Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rule 6730 Relating to ATS Reporting of Transactions to TRACE in U.S. Treasury Securities, 27643-27647 [2018-12648]
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Federal Register / Vol. 83, No. 114 / Wednesday, June 13, 2018 / Notices
date of the filing. However, pursuant to
Rule 19b–4(f)(6)(iii),12 the Commission
may designate a shorter time if such
action is consistent with the protection
of investors and the public interest. In
its filing with the Commission, Nasdaq
has asked the Commission to waive the
30-day operative delay so that the
proposal may become operative
immediately upon filing to allow
Nasdaq to immediately list units issued
by a company and its controlled
subsidiary and compete with other
exchanges for such listing. As noted
above, Nasdaq states that the proposed
rule will continue to impose all of the
existing listing requirements applicable
to units, supplemented by additional
requirements and investor protections
designed to address this specific type of
unit.
The Commission believes that waiver
of the 30-day operative delay is
consistent with the protection of
investors and the public interest
because the Paired Share Units for
which Nasdaq proposes to adopt initial
and continued listing requirements are
substantially similar to the traditional
units that may be listed pursuant to
Nasdaq Rule 5225 and the additional
requirements in the proposal address
the specific characteristics of Paired
Share Units and how Nasdaq’s existing
listing rules will be applied. The
Commission notes that a Paired Share
Unit would consist of a share of
common stock of a Company and a
share of the common stock of a REIT
that is that Company’s controlled
subsidiary, which are attached and only
can be traded together. The proposed
listing requirements would be
substantially similar to existing listing
requirements for units, but with
clarification about how certain aspects
will apply to a Paired Share Unit and its
components and additional
requirements designed to address issues
relating to this specific type of unit.
Therefore, the Commission designates
the proposed rule change operative
upon filing.13
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
12 17
CFR 240.19b–4(f)(6)(iii).
purposes only of waiving the operative
delay, the Commission has considered the proposed
rule’s impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
13 For
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Commission shall institute proceedings
under Section 19(b)(2)(B) 14 of the Act to
determine whether the proposed rule
change should be approved or
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–
NASDAQ–2018–041 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–NASDAQ–2018–041. 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 website (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 website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NASDAQ–2018–041, and
should be submitted on or before July 5,
2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–12649 Filed 6–12–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83393; File No. SR–FINRA–
2018–023]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Amend
FINRA Rule 6730 Relating to ATS
Reporting of Transactions to TRACE in
U.S. Treasury Securities
June 7, 2018.
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 June 5,
2018, 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
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 amend Rule
6730 to require alternative trading
systems (‘‘ATSs’’) that report
transactions in U.S. Treasury Securities
to the Transaction Reporting and
Compliance Engine (‘‘TRACE’’) to
identify non-FINRA member subscribers
on those transaction reports.
The text of the proposed rule change
is available on FINRA’s website 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
15 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
14 15
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Federal Register / Vol. 83, No. 114 / Wednesday, June 13, 2018 / Notices
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 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 the
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
On October 18, 2016, the SEC
approved a proposed rule change to
require FINRA members to report
secondary market transactions in U.S.
Treasury Securities to TRACE,3 and on
July 10, 2017, FINRA members began
reporting transaction information on
U.S. Treasury Security transactions
through TRACE.4 As approved, TRACE
transaction information in U.S. Treasury
Securities is for regulatory purposes
only and is not disseminated publicly.5
As with all TRACE reporting,
transactions in U.S. Treasury Securities
that occur on an ATS generally must be
reported to TRACE by the
counterparties, if they are FINRA
members, and by the ATS itself.6 A
significant amount of trading activity in
U.S. Treasury Securities on ATSs
involves market participants that are not
registered as broker-dealers or are not
FINRA members, including, for
example, hedge funds, banks and
principal trading firms (‘‘PTFs’’). As the
U.S. Department of the Treasury
(‘‘Treasury Department’’) noted in its
recent Capital Markets Report,
‘‘[t]rading activity [in U.S. Treasury
Securities] on the major electronic
interdealer platforms is dominated by
PTFs, . . . . and collectively they
account for over half of all transaction
volumes in the interdealer broker
segment of the [cash Treasury]
market.’’ 7 Although the Capital Markets
3 See Securities Exchange Act Release No. 79116
(October 18, 2016), 81 FR 73167 (October 24, 2016)
(Order Granting Accelerated Approval of File No.
SR–FINRA–2016–027).
4 See Regulatory Notice 16–39 (October 2016).
5 See Rule 6750(c)(5).
6 See Regulatory Notice 14–53 (November 2014).
There are limited exemptions available where all
the counterparties are FINRA members, which
would not apply where a transaction on an ATS
involves a non-FINRA member.
7 See Treasury Department, A Financial System
That Creates Economic Opportunities: Capital
Markets, Report to President Donald J. Trump,
Executive Order 13772 on Core Principles for
Regulating the United States Financial System, at
79–80 (October 2017) (‘‘Capital Markets Report’’),
https://www.treasury.gov/press-center/pressreleases/Documents/A-Financial-System-CapitalMarkets-FINAL-FINAL.pdf. The Capital Markets
Report cited the July 13, 2015 Joint Staff Report
(‘‘Joint Staff Report’’ or ‘‘JSR’’) issued by the U.S.
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Report does not define a ‘‘PTF,’’ the
Joint Staff Report identifies the
following as typical characteristics of
PTFs: (i) Principal investor; (ii) deploys
proprietary automated trading strategies;
(iii) low latency is typically a key
element of the trading strategies; and
(iv) may be registered as a broker-dealer
but does not have clients as in a typical
broker-dealer business model.8
Because each current ATS is a FINRA
member, all of the trading activity in
TRACE-Eligible Securities occurring on
an ATS is required to be reported to
TRACE by that ATS; however, the
identities of non-FINRA members
(including, but not limited to, hedge
funds, banks and PTFs) trading on the
ATSs are not reported because they are
treated as customers, not FINRA
members. Thus, while an ATS identifies
a specific FINRA-member counterparty
on its TRACE reports by that
counterparty’s market participant
identifier (‘‘MPID’’), for transactions
involving non-FINRA members, the
ATS reports the trade as a generic
customer trade and identifies the
counterparty only with a ‘‘C’’ identifier.
