Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt a Supplemental Schedule for Inventory Positions Pursuant to FINRA Rule 4524 (Supplemental FOCUS Information), 36357-36361 [2014-14942]
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Federal Register / Vol. 79, No. 123 / Thursday, June 26, 2014 / Notices
an identical later-arriving non-post-only
order. The Commission believes the
proposed rule change raises questions
regarding: (1) Whether it is unfairly
discriminatory, or inconsistent with the
protection of investors and the public
interest, for the later-arriving order to
have execution priority in these
circumstances; and (2) whether it is
inconsistent with a free and open
market and the national market system,
or the protection of investors and the
public interest, for an exchange to create
complex order interaction scenarios in
order to maintain a simplified fee
schedule.
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IV. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data and
arguments with respect to the concerns
identified above, as well as any others
they may have with the proposal. In
particular, the Commission invites the
written views of interested persons
concerning whether the proposed rule
change is inconsistent with
Section6(b)(5), or any other provision, of
the Act, or the rules and regulations
thereunder. Although there do not
appear to be any issues relevant to
approval or disapproval that would be
facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b–4, any request for an
opportunity to make an oral
presentation.41
Interested persons are invited to
submit written data, views and
arguments regarding whether the
proposed rule change should be
approved or disapproved by July 17,
2014. Any person who wishes to file a
rebuttal to any other person’s
submission must file that rebuttal by
July 31, 2014.
The Commission asks that
commenters address the sufficiency and
merit of the Exchange’s statements in
support of the proposal, in addition to
any other comments they may wish to
submit about the proposed rule change.
In particular, the Commission seeks
comment on the following:
1. As proposed, an incoming MDO
would not execute against certain
41 Section 19(b)(2) of the Act, as amended by the
Securities Act Amendments of 1975, Public Law
94–29 (June 4, 1975), grants the Commission
flexibility to determine what type of proceeding—
either oral or notice and opportunity for written
comments—is appropriate for consideration of a
particular proposal by a self-regulatory
organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban
Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30
(1975).
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resting orders willing to pay a take fee,
but could instead execute against laterarriving orders identical to the resting
orders.42 Would this result add
unnecessary complexity to the
Exchange’s priority rules and the equity
markets generally? Would it create
opportunities for Users to effect ‘‘queuejumping’’ or other strategies that might
be unfair or detrimental to the markets?
Please explain.
2. The Exchange asserts that, once a
User’s order is posted to the EDGX
Book, the User expects to receive a
rebate, even if it was willing to pay a
take fee when the order was initially
submitted.43 Does this accurately
represent User expectations? Please
explain. Would such a User be willing
to pay a fee to execute against an
incoming MDO if the net execution
price, taking into account the rebate
forgone and the fee paid, is within the
range of prices the User would have
been willing to accept upon order entry?
3. The Exchange indicates that one
reason an incoming MDO would not
execute against a resting, contra-side
Discretionary Order or MDO is because,
in this circumstance, the provider of
liquidity would receive a rebate while
the taker of liquidity would be charged
no fee.44 Is it appropriate for an
Exchange to address scenarios such as
this—in which it would lose money—by
adding complexity to the way orders
interact (including overriding time
priority), rather than adjusting its fee
schedule?
4. What type of market participants
would avail themselves of the MDO,
and how and why would the order type
improve market quality or otherwise
promote fair and orderly markets, or the
protection of investors and the public
interest?
Comments may be submitted by any
of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
EDGX–2014–05 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–EDGX–2014–05. This file
42 See supra notes 15–16, 32–36 and
accompanying text.
43 See supra note 34 and accompanying text.
44 See supra notes 15–16 and accompanying text.
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36357
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 Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
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 Web site 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 the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
publicly available. All submissions
should refer to File Number SR–EDGX–
2014–05 and should be submitted on or
before July 17, 2014. If comments are
received, any rebuttal comments should
be submitted by July 31, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.45
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–14971 Filed 6–25–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72444; File No. SR–FINRA–
2014–025]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Adopt a
Supplemental Schedule for Inventory
Positions Pursuant to FINRA Rule 4524
(Supplemental FOCUS Information)
June 20, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘SEA’’) 1 and Rule 19b–4
45 17
1 15
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U.S.C. 78s(b)(1).
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thereunder,2 notice is hereby given that
on June 16, 2014, the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been substantially prepared by
FINRA. The Commission is publishing
this notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to adopt a
supplemental schedule for inventory
positions pursuant to FINRA Rule 4524
(Supplemental FOCUS Information).
The text of the proposed rule change
is available on FINRA’s Web site at
https://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 Items II.A., II.B.,
and II.C. below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
Pursuant to SEA Rule 17a–5,3 most
firms are required to file with FINRA
reports concerning their financial and
operational status using the Financial
and Operational Combined Uniform
Single (FOCUS) Report.4 In general,
firms with a FOCUS filing requirement
must either file a FOCUS Report Part II
if they clear transactions or carry
customer accounts 5 or file a FOCUS
Report Part IIA if they do not.6 Firms
that are government securities brokerdealers registered under Section 15C of
the Act 7 do not file a FOCUS Report
2 17
CFR 240.19b–4.
CFR 240.17a–5.
4 SEC Form X–17A–5.
5 Firms that calculate net capital using Appendix
E to SEA Rule 15c3–1 file FOCUS Report Part II
CSE, rather than FOCUS Report Part II.
6 17 CFR 240.17a–5.
7 15 U.S.C. 78o–5.
