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, 22136-22138 [2016-08553]

Download as PDF 22136 Federal Register / Vol. 81, No. 72 / Thursday, April 14, 2016 / Notices 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 available publicly. All submissions should refer to File Number SR–BOX– 2016–14, and should be submitted on or before May 5, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.12 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–08559 Filed 4–13–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77571; File No. SR– NYSEArca–2016–28] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Designation of a Longer Period for Commission Action on a Proposed Rule Change, as Modified by Amendment No. 1, To List and Trade of Shares of RiverFront Dynamic US Dividend Advantage ETF and RiverFront Dynamic US Flex-Cap ETF Under NYSE Arca Equities Rule 8.600 Register on February 25, 2016.3 On April 7, 2016, the Exchange submitted Amendment No. 1 to the proposed rule change.4 The Commission received no comment letters on the proposed rule change. Section 19(b)(2) of the Act 5 provides that, within 45 days of the publication of notice of the filing of a proposed rule change, or within such longer period up to 90 days as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or as to which the self-regulatory organization consents, the Commission shall either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. The Commission is extending this 45-day time period. The Commission finds that it is appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider the proposed rule change. Accordingly, the Commission, pursuant to Section 19(b)(2) of the Act,6 designates May 25, 2016, as the date by which the Commission should either approve or disapprove or institute proceedings to determine whether to disapprove the proposed rule change (File Number SR– NYSEArca–2016–28), as modified byAmendment No. 1. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.7 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–08558 Filed 4–13–16; 8:45 am] BILLING CODE 8011–01–P mstockstill on DSK4VPTVN1PROD with NOTICES April 8, 2016. On February 5, 2016, NYSE Arca, Inc. (‘‘Exchange’’) 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 list and trade shares (‘‘Shares’’) of the following under NYSE Arca Equities Rule 8.600: RiverFront Dynamic US Dividend Advantage ETF and RiverFront Dynamic US Flex-Cap ETF. The Commission published notice of the proposed rule change in the Federal 12 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 19:23 Apr 13, 2016 Jkt 238001 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. 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 1 15 U.S.C. 78s(b)(1). 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’’). 2 17 3 See Securities Exchange Act Release No. 34– 77183 (February 19, 2016), 81 FR 9535 (February 25, 2016) (NYSEArca–2016–28). 4 Amendment No. 1 replaced and superseded the original filing in its entirety. 5 15 U.S.C. 78s(b)(2). 6 Id. 7 17 CFR 200.30–3(a)(31). PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 E:\FR\FM\14APN1.SGM 14APN1 Federal Register / Vol. 81, No. 72 / Thursday, April 14, 2016 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES 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 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 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 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). 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. 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. VerDate Sep<11>2014 17:56 Apr 13, 2016 Jkt 238001 milliseconds must comply with the new standard within 18 months of the effective date. 22137 within which to implement the requirement.17 With respect to the scope of events covered under the proposal, FINRA III. Comment Letters stated in the filing that through a combination of FINRA Rule 7430 and The Commission received four the OATS technical specifications, the comment letters on the proposal.10 current clock synchronization standard Healthy Markets supports the proposal already applies to the recording of the noting: ‘‘[s]ub-second clock date and time of any event that must be synchronization standards are an recorded under FINRA By-Laws or important element of market data and rules.18 For instance, FINRA stated that audit trail reliability, and most market Rule 7430 requires that firms technology is already synchronized at tolerances far more precise than the fifty synchronize business clocks used for purposes of recording the date and time milliseconds proposed.’’ Further, it of any event that must be recorded states that ‘‘[c]lock synchronization is a pursuant to the FINRA By-Laws or other critical component of today’s market FINRA Rules (e.g., the time a trade was structure and is long overdue for executed or the time an order was reform,’’ and notes that ‘‘[t]ighter received or routed), with reference to a synchronization standards would time source as designated by FINRA.19 enhance regulators’ abilities to surveil Under existing OATS technical for manipulative trading practices.’’ The specifications, all computer system commenter suggests that FINRA clocks and mechanical stamping devices recognize the differences between must be synchronized to within one ‘‘extremely time-sensitive trading firms second of the NITS atomic clock.20 and other market participants’’ by FINRA stated that this proposal imposing a higher standard on the firms consolidates and codifies its clock it labels ‘‘extremely time-sensitive.’’ 