Because of this, as the Capital Markets
Report noted, ‘‘[i]n essence, a significant
portion of PTF activity is anonymized in
the TRACE data.’’ 9 The Treasury
Department therefore recommended
‘‘closing the gap in the granularity of
PTF data’’ by requiring ATSs that
facilitate transactions in U.S. Treasury
Securities ‘‘to identify customers in
their reports of Treasury security
transactions to TRACE.’’ 10
To assess the scope of non-FINRA
member trading activity in U.S.
Treasury Securities on ATSs, FINRA
analyzed transaction data submitted to
TRACE and found that, consistent with
the views expressed in the Capital
Markets Report, the majority of trades in
U.S. Treasury Securities reported by
Department of the Treasury, the Board of Governors
of the Federal Reserve System, the Federal Reserve
Bank of New York, the SEC, and the U.S.
Commodity Futures Trading Commission (InterAgency Working Group for Treasury Market
Surveillance members (IAWG) or ‘‘official sector’’)
in response to unusually high levels of volatility
and a very rapid round-trip in prices that occurred
in the market for U.S. Treasury Securities, futures,
and other related financial products on October 15,
2014, https://www.treasury.gov/press-center/pressreleases/Documents/Joint_Staff_Report_Treasury_
10-15-2015.pdf.
8 See JSR, at 50.
9 See Capital Markets Report, at 80.
10 Id. The Capital Markets Report recommends
‘‘closing the gap in the granularity of PTF data,’’
and also recommends requiring ATSs to identify
‘‘customers’’ in their TRACE reports, which is a
broader term than ‘‘PTFs.’’ FINRA staff intends to
work with the staff of the Treasury Department to
ensure the scope of the reporting requirement is
appropriate and meets regulatory needs in light of
the recommendations in the Capital Markets Report.
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ATSs do not identify the subscriber that
is a counterparty to the trade. Because
a significant portion of ATS trades in
U.S. Treasury Securities involves
unidentified counterparties, the trading
data available to FINRA and the official
sector is incomplete. Requiring specific
subscriber information in ATS TRACE
reports for transactions in U.S. Treasury
Securities would enhance the
information available to FINRA and the
official sector and facilitate a better
understanding U.S. Treasury market
structure and liquidity. As the Treasury
Department noted in the JSR, ‘‘an event
like October 15 highlights the need to
better understand various factors that
are impacting liquidity in the U.S.
Treasury market, especially during
stressed market conditions . . .
[including] . . . changes in
intermediation, automated trading,
regulation, and buy and sell-side
participation that may have altered
trading practices as well as the sources
and characteristics of liquidity
provision.’’ 11
In addition, FINRA believes that the
proposed rule change would result in an
improvement to the effectiveness of
FINRA’s surveillance patterns from the
standpoint of greater granularity and
thus more accurate pattern detection,
including the increased ability to
identify potentially manipulative
activity. For example, FINRA’s ability to
detect wash sales or prearranged trading
activity would be improved if the audit
trail included the identity of the nonFINRA member counterparty rather than
the generic customer indicator received
today. The identity of the particular
ATS subscriber allows the surveillance
pattern to narrow down the potential
universe of matching trades and thus
more accurately detect instances of
potential manipulation. As such, the
additional detail that would be added to
transaction reports by identifying nonFINRA member counterparties would
enhance FINRA’s surveillance program
for U.S. Treasury Securities.
Consequently, as recommended in the
Capital Markets Report, FINRA is
proposing to require member ATSs with
a minimum threshold of trading
(‘‘covered ATS’’) to identify non-FINRA
member subscribers associated with
their TRACE trade reports in U.S.
Treasury Securities. Specifically, FINRA
proposes that a ‘‘covered ATS’’ would
mean an ATS, as that term is defined in
Rule 300 of SEC Regulation ATS,12 that
11 See
JSR, at 45.
17 CFR 242.300(a). As is the case with
FINRA Rule 6720(c) (Alternative rading Systems),
any member that meets the definition of
‘‘alternative trading system’’ set forth in Rule 300
12 See
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executed transactions in U.S. Treasury
Securities with non-FINRA member
subscribers of $10 billion or more in
monthly par value, computed by
aggregating buy and sell transactions,
for any two months in the preceding
calendar quarter.13 Pursuant to
proposed Supplementary Material .07,
each covered ATS would be required to
provide FINRA a list of its non-FINRA
member subscribers, as defined in Rule
300 of SEC Regulation ATS, which
would include entities such as PTFs,
hedge funds and banks. Based on the
lists provided by the ATSs, FINRA
would then assign each non-FINRA
member subscriber a unique MPID and
provide that MPID to each covered ATS
to which the non-FINRA member
subscribes so that each non-FINRA
member subscriber can be identified
consistently across all ATSs.14 Under
this approach, the confidentiality of an
individual ATS’s subscriber list would
be preserved because FINRA would
provide each ATS a list of MPIDs based
solely on the customer list provided to
FINRA by that ATS. Each covered ATS
would then use the assigned MPID in
the contra-party field for purposes of
identifying each non-FINRA member
counterparty, as required by Rule
6730(c)(6), in place of using the current
designations for contra-party
‘‘customer’’ or ‘‘non-member affiliate’’
identifiers.
