Document ID: SEC-2022-0076-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2022-01-19T05:00Z

[Federal Register Volume 87, Number 12 (Wednesday, January 19, 2022)]
[Notices]
[Pages 2976-2977]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-00879]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93966; File No. SR-FINRA-2021-029]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Amend FINRA 
Rule 6732 and Expand the Scope of Exemptions That FINRA May Grant ATSs 
From the TRACE Reporting Requirements

January 12, 2022.

I. Introduction

    On November 15, 2021, 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 amend FINRA Rule 6732 (Exemption from Trade 
Reporting Obligation for Certain Transactions on an Alternative Trading 
System) to expand the scope of exemptions from the transaction 
reporting obligations of FINRA Rule 6730 (Transaction Reporting) that 
FINRA may grant to a member alternative trading system (``ATS''). The 
proposed rule change was published for comment in the Federal Register 
on November 30, 2021.\3\ The Commission received no comments 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. 93651 (November 23, 
2021), 86 FR 67996 (November 30, 2021) (``Notice'').
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II. Description of the Proposal

    FINRA Rule 6730(a) requires each FINRA member that is a Party to a 
Transaction in a TRACE-Eligible Security \4\ to report the transaction 
to the Trade Reporting and Compliance Engine (``TRACE''). FINRA Rule 
6710(e) defines ``Party to a Transaction'' as an introducing broker-
dealer (if any), an executing broker-dealer, or a customer. An 
alternative trading system (``ATS'') is a Party to a Transaction 
occurring through its system and has a TRACE transaction reporting 
obligation, unless an exception or exemption applies.\5\
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    \4\ See FINRA Rule 6710(a) (defining ``TRACE-Eligible 
Security'').
    \5\ See Regulatory Notice 14-53 (November 2014).
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    FINRA Rule 6732 provides FINRA with the authority to exempt a 
member ATS from TRACE reporting obligations under FINRA Rule 6730. 
FINRA has stated that it adopted Rule 6732 in response to concerns 
raised by members regarding operational difficulties arising from the 
reporting of certain transactions on an ATS, particularly when the ATS 
does not have a role in the clearance and settlement for trades on its 
system.\6\ If FINRA grants an ATS an exemption under Rule 6732, a 
member subscriber of the ATS, when engaging in a trade on the ATS 
covered by the Rule 6732 exemption, must report against its 
counterparty (rather than the ATS), which mitigates these operational 
difficulties and facilitates clearance and settlement.\7\
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    \6\ See Notice, 86 FR at 67997. FINRA explained that members' 
back-end systems are often programmed to clear against the 
counterparty identified on TRACE trade reports, and when the ATS is 
not involved in clearance and settlement, member subscribers often 
prefer to TRACE-report against the party with which they clear and 
settle the trade (i.e., another subscriber, rather than the ATS). 
See id.
    \7\ See id.
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    Currently, under Rule 6732, FINRA may grant an ATS an exemption if 
the following criteria are satisfied: (1) A trade is between two FINRA 
members; (2) the trade does not pass through any ATS account, and the 
ATS seeking the exemption does not exchange TRACE-Eligible Securities 
or funds on behalf of the subscribers or take either side of the trade 
for clearing or settlement purposes, or in any other way insert itself 
into the trade; (3) the ATS seeking the exemption agrees to provide 
data relating to each exempted trade to FINRA on either a monthly basis 
or as otherwise proscribed by FINRA, and acknowledges that failure to 
meet this requirement would result in its exemption being revoked; (4) 
the ATS seeking the exemption pays the applicable reporting fee to 
FINRA; and (5) the ATS seeking the exemption has entered into a written 
agreement with each member that is a Party to a Transaction to ensure 
that each exempted trade is properly reported.\8\ Where these criteria 
are satisfied, an exempted trade occurring on the ATS must be reported 
by a member (other than the ATS) that meets the definition of ``Party 
to a Transaction'' identifying a counterparty other than the ATS with 
respect to each side of the trade.\9\
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    \8\ See FINRA Rule 6732(a).
    \9\ See FINRA Rule 6732(b).
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    FINRA is now proposing to amend Rule 6732 to expand the scope of 
transactions that may be exempted under Rule 6732 to include trades 
that involve only one FINRA member (other than the ATS). Specifically, 
FINRA proposes to delete the current language in subparagraph (a)(1) of 
Rule 6732 that requires an exempted transaction to be between two FINRA 
members, and