3 17
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and instead are required to file reports
concerning their financial and
operational status using the Report on
Finances and Operations of Government
Securities Brokers and Dealers (FOGS
Report).8 These firms are required to file
a FOGS Report Part I and either a FOGS
Report Part II if they clear transactions
or carry customer accounts or FOGS
Report Part IIA if they do not.9
FINRA Rule 4524 (Supplemental
FOCUS Information) requires each firm,
as FINRA shall designate, to file such
additional financial or operational
schedules or reports as FINRA may
deem necessary or appropriate for the
protection of investors or in the public
interest as a supplement to the FOCUS
Report.10 Pursuant to FINRA Rule 4524,
FINRA is proposing the adoption of a
supplemental schedule to the FOCUS
Report Part II, FOCUS Report Part IIA
and the FOGS Report Part I that would
provide more detailed information of
inventory positions held by firms. The
proposed Supplemental Inventory
Schedule (‘‘SIS’’) would be due 20
business days after the end of a firm’s
FOCUS or FOGS reporting period.11
The proposal requires the SIS to be
filed by firms that are required to file
FOCUS Report Part II, FOCUS Report
Part IIA or FOGS Report Part I with
inventory positions as of the end of the
FOCUS or FOGS reporting period with
two exceptions. The first exception is
for firms that have a minimum net
capital or liquid capital requirement 12
of less than $100,000. Such firms are not
allowed to engage in dealer activities
and are limited to 10 proprietary
transactions per year. Further, such
firms are not permitted to self-clear or
carry customer accounts. The second
exception is for firms that have
inventory positions consisting only of
money market mutual funds. Money
market mutual funds limit their
investments to short-term, high-quality
debt securities and are permitted to sell
and redeem shares at a stable price,
typically at $1.00 per share, without
regard to small variations in the value
8 Department
of the Treasury Form G–405.
CFR 405.2; 17 CFR 240.17a–5.
10 The reference to FOCUS reports under FINRA
Rule 4524 includes FOGS Reports required to be
filed by government securities broker-dealers
registered under Section 15C of the Act in lieu of
FOCUS Reports.
11 Firms that file FOCUS Report Part II CSE would
not be subject to the proposed SIS. As part of
FOCUS Report Part II CSE, the Aggregate Securities
and OTC Derivative Positions schedule requires
firms to provide information that is similar to the
proposed SIS.
12 Firms that file the FOCUS Report must comply
with a minimum net capital requirement, while
firms that file the FOGS Report must comply with
a minimum liquid capital requirement.
9 17
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of the funds’ underlying securities.13 A
firm with inventory positions consisting
only of money market mutual funds
would need to affirmatively indicate
through functionality on the eFOCUS
system that no SIS filing is required for
the reporting period. FINRA believes
that firms that meet either of these two
criteria pose significantly less risk to
customers and other market
participants. These exceptions will not
only minimize the burden on firms, but
also will allow FINRA to focus its
resources where the risk is most
concerning.
The proposed SIS is intended to
capture more details of a firm’s long and
short inventory positions than what is
captured on the FOCUS Report Part II,
FOCUS Report Part IIA and FOGS
Report Part I. For example, FOCUS
Report Part II, FOCUS Report Part IIA
and FOGS Report Part I require total
inventory of securities sold short to be
reported in aggregate (Item 1620),
providing no information on the types
of securities sold short by firms. In
addition, FOGS Report Part I requires
that all long inventory be reported in
aggregate (Item 850). Further, on FOCUS
Report Part II and IIA, long inventory is
reported in categories that aggregate
securities with different market risk
profiles (e.g., the Corporate Obligations
category on the FOCUS Report Part II
(Item 400) and Debt Securities category
on the FOCUS Report Part IIA (Item
419) include single name corporate
bonds, private-label mortgage-backed
securities and foreign issuer debt
obligations). The proposed SIS would
enhance FINRA’s ongoing surveillance
monitoring of firms’ financial condition
by providing greater transparency into
the market risk posed by a firm’s
inventory positions and the potential
impact to a firm’s net capital or liquid
capital, as well as related funding and
liquidity needs. In addition, the
information provided by the proposed
SIS would enable FINRA staff to
perform more targeted examinations of
firms’ market risk exposure.
The proposed rule change will be
effective upon Commission approval.
FINRA will announce the
implementation date of the proposed
supplemental schedule in a Regulatory
Notice to be published no later than 60
days following Commission approval.
The due date for the first proposed
schedule will be no later than 90 days
following Commission approval of the
proposed rule change.
13 See Securities Act Release No. 9408 (June 5,
2013), 78 FR 36834, 36835 (June 19, 2013)
(Proposed Rule: Money Market Fund Reform;
Amendments to Form PF).
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2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,14 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. FINRA believes that the
proposed rule change is consistent with
the provisions of the Act noted above in
that the proposed SIS will provide
FINRA with greater insights into the
types of securities held in inventory by
firms and the related market risk
associated with such inventory
positions. In addition, the proposed SIS
would enable FINRA staff to assess the
related impact on firms’ liquidity and
funding needs. The information
provided on the proposed SIS would be
used by FINRA to monitor firms’
financial condition and perform more
targeted examinations of firms’ market
risk exposure. The proposed rule change
also is consistent with Section
712(b)(3)(B) of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act 15 in that it is necessary to enable
FINRA to more effectively examine for
compliance with, and enforce, its rules
on capital adequacy.
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. FINRA
believes that the economic and
operational impact associated with
completion of the proposed SIS would
be minimal because the required
information should be readily available
to firms, as it is necessary for purposes
of computing the haircut deductions
required under SEA Rule 15c3–1.16
However, FINRA recognizes that there
may be an initial one-time cost to map
inventory positions to the line items on
the proposed SIS. FINRA believes that
any burden imposed by the proposed
SIS would be outweighed by the benefit
to firms in allowing the staff to better
understand a firm’s market risk, which
will lead to more focused reviews
during examinations. In addition, the
proposal is narrowly tailored to capture
those firms that pose the most risk to
customers and other market
participants. Firms with inventory
positions as of the end of the FOCUS or
14 15
U.S.C. 78o–3(b)(6).