If an ATS becomes a covered ATS
subsequent to the compliance date of
the proposed rule, it must comply with
new Supplementary Material .07 within
60 calendar days of the end of the
calendar quarter in which it becomes a
covered ATS. FINRA believes that 60
calendar days would afford sufficient
time for a newly covered ATS to
provide FINRA a list of, and obtain
MPIDs for, its non-FINRA member
subscribers, and to perform any
programming changes necessary to
accurately reflect in TRACE reports nonFINRA member counterparties using the
MPIDs assigned by FINRA.
of Regulation ATS would be required to comply
with the proposed rule change irrespective of
whether such member is excepted from the
requirements applicable to ATSs provided in Rule
301(b) of Regulation ATS (e.g., such as where the
member limits its securities activities to
government securities). See 17 CFR
242.301(a)()(ii)(A).
13 Based on a sample review period of Treasury
transaction data reported to FINRA, the top six
ATSs by volume would be considered ‘‘covered
ATS’’ and account for over 99% of the trade reports
submitted by ATSs to TRACE for U.S. Treasury
Securities.
14 Some non-members may have multiple MPIDs
assigned to them, for example if they use separate
aggregation units or desks to access or trade through
the ATS, in which case the unit assigned the MPID
is the subscriber for purposes of this rule proposal.
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Once an ATS becomes a ‘‘covered
ATS’’ under the rule, it will remain
within the scope of the definition. Thus,
a covered ATS must continue to identify
each non-FINRA member subscriber in
the contra-party field using the MPID
assigned by FINRA, irrespective of
whether its volume of executed
transactions in U.S. Treasury Securities
with non-FINRA member subscribers
falls below $10 billion in par value in
the future. In removing the current
differentiation between subscribers that
are FINRA members and those that are
not, and requiring the use of an MPID
by the ATS when reporting transactions
in U.S. Treasury Securities regardless of
the subscriber’s status as a FINRA
member, FINRA believes that the
proposal would improve the
completeness of the information on
transactions in U.S. Treasury Securities
available to FINRA and the official
sector.
Because a significant number of ATSs
have minimal volume of executions
with non-FINRA members in U.S.
Treasury Securities, the proposed rule
change would not apply to ATSs whose
par value traded in U.S. Treasury
Securities with non-FINRA member
subscribers is below $10 billion per
month for any two months in the
preceding calendar quarter. FINRA
believes that this approach is
appropriate in that it limits the
application of the proposed requirement
to the member ATSs that are most active
in trading U.S. Treasury Securities with
non-FINRA members, and, as such,
responsible for submitting most of the
ATS trade reports for transactions in
U.S. Treasury Securities against nonFINRA members. Limiting the proposed
counterparty identification requirement
in this manner balances the burdens
associated with complying with the
proposed rule (i.e., providing FINRA a
list of all non-FINRA member
subscribers, obtaining an MPID from
FINRA, and using the assigned MPID in
TRACE reporting), with the benefits
sought to be achieved by the proposed
requirement (i.e., additional granularity
that will enhance the quality of the
information available to FINRA and the
official sector on transactions in U.S.
Treasury Securities).
FINRA does not believe that the
absence of more detailed counterparty
information from those ATSs with
activity levels below the proposed
threshold will materially affect the
completeness of the audit trail.
However, if approved, FINRA intends to
monitor the continued appropriateness
of the $10 billion dollar threshold to
ensure that this amount remains
relevant in light of market changes. In
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27645
addition, FINRA intends to monitor the
impact of this exception on its audit
trail, as well as for any potential
negative impacts or changes in ATS or
non-member subscriber behavior.
If the Commission approves the
proposed rule change, FINRA will
announce the effective date of the
proposed rule change in a Regulatory
Notice to be published no later than 60
days following Commission approval.
The effective date will be no later than
180 days following publication of the
Regulatory Notice announcing
Commission approval. ATSs would be
required to submit a list of its nonmember subscribers to FINRA at least 60
days in advance of the effective date.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,15 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,16 which requires that FINRA
rules not impose any burden on
competition that is not necessary or
appropriate. FINRA believes that the
proposed rule change will make TRACE
reporting of U.S. Treasury Securities
transactions more complete and thus
enable FINRA to better identify
potentially abusive trading activity in
the Treasury market that is already
reported to TRACE but is anonymized
because of the existing limitations on
customer identification. Because this
activity by non-FINRA members
constitutes a significant portion of ATS
trading activity in U.S. Treasury
Securities, the proposed rule change
will significantly enhance FINRA’s
surveillance efforts as well as the
trading data available to the official
sector. As the Commission has noted in
the past, improved surveillance
capabilities can help FINRA detect and
deter fraudulent and manipulative acts
and practices, and thus promote just
and equitable principles of trade and the
protection of investors and the public
interest. In addition, this collection is
the ‘‘type of additional data reporting to
the official sector necessary to continue
to effectively monitor the functioning of
the Treasury market and meet the IAWG
mission.’’ 17
15 15
U.S.C. 78o–3(b)(6).
U.S.C. 78o–3(b)(9).
17 See JSR, at 49.
16 15
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Federal Register / Vol. 83, No. 114 / Wednesday, June 13, 2018 / Notices
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.
Economic Impacts
FINRA has undertaken an economic
impact assessment, as set forth below, to
analyze the need for the proposed
rulemaking, the regulatory objective of
the proposal, the economic baseline of
analysis, the anticipated economic
impacts, and the alternatives
considered.
(a) Purpose and Regulatory Objective
The proposed change to Rule 6730
would require ATSs that meet a
minimum threshold of trading against
non-FINRA member subscribers to
identify such subscribers on TRACE
transaction reports for U.S. Treasury
Securities. FINRA proposes to require
ATSs to identify such non-FINRA
members on TRACE transaction reports
to enhance the quality of the
information available to FINRA and the
official sector on transactions in U.S.
Treasury Securities.
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(b) Economic Baseline
As discussed above, FINRA members
have been reporting transaction
information on U.S. Treasury Securities
to TRACE since July 10, 2017 and such
information is used solely for FINRA
and official sector use. Since then, a
majority of the trades in this market can
be attributed to non-FINRA members.