[[Page 2977]]

replace it with the following: ``The trade involves at least one member 
(other than the ATS) that meets the definition of `Party to a 
Transaction.' ''
    FINRA has stated that, in many cases, transactions on an ATS that 
involve only one member are otherwise similar to the transactions 
between two members that are currently eligible for exemptive relief 
under existing Rule 6732.\10\ FINRA believes that expanding the scope 
of the current exemption to permit its use for transactions between a 
member (other than the ATS) and a non-member subscriber would extend 
the benefits of the rule--including simplifying compliance with TRACE 
trade reporting obligations--for additional ATS models and member 
subscribers, while capturing substantially the same regulatory 
information and enabling public dissemination of the transaction in a 
more streamlined manner.\11\
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    \10\ See Notice, 86 FR at 67997.
    \11\ See id.
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    FINRA also has proposed to add new paragraph (c) to Rule 6732, 
which provides that, with respect to a transaction between a member and 
a non-member on an ATS that is a ``covered ATS,'' \12\ the ATS must 
provide to the member subscriber, and the member subscriber must report 
to TRACE using, the FINRA-assigned identifier for each non-FINRA member 
subscriber. FINRA also has stated that an ATS that has received an 
exemption under Rule 6732 and that is a ``covered ATS'' must use the 
FINRA-assigned identifier to identify each non-FINRA member subscriber 
in the monthly transaction files that are required to be submitted to 
FINRA.\13\
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    \12\ See FINRA Rule 6730.07 (defining ``covered ATS'' as an ATS 
``that executed transactions in U.S. Treasury Securities against 
non-FINRA member subscribers of $10 billion or more in monthly par 
value, computed by aggregating buy and sell transactions, for any 
two months in the preceding calendar quarter'').
    \13\ See Notice, 86 FR at 67998, n. 12.
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    FINRA has represented that it will announce the effective date of 
the rule change in a Regulatory Notice, and the effective date will be 
no later than 365 days following Commission approval of the proposed 
rule change.\14\
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    \14\ See Notice, 86 FR at 67998.
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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.\15\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\16\ which 
requires, among other things, that the rules of a national securities 
association 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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    \15\ 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).
    \16\ 15 U.S.C. 78o-3(b)(6).
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    The proposed rule change appears reasonably designed to reduce 
reporting burdens on member ATSs and to mitigate operational burdens of 
ATS member subscribers with respect to clearance and settlement, 
without negatively impacting the regulatory audit trail or post-trade 
transparency for ATS transactions in TRACE-Eligible Securities. The 
proposed rule change will expand the scope of existing Rule 6732 by 
allowing FINRA to grant exemptions from the TRACE reporting 
requirements to ATSs regarding member-to-non-member trades in addition 
to, as currently, member-to-member trades. The proposal does not change 
any of the other criteria for granting an exemption under Rule 6732.
    Thus, although an ATS receiving an exemption pursuant to FINRA's 
expanded authority under Rule 6732 would no longer be submitting TRACE 
reports regarding exempted trades, the proposal appears reasonably 
designed to prevent any relevant information regarding such trades from 
being lost from the regulatory audit trail. An ATS granted an exemption 
under FINRA's expanded authority would have to enter into a written 
agreement with each member subscriber that is a Party to a Transaction 
that is exempted, specifying that the member must report that 
transaction to TRACE and identify the transaction as having occurred on 
the ATS using the ATS's MPID.\17\ The sole member subscriber involved 
in the transaction would have to identify a counterparty other than the 
ATS with respect to each side of the transaction.\18\ In addition, an 
ATS granted an exemption would have to agree to provide FINRA on a 
monthly basis (or such other basis as prescribed by FINRA) data 
relating to exempted trades occurring on the ATS's system, and to 
acknowledge that failure to report such data to FINRA, in addition to 
constituting a violation of FINRA rules, would result in revocation of 
any exemption granted pursuant to Rule 6732.\19\ Furthermore, under new 
Rule 6732(c), for an exempted trade between a member and a non-member 
on an ATS that is a ``covered ATS'' under FINRA Rule 6730.07, the ATS 
would have to provide to the member subscriber (and the member 
subscriber would have to report to TRACE using) the FINRA-assigned 
identifier for each non-FINRA member subscriber.
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    \17\ See FINRA Rule 6732(a)(5).
    \18\ See FINRA Rule 6732(b).
    \19\ See FINRA Rule 6732(a)(3).
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    The proposal also appears reasonably designed to prevent any 
negative impact on post-trade transparency. Although trade reports for 
exempt trades will no longer be submitted by the ATS and publicly 
disseminated, market observers will still have relevant information 
about the ATS trade between the member subscriber and the non-member 
because FINRA will continue to publicly disseminate the trade report 
submitted by the member subscriber that is the Party to the 
Transaction. This approach aligns public dissemination more closely 
with the legal and economic effects of the transaction, because an 
exemption under Rule 6732 can apply to a trade on the ATS only if the 
broker-dealer operator of the ATS is not a legal counterparty to the 
trade.\20\
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    \20\ See FINRA Rule 6732(a)(2).
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    For the reasons noted above, the Commission finds that the proposed 
rule change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-FINRA-2021-029) is approved.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-00879 Filed 1-18-22; 8:45 am]
BILLING CODE 8011-01-P