11 A synchronization requirements, second commenter urges ‘‘higher time including the new 50 millisecond synchronization requirements than standard, in a new Rule 4590 for clarity 12 FIF indicates that its proposed.’’ and ease of reference, so as to make members ‘‘generally agree the 50 clear that the requirements apply to the millisecond clock synchronization recording of the date and time of any requirement is appropriate for order and event that must be recorded under 13 and acknowledges execution events’’ FINRA By-Laws or rules.21 the ‘‘compelling regulatory need for fine With respect to implementation, in precision time stamps on order and the proposal FINRA stated that it has execution events,’’ 14 however, FIF accommodated such concerns in two expresses concern about FINRA ways. First, FINRA tailored the proposal proposing this rule given the pending so that the 50 millisecond standard 15 implementation of the CAT NMS Plan. would apply only to NMS Securities The fourth commenter requests that and OTC Equity Securities and not to ‘‘FINRA provide a list of impacted fixed income securities.22 Second, events to ensure that firms are FINRA proposed a phased appropriately implementing reduced implementation schedule for the 50 clock synchronization across all millisecond standard that allows firms relevant systems,’’ 16 and states that nine that capture time in milliseconds to months is a more reasonable timeframe comply with the 50 millisecond standard within six months of the 10 See supra, note 4. effective date of the rule and firms that 11 See Healthy Markets letter at 1–2. do not capture time in milliseconds to 12 See Kubitz letter. comply with the standard within 18 13 See FIF letter at 1. months of the effective date of the 14 See FIF letter at 2. rule.23 15 See FIF letter at 1. FIF also raises concerns Finally, in the filing, FINRA stated about applying the synchronization requirement to that it believes that it is appropriate and post-trade activities. See pages 1–3. The National Market System Plan governing the Consolidated necessary to proceed with the 50 Audit Trail (‘‘CAT NMS Plan’’) was required by millisecond standard now, rather than Rule 613 under the Act, which directed FINRA and forego this proposal in light of the the national securities exchanges to submit a national market systems plan to govern the creation, proposed CAT NMS Plan, because the 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 https:// www.catnmsplan.com/. 16 See Thomson Reuters letter at 1. PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 17 See id. at 2. Notice, 81 FR at 9551. 19 See Notice, 81 FR at 9550. 20 See id. 21 See Notice, 81 FR at 9551. 22 See Notice, 81 FR at 9553. 23 See id. 18 See E:\FR\FM\14APN1.SGM 14APN1 22138 Federal Register / Vol. 81, No. 72 / Thursday, April 14, 2016 / Notices standard is an important element of market data reliability, and it may be sometime before the clocksynchronization 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 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 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 mstockstill on DSK4VPTVN1PROD with NOTICES 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 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. 27 See Healthy Markets Letter and Kubitz Letter. 28 See Healthy Markets Letter. 29 See Kubitz Letter. 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. 32 In approving the proposed rule change, the Commission has also considered the rule change’s VerDate Sep<11>2014 17:56 Apr 13, 2016 Jkt 238001 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 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. For the reasons discussed above, the Commission finds that the proposed rule change is consistent with Section 15A of the Act. impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 33 21 U.S.C. 78o–3(b)(6). 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. PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 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. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.39 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–08553 Filed 4–13–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77570; File No. SR–CBOE– 2016–028] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Rule 6.1A April 8, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on April 4, 2016, Chicago Board Options Exchange, Incorporated (‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. 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 The Exchange proposed to amend Rule 6.1A related to Extended Trading Hours. The text of the proposed rule change is provided below. (additions are italicized; deletions are [bracketed]) * * * * * Chicago Board Options Exchange, Incorporated Rules * * * * * Rule 6.1A. Extended Trading Hours (a)–(j) No change. (k) Index Values. While it may not be calculated and disseminated at all times during Extended Trading Hours, current values of VIX will be widely disseminated at least once every fifteen 38 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 39 17 E:\FR\FM\14APN1.SGM 14APN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[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]


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

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

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