Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change Relating to ATS Reporting to TRACE of Transactions in U.S. Treasury Securities, 40601-40605 [2018-17496]

Download as PDF Federal Register / Vol. 83, No. 158 / Wednesday, August 15, 2018 / Notices proposed rule change would have any significant impact on inter-market competition as the Exchange’s affiliated exchanges already allow after hours trading until 8:00 p.m. ET, and other markets are free to provide similar trading hours. Furthermore, the Exchange does not believe that the proposed rule change would have any significant impact on intra-market competition as all Members would be able to enter orders later in the day due to the extended After Hours Trading Session. (C) Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange has neither solicited nor received written comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act 17 and Rule 19b– 4(f)(6) thereunder.18 A proposed rule change filed under Rule 19b–4(f)(6) 19 normally does not become operative for 30 days after the date of its filing. However, pursuant to Rule 19b–4(f)(6)(iii),20 the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange requests that the Commission waive the 30-day operative delay so that the proposal may become operative immediately upon filing. The Exchange represents that waiver of the 30-day operative delay will allow the Exchange to immediately provide a venue for market participants to source liquidity until 8:00 p.m. ET, similar to the operation of other exchanges. Because the proposed rules previously have been approved by the Commission for, and are substantively identical to those of, another listing exchange, the daltland on DSKBBV9HB2PROD with NOTICES 17 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). In addition, Rule 19b4(f)(6) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. 19 17 CFR 240.19b–4(f)(6). 20 17 CFR 240.19b–4(f)(6)(iii). 18 17 VerDate Sep<11>2014 18:28 Aug 14, 2018 Jkt 244001 40601 Commission believes does not believe that the proposal raises any novel or unique regulatory issues.21 Therefore, the Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. The Commission hereby waives the 30-day operative delay and designates the proposed rule change operative upon filing.22 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule change should be approved or disapproved. 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 will also 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–CboeBZX–2018–057 and should be submitted on or before September 5, 2018. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposal is consistent with the Act. Comments may be submitted by any of the following methods: For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.23 Eduardo A. Aleman, Assistant Secretary. 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– CboeBZX–2018–057 on the subject line. SECURITIES AND EXCHANGE COMMISSION 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–CboeBZX–2018–057. 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 21 See supra note 11. purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 22 For PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 [FR Doc. 2018–17490 Filed 8–14–18; 8:45 am] BILLING CODE 8011–01–P [Release No. 34–83815; File No. SR–FINRA– 2018–023] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change Relating to ATS Reporting to TRACE of Transactions in U.S. Treasury Securities August 9, 2018. I. Introduction On June 5, 2018, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend FINRA Rule 6730 to require certain 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 proposed rule change was published for 23 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\15AUN1.SGM 15AUN1 40602 Federal Register / Vol. 83, No. 158 / Wednesday, August 15, 2018 / Notices comment in the Federal Register on June 13, 2018.3 The Commission received three comment letters regarding the proposed rule change.4 On July 26, 2018, the Commission extended until September 11, 2018, the time period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.5 FINRA submitted a response to the comments on August 6, 2018.6 This order approves the proposed rule change. II. Description of Proposed Rule Change As described in further detail below, FINRA has proposed to add Supplementary Material .07 to existing FINRA Rule 6730 to require an ATS, as defined in Rule 300(a) of Regulation ATS,7 that effects transactions in U.S. Treasury Securities above a certain volume threshold to identify in its TRACE reports any counterparty to a Treasury transaction that is a nonFINRA member, using a market participant identifier (‘‘MPID’’) assigned by FINRA.8 A. Background daltland on DSKBBV9HB2PROD with NOTICES On October 18, 2016, the Commission approved a proposed rule change that required FINRA members to report secondary market transactions in U.S. Treasury Securities to TRACE.9 FINRA members began reporting such transactions to TRACE on July 10, 3 See Securities Exchange Act Release No. 83393 (June 7, 2018), 83 FR 27643 (‘‘Notice’’). 4 See letter to Secretary, Commission, from Stephen John Berger, Managing Director, Government and Regulatory Policy, Citadel, dated July 5, 2018 (‘‘Citadel Letter’’); letter to Robert W. Errett, Deputy Secretary, Commission, from Theodore Bragg, Chief Executive Officer, Execution Access, LLC, dated July 3, 2018 (‘‘Execution Access Letter’’); letter to Brent J. Fields, Secretary, Commission, from Tyler Gellasch, Executive Director, The Healthy Markets Association, dated July 5, 2018 (‘‘Healthy Markets Letter’’). 5 See Securities Exchange Act Release No. 83722 (July 26, 2018), 83 FR 37544 (Aug. 1, 2018). 6 See letter to Brent J. Fields, Secretary, Commission, from Racquel L. Russell, FINRA, dated August 6, 2018 (‘‘FINRA Response’’). 7 17 CFR 242.300(a). 8 FINRA Rule 6710(p) defines ‘‘U.S. Treasury Security’’ to mean ‘‘a security, other than a savings bond, issued by the U.S. Department of the Treasury to fund the operations of the federal government or to retire such outstanding securities. The term ‘U.S. Treasury Security’ also includes separate principal and interest components of a U.S. Treasury Security that has been separated pursuant to the Separate Trading of Registered Interest and Principal of Securities (STRIPS) program operated by the U.S. Department of Treasury.’’ 9 See Securities Exchange Act Release No. 79116 (October 18, 2016), 81 FR 73167 (October 24, 2016) (SR–FINRA–2016–027) (‘‘2016 Order’’). VerDate Sep<11>2014 18:28 Aug 14, 2018 Jkt 244001 2017.10 Information in TRACE regarding transactions in U.S. Treasury Securities is for regulatory purposes only and is not disseminated publicly.11 Under FINRA’s rules, each FINRA member that is a Party to a Transaction in a TRACE-Eligible Security must report the transaction.12 A TRACE transaction report must include, among other things, the contra-party’s identifier (i.e., MPID, customer, or a non-member affiliate, as applicable).13 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.14 On a TRACE report, an ATS must identify a FINRA member counterparty by that counterparty’s MPID.15 However, for a transaction involving a non-FINRA-member customer, the ATS must report the trade utilizing a generic customer identifier (‘‘C’’).16 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 hedge funds, banks, and principal trading firms (‘‘PTFs’’).17 The Department of the Treasury stated in its October 2017 Capital Markets Report that ‘‘[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.’’ 18 The Capital Markets Report 10 See Notice, 83 FR at 27644; FINRA Regulatory Notice 16–39 (October 2016). 11 See FINRA Rule 6750(c)(5) (providing that FINRA will not disseminate information on a transaction in a U.S. Treasury Security). See also Notice, 83 FR at 27644. 12 See FINRA Rule 6730(a). See also FINRA Rules 6710(a) and (e) (defining ‘‘TRACE-Eligible Security’’ and ‘‘Party to a Transaction,’’ respectively). 13 See FINRA Rule 6730(c)(6). 