity and ease of reference. This consolidation 
includes the current provision in the OATS technical specifications 
that conveys guidance on recordkeeping to demonstrate compliance with 
the synchronization standard, which would be codified without material 
change as Supplementary Material .01 to Rule 4590.
    FINRA proposed a phased implementation for the 50 millisecond 
standard.\9\ FINRA would require firms with systems that capture time 
in milliseconds to comply with the new 50 millisecond standard within 
six months of the effective date; firms that do not have systems that 
capture time in milliseconds must comply with the new standard within 
18 months of the effective date.
---------------------------------------------------------------------------

    \9\ FINRA will announce the effective date of the proposed rule 
change in a Regulatory Notice to be published no later than 90 days 
following Commission approval. See Notice, 81 FR at 9553.
---------------------------------------------------------------------------

III. Comment Letters

    The Commission received four comment letters on the proposal.\10\ 
Healthy Markets supports the proposal noting: ``[s]ub-second clock 
synchronization standards are an important element of market data and 
audit trail reliability, and most market technology is already 
synchronized at tolerances far more precise than the fifty milliseconds 
proposed.'' Further, it states that ``[c]lock synchronization is a 
critical component of today's market structure and is long overdue for 
reform,'' and notes that ``[t]ighter synchronization standards would 
enhance regulators' abilities to surveil for manipulative trading 
practices.'' The commenter suggests that FINRA recognize the 
differences between ``extremely time-sensitive trading firms and other 
market participants'' by imposing a higher standard on the firms it 
labels ``extremely time-sensitive.'' \11\ A second commenter urges 
``higher time synchronization requirements than proposed.'' \12\ FIF 
indicates that its members ``generally agree the 50 millisecond clock 
synchronization requirement is appropriate for order and execution 
events'' \13\ and acknowledges the ``compelling regulatory need for 
fine precision time stamps on order and execution events,'' \14\ 
however, FIF expresses concern about FINRA proposing this rule given 
the pending implementation of the CAT NMS Plan.\15\ The fourth 
commenter requests that ``FINRA provide a list of impacted events to 
ensure that firms are appropriately implementing reduced clock 
synchronization across all relevant systems,'' \16\ and states that 
nine months is a more reasonable timeframe within which to implement 
the requirement.\17\
---------------------------------------------------------------------------

    \10\ See supra, note 4.
    \11\ See Healthy Markets letter at 1-2.
    \12\ See Kubitz letter.
    \13\ See FIF letter at 1.
    \14\ See FIF letter at 2.
    \15\ See FIF letter at 1. FIF also raises concerns about 
applying the synchronization requirement to post-trade activities. 
See pages 1-3. The National Market System Plan governing the 
Consolidated Audit Trail (``CAT NMS Plan'') was required by Rule 613 
under the Act, which directed FINRA and the national securities 
exchanges to submit a national market systems plan to govern the 
creation, implementation, and maintenance of a consolidated audit 
trail and central repository. See Securities Exchange Act Release 
No. 67457 (July 17, 2012), 77 FR 45722 (August 1, 2012) (``Rule 613 
Adopting Release''). The CAT NMS Plan submitted by the national 
securities exchanges and FINRA on February 27, 2015 is available at 
http://www.catnmsplan.com/.
    \16\ See Thomson Reuters letter at 1.
    \17\ See id. at 2.
---------------------------------------------------------------------------

    With respect to the scope of events covered under the proposal, 
FINRA stated in the filing that through a combination of FINRA Rule 
7430 and the OATS technical specifications, the current clock 
synchronization standard already applies to the recording of the date 
and time of any event that must be recorded under FINRA By-Laws or 
rules.\18\ For instance, FINRA stated that Rule 7430 requires that 
firms synchronize business clocks used for purposes of recording the 
date and time of any event that must be recorded pursuant to the FINRA 
By-Laws or other FINRA Rules (e.g., the time a trade was executed or 
the time an order was received or routed), with reference to a time 
source as designated by FINRA.\19\ Under existing OATS technical 
specifications, all computer system clocks and mechanical stamping 
devices must be synchronized to within one second of the NITS atomic 
clock.\20\ FINRA stated that this proposal consolidates and codifies 
its clock synchronization requirements, including the new 50 
millisecond standard, in a new Rule 4590 for clarity and ease of 
reference, so as to make clear that the requirements apply to the 
recording of the date and time of any event that must be recorded under 
FINRA By-Laws or rules.\21\
---------------------------------------------------------------------------

    \18\ See Notice, 81 FR at 9551.
    \19\ See Notice, 81 FR at 9550.
    \20\ See id.
    \21\ See Notice, 81 FR at 9551.
---------------------------------------------------------------------------

