Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Approval of a Proposed Rule Change To Amend Rule 6191 To Implement an Anonymous, Grouped Masking Methodology for Over-the-Counter Activity in Connection With Web Site Data Publication of Appendix B Data Pursuant to the Regulation NMS Plan To Implement a Tick Size Pilot Program, 20948-20951 [2017-08978]

Download as PDF 20948 Federal Register / Vol. 82, No. 85 / Thursday, May 4, 2017 / Notices pmangrum on DSK3GDR082PROD with NOTICES transactions in a timeframe that is consistent with OCC’s liquidation assumptions. The proposed alignment of the close-out period with OCC’s liquidation assumptions mitigates OCC’s credit risks by reducing the risk that close-out prices vary too significantly from the prices used to mark the suspended clearing member’s stock loans to market. OCC’s proposed price-substitution authority also promotes the prompt and accurate clearance and settlement of stock loan transactions and assures the safeguarding of securities and funds under the programs by further encouraging non-suspended clearing members to execute close-out transactions in a commercially reasonable manner, thereby reducing financial risk to OCC. Finally, the proposed rule changes in the Hedge Program to permit OCC to terminate and re-establish a suspended clearing member’s positions through offset and ‘‘re-match’’ promote the prompt and accurate clearance and settlement of securities transactions and assure the safeguarding of securities and funds by facilitating orderly and efficient termination and reestablishment of stock loans involving a suspended clearing member, which mitigates operational and pricing risks that may arise for OCC and clearing members during the recall-and-return process. The Commission therefore finds that these aspects of the proposal are consistent with promoting prompt and accurate clearance and settlement of securities transactions and assuring the safeguarding of securities and funds which are in OCC’s custody or control, or for which it is responsible. Based on the conclusions discussed above, the Commission finds that OCC’s proposed rule changes are consistent with promoting the prompt and accurate clearance and settlement of securities transactions and assuring the safeguarding of securities and funds which are in OCC’s custody or control, or for which it is responsible as a guarantor in the Stock Loan Programs. Accordingly, the Commission finds that the proposals are consistent with Section 17A(b)(3)(F) of the Act.25 B. Consistency With Rules 17Ad– 22(e)(13) and (e)(23) of the Act The Commission finds that OCC’s proposals are consistent with Rules (e)(13) and (e)(23) under the Act.26 Rule 17Ad–22(e)(13) under the Act requires each covered clearing agency to U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(e)(13), and 17 CFR 240.17Ad–22(e)(23). establish, implement, maintain, and enforce policies and procedures reasonably designed to, among other things, ensure it has the authority and operational capacity to take timely action to contain losses and continue to meet its obligations in the event of a clearing member default.27 More generally, Rule 17Ad–22(e)(23) under the Act requires covered clearing agencies to establish, implement, maintain, and enforce policies and procedures reasonably designed to, among other things, provide for the public disclosure of all relevant rules and material procedures, including key aspects of default rules and procedures.28 The Commission believes that the proposed changes relating to clearing member suspension are consistent with Rule 17Ad–22(e)(13) under the Act. By proposing a fixed trading window in which clearing members must either execute close-out transactions relating to a clearing member suspension or opt for OCC-mandated settlements, OCC is seeking new authority that the Commission believes will better ensure that OCC can take timely actions to contain suspension-related losses and continue to meet stock loan-related obligations in the Stock Loan Programs. The Commission further believes that the proposed authority permitting OCC to withdraw the value of any difference between the clearing member-reported prices and OCC-determined close-out prices likewise better ensures that OCC can contain suspension-related losses, as clearing members would be further incentivized to execute timely close-out transactions at market prices. Finally, the Commission believes that the proposal relating to re-matching-insuspension better ensures that OCC has authority and operational capacity to contain losses and meet obligations to clearing members in the Hedge Program, in particular through new rules and mechanisms that reduce the operational, credit, and re-execution risks attendant to the recall-and-return process. The Commission therefore believes OCC’s proposal is consistent with Rule 17Ad– 22(e)(13) under the Act. The Commission also believes that OCC’s proposals are consistent with Rule 17Ad–22(e)(23) under the Act. Each aspect of OCC’s proposed rule change is proposed to be disclosed publicly in OCC’s rules governing the Stock Loan Programs, including the key suspension-related aspects of its rules providing for close-out transaction timeframes, new price-substitution 25 15 26 17 VerDate Sep<11>2014 14:39 May 03, 2017 Jkt 241001 27 17 28 17 PO 00000 CFR 240.17Ad–22(e)(13). CFR 240.17Ad–22(e)(23). Frm 00085 Fmt 4703 Sfmt 4703 authority, and termination and rematching-in-suspension. The Commission therefore believes that OCC’s proposal