14 See Notice, 83 FR at 27644. See also FINRA’s Regulatory Notice 14–53 (November 2014) (reminding ATSs and ATS subscribers of their reporting obligations in TRACE-Eligible Securities). While there are limited exceptions to the reporting requirement that are available when all the counterparties are FINRA members, these exceptions do not apply to transactions on an ATS involving a non-FINRA member. See Notice, 83 FR at 27644, n. 6. FINRA has stated that, because each current ATS is a FINRA member, each ATS must report to TRACE all trading activity in TRACEEligible Securities that occurs on the ATS. See Notice, 83 FR at 27644. 15 See Notice, 83 FR at 27644. 16 See id. In addition, if the non-FINRA member is an affiliate, the ATS must report the trade as a generic trade with a non-member affiliate by denoting the counterparty with an ‘‘A’’ identifier. See FINRA Rule 6730(c)(6). 17 See Notice, 83 FR at 27644. 18 Notice, 83 FR at 27644 (citing Treasury Department, A Financial System That Creates PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 stated that ‘‘a significant portion of PTF activity is anonymized in the TRACE data.’’ 19 The Treasury Department recommended requiring ATSs that facilitate transactions in U.S. Treasury Securities to identify customers in their trade reports.20 FINRA believes that requiring additional counterparty information in ATS TRACE reports for transactions in U.S. Treasury Securities would improve the effectiveness of FINRA’s surveillance patterns and help FINRA to identify potentially manipulative activity, including wash sales and prearranged trading activity.21 FINRA further believes that such information would facilitate a better understanding of Treasury market structure and liquidity.22 B. Proposed Changes to ATS Reporting Obligations FINRA has proposed to add Supplementary Material .07 to existing FINRA Rule 6730 to require each ‘‘covered ATS,’’ as described below, to provide FINRA with a list of all of its non-FINRA-member subscribers and to obtain from FINRA an MPID for each such subscriber. Each covered ATS would then be required to identify a non-FINRA-member subscriber in the contra-party field of a TRACE report of a U.S. Treasury Security transaction using the MPID assigned by FINRA. A covered ATS would no longer be permitted to identify a contra-party to such a transaction using the ‘‘customer’’ or ‘‘non-member affiliate’’ identifier. Based on the list of non-FINRA-member subscribers that a covered ATS provides to FINRA, FINRA will assign each nonFINRA-member subscriber a unique MPID (to be used consistently across ATSs) and provide a list of those MPIDs to the ATS.23 This approach is designed to preserve the confidentiality of an individual ATS’s subscriber list, because FINRA will provide a covered ATS with a list of MPIDs only for its own subscribers.24 Proposed Supplementary Material .07(b) of FINRA Rule 6730 defines a ‘‘covered ATS’’ as an ATS, as that term is defined in Rule 300 of Regulation 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/presscenter/press-releases/Documents/A-FinancialSystem-Capital-Markets-FINAL-FINAL.pdf). 19 See id. (citing Capital Markets Report at 80). 20 See id. (citing Capital Markets Report at 80). 21 See id. 22 See id. 23 See proposed FINRA Rule 6730, Supplementary Material .07(a). See also Notice, 83 FR at 27645. 24 See Notice, 83 FR at 27645. E:\FR\FM\15AUN1.SGM 15AUN1 Federal Register / Vol. 83, No. 158 / Wednesday, August 15, 2018 / Notices daltland on DSKBBV9HB2PROD with NOTICES ATS, that executed transactions in U.S. Treasury Securities against non-FINRAmember 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.25 FINRA has stated that, based on a review of U.S. Treasury Security transaction data reported to FINRA during a sample period, six ATSs would currently be considered covered ATSs.26 According to FINRA, these ATSs currently account for over 99% of the trade reports submitted by ATSs to TRACE for transactions in U.S. Treasury Securities.27 FINRA believes that 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 nonFINRA-member subscribers, obtaining MPIDs, and using the assigned MPIDs in TRACE reporting) with the benefits sought to be achieved (i.e., obtaining additional granularity that will enhance the quality of U.S. Treasury Security transaction data).28 FINRA further believes that the proposal would improve the completeness of the information on U.S. Treasury Security transactions available to FINRA and the official sector, and that the absence of more detailed counterparty information from ATSs with activity levels below the proposed threshold would not materially affect the completeness of the audit trail.29 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.30 FINRA has stated that its ability to detect wash sales or prearranged trading activity would be 25 FINRA stated that any member that meets the definition of ‘‘alternative trading system’’ set forth in Rule 300(a) of Regulation ATS will be required to comply with the new counterparty reporting requirements, regardless of whether the member is excepted from the requirements applicable to ATSs provided in Rule 301(b) of Regulation ATS (e.g., the exception applicable if the ATS limits its securities activities to government securities). See Notice, 83 FR at 27644, n. 12 (citing 17 CFR 242.301(a)(4)(ii)(A)). 26 See Notice, 83 FR at 27645, n. 13. 27 See id. 28 See Notice, 83 FR at 27645. 29 See id. FINRA also noted that, if the proposal is approved, FINRA intends to monitor the continued appropriateness of the $10 billion threshold, the impact of the exception on its audit trail, and potential negative impacts or changes in ATS or non-FINRA-member subscriber behavior. See id. 30 See id., 83 FR at 27644. VerDate Sep<11>2014 18:28 Aug 14, 2018 Jkt 244001 improved if the audit trail included the identity of the non-FINRA-member counterparty rather than the generic customer indicator received today.31 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.32 FINRA concluded that the more granular detail that would be added to transaction reports by identifying non-FINRAmember counterparties would enhance FINRA’s surveillance program for U.S. Treasury Securities.33 FINRA has stated that it 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 of the proposal, and that the effective date will be no later than 180 days following publication of that Regulatory Notice.34 Covered ATSs will be required to submit a list of their non-FINRAmember subscribers to FINRA at least 60 days in advance of the effective date.35 An ATS that becomes a covered ATS in the future would be required to begin complying with the requirements of Supplementary Material .07 of FINRA Rule 6730 within 60 calendar days of the end of the calendar quarter in which it becomes a covered ATS.36 This 60day period is designed to provide sufficient time for a newly covered ATS to provide FINRA with a list of, and obtain MPIDs for, its non-FINRAmember subscribers, and perform any necessary programming changes.37 Once an ATS is deemed a covered ATS, it must continue complying with the new counterparty reporting requirements even if its volume of executed transactions in U.S. Treasury Securities against non-FINRA-member subscribers falls below the threshold.38 III. Summary of Comments and FINRA’s Response The Commission received three comment letters regarding the proposal.39 Two commenters strongly supported the proposal.40 One of these commenters noted that making more Treasury market data readily available 31 See id. id. 33 See id. 34 See id., 83 FR at 27645. 35 See id. 36 See proposed FINRA Rule 6730, Supplementary Material .07(c). 37 See Notice, 83 FR at 27645. 38 See proposed FINRA Rule 6730, Supplementary Material .07(d). 39 See supra note 4. 40 See Citadel Letter; Healthy Markets Letter. 32 See PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 40603 to the official sector would improve general monitoring and surveillance capabilities, including those designed to detect prohibited trading practices and potential risks to market stability.41 Similarly, the second commenter noted that the absence of information regarding the identity of non-FINRAmember counterparties is ‘‘a significant limitation for effective surveillance and oversight.’’ 