15 Public Law 111–203, 124 Stat. 1376 (2010).
16 17 CFR 240.15c3–1.
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FOGS reporting period will not have to
file the proposed SIS if they: (1) Have
a minimum net capital or liquid capital
requirement of less than $100,000; or (2)
have inventory positions consisting only
of money market mutual funds. Based
on FOCUS Report data, as of June 30,
2013, FINRA estimates that 2,830 out of
4,327 firms (65 percent) have a
minimum net capital or liquid capital
requirement of less than $100,000.
As discussed in Item II.C. below,
FINRA initially considered exempting
from the SIS filing requirement those
firms that had inventory positions
consisting only of U.S. Treasury
securities or money market mutual
funds. However, three commenters
questioned the U.S. Treasury
exemption, noting among other factors
the market risk posed by certain U.S.
Treasury securities and the risks posed
by concentrations in those securities.
Alternatively, these commenters
suggested exemptions based on a firm’s
level of excess capital and leverage, for
short-term instruments and for small
broker-dealers. In response to
commenters’ suggestions, FINRA is not
proposing an exemption for U.S.
Treasury securities. However, FINRA is
proposing at this time to exempt from
the SIS filing requirement those firms
that have a minimum net capital or
liquid capital requirement of less than
$100,000. FINRA believes that
exempting such firms should serve to
reduce the compliance burdens for
many small firms while also ensuring
that FINRA receives the SIS data from
those firms that pose higher risk to
customers and other market
participants.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The proposed rule change was
published for comment in Regulatory
Notice 13–05 (January 2013) (the
‘‘Notice’’). Four comments were
received in response to the Notice. 17
Below is a summary of the comments
and FINRA’s responses.
1. Exemption for U.S. Treasury
Securities
In the Notice, FINRA specifically
requested comment on whether firms
17 See Letter from Pat Nelson, dated January 31,
2013 (‘‘Nelson’’); letter from Jim Nelson, dated
February 7, 2013 (‘‘Jim Nelson’’); letter from
Wendie L Wachtel, CCO, Wachtel & Co Inc, to
Marcia E Asquith, Corporate Secretary, FINRA,
dated February 12, 2013 (‘‘Wachtel’’); and letter
from Howard Spindel, Senior Managing Director,
and Cassondra E. Joseph, Managing Director,
Integrated Management Solutions USA LLC, dated
February 25, 2013 (‘‘IMS’’).
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36359
that have inventory positions consisting
only of U.S. Treasury securities should
be exempt from the filing requirement.
One commenter believed that no
securities, including U.S. Treasury
securities, should be excluded from
review as all securities pose certain
risks especially if they are
concentrated.18 As discussed further
below, one commenter believed that the
exemption is a poor match with
regulatory objectives.19 Another
commenter disagreed with the
exemption and questioned ‘‘why FINRA
would exempt from reporting a firm
with a portfolio of longer-term, low
coupon U.S. Government bonds that
would be significantly more sensitive to
market risk than many other debt
instruments especially investment-grade
ones of much shorter durations.’’20 The
commenter believed that there should
be an exemption for firms that invest
their excess cash in short-term
instruments such as money market
mutual funds, short-term funds and
high-grade debt instruments maturing in
the short term.21
FINRA has considered these
comments and agrees that a firm that
has inventory positions consisting only
of U.S. Treasury securities should be
required to file the proposed SIS.
FINRA, however, proposes to exempt
from the filing requirement those firms
that: (1) Have a minimum net capital or
liquid capital requirement of less than
$100,000; or (2) have inventory
positions consisting only of money
market mutual funds. In response to the
comment for a short-term instrument
exemption, FINRA notes that the
proposal exempts firms with inventory
positions consisting only of money
market mutual funds. However, FINRA
believes that firms with inventory
positions in short-term funds or highgrade debt instruments maturing in the
short term should not be exempted from
the proposed SIS as those positions are
subject to greater market risk. For
example, the credit crisis showed that
short-term debt instruments (e.g.,
auction rate securities) can suffer
material losses, irrespective of their
investment grade ratings.
2. Exemption for Firms Based on Net
Capital or Liquid Capital Requirement
In the Notice, FINRA specifically
requested comment on whether there is
a category of firms that should not be
required to file the proposed SIS based
upon a de minimis amount of inventory
18 Nelson.
19 Wachtel.
20 IMS.
21 IMS.
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positions. One commenter believed
there should be a de minimis cutoff and
stated that FINRA should ‘‘not place
undue burdens on the small broker
dealer community.’’ 22 The commenter
suggested that ‘‘reporting should only be
required by firms that pose a systemic
risk to the financial markets.’’23 One
commenter believed that an exemption
should be focused on a firm’s level of
excess capital and leverage.24 FINRA
has considered these comments and
proposes that firms with inventory
positions that have a net capital or
liquid capital requirement of less than
$100,000 would not need to file the
proposed SIS. These firms are
prohibited from engaging in dealer
activities, self-clearing or carrying
customer accounts and, as such pose
less risk to the financial markets than
firms with higher net capital or liquid
capital requirements. FINRA disagrees
with the commenters that reporting
should only be required by firms that
pose systemic risk or that an exemption
should be focused on a firm’s level of
excess capital and leverage. Systemic
risk is not the focus of the proposed SIS;
rather, the proposal is intended to
protect customers and other market
participants who could be at risk if the
firm’s financial condition deteriorates.