Current TRACE reporting
requirements enable FINRA to identify
the ATS on which a transaction occurs
as well as the other members that are
parties to those transactions. However,
FINRA does not have similar insight
into the identity of the non-FINRA
members that are parties to transactions
on ATSs because such participants are
identified as either a customer or a nonmember affiliate.
The proposed rule change would
apply to ATSs that report transactions
in U.S. Treasury Securities to TRACE.
As mentioned in FINRA’s filing that
required the reporting of U.S. Treasury
Securities transactions to TRACE, ‘‘[t]he
Treasury cash market has been
bifurcated between the inter-dealer
market, in which dealers trade with one
another, and the dealer-to-customer
market, where customers may include
asset managers, pension funds,
insurance companies, and
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corporations.’’ 18 A number of entities
that are not registered broker-dealers are
currently part of the inter-dealer market
but they are not identified in TRACE
reports.
(c) Economic Impacts
FINRA believes that the proposed rule
change to require ATSs to identify nonFINRA members in TRACE reports for
U.S. Treasury Securities transactions
should potentially impact a small
number of ATSs (i.e., those whose
activity is at or above the minimum
threshold discussed above).
Between July 10, 2017 and March 31,
2018, there were 17 ATSs on which U.S.
Treasury Securities were traded. A
significant amount of the trading
volume, involved at least one market
participant not registered as a brokerdealer. Six of these ATSs had
transaction volume of $10 billion or
more in par value in at least two months
in a given calendar quarter against nonFINRA members and would have been
subject to the requirement had the
proposed rule been in place.19 The total
trading volume of the six ATSs against
non-FINRA member subscribers
accounted for more than 99.9% of
trading by non-FINRA member
subscribers across all ATSs.
FINRA reached out to several ATSs to
inquire about the potential sources of
costs. ATSs that are most active in
trading of U.S. Treasury Securities with
non-FINRA members, and hence may
have volumes at or above the proposed
volume threshold, may potentially need
to update the existing systems or build
new systems and develop protocols in
order to provide FINRA with a list of all
non-FINRA member subscribers, obtain
a corresponding list of MPIDs from
FINRA, and use the assigned MPIDs in
TRACE reporting. FINRA understands
that the proposed requirement would
also entail quality assurance testing
relating to identifying clients and
matching the assigned MPIDs with the
client list.
FINRA also considered the potential
impacts of the proposed identification
requirement on non-FINRA member
subscribers. To the extent that such
participants prefer avoiding
identification in TRACE reporting, they
may shift some or all of their trading
activity to other ATSs that are below the
threshold. Non-FINRA member
subscribers may also incur search costs
18 See Securities Exchange Act Release No. 78359
(July 19, 2016), 81 FR 48465 (July 25, 2016) (Notice
of Filing of File No. SR–FINRA–2016–027).
19 The six ATSs had transaction volume of more
than $10 billion in par value in all of the months
in our sample period, while the remaining 11 ATSs
never reached the threshold in any of the months.
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or may have to pay a liquidity premium
in case there is lighter trading on such
ATSs.
Alternatively, trading may shift to
FINRA-registered broker-dealers that are
not ATSs or to venues that are not under
FINRA jurisdiction, such as banks, and
thus have no reporting obligations to
TRACE. However, based on
conversations with the industry, FINRA
understands that most trading in this
market is electronic and member firms
and non-FINRA venues do not currently
have the capability to facilitate the
volume of orders and trades that FINRAmember ATSs can facilitate through
electronic systems. FINRA cannot
predict if non-FINRA member market
participants will ultimately find it more
beneficial to establish an alternative
venue that is not required to report to
TRACE, but will monitor for such a
potential outcome.
(d) Alternatives Considered
FINRA considered various approaches
to identifying non-FINRA members that
are parties to reported transactions in
U.S. Treasury Securities and engaged in
discussions with ATSs and other
stakeholders. One alternative
considered was to require each ATS to
provide a monthly list of all of its nonFINRA member subscribers and identify
each of its customers on TRACE reports
for U.S. Treasury Securities. This
approach, which would cover the
broadest range of subscribers, would
identify all of an ATS’s subscribers
regardless of the ATS’s amount of
trading activity. Another alternative
considered was to require each ATS to
provide FINRA with its order book
information, including providing each
customer’s order book activity rather
than identifying individual customers
on TRACE trade reports. FINRA would
then link the order book information to
the trade reports. Like the first option,
this alternative would provide FINRA
with complete insight into each
customer’s activity on the ATS;
however, FINRA would be compiling
the transaction data from the order book
information submitted by ATSs, rather
than having the ATSs identify
customers when reporting to TRACE.
However, the analysis of the
transaction data and careful
consideration of the trade-offs between
the costs associated with collecting
transaction or order book information
from each ATS and the incremental
value the information brings to the
surveillance program, concluded that
the proposed approach would cover a
significant amount of non-FINRA
member customer activity, and enhance
the quality of the information available
E:\FR\FM\13JNN1.SGM
13JNN1
Federal Register / Vol. 83, No. 114 / Wednesday, June 13, 2018 / Notices
to FINRA and the official sector on
transactions in U.S. Treasury Securities.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
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:
amozie on DSK3GDR082PROD with NOTICES1
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–2018–023 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–FINRA–2018–023. 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 website (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
VerDate Sep<11>2014
18:01 Jun 12, 2018
Jkt 244001
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website 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 FINRA. All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
2018–023, and should be submitted on
or before July 5, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Eduardo A. Aleman,
Assistant Secretary.
27647
section2459@state.gov). The mailing
address is U.S. Department of State,
L/PD, SA–5, Suite 5H03, Washington,
DC 20522–0505.
SUPPLEMENTARY INFORMATION: The
foregoing determinations were made
pursuant to the authority vested in me
by the Act of October 19, 1965 (79 Stat.