is consistent with Rules 17Ad–22(e)(23) under the Act. III. Conclusion On the basis of the foregoing, the Commission finds that the proposed change is consistent with the requirements of the Act, and in particular, with the requirements of Section 17A of the Act 29 and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,30 that the proposed rule change (SR–OCC–2017– 004) be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.31 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–08982 Filed 5–3–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80551; File No. SR–FINRA– 2017–006] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Approval of a Proposed Rule Change To Amend Rule 6191 To Implement an Anonymous, Grouped Masking Methodology for Over-the-Counter Activity in Connection With Web Site Data Publication of Appendix B Data Pursuant to the Regulation NMS Plan To Implement a Tick Size Pilot Program April 28, 2017. I. Introduction On March 3, 2017, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend FINRA Rule 6191 to implement an anonymous, grouped masking methodology for over-thecounter (‘‘OTC’’) activity in connection with Web site publication of Appendix B data pursuant to the Regulation NMS 29 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 30 15 U.S.C. 78s(b)(2). 31 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. E:\FR\FM\04MYN1.SGM 04MYN1 Federal Register / Vol. 82, No. 85 / Thursday, May 4, 2017 / Notices Plan to Implement a Tick Size Pilot Program (‘‘Plan’’ or ‘‘Pilot’’).3 The proposed rule change was published for comment in the Federal Register on March 15, 2017.4 The Commission received three comment letters on the proposed rule change.5 This order approves the proposed rule change. II. Description of the Proposal pmangrum on DSK3GDR082PROD with NOTICES FINRA Rule 6191(b) (Compliance with Data Collection Requirements) implements the data collection and Web site publication requirements of the Plan. FINRA Rule 6191(b)(2)(A) describes the data collection and submission requirements for data that is required under Appendix B.I. and B.II. of the Plan. FINRA Rule 6191(b)(2)(B) provides, among other things, that FINRA will publish data collected pursuant to FINRA Rule 6191(b)(2)(A) on its Web site within 120 calendar days following month end at no charge,6 and that such publication will not identify the Trading Center that generated the data. FINRA Rule 6191(b)(3)(A) describes the data collection and submission requirements for data specified under Appendix B.IV. of the Plan. FINRA Rule 6191(b)(3)(C) provides, among other things, that FINRA will publish data collected pursuant to FINRA Rule 6191(b)(3)(A) on its Web site within 120 calendar days following month end at no charge,7 and that such publication will not identify the Trading Center that generated the data. FINRA proposes new Supplementary Material .15 to FINRA Rule 6191 to implement an anonymous, grouped masking methodology for Appendix B.I., B.II. and B.IV. data (‘‘Appendix B data’’). FINRA also proposes to incorporate the OTC Trading Centers for which Chicago Stock Exchange, Inc. (‘‘CHX’’) is the designated examining authority (‘‘DEA’’) into the anonymous, grouped masking methodology and publish OTC-wide statistics for 3 See Securities Exchange Act Release No. 74892 (May 6, 2015), 80 FR 27513 (May 13, 2015) (‘‘Approval Order’’). Unless otherwise specified, capitalized terms used in this order are defined as set forth in the Plan. 4 See Securities Exchange Act Release No. 80193 (Mar. 9, 2017), 82 FR 13901 (‘‘Notice’’). 5 See Letters to Brent J. Fields, Secretary, Commission from Alisa McCoy, dated March 13, 2017 (‘‘McCoy Letter’’); Christopher W. Bok, Financial Information Forum, dated April 5, 2017 (‘‘FIF Letter’’); and Stephen John Berger, Managing Director, Government & Regulatory Policy, Citadel, dated April 7, 2017 (‘‘Citadel Letter’’). 6 FINRA Rule 6191.12 provides that the Web site publication of Appendix B data shall commence on April 28, 2017. 7 Id. VerDate Sep<11>2014 14:39 May 03, 2017 Jkt 241001 Appendix B data on the FINRA Web site.8 A. Grouping Methodology FINRA proposes to establish ATS and non-ATS categories. Thereafter, FINRA would assign OTC Trading Centers into groups of five to twenty-five, using an undisclosed methodology to assign each Trading Center to a group. The Trading Center group assignments will not be published and generally will remain unchanged for the duration of the data publication period, with the exception of the entrance of a new Trading Center (i.e., new FINRA member). FINRA will assign an anonymized identifier for each group that will remain unchanged for the duration of the data publication period. The anonymized identifier will be used for all Appendix B data sets. The number of Trading Centers assigned to each group will not specifically be disclosed; however, as noted above, each group will contain between five and twenty-five market participant identifiers (‘‘MPIDs’’). In addition, for each day’s statistics, the number of MPIDs in each group with activity in any Pilot Security for that day will be published. B. Appendix B.I. Data Aggregation Methodology FINRA proposes to aggregate the Appendix B.I. data by aggregating statistics within each group by Pilot Security for each trading day. The methodology used for computing the statistics at the group level will be the same methodology used to compute these statistics at the Trading Center level in the non-public version of the data (and in the public version of