As such, requiring only firms that pose
systemic risk to report to FINRA would
hinder the staff’s ability to identify and
monitor the market, funding and
liquidity risk of other firms whose
inventory positions and dealer activities
could result in harm to customers and
other market participants. In addition,
an exemption based on a firm’s high
excess net capital or liquid capital
without regard to the type of inventory
positions held would exempt a number
of firms that hold significant levels of
complex securities in inventory and
self-clear, carry customer accounts or
engage in dealer activities. Further, an
exemption based on leverage would
exempt those firms that have a low
leverage ratio without regard to other
risk factors, such as a high
concentration in a particular category of
less liquid securities (e.g., high yield
debt, private label collateralized
mortgage obligations).
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3. Economic Impact
In the Notice, FINRA specifically
requested comment on the economic
impact of the proposed SIS. Two
commenters believed that the proposed
SIS would place an unjustified burden
on firms.25 One of these commenters
stated that even though firms already
have the requested inventory
information, the data will have to be put
in the required format.26 The
commenter suggested that FINRA
should ask a firm for a copy of its
inventory and then input the data.27
One commenter believed that there
would be significant cost with no
benefit and the proposed SIS would
increase the effort of monthly filing by
15%.28 Further, the commenter
requested that any new requirements be
incorporated into the original FOCUS
form rather than requiring separate
schedules that entail burdensome
duplication and reconciliations.29
However, one commenter agreed that
firms currently compile inventory
information as it is needed to compute
haircut deductions when calculating net
capital and stated that the proposed SIS
is not nearly as burdensome as receiving
questions from FINRA examiners or
coordinators seeking to drill down into
figures that are provided by the FOCUS
Report.30
Consistent with the discussion above,
FINRA believes that the economic
impact associated with completion of
the proposed SIS would be minimal
because the required information should
be readily available to firms, as it is
necessary for purposes of computing the
haircut deductions required under SEA
Rule 15c3–1.31 Moreover, FINRA
believes the proposed SIS is an effective
and timely way to obtain detail of the
inventory positions held by firms.
FINRA notes it consulted with its
advisory committees to help inform this
view. In regard to the comment that the
proposed SIS would increase the effort
of monthly filing by 15%, FINRA notes
that the commenter did not provide any
evidence, basis or context to support the
assertion, and therefore FINRA is
uncertain as to its reliability. With
respect to incorporating new
requirements into the original FOCUS
form, Form X–17A–5, FINRA notes that
it is an SEC form, and any changes to
it must be proposed and adopted by the
SEC. However, FINRA would support
updates to Form X–17A–5 by the SEC
that would incorporate this more
detailed reporting, and, if such updates
were made, FINRA staff would seek to
25 Jim
Nelson and Nelson.
26 Nelson.
reduce accordingly the requirement for
firms to file the proposed SIS.
4. Instructions and Recommended
Changes
One commenter was concerned that
there were no instructions provided for
the proposed SIS and that key
definitions such as ‘‘arbitrage’’ and ‘‘no
ready market’’ are not defined.32 In
addition, the commenter believed that
the term ‘‘Investments’’ is particularly
confusing in the category for
‘‘Investments with no ready market’’
and suggested that ‘‘Securities’’ should
be used.33 In addition, the commenter
believed that asking for a beginning date
on the proposed SIS is meaningless
information.34 Furthermore, the
commenter stated that the proposed SIS
ignores financings such as repurchase
agreements and loans, does not contain
a line for securities lending, does not
itemize derivatives by market bias and
does not request a breakdown of the
types of commodities actually being
held.35
In response to the commenter, FINRA
has developed instructions for the
proposed SIS. The instructions include
guidance, clarifications and definitions
with respect to specific line items that
FINRA believes should ameliorate the
commenter’s concern. In addition,
FINRA has amended the proposed SIS
to state ‘‘[s]ecurities with no ready
market’’ on line 13, instead of
‘‘[i]nvestments with no ready market,’’
to alleviate confusion and has removed
the line item for a beginning period
date. With regard to capturing
information about repurchase
agreements and securities lending,
FINRA notes that the proposed SIS is an
inventory schedule and, as such, is not
intended to capture financing
transactions. In response to the
comment about itemizing derivatives
exposures by market bias, FINRA has
expanded the ‘‘Derivatives including
Options’’ on line 11 to distinguish
between centrally cleared derivatives
and other derivatives and to require a
limited breakdown of information for
the two categories. In addition, FINRA
notes that additional derivatives
information is captured on the
Derivatives and Other Off-Balance Sheet
Schedule. Finally, in response to the
request for a breakdown of the types of
commodities actually being held,
FINRA believes, at this time, that the
proposed SIS captures the information
that is needed to enable FINRA staff to
27 Nelson.
28 Wachtel.
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Nelson and Nelson.
23 Nelson.
24 Wachtel.
32 IMS.
29 Wachtel.
22 Jim
35 IMS.
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Federal Register / Vol. 79, No. 123 / Thursday, June 26, 2014 / Notices
assess the related market risk and
impact on firms’ liquidity and funding
needs arising from inventory holdings.
5. Alternatives to Proposed SIS
One commenter offered an alternative
to the proposed SIS.36 The commenter
suggested that ‘‘FINRA should offer
firms the ability to report the dollar
amounts to which each haircut category
applies.’’ 37 The commenter believed
that ‘‘[t]he haircut category is so much
more relevant than the issuer type or
even whether the haircut is on a long or
short position.’’ 38 FINRA disagrees with
the commenter and believes that for
purposes of understanding market risk
associated with firms’ inventory
positions, issuer type is more
appropriate than haircut category. For
example, an equity security has
different market risk than certain highyield bonds; however, both types of
securities can be in the same haircut
category. Therefore, FINRA believes that
obtaining information regarding the
actual makeup of a firm’s inventory
positions is best achieved through the
proposed SIS.