985; 22 U.S.C. 2459), E.O. 12047 of
March 27, 1978, the Foreign Affairs
Reform and Restructuring Act of 1998
(112 Stat. 2681, et seq.; 22 U.S.C. 6501
note, et seq.), Delegation of Authority
No. 234 of October 1, 1999, and
Delegation of Authority No. 236–3 of
August 28, 2000.
Marie Therese Porter Royce,
Assistant Secretary for Educational and
Cultural Affairs, Department of State.
[FR Doc. 2018–12720 Filed 6–12–18; 8:45 am]
BILLING CODE 4710–05–P
DEPARTMENT OF STATE
[Public Notice: 10452]
BILLING CODE 8011–01–P
Notice of Determinations; Culturally
Significant Object Imported for
Exhibition Determinations: Exhibition
of the ‘‘Wagner Garden Carpet’’
DEPARTMENT OF STATE
SUMMARY:
[FR Doc. 2018–12648 Filed 6–12–18; 8:45 am]
[Public Notice: 10447]
Notice of Determinations; Culturally
Significant Objects Imported for
Exhibition Determinations: ‘‘Truth and
Beauty: The Pre-Raphaelites and the
Old Masters’’ Exhibition
Notice is hereby given of the
following determinations: I hereby
determine that certain objects to be
included in the exhibition ‘‘Truth and
Beauty: The Pre-Raphaelites and the Old
Masters,’’ imported from abroad for
temporary exhibition within the United
States, are of cultural significance. The
objects are imported pursuant to loan
agreements with the foreign owners or
custodians. I also determine that the
exhibition or display of the exhibit
objects at the Fine Arts Museums of San
Francisco, Legion of Honor Museum,
San Francisco, California, from on or
about June 30, 2018, until on or about
September 30, 2018, and at possible
additional exhibitions or venues yet to
be determined, is in the national
interest. I have ordered that Public
Notice of these determinations be
published in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Julie
Simpson, Attorney-Adviser, Office of
the Legal Adviser, U.S. Department of
State (telephone: 202–632–6471; email:
SUMMARY:
2017
PO 00000
CFR 200.30–3(a)(12).
Frm 00110
Fmt 4703
Sfmt 4703
Notice is hereby given of the
following determinations: I hereby
determine that a certain object, entitled
the ‘‘Wagner Garden Carpet,’’ to be
exhibited in the Department of Islamic
Art of The Metropolitan Museum of Art
and at the Museum of Fine Arts,
Houston, and imported from abroad for
temporary exhibition within the United
States, is of cultural significance. The
object is imported pursuant to loan
agreements with the foreign owner or
custodian. I also determine that the
exhibition or display of the exhibit
object at The Metropolitan Museum of
Art, New York, New York, from on or
about July 10, 2018, until on or about
October 7, 2018, at the Museum of Fine
Arts, Houston, in Houston, Texas, from
on or about November 2, 2018, until on
or about March 24, 2019, and at possible
additional exhibitions or venues yet to
be determined, is in the national
interest. I have ordered that Public
Notice of these determinations be
published in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Julie
Simpson, Attorney-Adviser, Office of
the Legal Adviser, U.S. Department of
State (telephone: 202–632–6471; email:
section2459@state.gov). The mailing
address is U.S. Department of State, L/
PD, SA–5, Suite 5H03, Washington, DC
20522–0505.
SUPPLEMENTARY INFORMATION: The
foregoing determinations were made
pursuant to the authority vested in me
E:\FR\FM\13JNN1.SGM
13JNN1
]]>Agencies
[Federal Register Volume 83, Number 114 (Wednesday, June 13, 2018)]
[Notices]
[Pages 27643-27647]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-12648]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83393; File No. SR-FINRA-2018-023]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
FINRA Rule 6730 Relating to ATS Reporting of Transactions to TRACE in
U.S. Treasury Securities
June 7, 2018.
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 June 5, 2018, 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 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 amend Rule 6730 to require alternative
trading systems (``ATSs'') that report transactions in U.S. Treasury
Securities to the Transaction Reporting and Compliance Engine
(``TRACE'') to identify non-FINRA member subscribers on those
transaction reports.
The text of the proposed rule change is available on FINRA's
website 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
[[Page 27644]]
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 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
On October 18, 2016, the SEC approved a proposed rule change to
require FINRA members to report secondary market transactions in U.S.
Treasury Securities to TRACE,\3\ and on July 10, 2017, FINRA members
began reporting transaction information on U.S. Treasury Security
transactions through TRACE.\4\ As approved, TRACE transaction
information in U.S. Treasury Securities is for regulatory purposes only
and is not disseminated publicly.\5\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 79116 (October 18,
2016), 81 FR 73167 (October 24, 2016) (Order Granting Accelerated
Approval of File No. SR-FINRA-2016-027).
\4\ See Regulatory Notice 16-39 (October 2016).
\5\ See Rule 6750(c)(5).
---------------------------------------------------------------------------
As with all TRACE reporting, transactions in U.S. Treasury
Securities that occur on an ATS generally must be reported to TRACE by
the counterparties, if they are FINRA members, and by the ATS
itself.\6\ A significant amount of trading activity in U.S. Treasury
Securities on ATSs involves market participants that are not registered
as broker-dealers or are not FINRA members, including, for example,
hedge funds, banks and principal trading firms (``PTFs''). As the U.S.
Department of the Treasury (``Treasury Department'') noted in its
recent Capital Markets Report, ``[t]rading activity [in U.S. Treasury
Securities] on the major electronic interdealer platforms is dominated
by PTFs, . . . . and collectively they account for over half of all
transaction volumes in the interdealer broker segment of the [cash
Treasury] market.'' \7\ Although the Capital Markets Report does not
define a ``PTF,'' the Joint Staff Report identifies the following as
typical characteristics of PTFs: (i) Principal investor; (ii) deploys
proprietary automated trading strategies; (iii) low latency is
typically a key element of the trading strategies; and (iv) may be
registered as a broker-dealer but does not have clients as in a typical
broker-dealer business model.\8\
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\6\ See Regulatory Notice 14-53 (November 2014). There are
limited exemptions available where all the counterparties are FINRA
members, which would not apply where a transaction on an ATS
involves a non-FINRA member.