the exchange data).9 Specifically, FINRA would calculate group-level sums for statistics that are quantity counts 10 and 8 In connection with the instant filing, FINRA and CHX requested exemptive relief from the Plan to permit the publication on the FINRA Web site of data relating to OTC activity pursuant to Appendix B.I., B.II. and B.IV. using an anonymous, grouped masking methodology. See Letter from Marcia E. Asquith, Executive Vice President, Board and External Relations, FINRA, to Robert W. Errett, Deputy Secretary, Commission, dated March 2, 2017. The Commission, pursuant to its authority under Rule 608(e) of Regulation NMS, has granted FINRA and CHX a limited exemption from the requirement to comply with certain provisions of the Plan as specified in the letters and noted herein. See letter from David Shillman, Associate Director, Division of Trading and Markets, Commission to Marcia E. Asquith, Executive Vice President, Board and External Relations, FINRA, dated April 28, 2017 (‘‘SEC Exemption Letter’’). 9 See Tick Size Appendix B and C Statistics FAQs (available at http://www.finra.org/sites/default/files/ Tick-Size-Pilot-Appendix-B-and-C-FAQ.pdf). 10 See e.g., Appendix B.I.a(7) (cumulative number of orders). PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 20949 use all underlying data within a group to calculate statistics requiring averages or weighted averages.11 Data will be aggregated separately for each order type and subcategory, and will not be aggregated across order types or subcategories. C. Appendix B.II. Data Aggregation Methodology Appendix B.II. data includes orderlevel statistics; thus, FINRA proposes that all individual orders be displayed for all Trading Centers within a group, with each order attributed to the group rather than the underlying Trading Center. In addition, Appendix B.II. order information would be displayed in chronological order based on time of order receipt. D. Appendix B.IV. Data Aggregation Methodology FINRA proposes to aggregate Appendix B.IV. data by aggregating statistics within each group by trading day by summing the statistics of all Market Maker activity represented within the group. The number of Market Makers would be displayed as the unique number of Market Makers 12 across all Trading Centers within the group. III. Summary of Comment Letters The Commission received three comment letters expressing general support for the proposed rule change.13 One commenter praised ‘‘the significant steps taken to improve the masking methodology’’ for the Pilot data.14 Another commenter commended FINRA for ‘‘taking into account the feedback received from market participants and working to devise an approach that seeks to address identified confidentiality concerns while still maintaining the usefulness of the publicly available data.’’ 15 One commenter, however, expressed a continued concern related to FINRA’s 11 See e.g., Appendix B.I.a(28) (the share weighted average realized spread for executions of orders); and Appendix B.I.a(29) (the received shareweighted average percentage for shares not displayable as of order receipt). FINRA will calculate averages for all price variables and percentages. 12 As provided in FINRA Rule 6191.11, FINRA will provide a count of the number of Market Makers used in the participation calculations. Thus, if a single unique Market Maker traded on multiple Trading Centers within the same masking group, for the Appendix B.IV. count of unique Market Makers on a given trading day, FINRA will count this activity as attributed to one unique Market Maker. 13 One letter reads in its entirety ‘‘That is great idea since all of the compromise.’’ See McCoy Letter. 14 See FIF Letter. 15 See Citadel Letter. E:\FR\FM\04MYN1.SGM 04MYN1 20950 Federal Register / Vol. 82, No. 85 / Thursday, May 4, 2017 / Notices proposed grouping methodology.16 Specifically, this commenter believed that the proposal to break ATS and nonATS OTC Trading Centers into groupings of five to twenty-five MPIDs may allow interested parties the opportunity to discern the identity of the Trading Center, perhaps by comparing the published data to Rule 605 reports of OTC volume data published by FINRA. This commenter also expressed concern that the disclosure of the number of active MPIDs in each group could potentially lead to the identification of brokerdealer Trading Centers. As an alternative, the commenter suggested that all OTC Trading Centers be aggregated into either a single ATS or non-ATS category. Another commenter recommended eliminating the proposed daily publication of the number of MPIDs with activity in each group of Trading Centers.17 This commenter suggested that FINRA reconsider whether this additional information is necessary to provide a useful data set to the public because, ‘‘in practice, FINRA will thus be disclosing information regarding the number of trading centers assigned to each group.’’ In this commenter’s view, FINRA must ensure that the additional data cannot be used to ‘‘undermine the confidentiality of FINRA’s methodology for assigning trading centers to particular groups or the actual group assignments.’’ IV. Discussion and Commission’s Findings pmangrum on DSK3GDR082PROD with NOTICES After careful review of the proposed rule change and the comment letters, the Commission finds that the proposal is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to a national securities association.18 Specifically, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Act,19 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, and Section 15A(b)(9) of the Act,20 which requires that FINRA rules not impose any burden on 16 See FIF Letter. Citadel Letter. 