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:
Paper Comments
• Send paper comments to Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–FINRA–2014–025. 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 Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
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 Web site 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
a.m. and 3 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; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–FINRA–2014–025 and
should be submitted on or before July
17, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.39
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–14942 Filed 6–25–14; 8:45 am]
BILLING CODE 8011–01–P
tkelley on DSK3SPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2014–025 on the subject line.
36 IMS.
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72439; File No. SR–
NYSEArca–2014–47]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of
Amendments No. 2 and No. 3 and
Order Granting Accelerated Approval
of a Proposed Rule Change, as
Modified by Amendments No. 1, No. 2,
and No. 3 To List and Trade Shares of
Fidelity® Corporate Bond ETF
Managed Shares Under NYSE Arca
Equities Rule 8.600
June 20, 2014.
I. Introduction
On April 16, 2014, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) 1 of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 2 and Rule 19b–4 thereunder,3 a
proposed rule change to list and trade
shares (‘‘Shares’’) of the Fidelity
Corporate Bond ETF (‘‘Fund’’). On April
30, 2014, the Exchange filed
Amendment No. 1 to the proposed rule
change, which amended and replaced
the proposed rule change in its
entirety.4 The proposed rule change, as
modified by Amendment No. 1, was
published for comment in the Federal
Register on May 1, 2014.5 On June 16,
2014, the Exchange filed Amendment
No. 2 to the proposed rule change.6 On
June 19, 2014, the Exchange filed
Amendment No. 3 to the proposed rule
change.7 The Commission received no
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
4 Amendment No. 1 replaced SR–NYSEArca–
2014–47 as originally filed and supersedes such
filing in its entirety.
5 See Securities Exchange Act Release No. 72068
(May 1, 2014), 79 FR 25923 (‘‘Notice’’).
6 In Amendment No. 2, the Exchange: (1) Clarified
its description of the reference assets that may
underlie the derivative investments held by the
Fund; (2) deleted a representation that the Fund’s
investments in preferred securities are generally not
expected to be exchange-listed, thus making clearer
that the Fund may invest in both exchange-listed
and non-exchange-listed preferred securities; (3)
clarified that information regarding only U.S.
exchange-listed options is available via the Options
Price Reporting Authority (‘‘OPRA’’); and (4)
corrected its characterization of investments such as
swaps, forwards and currency-related derivatives by
referring to them as ‘‘OTC-traded derivative
instruments’’ rather than as ‘‘OTC-traded derivative
securities.’’
7 In Amendment No. 3, the Exchange: (1)
Expanded the list of reference assets underlying the
futures contracts which the Fund may hold to
include both rates and indexes of rates; (2) added
that futures contracts currently overlie both rates
and indexes of rates; and (3) deleted an unnecessary
2 15
CFR 200.30–3(a)(12).
Frm 00076
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Continued
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]]>Agencies
[Federal Register Volume 79, Number 123 (Thursday, June 26, 2014)]
[Notices]
[Pages 36357-36361]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-14942]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72444; File No. SR-FINRA-2014-025]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt a
Supplemental Schedule for Inventory Positions Pursuant to FINRA Rule
4524 (Supplemental FOCUS Information)
June 20, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``SEA'') \1\ and Rule 19b-4
[[Page 36358]]
thereunder,\2\ notice is hereby given that on June 16, 2014, the
Financial Industry Regulatory Authority, Inc. (``FINRA'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been substantially prepared by FINRA. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to adopt a supplemental schedule for inventory
positions pursuant to FINRA Rule 4524 (Supplemental FOCUS Information).
The text of the proposed rule change is available on FINRA's Web
site at https://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 Items II.A.,
II.B., and II.C. below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Pursuant to SEA Rule 17a-5,\3\ most firms are required to file with
FINRA reports concerning their financial and operational status using
the Financial and Operational Combined Uniform Single (FOCUS)
Report.\4\ In general, firms with a FOCUS filing requirement must
either file a FOCUS Report Part II if they clear transactions or carry
customer accounts \5\ or file a FOCUS Report Part IIA if they do
not.\6\ Firms that are government securities broker-dealers registered
under Section 15C of the Act \7\ do not file a FOCUS Report and instead
are required to file reports concerning their financial and operational
status using the Report on Finances and Operations of Government
Securities Brokers and Dealers (FOGS Report).\8\ These firms are
required to file a FOGS Report Part I and either a FOGS Report Part II
if they clear transactions or carry customer accounts or FOGS Report
Part IIA if they do not.\9\
---------------------------------------------------------------------------
\3\ 17 CFR 240.17a-5.
\4\ SEC Form X-17A-5.
\5\ Firms that calculate net capital using Appendix E to SEA
Rule 15c3-1 file FOCUS Report Part II CSE, rather than FOCUS Report
Part II.
\6\ 17 CFR 240.17a-5.
\7\ 15 U.S.C. 78o-5.
\8\ Department of the Treasury Form G-405.
\9\ 17 CFR 405.2; 17 CFR 240.17a-5.