    With respect to implementation, in the proposal FINRA stated that 
it has accommodated such concerns in two ways. First, FINRA tailored 
the proposal so that the 50 millisecond standard would apply only to 
NMS Securities and OTC Equity Securities and not to fixed income 
securities.\22\ Second, FINRA proposed a phased implementation schedule 
for the 50 millisecond standard that allows firms that capture time in 
milliseconds to comply with the 50 millisecond standard within six 
months of the effective date of the rule and firms that do not capture 
time in milliseconds to comply with the standard within 18 months of 
the effective date of the rule.\23\
---------------------------------------------------------------------------

    \22\ See Notice, 81 FR at 9553.
    \23\ See id.
---------------------------------------------------------------------------

    Finally, in the filing, FINRA stated that it believes that it is 
appropriate and necessary to proceed with the 50 millisecond standard 
now, rather than forego this proposal in light of the proposed CAT NMS 
Plan, because the

[[Page 22138]]

standard is an important element of market data reliability, and it may 
be sometime before the clock-synchronization requirements of the CAT 
NMS Plan take effect.\24\ FINRA stated that it relies on the accuracy 
of market data to fulfill its regulatory obligations as a national 
securities association.\25\ Accordingly, FINRA believes it has a 
current need to tighten the clock synchronization standard for events 
that must be recorded pursuant to the FINRA By-Laws or other FINRA 
Rules.\26\
---------------------------------------------------------------------------

    \24\ In the Notice, FINRA also notes that the proposed clock 
synchronization standard is consistent with the 50 millisecond clock 
synchronization standard advanced by the CAT NMS Plan. See Notice, 
81 FR at 9552.
    \25\ See id.
    \26\ Id.
---------------------------------------------------------------------------

    Two commenters suggested that FINRA should consider differentiating 
between market participants when setting clock-synchronization 
standards.\27\ For instance, one commenter stated that FINRA should 
recognize differences between extremely time-sensitive trading firms 
and other market participants, and suggested differentiating between 
co-located broker-dealers and others.\28\ Similarly, one commenter 
suggested that firms that co-locate their equipment to or otherwise 
have access to an exchange datacenter should be held to tighter 
requirements.\29\
---------------------------------------------------------------------------

    \27\ See Healthy Markets Letter and Kubitz Letter.
    \28\ See Healthy Markets Letter.
    \29\ See Kubitz Letter.
---------------------------------------------------------------------------

    In the filing, FINRA stated that audit trail integrity relies on 
the ability to accurately sequence events for a given period of time, 
including events generated by firms that do not engage in high-
frequency trading.\30\ FINRA believes it is important to apply the same 
standard to all computer-related events, regardless of firm size or 
activity type.\31\
---------------------------------------------------------------------------

    \30\ See Notice, 81 FR at 9552.
    \31\ In the Notice, FINRA states that while it does not believe 
it is practicable to adopt different standards for market 
participants, as some commenters suggested, it is proposing to 
provide less automated firms with more time to adjust their systems 
to the new proposed standard. See Notice, 81 FR 9552 n.25.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After carefully considering the proposed rule change and the 
comment letters, 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.\32\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act, 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.\33\
---------------------------------------------------------------------------

    \32\ In approving the proposed rule change, the Commission has 
also considered the rule change's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \33\ 21 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The Commission agrees with the commenter's observation that clock 
synchronization is a ``critical component of today's market 
structure.'' \34\ Tightening the clock synchronization requirement to 
50 milliseconds will bolster FINRA's ability to meet its regulatory 
obligations as a national securities association. As the Commission has 
noted, time drift away from a universal, synchronized standard is an 
important issue to address to enhance the integrity of audit trail 
data.\35\ The Commission agrees with the commenter's observation that 
updating clock synchronization standards is important to improve 
transparency and enhance surveillance and enforcement capabilities. 
Further, the Commission believes that FINRA's decision to have a 
consistent clock synchronization standard across the industry at this 
time is a reasonable decision. The Commission believes it is important 
to pursue a 50 millisecond standard at this time so that FINRA can 
compile more accurate audit trail data and conduct surveillance with 
more precise time-sequenced data, rather than waiting for the issue to 
be addressed by the CAT NMS Plan.\36\ Tighter synchronization is 
critical to precisely reconstructing market events, as the commenter 
noted,\37\ which will facilitate FINRA's efforts to detect and 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. In addition, the Commission notes that the 
proposed rule change does not alter the events that are covered by the 
clock synchronization requirement.
---------------------------------------------------------------------------

    \34\ See Healthy Markets letter at 1.
    \35\ See Rule 613 Adopting Release, 77 FR at 45774. The 
Commission notes that the FINRA proposal is consistent with the 
clock-synchronization standard advanced by the CAT NMS Plan.
    \36\ See supra, note 24.
    \37\ See Healthy Markets letter at 1.
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission finds that the 
proposed rule change is consistent with Section 15A of the Act.

V. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\38\ that the proposed rule change (SR-FINRA-2016-005) be and hereby is 
approved.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
---------------------------------------------------------------------------

    \39\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08553 Filed 4-13-16; 8:45 am]
 BILLING CODE 8011-01-P