18 In approving this rule change, the Commission has considered the rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 19 15 U.S.C. 78o–3(b)(6). 20 15 U.S.C. 78o–3(b)(9). 17 See VerDate Sep<11>2014 14:39 May 03, 2017 Jkt 241001 competition that is not necessary or appropriate. In the Approval Order, the Commission noted that the Pilot is, by design, an objective, data-driven test that should ‘‘provide measurable data that should facilitate the ability of the Commission, the public and market participants to review and analyze the effect of tick size on the trading, liquidity and market quality of securities of smaller capitalization companies.’’ 21 The Commission further stated that the Plan should provide ‘‘a data-driven approach to evaluate whether certain changes to the market structure for Pilot Securities would be consistent with the Commission’s mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.’’ 22 To that end, the Plan provides for the collection, submission and publication of data specified in Appendix B of the Plan. The Plan further provides that the data to be made publicly available not identify the Trading Center that generated the data. As discussed below, the Commission believes that FINRA’s proposal is consistent with the requirements of the Act and would further the purpose of the Plan to provide measurable data. FINRA, as a Participant in the Plan, has an obligation to comply, and enforce compliance by its members, with the terms of the Plan. Rule 608(c) of Regulation NMS provides that ‘‘[e]ach self-regulatory organization shall comply with the terms of any effective national market system plan of which it is a sponsor or participant.’’ 23 Proposed FINRA Rule 6191, Supplementary Material .15 would establish a means to anonymize the identities of OTC Trading Centers when publishing the data set forth in Appendix B to the Plan. The Commission also believes that the proposal is consistent with the Act because it is designed to assist FINRA in meeting its regulatory obligations pursuant to Rule 608 of Regulation NMS and the Plan. FINRA’s proposal seeks to address the provision in the Plan that individual OTC Trading Centers not be identified in the published data. FINRA proposes to create ATS and non-ATS categories and then assign OTC Trading Centers into groups of five to twenty-five. In addition, FINRA proposes to aggregate and publish data from those OTC Trading Centers for which CHX is DEA. Thereafter, FINRA would publish Appendix B data for OTC Trading 21 See Approval Order, supra note 3. 22 Id. 23 17 PO 00000 CFR 242.608(c). Frm 00087 Fmt 4703 Sfmt 4703 Centers by group on its Web site using an anonymized identifier. The Commission notes that commenters had previously raised concerns about the publication of OTC Trading Centers’ Appendix B data on a disaggregated basis.24 FINRA noted that it filed the proposed rule change to mitigate the confidentiality concerns of the commenters. As noted above, while commenters were generally supportive of FINRA’s proposal, some believe FINRA should do more to mitigate confidentiality concerns related to OTC Trading Centers’ Appendix B data. These commenters suggested that FINRA eliminate the sub-groupings of ATS and non-ATS OTC Trading Centers, or the daily identification of the number of active MPIDs in each group. While these commenters broadly suggested this information might be used to identify the group to which a particular OTC Trading Center was assigned, they did not articulate why the identification of that group, if possible, could reveal proprietary information or otherwise harm the interests of the OTC Trading Center. In this regard, the Commission notes that the activity of each OTC Trading Center would be combined with that of at least four other OTC Trading Centers, and would be at least four months old. The Commission believes that FINRA’s proposal to develop an anonymous, grouped masking methodology is reasonably designed to address concerns that the activity of individual Trading Centers might be identified. The Commission notes that the identities of individual Trading Centers within each group would not be disclosed and the activity of each Trading Center would be aggregated with the activity of four to twenty-four other Trading Centers. At the same time, the Commission believes that the maintenance of these groups, and the daily identification of the number of active MPIDs in each group, should substantially enhance the usefulness of the Pilot data for academics and others seeking to analyze it. For example, establishing smaller groups of OTC Trading Centers should increase the ability of researchers to control for group fixed effects, and thereby help 24 See Letters from William Hebert, Managing Director, Financial Information Forum, to Robert W. Errett, Deputy Secretary, Commission, dated December 21, 2016; and Adam C. Cooper, Senior Managing Director and Chief Legal Officer, Citadel Securities, to Brent J. Fields, Secretary, Commission, dated December 21, 2016. See also Securities Exchange Act Release No. 79424 (November 29, 2016), 81 FR 87603 (December 5, 2016) (Notice of Filing and Immediate Effectiveness of File No. SR–FINRA–2016–042). E:\FR\FM\04MYN1.SGM 04MYN1 Federal Register / Vol. 82, No. 85 / Thursday, May 4, 2017 / Notices isolate the impact of the Pilot so that more precise and robust