---------------------------------------------------------------------------
FINRA Rule 4524 (Supplemental FOCUS Information) requires each
firm, as FINRA shall designate, to file such additional financial or
operational schedules or reports as FINRA may deem necessary or
appropriate for the protection of investors or in the public interest
as a supplement to the FOCUS Report.\10\ Pursuant to FINRA Rule 4524,
FINRA is proposing the adoption of a supplemental schedule to the FOCUS
Report Part II, FOCUS Report Part IIA and the FOGS Report Part I that
would provide more detailed information of inventory positions held by
firms. The proposed Supplemental Inventory Schedule (``SIS'') would be
due 20 business days after the end of a firm's FOCUS or FOGS reporting
period.\11\
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\10\ The reference to FOCUS reports under FINRA Rule 4524
includes FOGS Reports required to be filed by government securities
broker-dealers registered under Section 15C of the Act in lieu of
FOCUS Reports.
\11\ Firms that file FOCUS Report Part II CSE would not be
subject to the proposed SIS. As part of FOCUS Report Part II CSE,
the Aggregate Securities and OTC Derivative Positions schedule
requires firms to provide information that is similar to the
proposed SIS.
---------------------------------------------------------------------------
The proposal requires the SIS to be filed by firms that are
required to file FOCUS Report Part II, FOCUS Report Part IIA or FOGS
Report Part I with inventory positions as of the end of the FOCUS or
FOGS reporting period with two exceptions. The first exception is for
firms that have a minimum net capital or liquid capital requirement
\12\ of less than $100,000. Such firms are not allowed to engage in
dealer activities and are limited to 10 proprietary transactions per
year. Further, such firms are not permitted to self-clear or carry
customer accounts. The second exception is for firms that have
inventory positions consisting only of money market mutual funds. Money
market mutual funds limit their investments to short-term, high-quality
debt securities and are permitted to sell and redeem shares at a stable
price, typically at $1.00 per share, without regard to small variations
in the value of the funds' underlying securities.\13\ A firm with
inventory positions consisting only of money market mutual funds would
need to affirmatively indicate through functionality on the eFOCUS
system that no SIS filing is required for the reporting period. FINRA
believes that firms that meet either of these two criteria pose
significantly less risk to customers and other market participants.
These exceptions will not only minimize the burden on firms, but also
will allow FINRA to focus its resources where the risk is most
concerning.
---------------------------------------------------------------------------
\12\ Firms that file the FOCUS Report must comply with a minimum
net capital requirement, while firms that file the FOGS Report must
comply with a minimum liquid capital requirement.
\13\ See Securities Act Release No. 9408 (June 5, 2013), 78 FR
36834, 36835 (June 19, 2013) (Proposed Rule: Money Market Fund
Reform; Amendments to Form PF).
---------------------------------------------------------------------------
The proposed SIS is intended to capture more details of a firm's
long and short inventory positions than what is captured on the FOCUS
Report Part II, FOCUS Report Part IIA and FOGS Report Part I. For
example, FOCUS Report Part II, FOCUS Report Part IIA and FOGS Report
Part I require total inventory of securities sold short to be reported
in aggregate (Item 1620), providing no information on the types of
securities sold short by firms. In addition, FOGS Report Part I
requires that all long inventory be reported in aggregate (Item 850).
Further, on FOCUS Report Part II and IIA, long inventory is reported in
categories that aggregate securities with different market risk
profiles (e.g., the Corporate Obligations category on the FOCUS Report
Part II (Item 400) and Debt Securities category on the FOCUS Report
Part IIA (Item 419) include single name corporate bonds, private-label
mortgage-backed securities and foreign issuer debt obligations). The
proposed SIS would enhance FINRA's ongoing surveillance monitoring of
firms' financial condition by providing greater transparency into the
market risk posed by a firm's inventory positions and the potential
impact to a firm's net capital or liquid capital, as well as related
funding and liquidity needs. In addition, the information provided by
the proposed SIS would enable FINRA staff to perform more targeted
examinations of firms' market risk exposure.
The proposed rule change will be effective upon Commission
approval. FINRA will announce the implementation date of the proposed
supplemental schedule in a Regulatory Notice to be published no later
than 60 days following Commission approval. The due date for the first
proposed schedule will be no later than 90 days following Commission
approval of the proposed rule change.
[[Page 36359]]
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\14\ 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. FINRA believes that the proposed rule change is
consistent with the provisions of the Act noted above in that the
proposed SIS will provide FINRA with greater insights into the types of
securities held in inventory by firms and the related market risk
associated with such inventory positions. In addition, the proposed SIS
would enable FINRA staff to assess the related impact on firms'
liquidity and funding needs. The information provided on the proposed
SIS would be used by FINRA to monitor firms' financial condition and
perform more targeted examinations of firms' market risk exposure. The
proposed rule change also is consistent with Section 712(b)(3)(B) of
the Dodd-Frank Wall Street Reform and Consumer Protection Act \15\ in
that it is necessary to enable FINRA to more effectively examine for
compliance with, and enforce, its rules on capital adequacy.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78o-3(b)(6).
\15\ Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------
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. FINRA believes that the
economic and operational impact associated with completion of the
proposed SIS would be minimal because the required information should
be readily available to firms, as it is necessary for purposes of
computing the haircut deductions required under SEA Rule 15c3-1.\16\
However, FINRA recognizes that there may be an initial one-time cost to
map inventory positions to the line items on the proposed SIS. FINRA
believes that any burden imposed by the proposed SIS would be
outweighed by the benefit to firms in allowing the staff to better
understand a firm's market risk, which will lead to more focused
reviews during examinations. In addition, the proposal is narrowly
tailored to capture those firms that pose the most risk to customers
and other market participants. Firms with inventory positions as of the
end of the FOCUS or FOGS reporting period will not have to file the
proposed SIS if they: (1) Have a minimum net capital or liquid capital
requirement of less than $100,000; or (2) have inventory positions
consisting only of money market mutual funds. Based on FOCUS Report
data, as of June 30, 2013, FINRA estimates that 2,830 out of 4,327
firms (65 percent) have a minimum net capital or liquid capital
requirement of less than $100,000.