42 The third commenter generally supported the goal of increased transparency in the U.S. Treasury market but did not think that the proposal ‘‘is sufficient or even necessarily an appropriate means of facilitating transparency among nonFINRA member participants in the Treasury market.’’ 43 This commenter warned that the proposal ‘‘may actually result in reduced transparency’’ because it might cause non-FINRA members to shift their trading in U.S. Treasury Securities ‘‘from FINRA member firms to non-FINRA member and bank affiliates that have no reporting responsibilities.’’ 44 The commenter concluded that ‘‘Congress or the SEC should consider requiring PTFs to register as broker-dealers such that FINRA, in turn, may require them to centrally clear their transactions and report their transactions to TRACE. Until such a requirement exists, the problem of market opacity will persist.’’ 45 In its response letter, FINRA acknowledged that reporting by nonFINRA members would provide a more complete picture of Treasury market activity, but believes that the proposal represents an appropriate next step to improve the usefulness of the Treasury transaction data currently reported through TRACE, given the limits of its jurisdictional authority.46 FINRA further noted that the Department of the Treasury, the Commission, the Federal Reserve Bank of New York, and the CFTC have stated that they are assessing effective means to ensure the collection of data regarding Treasury cash securities market transactions is comprehensive and includes information from institutions that are 41 See Citadel Letter at 1. Markets Letter at 3. 43 Execution Access Letter at 2. 44 Id. Another commenter agreed that banks should be subject to reporting requirements, but expressed the view that the ‘‘important effort’’ represented by the proposal should not be delayed or limited pending action with respect to the establishment of reporting obligations for banks. See Heathy Markets at 3. 45 Execution Access Letter at 3. 46 See FINRA Response at 1–2. 42 Healthy E:\FR\FM\15AUN1.SGM 15AUN1 40604 Federal Register / Vol. 83, No. 158 / Wednesday, August 15, 2018 / Notices daltland on DSKBBV9HB2PROD with NOTICES not FINRA members.47 FINRA also noted that the Federal Reserve Board has announced that it plans to collect data from banks for secondary market transactions in U.S. Treasury Securities and is discussing with FINRA whether TRACE could be leveraged to potentially serve as the Board’s collection agent for the data.48 Similarly, this commenter believed that ‘‘ATS participants whose trades are presently reported to TRACE only as ‘customer’ trades—including banks, hedge funds, and PTFs—may choose to not become an ATS subscriber or refrain from trading on ATS’s to maintain anonymity and avoid regulatory oversight.’’ 49 FINRA acknowledged that the proposal could result in a change in behavior by non-FINRA members, but reiterated its understanding, expressed in the Notice, that most trading in the Treasury cash market is electronic and that 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.50 Accordingly, FINRA believes that the proposal is designed to apply to the trading venues most likely not to see a shift in volume away to other venues.51 FINRA also reiterated that it would monitor activity in U.S. Treasury Securities with respect to the operation of the proposal.52 The commenter also argued that the proposal ‘‘unfairly allocates to ATSs the significant operational costs and regulatory burdens of trade reporting’’ 53 and that ‘‘ATS’s will likely need to recoup these costs by passing them through to their customers.’’ 54 FINRA responded that it is sensitive to the need to balance the regulatory objectives of a proposal with the burdens and costs 47 See id. at 2 (citing Joint Press Release, Department of the Treasury, et al., Statement Regarding Progress on the Review of the U.S. Treasury Market Structure since the July 2015 Joint Staff Report (August 2, 2016), https://www.sec.gov/ news/pressrelease/2016-155.html; Joint Press Release, U.S. Department of the Treasury, et al., Statement on Trade Reporting in the U.S. Treasury Market (May 16, 2016), https://www.sec.gov/news/ pressrelease/2016-90.html). 48 See id. at 2 (citing Press Release, Board of Governors of the Federal Reserve System (October 21, 2016), https://www.federalreserve.gov/ newsevents/pressreleases/other20161021a.htm). 49 Execution Access Letter at 2. 50 See FINRA Response at 2. 51 See id. 52 See id. A second commenter who broadly supported the proposal also noted that the new counterparty reporting requirements ‘‘may lead to trading shifting to non-ATS or other venues’’ and observed that ‘‘it might be valuable to further expand the reporting obligations in the future.’’ Healthy Markets Letter at 3. 53 Execution Access Letter at 2–3. 54 Id. at 3. VerDate Sep<11>2014 18:28 Aug 14, 2018 Jkt 244001 imposed on member firms, and sought to narrowly tailor the proposal by establishing a minimum volume threshold below which the identification requirements would not apply.55 FINRA also noted that, because firms currently must populate the counterparty field in their TRACE reports, the proposal will not require ATSs to undertake programming related to populating a new field, but rather will require them to use a FINRAassigned MPID in place of the current generic contra-party identifiers for ‘‘customer’’ or ‘‘non-member affiliate.’’ 56 FINRA further noted that it intends to set an effective date for the proposal of approximately 180 days from the date of the Regulatory Notice announcing a Commission approval of the proposal, which is designed to provide ATSs with enough time to determine whether they are covered and, if so, to obtain MPIDs for nonFINRA-member subscribers and make any necessary programming changes.57 Finally, one of the commenters who broadly supported the proposal suggested that FINRA ultimately should require identification using the legal entity identifiers (‘‘LEIs’’) rather than MPIDs.58 FINRA responded that, at this time, MPIDs are the most appropriate identifier for TRACE reports because MPIDs are established and widely used by its members for purposes of reporting trade and counterparty information to FINRA.59 IV. Discussion and Commission Findings After carefully considering the proposal, the comments submitted, and FINRA’s response to the comments, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.60 In particular, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Act,61 which requires, among other things, that FINRA’s rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable 55 See FINRA Response at 3. id. 57 See id. In addition, an ATS that becomes a covered ATS in the future will have 60 calendar days from the end of the calendar quarter in which it becomes covered to begin complying with the requirements. See id. 58 See Healthy Markets Letter at 3–4. 59 See FINRA Response at 4. 60 In approving this proposal, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 61 15 U.S.C. 78o–3(b)(6). 56 See PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 principles of trade, and, in general, to protect investors and the public interest. The Commission called FINRA’s 2016 proposal to expand TRACE reporting to include member transactions in U.S. Treasury Securities ‘‘an important first step in providing the official sector with more comprehensive data about the Treasury cash market.’’ 62 Currently, TRACE reports require specific identification only of FINRA member counterparties; non-FINRA-member counterparties are reported only as ‘‘C’’ for customer or ‘‘A’’ if the counterparty is a non-member affiliate. FINRA has now proposed to require covered ATSs to specifically identify all non-FINRAmember counterparties in their TRACE reports of U.S. Treasury Security transactions. The Commission concurs with FINRA’s assessment that ‘‘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.’’ 