analysis can be performed. Similarly, identifying daily the number of active MPIDs should increase the ability of researchers to assess the impact of the Pilot by allowing them to control for changes in the number of OTC Trading Centers in each group that are active in Pilot Securities.25 The Commission also believes that FINRA’s proposal to aggregate and publish data from those OTC Trading Centers for which CHX is the DEA should help to mitigate confidentiality concerns. The Commission notes that CHX is DEA to a small number of OTC Trading Centers. Therefore, including these OTC Trading Centers in the broader anonymous data set should mitigate concerns about the disclosure of their identities. For the reasons noted above, the Commission finds that the proposal is consistent with the requirements of the Act. The proposal clarifies and implements certain data collection requirements set forth in the Plan. V. Conclusion It is therefore ordered that, pursuant to Section 19(b)(2) of the Act,26 that the proposed rule change (SR–FINRA– 2017–006), be and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.27 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–08978 Filed 5–3–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80554; File No. SR–C2– 2017–016] Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Rule 6.13 April 28, 2017. pmangrum on DSK3GDR082PROD with NOTICES Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on April 25, 2017, C2 Options Exchange, 25 The Commission also notes that FINRA will publish Appendix B data from OTC Trading Centers 120 days after the month end. This delay in publication should help support FINRA’s efforts to mitigate confidentiality concerns. 26 15 U.S.C. 78s(b)(2). 27 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. VerDate Sep<11>2014 14:39 May 03, 2017 Jkt 241001 Incorporated (the ‘‘Exchange’’ or ‘‘C2’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange filed the proposal pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(6) thereunder.4 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 seeks to amend Rule 6.13. The text of the proposed rule change is provided below. (additions are italicized; deletions are [bracketed]) * * * * * C2 Options Exchange, Incorporated Rules * * * * * Rule 6.13. Complex Order Execution (a)–(b) No change. (c) Process for Complex Order RFR Auction. Prior to routing to the COB, eligible complex orders may be subject to an automated request for responses (‘‘RFR’’) auction process. (1) For purposes of paragraph (c): (A) ‘‘COA’’ is the automated complex order RFR auction process. (B) A ‘‘COA-eligible order’’ means a complex order that, as determined by the Exchange on a class-by-class basis, is eligible for a COA considering the order’s [marketability (defined as a number of ticks away from the current market),] size, complex order type and complex order origin types (i.e. nonbroker-dealer public customer, brokerdealers that are not Market-Makers or specialists on an options exchange, and/ or Market-makers or specialists on an options exchange). Complex orders processed through a COA may be executed without consideration to prices of the same complex orders that might be available on other exchanges. (2) Initiation of a COA: (A) The System will send an RFR message to all Participants who have elected to receive RFR messages on receipt of (i) a COA-eligible order with two or more legs that is better than the same side of the Exchange spread market or (ii) a complex order with three or more legs that meets the class, size, and complex order type parameters of subparagraph (c)(1)(B) and is marketable against the Exchange spread 3 15 4 17 PO 00000 Fmt 4703 market. Complex orders as described in subparagraph (c)(2)(A)(ii) will initiate a COA regardless of the order’s routing parameters or handling instructions. Immediate or cancel orders that are not marketable against the derived net market in accordance with subparagraph (c)(2)(B) will be cancelled. The RFR message will identify the component series, the size and side of the market of the COA-eligible order and any contingencies, if applicable. (B) [Notwithstanding the foregoing, Participants may request on an order-byorder basis that incoming COA-eligible orders not COA (a ‘‘do-not-COA’’ request).] Notwithstanding subparagraph (c)(2)(A)(i), Trading Permit Holders may request on an order-by-order basis that an incoming COA-eligible order with two legs not COA (a ‘‘do-not-COA’’ request). Notwithstanding subparagraph (c)(2)(A)(ii), the System will reject back to a Trading Permit Holder any complex order described in that subparagraph that includes a do-not-COA request. An order initially submitted to the Exchange with a do-not-COA request may still COA after it has rested on the COB pursuant to Interpretation and Policy .02. (3)–(9) No change. . . . Interpretations and Policies: .01–.07 No change. * * * * * The text of the proposed rule change is also available on the Exchange’s Web site (http://www.cboe.com/AboutCBOE/ CBOELegalRegulatoryHome.aspx), at the Exchange’s Office of the Secretary, 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, the Exchange 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. The Exchange has prepared summaries, set forth in sections A, B, and 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 Exchange seeks to amend Rule 6.13(c) in order to hardcode the marketability U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). Frm 00088 20951 Sfmt 4703 E:\FR\FM\04MYN1.SGM 04MYN1