\7\ See Treasury Department, A Financial System That Creates
Economic Opportunities: Capital Markets, Report to President Donald
J. Trump, Executive Order 13772 on Core Principles for Regulating
the United States Financial System, at 79-80 (October 2017)
(``Capital Markets Report''), https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf. The Capital Markets Report cited the July 13, 2015 Joint
Staff Report (``Joint Staff Report'' or ``JSR'') issued by the U.S.
Department of the Treasury, the Board of Governors of the Federal
Reserve System, the Federal Reserve Bank of New York, the SEC, and
the U.S. Commodity Futures Trading Commission (Inter-Agency Working
Group for Treasury Market Surveillance members (IAWG) or ``official
sector'') in response to unusually high levels of volatility and a
very rapid round-trip in prices that occurred in the market for U.S.
Treasury Securities, futures, and other related financial products
on October 15, 2014, https://www.treasury.gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-2015.pdf.
\8\ See JSR, at 50.
---------------------------------------------------------------------------
Because each current ATS is a FINRA member, all of the trading
activity in TRACE-Eligible Securities occurring on an ATS is required
to be reported to TRACE by that ATS; however, the identities of non-
FINRA members (including, but not limited to, hedge funds, banks and
PTFs) trading on the ATSs are not reported because they are treated as
customers, not FINRA members. Thus, while an ATS identifies a specific
FINRA-member counterparty on its TRACE reports by that counterparty's
market participant identifier (``MPID''), for transactions involving
non-FINRA members, the ATS reports the trade as a generic customer
trade and identifies the counterparty only with a ``C'' identifier.
Because of this, as the Capital Markets Report noted, ``[i]n essence, a
significant portion of PTF activity is anonymized in the TRACE data.''
\9\ The Treasury Department therefore recommended ``closing the gap in
the granularity of PTF data'' by requiring ATSs that facilitate
transactions in U.S. Treasury Securities ``to identify customers in
their reports of Treasury security transactions to TRACE.'' \10\
---------------------------------------------------------------------------
\9\ See Capital Markets Report, at 80.
\10\ Id. The Capital Markets Report recommends ``closing the gap
in the granularity of PTF data,'' and also recommends requiring ATSs
to identify ``customers'' in their TRACE reports, which is a broader
term than ``PTFs.'' FINRA staff intends to work with the staff of
the Treasury Department to ensure the scope of the reporting
requirement is appropriate and meets regulatory needs in light of
the recommendations in the Capital Markets Report.
---------------------------------------------------------------------------
To assess the scope of non-FINRA member trading activity in U.S.
Treasury Securities on ATSs, FINRA analyzed transaction data submitted
to TRACE and found that, consistent with the views expressed in the
Capital Markets Report, the majority of trades in U.S. Treasury
Securities reported by ATSs do not identify the subscriber that is a
counterparty to the trade. Because a significant portion of ATS trades
in U.S. Treasury Securities involves unidentified counterparties, the
trading data available to FINRA and the official sector is incomplete.
Requiring specific subscriber information in ATS TRACE reports for
transactions in U.S. Treasury Securities would enhance the information
available to FINRA and the official sector and facilitate a better
understanding U.S. Treasury market structure and liquidity. As the
Treasury Department noted in the JSR, ``an event like October 15
highlights the need to better understand various factors that are
impacting liquidity in the U.S. Treasury market, especially during
stressed market conditions . . . [including] . . . changes in
intermediation, automated trading, regulation, and buy and sell-side
participation that may have altered trading practices as well as the
sources and characteristics of liquidity provision.'' \11\
---------------------------------------------------------------------------
\11\ See JSR, at 45.
---------------------------------------------------------------------------
In addition, FINRA believes that the proposed rule change would
result in an improvement to the effectiveness of FINRA's surveillance
patterns from the standpoint of greater granularity and thus more
accurate pattern detection, including the increased ability to identify
potentially manipulative activity. For example, FINRA's ability to
detect wash sales or prearranged trading activity would be improved if
the audit trail included the identity of the non-FINRA member
counterparty rather than the generic customer indicator received today.
The identity of the particular ATS subscriber allows the surveillance
pattern to narrow down the potential universe of matching trades and
thus more accurately detect instances of potential manipulation. As
such, the additional detail that would be added to transaction reports
by identifying non-FINRA member counterparties would enhance FINRA's
surveillance program for U.S. Treasury Securities.
Consequently, as recommended in the Capital Markets Report, FINRA
is proposing to require member ATSs with a minimum threshold of trading
(``covered ATS'') to identify non-FINRA member subscribers associated
with their TRACE trade reports in U.S. Treasury Securities.
Specifically, FINRA proposes that a ``covered ATS'' would mean an ATS,
as that term is defined in Rule 300 of SEC Regulation ATS,\12\ that
[[Page 27645]]
executed transactions in U.S. Treasury Securities with non-FINRA member
subscribers of $10 billion or more in monthly par value, computed by
aggregating buy and sell transactions, for any two months in the
preceding calendar quarter.\13\ Pursuant to proposed Supplementary
Material .07, each covered ATS would be required to provide FINRA a
list of its non-FINRA member subscribers, as defined in Rule 300 of SEC
Regulation ATS, which would include entities such as PTFs, hedge funds
and banks. Based on the lists provided by the ATSs, FINRA would then
assign each non-FINRA member subscriber a unique MPID and provide that
MPID to each covered ATS to which the non-FINRA member subscribes so
that each non-FINRA member subscriber can be identified consistently
across all ATSs.\14\ Under this approach, the confidentiality of an
individual ATS's subscriber list would be preserved because FINRA would
provide each ATS a list of MPIDs based solely on the customer list
provided to FINRA by that ATS. Each covered ATS would then use the
assigned MPID in the contra-party field for purposes of identifying
each non-FINRA member counterparty, as required by Rule 6730(c)(6), in
place of using the current designations for contra-party ``customer''
or ``non-member affiliate'' identifiers.