63 The Commission concludes, therefore, that expanding TRACE reporting of Treasury transactions in the manner described in the proposal is reasonably designed to help FINRA fulfill its mandate in Section 15A(b)(6) of the Act 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. The Commission further believes that expanded reporting of counterparty identities in the manner described in the proposal will help to establish a more complete audit trail for transactions in U.S. Treasury Securities, thereby assisting regulators in detecting and deterring improper trading activity. More complete information regarding counterparty identity also will provide the official sector with a better understanding of the structure and characteristics of the U.S. Treasury cash market. The Commission notes that the proposal is consistent with the Treasury Department’s recommendation in the Capital Markets Report that FINRA members that facilitate transactions in U.S. Treasury Securities be required to identify customers in their reports of transactions in U.S. Treasury Securities.64 The Commission acknowledges the concerns of one commenter who argued that the proposal ‘‘does not do enough to achieve full transparency in the Treasury Market and may actually result in reduced transparency’’ and that some non-FINRA-member market participants 62 2016 Order, 81 FR at 73174. 83 FR at 27644. 64 See supra note 18 and accompanying text. 63 Notice, E:\FR\FM\15AUN1.SGM 15AUN1 Federal Register / Vol. 83, No. 158 / Wednesday, August 15, 2018 / Notices daltland on DSKBBV9HB2PROD with NOTICES might elect not to trade on covered ATSs ‘‘to maintain anonymity and avoid regulatory oversight.’’ 65 The Commission believes, nevertheless, that this comment does not preclude approval of the proposal at this time. Although some Treasury transactions will continue to be outside the scope of the new requirements, the new counterparty information reported by covered ATSs should greatly enhance surveillance capabilities and provide additional insights into the Treasury cash market. The Commission notes that other public sector authorities have expressed their intention to continue to assess effective means to ensure that reported data regarding the Treasury cash market is comprehensive and includes information from institutions that are not FINRA members.66 Furthermore, although theoretically possible, it might not be practical for non-FINRA members to shift their trading activity away from covered ATSs if covered ATSs continue to serve as significant pools of liquidity for U.S. Treasury Securities. The Commission notes that FINRA ‘‘intends to monitor . . . for any potential negative impacts or changes in ATS or non-member subscriber behavior.’’ 67 The Commission believes that the proposal is reasonably designed to minimize burdens on ATSs while still fulfilling the important policy objectives discussed above. The new non-FINRAmember identification requirements will apply only to ATSs that exceed the $10 billion threshold. These ATS currently account for the vast majority of ATS transaction reports for transactions in U.S. Treasury Securities against nonFINRA members.68 Furthermore, the proposal does not appear likely to require covered ATSs to undertake significant programming work because new reporting fields will not be necessary. All ATSs that report to TRACE already utilize fields for counterparty identifiers and are familiar with the use of MPIDs for FINRA member counterparties. For Treasury transactions on covered ATSs, the proposal eliminates use of the generic ‘‘C’’ and ‘‘A’’ identifiers and instead requires the ATS to populate the counterparty identifier field with an MPID in all cases, regardless of whether a particular counterparty is a FINRA member. Under the new rule, FINRA 65 Execution Access Letter at 2. supra notes 47–48 and accompanying text. 67 Notice, 83 FR at 27645. 68 FINRA stated that, based on a review of TRACE data over a sample period, only six ATSs that accounted for 99% of trade reports exceeded the proposed threshold. See Notice, 83 FR at 27645, at n. 13. 66 See VerDate Sep<11>2014 18:28 Aug 14, 2018 Jkt 244001 will assign MPIDs to all non-FINRAmember subscribers of covered ATSs who engage in Treasury transactions without employing a de minimis cut-off. The Commission believes that this is a reasonable means of simplifying compliance with the rule because covered ATSs will not have to analyze the transaction volume of non-FINRAmember subscribers to ascertain whether any of them become subject to or subsequently fall outside the scope of the rule. In addition, an ATS that reaches the $10 billion threshold will remain a covered ATS even if its volume of executed transactions in U.S. Treasury Securities subsequently falls below the $10 billion threshold.69 The Commission believes that this will simplify compliance with the new rule because an ATS will not be required to continue monitoring its volume of executions in U.S. Treasury Securities against non-FINRA-member subscribers once it has reached the $10 billion threshold. Finally, the Commission notes that the new rule will impose duties only on covered ATSs and not on any of their subscribers. Pursuant to Section 19(b)(5) of the Act,70 the Commission consulted with and considered the views of the Treasury Department in determining to approve the proposed rule change. The Treasury Department supports FINRA’s proposal to require covered ATSs to identify non-FINRA-member counterparties in their TRACE reports of Treasury transactions.71 Pursuant to Section 19(b)(6) of the Act,72 the Commission has considered the sufficiency and appropriateness of existing laws and rules applicable to government securities brokers, government securities dealers, and their associated persons in approving the proposal. As discussed above, ATSs currently report Treasury transactions using generic identifiers that do not specifically identify non-FINRAmember counterparties. By requiring covered ATSs to identify non-FINRAmember counterparties in their TRACE reports of Treasury transactions, the 69 See FINRA Rule 6730, Supplementary Material .07(d). 70 15 U.S.C. 78s(b)(5) (providing that the Commission ‘‘shall consult with and consider the views of the Secretary of the Treasury prior to approving a proposed rule filed by a registered securities association that primarily concerns conduct related to transactions in government securities, except where the Commission determines that an emergency exists requiring expeditious or summary action and publishes its reasons therefor’’). 71 Telephone conversation with Treasury Department staff and Brett Redfearn, Director, Division of Trading and Markets, et al., on August 3, 2018. 72 15 U.S.C. 78s(b)(6). PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 40605 new rule will enhance FINRA’s surveillance program for U.S. Treasury Securities and provide the official sector with important additional information concerning activity in the U.S. Treasury cash market. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,73 that the proposed rule change (SR–FINRA– 2018–023) is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.74 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–17496 Filed 8–14–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83814; File No. SR– PEARL–2018–17] Self-Regulatory Organizations: Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by MIAX PEARL, LLC To Amend the MIAX PEARL Fee Schedule August 9, 2018. Pursuant to the provisions of 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 August 1, 2018, MIAX PEARL, LLC (‘‘MIAX PEARL’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing a proposal to amend the MIAX PEARL Fee Schedule (the ‘‘Fee Schedule’’). The text of the proposed rule change is available on the Exchange’s website at https://www.miaxoptions.com/rulefilings/pearl at MIAX PEARL’s principal office, and at the Commission’s Public Reference Room. 73 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 74 17 E:\FR\FM\15AUN1.SGM 15AUN1