---------------------------------------------------------------------------
\16\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------
As discussed in Item II.C. below, FINRA initially considered
exempting from the SIS filing requirement those firms that had
inventory positions consisting only of U.S. Treasury securities or
money market mutual funds. However, three commenters questioned the
U.S. Treasury exemption, noting among other factors the market risk
posed by certain U.S. Treasury securities and the risks posed by
concentrations in those securities. Alternatively, these commenters
suggested exemptions based on a firm's level of excess capital and
leverage, for short-term instruments and for small broker-dealers. In
response to commenters' suggestions, FINRA is not proposing an
exemption for U.S. Treasury securities. However, FINRA is proposing at
this time to exempt from the SIS filing requirement those firms that
have a minimum net capital or liquid capital requirement of less than
$100,000. FINRA believes that exempting such firms should serve to
reduce the compliance burdens for many small firms while also ensuring
that FINRA receives the SIS data from those firms that pose higher risk
to customers and other market participants.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in Regulatory
Notice 13-05 (January 2013) (the ``Notice''). Four comments were
received in response to the Notice. \17\ Below is a summary of the
comments and FINRA's responses.
---------------------------------------------------------------------------
\17\ See Letter from Pat Nelson, dated January 31, 2013
(``Nelson''); letter from Jim Nelson, dated February 7, 2013 (``Jim
Nelson''); letter from Wendie L Wachtel, CCO, Wachtel & Co Inc, to
Marcia E Asquith, Corporate Secretary, FINRA, dated February 12,
2013 (``Wachtel''); and letter from Howard Spindel, Senior Managing
Director, and Cassondra E. Joseph, Managing Director, Integrated
Management Solutions USA LLC, dated February 25, 2013 (``IMS'').
---------------------------------------------------------------------------
1. Exemption for U.S. Treasury Securities
In the Notice, FINRA specifically requested comment on whether
firms that have inventory positions consisting only of U.S. Treasury
securities should be exempt from the filing requirement. One commenter
believed that no securities, including U.S. Treasury securities, should
be excluded from review as all securities pose certain risks especially
if they are concentrated.\18\ As discussed further below, one commenter
believed that the exemption is a poor match with regulatory
objectives.\19\ Another commenter disagreed with the exemption and
questioned ``why FINRA would exempt from reporting a firm with a
portfolio of longer-term, low coupon U.S. Government bonds that would
be significantly more sensitive to market risk than many other debt
instruments especially investment-grade ones of much shorter
durations.''\20\ The commenter believed that there should be an
exemption for firms that invest their excess cash in short-term
instruments such as money market mutual funds, short-term funds and
high-grade debt instruments maturing in the short term.\21\
---------------------------------------------------------------------------
\18\ Nelson.
\19\ Wachtel.
\20\ IMS.
\21\ IMS.
---------------------------------------------------------------------------
FINRA has considered these comments and agrees that a firm that has
inventory positions consisting only of U.S. Treasury securities should
be required to file the proposed SIS. FINRA, however, proposes to
exempt from the filing requirement those firms that: (1) Have a minimum
net capital or liquid capital requirement of less than $100,000; or (2)
have inventory positions consisting only of money market mutual funds.
In response to the comment for a short-term instrument exemption, FINRA
notes that the proposal exempts firms with inventory positions
consisting only of money market mutual funds. However, FINRA believes
that firms with inventory positions in short-term funds or high-grade
debt instruments maturing in the short term should not be exempted from
the proposed SIS as those positions are subject to greater market risk.
For example, the credit crisis showed that short-term debt instruments
(e.g., auction rate securities) can suffer material losses,
irrespective of their investment grade ratings.
2. Exemption for Firms Based on Net Capital or Liquid Capital
Requirement
In the Notice, FINRA specifically requested comment on whether
there is a category of firms that should not be required to file the
proposed SIS based upon a de minimis amount of inventory
[[Page 36360]]
positions. One commenter believed there should be a de minimis cutoff
and stated that FINRA should ``not place undue burdens on the small
broker dealer community.'' \22\ The commenter suggested that
``reporting should only be required by firms that pose a systemic risk
to the financial markets.''\23\ One commenter believed that an
exemption should be focused on a firm's level of excess capital and
leverage.\24\ FINRA has considered these comments and proposes that
firms with inventory positions that have a net capital or liquid
capital requirement of less than $100,000 would not need to file the
proposed SIS. These firms are prohibited from engaging in dealer
activities, self-clearing or carrying customer accounts and, as such
pose less risk to the financial markets than firms with higher net
capital or liquid capital requirements. FINRA disagrees with the
commenters that reporting should only be required by firms that pose
systemic risk or that an exemption should be focused on a firm's level
of excess capital and leverage. Systemic risk is not the focus of the
proposed SIS; rather, the proposal is intended to protect customers and
other market participants who could be at risk if the firm's financial
condition deteriorates. As such, requiring only firms that pose
systemic risk to report to FINRA would hinder the staff's ability to
identify and monitor the market, funding and liquidity risk of other
firms whose inventory positions and dealer activities could result in
harm to customers and other market participants. In addition, an
exemption based on a firm's high excess net capital or liquid capital
without regard to the type of inventory positions held would exempt a
number of firms that hold significant levels of complex securities in
inventory and self-clear, carry customer accounts or engage in dealer
activities. Further, an exemption based on leverage would exempt those
firms that have a low leverage ratio without regard to other risk
factors, such as a high concentration in a particular category of less
liquid securities (e.g., high yield debt, private label collateralized
mortgage obligations).