Agencies

[Federal Register Volume 82, Number 85 (Thursday, May 4, 2017)]
[Notices]
[Pages 20948-20951]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-08978]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80551; File No. SR-FINRA-2017-006]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of a Proposed Rule Change To 
Amend Rule 6191 To Implement an Anonymous, Grouped Masking Methodology 
for Over-the-Counter Activity in Connection With Web Site Data 
Publication of Appendix B Data Pursuant to the Regulation NMS Plan To 
Implement a Tick Size Pilot Program

April 28, 2017.

I. Introduction

    On March 3, 2017, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend FINRA Rule 6191 to implement an 
anonymous, grouped masking methodology for over-the-counter (``OTC'') 
activity in connection with Web site publication of Appendix B data 
pursuant to the Regulation NMS

[[Page 20949]]

Plan to Implement a Tick Size Pilot Program (``Plan'' or ``Pilot'').\3\ 
The proposed rule change was published for comment in the Federal 
Register on March 15, 2017.\4\ The Commission received three comment 
letters on the proposed rule change.\5\ 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. 74892 (May 6, 2015), 
80 FR 27513 (May 13, 2015) (``Approval Order''). Unless otherwise 
specified, capitalized terms used in this order are defined as set 
forth in the Plan.
    \4\ See Securities Exchange Act Release No. 80193 (Mar. 9, 
2017), 82 FR 13901 (``Notice'').
    \5\ See Letters to Brent J. Fields, Secretary, Commission from 
Alisa McCoy, dated March 13, 2017 (``McCoy Letter''); Christopher W. 
Bok, Financial Information Forum, dated April 5, 2017 (``FIF 
Letter''); and Stephen John Berger, Managing Director, Government & 
Regulatory Policy, Citadel, dated April 7, 2017 (``Citadel 
Letter'').
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II. Description of the Proposal

    FINRA Rule 6191(b) (Compliance with Data Collection Requirements) 
implements the data collection and Web site publication requirements of 
the Plan. FINRA Rule 6191(b)(2)(A) describes the data collection and 
submission requirements for data that is required under Appendix B.I. 
and B.II. of the Plan. FINRA Rule 6191(b)(2)(B) provides, among other 
things, that FINRA will publish data collected pursuant to FINRA Rule 
6191(b)(2)(A) on its Web site within 120 calendar days following month 
end at no charge,\6\ and that such publication will not identify the 
Trading Center that generated the data.
---------------------------------------------------------------------------

    \6\ FINRA Rule 6191.12 provides that the Web site publication of 
Appendix B data shall commence on April 28, 2017.
---------------------------------------------------------------------------

    FINRA Rule 6191(b)(3)(A) describes the data collection and 
submission requirements for data specified under Appendix B.IV. of the 
Plan. FINRA Rule 6191(b)(3)(C) provides, among other things, that FINRA 
will publish data collected pursuant to FINRA Rule 6191(b)(3)(A) on its 
Web site within 120 calendar days following month end at no charge,\7\ 
and that such publication will not identify the Trading Center that 
generated the data.
---------------------------------------------------------------------------

    \7\ Id.
---------------------------------------------------------------------------

    FINRA proposes new Supplementary Material .15 to FINRA Rule 6191 to 
implement an anonymous, grouped masking methodology for Appendix B.I., 
B.II. and B.IV. data (``Appendix B data''). FINRA also proposes to 
incorporate the OTC Trading Centers for which Chicago Stock Exchange, 
Inc. (``CHX'') is the designated examining authority (``DEA'') into the 
anonymous, grouped masking methodology and publish OTC-wide statistics 
for Appendix B data on the FINRA Web site.\8\
---------------------------------------------------------------------------

    \8\ In connection with the instant filing, FINRA and CHX 
requested exemptive relief from the Plan to permit the publication 
on the FINRA Web site of data relating to OTC activity pursuant to 
Appendix B.I., B.II. and B.IV. using an anonymous, grouped masking 
methodology. See Letter from Marcia E. Asquith, Executive Vice 
President, Board and External Relations, FINRA, to Robert W. Errett, 
Deputy Secretary, Commission, dated March 2, 2017. The Commission, 
pursuant to its authority under Rule 608(e) of Regulation NMS, has 
granted FINRA and CHX a limited exemption from the requirement to 
comply with certain provisions of the Plan as specified in the 
letters and noted herein. See letter from David Shillman, Associate 
Director, Division of Trading and Markets, Commission to Marcia E. 
Asquith, Executive Vice President, Board and External Relations, 
FINRA, dated April 28, 2017 (``SEC Exemption Letter'').
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A. Grouping Methodology

    FINRA proposes to establish ATS and non-ATS categories. Thereafter, 
FINRA would assign OTC Trading Centers into groups of five to twenty-
five, using an undisclosed methodology to assign each Trading Center to 
a group.
    The Trading Center group assignments will not be published and 
generally will remain unchanged for the duration of the data 
publication period, with the exception of the entrance of a new Trading 
Center (i.e., new FINRA member). FINRA will assign an anonymized 
identifier for each group that will remain unchanged for the duration 
of the data publication period. The anonymized identifier will be used 
for all Appendix B data sets. The number of Trading Centers assigned to 
each group will not specifically be disclosed; however, as noted above, 
each group will contain between five and twenty-five market participant 
identifiers (``MPIDs''). In addition, for each day's statistics, the 
number of MPIDs in each group with activity in any Pilot Security for 
that day will be published.