Agencies

[Federal Register Volume 83, Number 158 (Wednesday, August 15, 2018)]
[Notices]
[Pages 40601-40605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17496]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83815; File No. SR-FINRA-2018-023]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change Relating to ATS 
Reporting to TRACE of Transactions in U.S. Treasury Securities

August 9, 2018.

I. Introduction

    On June 5, 2018, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend FINRA Rule 6730 to require certain 
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 proposed rule change was published for

[[Page 40602]]

comment in the Federal Register on June 13, 2018.\3\ The Commission 
received three comment letters regarding the proposed rule change.\4\ 
On July 26, 2018, the Commission extended until September 11, 2018, the 
time period within which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change.\5\ FINRA 
submitted a response to the comments on August 6, 2018.\6\ 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. 83393 (June 7, 
2018), 83 FR 27643 (``Notice'').
    \4\ See letter to Secretary, Commission, from Stephen John 
Berger, Managing Director, Government and Regulatory Policy, 
Citadel, dated July 5, 2018 (``Citadel Letter''); letter to Robert 
W. Errett, Deputy Secretary, Commission, from Theodore Bragg, Chief 
Executive Officer, Execution Access, LLC, dated July 3, 2018 
(``Execution Access Letter''); letter to Brent J. Fields, Secretary, 
Commission, from Tyler Gellasch, Executive Director, The Healthy 
Markets Association, dated July 5, 2018 (``Healthy Markets 
Letter'').
    \5\ See Securities Exchange Act Release No. 83722 (July 26, 
2018), 83 FR 37544 (Aug. 1, 2018).
    \6\ See letter to Brent J. Fields, Secretary, Commission, from 
Racquel L. Russell, FINRA, dated August 6, 2018 (``FINRA 
Response'').
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II. Description of Proposed Rule Change

    As described in further detail below, FINRA has proposed to add 
Supplementary Material .07 to existing FINRA Rule 6730 to require an 
ATS, as defined in Rule 300(a) of Regulation ATS,\7\ that effects 
transactions in U.S. Treasury Securities above a certain volume 
threshold to identify in its TRACE reports any counterparty to a 
Treasury transaction that is a non-FINRA member, using a market 
participant identifier (``MPID'') assigned by FINRA.\8\
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    \7\ 17 CFR 242.300(a).
    \8\ FINRA Rule 6710(p) defines ``U.S. Treasury Security'' to 
mean ``a security, other than a savings bond, issued by the U.S. 
Department of the Treasury to fund the operations of the federal 
government or to retire such outstanding securities. The term `U.S. 
Treasury Security' also includes separate principal and interest 
components of a U.S. Treasury Security that has been separated 
pursuant to the Separate Trading of Registered Interest and 
Principal of Securities (STRIPS) program operated by the U.S. 
Department of Treasury.''
---------------------------------------------------------------------------

A. Background

    On October 18, 2016, the Commission approved a proposed rule change 
that required FINRA members to report secondary market transactions in 
U.S. Treasury Securities to TRACE.\9\ FINRA members began reporting 
such transactions to TRACE on July 10, 2017.\10\ Information in TRACE 
regarding transactions in U.S. Treasury Securities is for regulatory 
purposes only and is not disseminated publicly.\11\
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 79116 (October 18, 
2016), 81 FR 73167 (October 24, 2016) (SR-FINRA-2016-027) (``2016 
Order'').
    \10\ See Notice, 83 FR at 27644; FINRA Regulatory Notice 16-39 
(October 2016).
    \11\ See FINRA Rule 6750(c)(5) (providing that FINRA will not 
disseminate information on a transaction in a U.S. Treasury 
Security). See also Notice, 83 FR at 27644.
---------------------------------------------------------------------------

    Under FINRA's rules, each FINRA member that is a Party to a 
Transaction in a TRACE-Eligible Security must report the 
transaction.\12\ A TRACE transaction report must include, among other 
things, the contra-party's identifier (i.e., MPID, customer, or a non-
member affiliate, as applicable).\13\ 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.\14\ On a TRACE report, an ATS must identify a FINRA member 
counterparty by that counterparty's MPID.\15\ However, for a 
transaction involving a non-FINRA-member customer, the ATS must report 
the trade utilizing a generic customer identifier (``C'').\16\
---------------------------------------------------------------------------

    \12\ See FINRA Rule 6730(a). See also FINRA Rules 6710(a) and 
(e) (defining ``TRACE-Eligible Security'' and ``Party to a 
Transaction,'' respectively).
    \13\ See FINRA Rule 6730(c)(6).
    \14\ See Notice, 83 FR at 27644. See also FINRA's Regulatory 
Notice 14-53 (November 2014) (reminding ATSs and ATS subscribers of 
their reporting obligations in TRACE-Eligible Securities). While 
there are limited exceptions to the reporting requirement that are 
available when all the counterparties are FINRA members, these 
exceptions do not apply to transactions on an ATS involving a non-
FINRA member. See Notice, 83 FR at 27644, n. 6. FINRA has stated 
that, because each current ATS is a FINRA member, each ATS must 
report to TRACE all trading activity in TRACE-Eligible Securities 
that occurs on the ATS. See Notice, 83 FR at 27644.
    \15\ See Notice, 83 FR at 27644.
    \16\ See id. In addition, if the non-FINRA member is an 
affiliate, the ATS must report the trade as a generic trade with a 
non-member affiliate by denoting the counterparty with an ``A'' 
identifier. See FINRA Rule 6730(c)(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 hedge funds, 
banks, and principal trading firms (``PTFs'').\17\ The Department of 
the Treasury stated in its October 2017 Capital Markets Report that 
``[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.'' \18\ 
The Capital Markets Report stated that ``a significant portion of PTF 
activity is anonymized in the TRACE data.'' \19\ The Treasury 
Department recommended requiring ATSs that facilitate transactions in 
U.S. Treasury Securities to identify customers in their trade 
reports.\20\ FINRA believes that requiring additional counterparty 
information in ATS TRACE reports for transactions in U.S. Treasury 
Securities would improve the effectiveness of FINRA's surveillance 
patterns and help FINRA to identify potentially manipulative activity, 
including wash sales and prearranged trading activity.\21\ FINRA 
further believes that such information would facilitate a better 
understanding of Treasury market structure and liquidity.\22\
---------------------------------------------------------------------------