---------------------------------------------------------------------------
\12\ See 17 CFR 242.300(a). As is the case with FINRA Rule
6720(c) (Alternative rading Systems), any member that meets the
definition of ``alternative trading system'' set forth in Rule 300
of Regulation ATS would be required to comply with the proposed rule
change irrespective of whether such member is excepted from the
requirements applicable to ATSs provided in Rule 301(b) of
Regulation ATS (e.g., such as where the member limits its securities
activities to government securities). See 17 CFR
242.301(a)()(ii)(A).
\13\ Based on a sample review period of Treasury transaction
data reported to FINRA, the top six ATSs by volume would be
considered ``covered ATS'' and account for over 99% of the trade
reports submitted by ATSs to TRACE for U.S. Treasury Securities.
\14\ Some non-members may have multiple MPIDs assigned to them,
for example if they use separate aggregation units or desks to
access or trade through the ATS, in which case the unit assigned the
MPID is the subscriber for purposes of this rule proposal.
---------------------------------------------------------------------------
If an ATS becomes a covered ATS subsequent to the compliance date
of the proposed rule, it must comply with new Supplementary Material
.07 within 60 calendar days of the end of the calendar quarter in which
it becomes a covered ATS. FINRA believes that 60 calendar days would
afford sufficient time for a newly covered ATS to provide FINRA a list
of, and obtain MPIDs for, its non-FINRA member subscribers, and to
perform any programming changes necessary to accurately reflect in
TRACE reports non-FINRA member counterparties using the MPIDs assigned
by FINRA.
Once an ATS becomes a ``covered ATS'' under the rule, it will
remain within the scope of the definition. Thus, a covered ATS must
continue to identify each non-FINRA member subscriber in the contra-
party field using the MPID assigned by FINRA, irrespective of whether
its volume of executed transactions in U.S. Treasury Securities with
non-FINRA member subscribers falls below $10 billion in par value in
the future. In removing the current differentiation between subscribers
that are FINRA members and those that are not, and requiring the use of
an MPID by the ATS when reporting transactions in U.S. Treasury
Securities regardless of the subscriber's status as a FINRA member,
FINRA believes that the proposal would improve the completeness of the
information on transactions in U.S. Treasury Securities available to
FINRA and the official sector.
Because a significant number of ATSs have minimal volume of
executions with non-FINRA members in U.S. Treasury Securities, the
proposed rule change would not apply to ATSs whose par value traded in
U.S. Treasury Securities with non-FINRA member subscribers is below $10
billion per month for any two months in the preceding calendar quarter.
FINRA believes that this approach is appropriate in that it limits the
application of the proposed requirement to the member ATSs that are
most active in trading U.S. Treasury Securities with non-FINRA members,
and, as such, responsible for submitting most of the ATS trade reports
for transactions in U.S. Treasury Securities against non-FINRA members.
Limiting the proposed counterparty identification requirement in this
manner balances the burdens associated with complying with the proposed
rule (i.e., providing FINRA a list of all non-FINRA member subscribers,
obtaining an MPID from FINRA, and using the assigned MPID in TRACE
reporting), with the benefits sought to be achieved by the proposed
requirement (i.e., additional granularity that will enhance the quality
of the information available to FINRA and the official sector on
transactions in U.S. Treasury Securities).
FINRA does not believe that the absence of more detailed
counterparty information from those ATSs with activity levels below the
proposed threshold will materially affect the completeness of the audit
trail. However, if approved, FINRA intends to monitor the continued
appropriateness of the $10 billion dollar threshold to ensure that this
amount remains relevant in light of market changes. In addition, FINRA
intends to monitor the impact of this exception on its audit trail, as
well as for any potential negative impacts or changes in ATS or non-
member subscriber behavior.
If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice to be published no later than 60 days following Commission
approval. The effective date will be no later than 180 days following
publication of the Regulatory Notice announcing Commission approval.
ATSs would be required to submit a list of its non-member subscribers
to FINRA at least 60 days in advance of the effective date.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\15\ 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,\16\ which requires
that FINRA rules not impose any burden on competition that is not
necessary or appropriate. FINRA believes that the proposed rule change
will make TRACE reporting of U.S. Treasury Securities transactions more
complete and thus enable FINRA to better identify potentially abusive
trading activity in the Treasury market that is already reported to
TRACE but is anonymized because of the existing limitations on customer
identification. Because this activity by non-FINRA members constitutes
a significant portion of ATS trading activity in U.S. Treasury
Securities, the proposed rule change will significantly enhance FINRA's
surveillance efforts as well as the trading data available to the
official sector. As the Commission has noted in the past, improved
surveillance capabilities can help FINRA detect and deter fraudulent
and manipulative acts and practices, and thus promote just and
equitable principles of trade and the protection of investors and the
public interest. In addition, this collection is the ``type of
additional data reporting to the official sector necessary to continue
to effectively monitor the functioning of the Treasury market and meet
the IAWG mission.'' \17\
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\15\ 15 U.S.C. 78o-3(b)(6).
\16\ 15 U.S.C. 78o-3(b)(9).
\17\ See JSR, at 49.
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[[Page 27646]]
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.
Economic Impacts
FINRA has undertaken an economic impact assessment, as set forth
below, to analyze the need for the proposed rulemaking, the regulatory
objective of the proposal, the economic baseline of analysis, the
anticipated economic impacts, and the alternatives considered.