B. Appendix B.I. Data Aggregation Methodology

    FINRA proposes to aggregate the Appendix B.I. data by aggregating 
statistics within each group by Pilot Security for each trading day. 
The methodology used for computing the statistics at the group level 
will be the same methodology used to compute these statistics at the 
Trading Center level in the non-public version of the data (and in the 
public version of the exchange data).\9\ Specifically, FINRA would 
calculate group-level sums for statistics that are quantity counts \10\ 
and use all underlying data within a group to calculate statistics 
requiring averages or weighted averages.\11\ Data will be aggregated 
separately for each order type and subcategory, and will not be 
aggregated across order types or subcategories.
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    \9\ See Tick Size Appendix B and C Statistics FAQs (available at 
http://www.finra.org/sites/default/files/Tick-Size-Pilot-Appendix-B-and-C-FAQ.pdf).
    \10\ See e.g., Appendix B.I.a(7) (cumulative number of orders).
    \11\ See e.g., Appendix B.I.a(28) (the share weighted average 
realized spread for executions of orders); and Appendix B.I.a(29) 
(the received share-weighted average percentage for shares not 
displayable as of order receipt). FINRA will calculate averages for 
all price variables and percentages.
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C. Appendix B.II. Data Aggregation Methodology

    Appendix B.II. data includes order-level statistics; thus, FINRA 
proposes that all individual orders be displayed for all Trading 
Centers within a group, with each order attributed to the group rather 
than the underlying Trading Center. In addition, Appendix B.II. order 
information would be displayed in chronological order based on time of 
order receipt.

D. Appendix B.IV. Data Aggregation Methodology

    FINRA proposes to aggregate Appendix B.IV. data by aggregating 
statistics within each group by trading day by summing the statistics 
of all Market Maker activity represented within the group. The number 
of Market Makers would be displayed as the unique number of Market 
Makers \12\ across all Trading Centers within the group.
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    \12\ As provided in FINRA Rule 6191.11, FINRA will provide a 
count of the number of Market Makers used in the participation 
calculations. Thus, if a single unique Market Maker traded on 
multiple Trading Centers within the same masking group, for the 
Appendix B.IV. count of unique Market Makers on a given trading day, 
FINRA will count this activity as attributed to one unique Market 
Maker.
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III. Summary of Comment Letters

    The Commission received three comment letters expressing general 
support for the proposed rule change.\13\ One commenter praised ``the 
significant steps taken to improve the masking methodology'' for the 
Pilot data.\14\ Another commenter commended FINRA for ``taking into 
account the feedback received from market participants and working to 
devise an approach that seeks to address identified confidentiality 
concerns while still maintaining the usefulness of the publicly 
available data.'' \15\
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    \13\ One letter reads in its entirety ``That is great idea since 
all of the compromise.'' See McCoy Letter.
    \14\ See FIF Letter.
    \15\ See Citadel Letter.
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    One commenter, however, expressed a continued concern related to 
FINRA's

[[Page 20950]]

proposed grouping methodology.\16\ Specifically, this commenter 
believed that the proposal to break ATS and non-ATS OTC Trading Centers 
into groupings of five to twenty-five MPIDs may allow interested 
parties the opportunity to discern the identity of the Trading Center, 
perhaps by comparing the published data to Rule 605 reports of OTC 
volume data published by FINRA. This commenter also expressed concern 
that the disclosure of the number of active MPIDs in each group could 
potentially lead to the identification of broker-dealer Trading 
Centers. As an alternative, the commenter suggested that all OTC 
Trading Centers be aggregated into either a single ATS or non-ATS 
category.
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    \16\ See FIF Letter.
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    Another commenter recommended eliminating the proposed daily 
publication of the number of MPIDs with activity in each group of 
Trading Centers.\17\ This commenter suggested that FINRA reconsider 
whether this additional information is necessary to provide a useful 
data set to the public because, ``in practice, FINRA will thus be 
disclosing information regarding the number of trading centers assigned 
to each group.'' In this commenter's view, FINRA must ensure that the 
additional data cannot be used to ``undermine the confidentiality of 
FINRA's methodology for assigning trading centers to particular groups 
or the actual group assignments.''
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    \17\ See Citadel Letter.
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IV. Discussion and Commission's Findings