    \17\ See Notice, 83 FR at 27644.
    \18\ Notice, 83 FR at 27644 (citing 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).
    \19\ See id. (citing Capital Markets Report at 80).
    \20\ See id. (citing Capital Markets Report at 80).
    \21\ See id.
    \22\ See id.
---------------------------------------------------------------------------

B. Proposed Changes to ATS Reporting Obligations

    FINRA has proposed to add Supplementary Material .07 to existing 
FINRA Rule 6730 to require each ``covered ATS,'' as described below, to 
provide FINRA with a list of all of its non-FINRA-member subscribers 
and to obtain from FINRA an MPID for each such subscriber. Each covered 
ATS would then be required to identify a non-FINRA-member subscriber in 
the contra-party field of a TRACE report of a U.S. Treasury Security 
transaction using the MPID assigned by FINRA. A covered ATS would no 
longer be permitted to identify a contra-party to such a transaction 
using the ``customer'' or ``non-member affiliate'' identifier. Based on 
the list of non-FINRA-member subscribers that a covered ATS provides to 
FINRA, FINRA will assign each non-FINRA-member subscriber a unique MPID 
(to be used consistently across ATSs) and provide a list of those MPIDs 
to the ATS.\23\ This approach is designed to preserve the 
confidentiality of an individual ATS's subscriber list, because FINRA 
will provide a covered ATS with a list of MPIDs only for its own 
subscribers.\24\
---------------------------------------------------------------------------

    \23\ See proposed FINRA Rule 6730, Supplementary Material 
.07(a). See also Notice, 83 FR at 27645.
    \24\ See Notice, 83 FR at 27645.
---------------------------------------------------------------------------

    Proposed Supplementary Material .07(b) of FINRA Rule 6730 defines a 
``covered ATS'' as an ATS, as that term is defined in Rule 300 of 
Regulation

[[Page 40603]]

ATS, that executed transactions in U.S. Treasury Securities against 
non-FINRA-member subscribers of $10 billion or more in monthly par 
value, computed by aggregating buy and sell transactions, for any two 
months in the preceding calendar quarter.\25\ FINRA has stated that, 
based on a review of U.S. Treasury Security transaction data reported 
to FINRA during a sample period, six ATSs would currently be considered 
covered ATSs.\26\ According to FINRA, these ATSs currently account for 
over 99% of the trade reports submitted by ATSs to TRACE for 
transactions in U.S. Treasury Securities.\27\ FINRA believes that 
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 MPIDs, and using the assigned MPIDs in TRACE reporting) with 
the benefits sought to be achieved (i.e., obtaining additional 
granularity that will enhance the quality of U.S. Treasury Security 
transaction data).\28\ FINRA further believes that the proposal would 
improve the completeness of the information on U.S. Treasury Security 
transactions available to FINRA and the official sector, and that the 
absence of more detailed counterparty information from ATSs with 
activity levels below the proposed threshold would not materially 
affect the completeness of the audit trail.\29\
---------------------------------------------------------------------------

    \25\ FINRA stated that any member that meets the definition of 
``alternative trading system'' set forth in Rule 300(a) of 
Regulation ATS will be required to comply with the new counterparty 
reporting requirements, regardless of whether the member is excepted 
from the requirements applicable to ATSs provided in Rule 301(b) of 
Regulation ATS (e.g., the exception applicable if the ATS limits its 
securities activities to government securities). See Notice, 83 FR 
at 27644, n. 12 (citing 17 CFR 242.301(a)(4)(ii)(A)).
    \26\ See Notice, 83 FR at 27645, n. 13.
    \27\ See id.
    \28\ See Notice, 83 FR at 27645.
    \29\ See id. FINRA also noted that, if the proposal is approved, 
FINRA intends to monitor the continued appropriateness of the $10 
billion threshold, the impact of the exception on its audit trail, 
and potential negative impacts or changes in ATS or non-FINRA-member 
subscriber behavior. See id.
---------------------------------------------------------------------------

    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.\30\ FINRA has stated that its 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.\31\ 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.\32\ 
FINRA concluded that the more granular 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.\33\
---------------------------------------------------------------------------

    \30\ See id., 83 FR at 27644.
    \31\ See id.
    \32\ See id.
    \33\ See id.
---------------------------------------------------------------------------

    FINRA has stated that it 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 of the proposal, and that 
the effective date will be no later than 180 days following publication 
of that Regulatory Notice.\34\ Covered ATSs will be required to submit 
a list of their non-FINRA-member subscribers to FINRA at least 60 days 
in advance of the effective date.\35\ An ATS that becomes a covered ATS 
in the future would be required to begin complying with the 
requirements of Supplementary Material .07 of FINRA Rule 6730 within 60 
calendar days of the end of the calendar quarter in which it becomes a 
covered ATS.\36\ This 60-day period is designed to provide sufficient 
time for a newly covered ATS to provide FINRA with a list of, and 
obtain MPIDs for, its non-FINRA-member subscribers, and perform any 
necessary programming changes.\37\ Once an ATS is deemed a covered ATS, 
it must continue complying with the new counterparty reporting 
requirements even if its volume of executed transactions in U.S. 
Treasury Securities against non-FINRA-member subscribers falls below 
the threshold.\38\
---------------------------------------------------------------------------

    \34\ See id., 83 FR at 27645.
    \35\ See id.
    \36\ See proposed FINRA Rule 6730, Supplementary Material 
.07(c).
    \37\ See Notice, 83 FR at 27645.
    \38\ See proposed FINRA Rule 6730, Supplementary Material 
.07(d).
---------------------------------------------------------------------------

III. Summary of Comments and FINRA's Response

    The Commission received three comment letters regarding the 
proposal.\39\ Two commenters strongly supported the proposal.\40\ One 
of these commenters noted that making more Treasury market data readily 
available to the official sector would improve general monitoring and 
surveillance capabilities, including those designed to detect 
prohibited trading practices and potential risks to market 
stability.\41\ Similarly, the second commenter noted that the absence 
of information regarding the identity of non-FINRA-member 
counterparties is ``a significant limitation for effective surveillance 
and oversight.'' \42\
---------------------------------------------------------------------------

    \39\ See supra note 4.
    \40\ See Citadel Letter; Healthy Markets Letter.
    \41\ See Citadel Letter at 1.
    \42\ Healthy Markets Letter at 3.
---------------------------------------------------------------------------