(a) Purpose and Regulatory Objective
The proposed change to Rule 6730 would require ATSs that meet a
minimum threshold of trading against non-FINRA member subscribers to
identify such subscribers on TRACE transaction reports for U.S.
Treasury Securities. FINRA proposes to require ATSs to identify such
non-FINRA members on TRACE transaction reports to enhance the quality
of the information available to FINRA and the official sector on
transactions in U.S. Treasury Securities.
(b) Economic Baseline
As discussed above, FINRA members have been reporting transaction
information on U.S. Treasury Securities to TRACE since July 10, 2017
and such information is used solely for FINRA and official sector use.
Since then, a majority of the trades in this market can be attributed
to non-FINRA members.
Current TRACE reporting requirements enable FINRA to identify the
ATS on which a transaction occurs as well as the other members that are
parties to those transactions. However, FINRA does not have similar
insight into the identity of the non-FINRA members that are parties to
transactions on ATSs because such participants are identified as either
a customer or a non-member affiliate.
The proposed rule change would apply to ATSs that report
transactions in U.S. Treasury Securities to TRACE. As mentioned in
FINRA's filing that required the reporting of U.S. Treasury Securities
transactions to TRACE, ``[t]he Treasury cash market has been bifurcated
between the inter-dealer market, in which dealers trade with one
another, and the dealer-to-customer market, where customers may include
asset managers, pension funds, insurance companies, and corporations.''
\18\ A number of entities that are not registered broker-dealers are
currently part of the inter-dealer market but they are not identified
in TRACE reports.
---------------------------------------------------------------------------
\18\ See Securities Exchange Act Release No. 78359 (July 19,
2016), 81 FR 48465 (July 25, 2016) (Notice of Filing of File No. SR-
FINRA-2016-027).
---------------------------------------------------------------------------
(c) Economic Impacts
FINRA believes that the proposed rule change to require ATSs to
identify non-FINRA members in TRACE reports for U.S. Treasury
Securities transactions should potentially impact a small number of
ATSs (i.e., those whose activity is at or above the minimum threshold
discussed above).
Between July 10, 2017 and March 31, 2018, there were 17 ATSs on
which U.S. Treasury Securities were traded. A significant amount of the
trading volume, involved at least one market participant not registered
as a broker-dealer. Six of these ATSs had transaction volume of $10
billion or more in par value in at least two months in a given calendar
quarter against non-FINRA members and would have been subject to the
requirement had the proposed rule been in place.\19\ The total trading
volume of the six ATSs against non-FINRA member subscribers accounted
for more than 99.9% of trading by non-FINRA member subscribers across
all ATSs.
---------------------------------------------------------------------------
\19\ The six ATSs had transaction volume of more than $10
billion in par value in all of the months in our sample period,
while the remaining 11 ATSs never reached the threshold in any of
the months.
---------------------------------------------------------------------------
FINRA reached out to several ATSs to inquire about the potential
sources of costs. ATSs that are most active in trading of U.S. Treasury
Securities with non-FINRA members, and hence may have volumes at or
above the proposed volume threshold, may potentially need to update the
existing systems or build new systems and develop protocols in order to
provide FINRA with a list of all non-FINRA member subscribers, obtain a
corresponding list of MPIDs from FINRA, and use the assigned MPIDs in
TRACE reporting. FINRA understands that the proposed requirement would
also entail quality assurance testing relating to identifying clients
and matching the assigned MPIDs with the client list.
FINRA also considered the potential impacts of the proposed
identification requirement on non-FINRA member subscribers. To the
extent that such participants prefer avoiding identification in TRACE
reporting, they may shift some or all of their trading activity to
other ATSs that are below the threshold. Non-FINRA member subscribers
may also incur search costs or may have to pay a liquidity premium in
case there is lighter trading on such ATSs.
Alternatively, trading may shift to FINRA-registered broker-dealers
that are not ATSs or to venues that are not under FINRA jurisdiction,
such as banks, and thus have no reporting obligations to TRACE.
However, based on conversations with the industry, FINRA understands
that most trading in this market is electronic and member firms and
non-FINRA venues do not currently have the capability to facilitate the
volume of orders and trades that FINRA-member ATSs can facilitate
through electronic systems. FINRA cannot predict if non-FINRA member
market participants will ultimately find it more beneficial to
establish an alternative venue that is not required to report to TRACE,
but will monitor for such a potential outcome.
(d) Alternatives Considered
FINRA considered various approaches to identifying non-FINRA
members that are parties to reported transactions in U.S. Treasury
Securities and engaged in discussions with ATSs and other stakeholders.
One alternative considered was to require each ATS to provide a monthly
list of all of its non-FINRA member subscribers and identify each of
its customers on TRACE reports for U.S. Treasury Securities. This
approach, which would cover the broadest range of subscribers, would
identify all of an ATS's subscribers regardless of the ATS's amount of
trading activity. Another alternative considered was to require each
ATS to provide FINRA with its order book information, including
providing each customer's order book activity rather than identifying
individual customers on TRACE trade reports. FINRA would then link the
order book information to the trade reports. Like the first option,
this alternative would provide FINRA with complete insight into each
customer's activity on the ATS; however, FINRA would be compiling the
transaction data from the order book information submitted by ATSs,
rather than having the ATSs identify customers when reporting to TRACE.
However, the analysis of the transaction data and careful
consideration of the trade-offs between the costs associated with
collecting transaction or order book information from each ATS and the
incremental value the information brings to the surveillance program,
concluded that the proposed approach would cover a significant amount
of non-FINRA member customer activity, and enhance the quality of the
information available
[[Page 27647]]
to FINRA and the official sector on transactions in U.S. Treasury
Securities.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
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 [email protected]. Please include
File Number SR-FINRA-2018-023 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-FINRA-2018-023. 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 website (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 website 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 FINRA. All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FINRA-2018-023, and should be submitted
on or before July 5, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-12648 Filed 6-12-18; 8:45 am]
BILLING CODE 8011-01-P