    After careful review of the proposed rule change and the comment 
letters, the Commission finds that the proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities association.\18\ Specifically, 
the Commission finds that the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\19\ 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, and Section 15A(b)(9) of the Act,\20\ which requires 
that FINRA rules not impose any burden on competition that is not 
necessary or appropriate.
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    \18\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78o-3(b)(6).
    \20\ 15 U.S.C. 78o-3(b)(9).
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    In the Approval Order, the Commission noted that the Pilot is, by 
design, an objective, data-driven test that should ``provide measurable 
data that should facilitate the ability of the Commission, the public 
and market participants to review and analyze the effect of tick size 
on the trading, liquidity and market quality of securities of smaller 
capitalization companies.'' \21\ The Commission further stated that the 
Plan should provide ``a data-driven approach to evaluate whether 
certain changes to the market structure for Pilot Securities would be 
consistent with the Commission's mission to protect investors, maintain 
fair, orderly and efficient markets and facilitate capital formation.'' 
\22\ To that end, the Plan provides for the collection, submission and 
publication of data specified in Appendix B of the Plan. The Plan 
further provides that the data to be made publicly available not 
identify the Trading Center that generated the data. As discussed 
below, the Commission believes that FINRA's proposal is consistent with 
the requirements of the Act and would further the purpose of the Plan 
to provide measurable data.
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    \21\ See Approval Order, supra note 3.
    \22\ Id.
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    FINRA, as a Participant in the Plan, has an obligation to comply, 
and enforce compliance by its members, with the terms of the Plan. Rule 
608(c) of Regulation NMS provides that ``[e]ach self-regulatory 
organization shall comply with the terms of any effective national 
market system plan of which it is a sponsor or participant.'' \23\ 
Proposed FINRA Rule 6191, Supplementary Material .15 would establish a 
means to anonymize the identities of OTC Trading Centers when 
publishing the data set forth in Appendix B to the Plan. The Commission 
also believes that the proposal is consistent with the Act because it 
is designed to assist FINRA in meeting its regulatory obligations 
pursuant to Rule 608 of Regulation NMS and the Plan.
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    \23\ 17 CFR 242.608(c).
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    FINRA's proposal seeks to address the provision in the Plan that 
individual OTC Trading Centers not be identified in the published data. 
FINRA proposes to create ATS and non-ATS categories and then assign OTC 
Trading Centers into groups of five to twenty-five. In addition, FINRA 
proposes to aggregate and publish data from those OTC Trading Centers 
for which CHX is DEA. Thereafter, FINRA would publish Appendix B data 
for OTC Trading Centers by group on its Web site using an anonymized 
identifier.
    The Commission notes that commenters had previously raised concerns 
about the publication of OTC Trading Centers' Appendix B data on a 
disaggregated basis.\24\ FINRA noted that it filed the proposed rule 
change to mitigate the confidentiality concerns of the commenters.
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    \24\ See Letters from William Hebert, Managing Director, 
Financial Information Forum, to Robert W. Errett, Deputy Secretary, 
Commission, dated December 21, 2016; and Adam C. Cooper, Senior 
Managing Director and Chief Legal Officer, Citadel Securities, to 
Brent J. Fields, Secretary, Commission, dated December 21, 2016. See 
also Securities Exchange Act Release No. 79424 (November 29, 2016), 
81 FR 87603 (December 5, 2016) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2016-042).
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    As noted above, while commenters were generally supportive of 
FINRA's proposal, some believe FINRA should do more to mitigate 
confidentiality concerns related to OTC Trading Centers' Appendix B 
data. These commenters suggested that FINRA eliminate the sub-groupings 
of ATS and non-ATS OTC Trading Centers, or the daily identification of 
the number of active MPIDs in each group. While these commenters 
broadly suggested this information might be used to identify the group 
to which a particular OTC Trading Center was assigned, they did not 
articulate why the identification of that group, if possible, could 
reveal proprietary information or otherwise harm the interests of the 
OTC Trading Center. In this regard, the Commission notes that the 
activity of each OTC Trading Center would be combined with that of at 
least four other OTC Trading Centers, and would be at least four months 
old.
    The Commission believes that FINRA's proposal to develop an 
anonymous, grouped masking methodology is reasonably designed to 
address concerns that the activity of individual Trading Centers might 
be identified. The Commission notes that the identities of individual 
Trading Centers within each group would not be disclosed and the 
activity of each Trading Center would be aggregated with the activity 
of four to twenty-four other Trading Centers. At the same time, the 
Commission believes that the maintenance of these groups, and the daily 
identification of the number of active MPIDs in each group, should 
substantially enhance the usefulness of the Pilot data for academics 
and others seeking to analyze it. For example, establishing smaller 
groups of OTC Trading Centers should increase the ability of 
researchers to control for group fixed effects, and thereby help

[[Page 20951]]

isolate the impact of the Pilot so that more precise and robust 
analysis can be performed. Similarly, identifying daily the number of 
active MPIDs should increase the ability of researchers to assess the 
impact of the Pilot by allowing them to control for changes in the 
number of OTC Trading Centers in each group that are active in Pilot 
Securities.\25\
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    \25\ The Commission also notes that FINRA will publish Appendix 
B data from OTC Trading Centers 120 days after the month end. This 
delay in publication should help support FINRA's efforts to mitigate 
confidentiality concerns.
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    The Commission also believes that FINRA's proposal to aggregate and 
publish data from those OTC Trading Centers for which CHX is the DEA 
should help to mitigate confidentiality concerns. The Commission notes 
that CHX is DEA to a small number of OTC Trading Centers. Therefore, 
including these OTC Trading Centers in the broader anonymous data set 
should mitigate concerns about the disclosure of their identities.
    For the reasons noted above, the Commission finds that the proposal 
is consistent with the requirements of the Act. The proposal clarifies 
and implements certain data collection requirements set forth in the 
Plan.

V. Conclusion

    It is therefore ordered that, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-FINRA-2017-006), be and 
hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-08978 Filed 5-3-17; 8:45 am]
BILLING CODE 8011-01-P