    The third commenter generally supported the goal of increased 
transparency in the U.S. Treasury market but did not think that the 
proposal ``is sufficient or even necessarily an appropriate means of 
facilitating transparency among non-FINRA member participants in the 
Treasury market.'' \43\ This commenter warned that the proposal ``may 
actually result in reduced transparency'' because it might cause non-
FINRA members to shift their trading in U.S. Treasury Securities ``from 
FINRA member firms to non-FINRA member and bank affiliates that have no 
reporting responsibilities.'' \44\ The commenter concluded that 
``Congress or the SEC should consider requiring PTFs to register as 
broker-dealers such that FINRA, in turn, may require them to centrally 
clear their transactions and report their transactions to TRACE. Until 
such a requirement exists, the problem of market opacity will 
persist.'' \45\
---------------------------------------------------------------------------

    \43\ Execution Access Letter at 2.
    \44\ Id. Another commenter agreed that banks should be subject 
to reporting requirements, but expressed the view that the 
``important effort'' represented by the proposal should not be 
delayed or limited pending action with respect to the establishment 
of reporting obligations for banks. See Heathy Markets at 3.
    \45\ Execution Access Letter at 3.
---------------------------------------------------------------------------

    In its response letter, FINRA acknowledged that reporting by non-
FINRA members would provide a more complete picture of Treasury market 
activity, but believes that the proposal represents an appropriate next 
step to improve the usefulness of the Treasury transaction data 
currently reported through TRACE, given the limits of its 
jurisdictional authority.\46\ FINRA further noted that the Department 
of the Treasury, the Commission, the Federal Reserve Bank of New York, 
and the CFTC have stated that they are assessing effective means to 
ensure the collection of data regarding Treasury cash securities market 
transactions is comprehensive and includes information from 
institutions that are

[[Page 40604]]

not FINRA members.\47\ FINRA also noted that the Federal Reserve Board 
has announced that it plans to collect data from banks for secondary 
market transactions in U.S. Treasury Securities and is discussing with 
FINRA whether TRACE could be leveraged to potentially serve as the 
Board's collection agent for the data.\48\
---------------------------------------------------------------------------

    \46\ See FINRA Response at 1-2.
    \47\ See id. at 2 (citing Joint Press Release, Department of the 
Treasury, et al., Statement Regarding Progress on the Review of the 
U.S. Treasury Market Structure since the July 2015 Joint Staff 
Report (August 2, 2016), https://www.sec.gov/news/pressrelease/2016-155.html; Joint Press Release, U.S. Department of the Treasury, et 
al., Statement on Trade Reporting in the U.S. Treasury Market (May 
16, 2016), https://www.sec.gov/news/pressrelease/2016-90.html).
    \48\ See id. at 2 (citing Press Release, Board of Governors of 
the Federal Reserve System (October 21, 2016), https://www.federalreserve.gov/newsevents/pressreleases/other20161021a.htm).
---------------------------------------------------------------------------

    Similarly, this commenter believed that ``ATS participants whose 
trades are presently reported to TRACE only as `customer' trades--
including banks, hedge funds, and PTFs--may choose to not become an ATS 
subscriber or refrain from trading on ATS's to maintain anonymity and 
avoid regulatory oversight.'' \49\ FINRA acknowledged that the proposal 
could result in a change in behavior by non-FINRA members, but 
reiterated its understanding, expressed in the Notice, that most 
trading in the Treasury cash market is electronic and that 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.\50\ Accordingly, FINRA believes that the 
proposal is designed to apply to the trading venues most likely not to 
see a shift in volume away to other venues.\51\ FINRA also reiterated 
that it would monitor activity in U.S. Treasury Securities with respect 
to the operation of the proposal.\52\
---------------------------------------------------------------------------

    \49\ Execution Access Letter at 2.
    \50\ See FINRA Response at 2.
    \51\ See id.
    \52\ See id. A second commenter who broadly supported the 
proposal also noted that the new counterparty reporting requirements 
``may lead to trading shifting to non-ATS or other venues'' and 
observed that ``it might be valuable to further expand the reporting 
obligations in the future.'' Healthy Markets Letter at 3.
---------------------------------------------------------------------------

    The commenter also argued that the proposal ``unfairly allocates to 
ATSs the significant operational costs and regulatory burdens of trade 
reporting'' \53\ and that ``ATS's will likely need to recoup these 
costs by passing them through to their customers.'' \54\ FINRA 
responded that it is sensitive to the need to balance the regulatory 
objectives of a proposal with the burdens and costs imposed on member 
firms, and sought to narrowly tailor the proposal by establishing a 
minimum volume threshold below which the identification requirements 
would not apply.\55\ FINRA also noted that, because firms currently 
must populate the counterparty field in their TRACE reports, the 
proposal will not require ATSs to undertake programming related to 
populating a new field, but rather will require them to use a FINRA-
assigned MPID in place of the current generic contra-party identifiers 
for ``customer'' or ``non-member affiliate.'' \56\ FINRA further noted 
that it intends to set an effective date for the proposal of 
approximately 180 days from the date of the Regulatory Notice 
announcing a Commission approval of the proposal, which is designed to 
provide ATSs with enough time to determine whether they are covered 
and, if so, to obtain MPIDs for non-FINRA-member subscribers and make 
any necessary programming changes.\57\
---------------------------------------------------------------------------

    \53\ Execution Access Letter at 2-3.
    \54\ Id. at 3.
    \55\ See FINRA Response at 3.
    \56\ See id.
    \57\ See id. In addition, an ATS that becomes a covered ATS in 
the future will have 60 calendar days from the end of the calendar 
quarter in which it becomes covered to begin complying with the 
requirements. See id.
---------------------------------------------------------------------------

    Finally, one of the commenters who broadly supported the proposal 
suggested that FINRA ultimately should require identification using the 
legal entity identifiers (``LEIs'') rather than MPIDs.\58\ FINRA 
responded that, at this time, MPIDs are the most appropriate identifier 
for TRACE reports because MPIDs are established and widely used by its 
members for purposes of reporting trade and counterparty information to 
FINRA.\59\
---------------------------------------------------------------------------

    \58\ See Healthy Markets Letter at 3-4.
    \59\ See FINRA Response at 4.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After carefully considering the proposal, the comments submitted, 
and FINRA's response to the comments, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities association.\60\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\61\ which requires, among other things, that FINRA's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \60\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \61\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The Commission called FINRA's 2016 proposal to expand TRACE 
reporting to include member transactions in U.S. Treasury Securities 
``an important first step in providing the official sector with more 
comprehensive data about the Treasury cash market.'' \62\ Currently, 
TRACE reports require specific identification only of FINRA member 
counterparties; non-FINRA-member counterparties are reported only as 
``C'' for customer or ``A'' if the counterparty is a non-member 
affiliate. FINRA has now proposed to require covered ATSs to 
specifically identify all non-FINRA-member counterparties in their 
TRACE reports of U.S. Treasury Security transactions. The Commission 
concurs with FINRA's assessment that ``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.'' \63\ The Commission concludes, therefore, that 
expanding TRACE reporting of Treasury transactions in the manner 
described in the proposal is reasonably designed to help FINRA fulfill 
its mandate in Section 15A(b)(6) of the Act 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.
---------------------------------------------------------------------------