---------------------------------------------------------------------------
\22\ Jim Nelson and Nelson.
\23\ Nelson.
\24\ Wachtel.
---------------------------------------------------------------------------
3. Economic Impact
In the Notice, FINRA specifically requested comment on the economic
impact of the proposed SIS. Two commenters believed that the proposed
SIS would place an unjustified burden on firms.\25\ One of these
commenters stated that even though firms already have the requested
inventory information, the data will have to be put in the required
format.\26\ The commenter suggested that FINRA should ask a firm for a
copy of its inventory and then input the data.\27\ One commenter
believed that there would be significant cost with no benefit and the
proposed SIS would increase the effort of monthly filing by 15%.\28\
Further, the commenter requested that any new requirements be
incorporated into the original FOCUS form rather than requiring
separate schedules that entail burdensome duplication and
reconciliations.\29\ However, one commenter agreed that firms currently
compile inventory information as it is needed to compute haircut
deductions when calculating net capital and stated that the proposed
SIS is not nearly as burdensome as receiving questions from FINRA
examiners or coordinators seeking to drill down into figures that are
provided by the FOCUS Report.\30\
---------------------------------------------------------------------------
\25\ Jim Nelson and Nelson.
\26\ Nelson.
\27\ Nelson.
\28\ Wachtel.
\29\ Wachtel.
\30\ IMS.
---------------------------------------------------------------------------
Consistent with the discussion above, FINRA believes that the
economic impact associated with completion of the proposed SIS would be
minimal because the required information should be readily available to
firms, as it is necessary for purposes of computing the haircut
deductions required under SEA Rule 15c3-1.\31\ Moreover, FINRA believes
the proposed SIS is an effective and timely way to obtain detail of the
inventory positions held by firms. FINRA notes it consulted with its
advisory committees to help inform this view. In regard to the comment
that the proposed SIS would increase the effort of monthly filing by
15%, FINRA notes that the commenter did not provide any evidence, basis
or context to support the assertion, and therefore FINRA is uncertain
as to its reliability. With respect to incorporating new requirements
into the original FOCUS form, Form X-17A-5, FINRA notes that it is an
SEC form, and any changes to it must be proposed and adopted by the
SEC. However, FINRA would support updates to Form X-17A-5 by the SEC
that would incorporate this more detailed reporting, and, if such
updates were made, FINRA staff would seek to reduce accordingly the
requirement for firms to file the proposed SIS.
---------------------------------------------------------------------------
\31\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------
4. Instructions and Recommended Changes
One commenter was concerned that there were no instructions
provided for the proposed SIS and that key definitions such as
``arbitrage'' and ``no ready market'' are not defined.\32\ In addition,
the commenter believed that the term ``Investments'' is particularly
confusing in the category for ``Investments with no ready market'' and
suggested that ``Securities'' should be used.\33\ In addition, the
commenter believed that asking for a beginning date on the proposed SIS
is meaningless information.\34\ Furthermore, the commenter stated that
the proposed SIS ignores financings such as repurchase agreements and
loans, does not contain a line for securities lending, does not itemize
derivatives by market bias and does not request a breakdown of the
types of commodities actually being held.\35\
---------------------------------------------------------------------------
\32\ IMS.
\33\ IMS.
\34\ IMS.
\35\ IMS.
---------------------------------------------------------------------------
In response to the commenter, FINRA has developed instructions for
the proposed SIS. The instructions include guidance, clarifications and
definitions with respect to specific line items that FINRA believes
should ameliorate the commenter's concern. In addition, FINRA has
amended the proposed SIS to state ``[s]ecurities with no ready market''
on line 13, instead of ``[i]nvestments with no ready market,'' to
alleviate confusion and has removed the line item for a beginning
period date. With regard to capturing information about repurchase
agreements and securities lending, FINRA notes that the proposed SIS is
an inventory schedule and, as such, is not intended to capture
financing transactions. In response to the comment about itemizing
derivatives exposures by market bias, FINRA has expanded the
``Derivatives including Options'' on line 11 to distinguish between
centrally cleared derivatives and other derivatives and to require a
limited breakdown of information for the two categories. In addition,
FINRA notes that additional derivatives information is captured on the
Derivatives and Other Off-Balance Sheet Schedule. Finally, in response
to the request for a breakdown of the types of commodities actually
being held, FINRA believes, at this time, that the proposed SIS
captures the information that is needed to enable FINRA staff to
[[Page 36361]]
assess the related market risk and impact on firms' liquidity and
funding needs arising from inventory holdings.
5. Alternatives to Proposed SIS
One commenter offered an alternative to the proposed SIS.\36\ The
commenter suggested that ``FINRA should offer firms the ability to
report the dollar amounts to which each haircut category applies.''
\37\ The commenter believed that ``[t]he haircut category is so much
more relevant than the issuer type or even whether the haircut is on a
long or short position.'' \38\ FINRA disagrees with the commenter and
believes that for purposes of understanding market risk associated with
firms' inventory positions, issuer type is more appropriate than
haircut category. For example, an equity security has different market
risk than certain high-yield bonds; however, both types of securities
can be in the same haircut category. Therefore, FINRA believes that
obtaining information regarding the actual makeup of a firm's inventory
positions is best achieved through the proposed SIS.
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\36\ IMS.
\37\ IMS.
\38\ IMS.
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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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2014-025 on the subject line.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2014-025. 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 Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule 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 Web site 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
a.m. and 3 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; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FINRA-2014-025 and should be submitted
on or before July 17, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14942 Filed 6-25-14; 8:45 am]
BILLING CODE 8011-01-P