    \62\ 2016 Order, 81 FR at 73174.
    \63\ Notice, 83 FR at 27644.
---------------------------------------------------------------------------

    The Commission further believes that expanded reporting of 
counterparty identities in the manner described in the proposal will 
help to establish a more complete audit trail for transactions in U.S. 
Treasury Securities, thereby assisting regulators in detecting and 
deterring improper trading activity. More complete information 
regarding counterparty identity also will provide the official sector 
with a better understanding of the structure and characteristics of the 
U.S. Treasury cash market. The Commission notes that the proposal is 
consistent with the Treasury Department's recommendation in the Capital 
Markets Report that FINRA members that facilitate transactions in U.S. 
Treasury Securities be required to identify customers in their reports 
of transactions in U.S. Treasury Securities.\64\
---------------------------------------------------------------------------

    \64\ See supra note 18 and accompanying text.
---------------------------------------------------------------------------

    The Commission acknowledges the concerns of one commenter who 
argued that the proposal ``does not do enough to achieve full 
transparency in the Treasury Market and may actually result in reduced 
transparency'' and that some non-FINRA-member market participants

[[Page 40605]]

might elect not to trade on covered ATSs ``to maintain anonymity and 
avoid regulatory oversight.'' \65\ The Commission believes, 
nevertheless, that this comment does not preclude approval of the 
proposal at this time. Although some Treasury transactions will 
continue to be outside the scope of the new requirements, the new 
counterparty information reported by covered ATSs should greatly 
enhance surveillance capabilities and provide additional insights into 
the Treasury cash market. The Commission notes that other public sector 
authorities have expressed their intention to continue to assess 
effective means to ensure that reported data regarding the Treasury 
cash market is comprehensive and includes information from institutions 
that are not FINRA members.\66\ Furthermore, although theoretically 
possible, it might not be practical for non-FINRA members to shift 
their trading activity away from covered ATSs if covered ATSs continue 
to serve as significant pools of liquidity for U.S. Treasury 
Securities. The Commission notes that FINRA ``intends to monitor . . . 
for any potential negative impacts or changes in ATS or non-member 
subscriber behavior.'' \67\
---------------------------------------------------------------------------

    \65\ Execution Access Letter at 2.
    \66\ See supra notes 47-48 and accompanying text.
    \67\ Notice, 83 FR at 27645.
---------------------------------------------------------------------------

    The Commission believes that the proposal is reasonably designed to 
minimize burdens on ATSs while still fulfilling the important policy 
objectives discussed above. The new non-FINRA-member identification 
requirements will apply only to ATSs that exceed the $10 billion 
threshold. These ATS currently account for the vast majority of ATS 
transaction reports for transactions in U.S. Treasury Securities 
against non-FINRA members.\68\ Furthermore, the proposal does not 
appear likely to require covered ATSs to undertake significant 
programming work because new reporting fields will not be necessary. 
All ATSs that report to TRACE already utilize fields for counterparty 
identifiers and are familiar with the use of MPIDs for FINRA member 
counterparties. For Treasury transactions on covered ATSs, the proposal 
eliminates use of the generic ``C'' and ``A'' identifiers and instead 
requires the ATS to populate the counterparty identifier field with an 
MPID in all cases, regardless of whether a particular counterparty is a 
FINRA member. Under the new rule, FINRA will assign MPIDs to all non-
FINRA-member subscribers of covered ATSs who engage in Treasury 
transactions without employing a de minimis cut-off. The Commission 
believes that this is a reasonable means of simplifying compliance with 
the rule because covered ATSs will not have to analyze the transaction 
volume of non-FINRA-member subscribers to ascertain whether any of them 
become subject to or subsequently fall outside the scope of the rule. 
In addition, an ATS that reaches the $10 billion threshold will remain 
a covered ATS even if its volume of executed transactions in U.S. 
Treasury Securities subsequently falls below the $10 billion 
threshold.\69\ The Commission believes that this will simplify 
compliance with the new rule because an ATS will not be required to 
continue monitoring its volume of executions in U.S. Treasury 
Securities against non-FINRA-member subscribers once it has reached the 
$10 billion threshold. Finally, the Commission notes that the new rule 
will impose duties only on covered ATSs and not on any of their 
subscribers.
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    \68\ FINRA stated that, based on a review of TRACE data over a 
sample period, only six ATSs that accounted for 99% of trade reports 
exceeded the proposed threshold. See Notice, 83 FR at 27645, at n. 
13.
    \69\ See FINRA Rule 6730, Supplementary Material .07(d).
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    Pursuant to Section 19(b)(5) of the Act,\70\ the Commission 
consulted with and considered the views of the Treasury Department in 
determining to approve the proposed rule change. The Treasury 
Department supports FINRA's proposal to require covered ATSs to 
identify non-FINRA-member counterparties in their TRACE reports of 
Treasury transactions.\71\ Pursuant to Section 19(b)(6) of the Act,\72\ 
the Commission has considered the sufficiency and appropriateness of 
existing laws and rules applicable to government securities brokers, 
government securities dealers, and their associated persons in 
approving the proposal. As discussed above, ATSs currently report 
Treasury transactions using generic identifiers that do not 
specifically identify non-FINRA-member counterparties. By requiring 
covered ATSs to identify non-FINRA-member counterparties in their TRACE 
reports of Treasury transactions, the new rule will enhance FINRA's 
surveillance program for U.S. Treasury Securities and provide the 
official sector with important additional information concerning 
activity in the U.S. Treasury cash market.
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    \70\ 15 U.S.C. 78s(b)(5) (providing that the Commission ``shall 
consult with and consider the views of the Secretary of the Treasury 
prior to approving a proposed rule filed by a registered securities 
association that primarily concerns conduct related to transactions 
in government securities, except where the Commission determines 
that an emergency exists requiring expeditious or summary action and 
publishes its reasons therefor'').
    \71\ Telephone conversation with Treasury Department staff and 
Brett Redfearn, Director, Division of Trading and Markets, et al., 
on August 3, 2018.
    \72\ 15 U.S.C. 78s(b)(6).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\73\ that the proposed rule change (SR-FINRA-2018-023) is approved.
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    \73\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\74\
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    \74\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-17496 Filed 8-14-18; 8:45 am]
 BILLING CODE 8011-01-P
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