Amendments Regarding the Definition of “Exchange” and Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities, National Market System (NMS) Stocks, and Other Securities, 15496-15696 [2022-01975]
Download as PDF
<![CDATA[
15496
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
17 CFR Parts 232, 240, 242, and 249
[Release No. 34–94062; File No. S7–02–22]
RIN 3235–AM45
Amendments Regarding the Definition
of ‘‘Exchange’’ and Alternative Trading
Systems (ATSs) That Trade U.S.
Treasury and Agency Securities,
National Market System (NMS) Stocks,
and Other Securities
Securities and Exchange
Commission.
ACTION: Proposed rule.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’) is
proposing to amend Rule 3b–16 under
Securities Exchange Act of 1934
(‘‘Exchange Act’’), which defines certain
terms used in the statutory definition of
‘‘exchange’’ under Section 3(a)(1) of the
Exchange Act to include systems that
offer the use of non-firm trading interest
and communication protocols to bring
together buyers and sellers of securities.
In addition, the Commission is reproposing amendments to its
regulations under the Exchange Act that
were initially proposed in September
2020 for ATSs to take into consideration
systems that may fall within the
definition of exchange because of the
proposed amendments and operate as
an ATS. The Commission is reproposing, with certain revisions,
amendments to its regulations for ATSs
that trade government securities as
defined under Section 3(a)(42) of the
Exchange Act (‘‘government securities’’)
or repurchase and reverse repurchase
agreements on government securities
(‘‘Government Securities ATSs’’). The
Commission is also proposing to amend
Form ATS–N for NMS Stock ATSs,
which would require existing NMS
Stock ATSs to amend their existing
disclosures. In addition, the
Commission is proposing to amend the
fair access rule for ATSs. The
Commission is also proposing to require
electronic filing of and to modernize
Form ATS–R and Form ATS, which
would require existing Form ATS filers
to amend their existing disclosures.
Further, the Commission is re-proposing
amendments to its regulations regarding
systems compliance and integrity to
apply to ATSs that meet certain volume
thresholds in U.S. Treasury Securities or
in a debt security issued or guaranteed
by a U.S. executive agency, or
government-sponsored enterprise
(‘‘Agency Securities’’).
jspears on DSK121TN23PROD with PROPOSALS2
SUMMARY:
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Comments should be received on
or before April 18, 2022.
ADDRESSES: Comments may be
submitted by any of the following
methods:
DATES:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
regulatory-actions/how-to-submitcomments); or
• Send an email to rule-comments@
sec.gov. Please include File Number S7–
02–22 on the subject line.
Paper Comments
• Send paper comments to Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to File
Number S7–02–22. 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/proposed.shtml). Comments are
also 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
a.m. and 3 p.m. Operating conditions
may limit access to the Commission’s
public reference room. 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.
Studies, memoranda, or other
substantive items may be added by the
Commission or staff to the comment file
during this rulemaking. A notification of
the inclusion in the comment file of any
materials will be made available on the
Commission’s website. To ensure direct
electronic receipt of such notifications,
sign up through the ‘‘Stay Connected’’
option at www.sec.gov to receive
notifications by email.
FOR FURTHER INFORMATION CONTACT:
Regulation ATS: Tyler Raimo, Assistant
Director, at (202) 551–6227; Matthew
Cursio, Special Counsel, at (202) 551–
5748; David Garcia, Special Counsel, at
(202) 551–5681; Megan Mitchell,
Special Counsel, at (202) 551–4887;
Amir Katz, Special Counsel, at (202)
551–7653; and Joanne Kim, Attorney
Advisor, at (202) 551–4393, and for
Regulation SCI: David Liu, Special
Counsel, at (312) 353–6265 and Sara
Hawkins, Special Counsel, at (202) 551–
PO 00000
Frm 00002
Fmt 4701
Sfmt 4702
5523, Office of Market Supervision,
Division of Trading and Markets,
Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The
Commission is proposing amendments
to the following rules under the
Exchange Act: (1) 17 CFR 232.101 (Rule
101 of Regulation S–T); (2) 17 CFR
240.3b–16 (Rule 3b–16); (3) 17 CFR
242.300 (Rule 300 of Regulation ATS); 1
(4) 17 CFR 242.301 (Rule 301 of
Regulation ATS); (5) 17 CFR 242.302
(Rule 302 of Regulation ATS); (6) 17
CFR 242.304 (Rule 304 of Regulation
ATS); 2 and (7) 17 CFR 242.1000 (Rule
1000 of Regulation SCI).3
I. Introduction
In September 2020, the Commission
issued a proposal to amend Regulation
ATS and Regulation SCI for Government
Securities ATSs (‘‘2020 Proposal’’).4 The
Commission recognized the critical role
of government securities in the U.S. and
global economy, the significant volume
in government securities transacted on
systems currently operating as ATSs,
and these ATSs’ growing importance to
investors and overall securities market
structure. Notwithstanding their
importance for government securities,
the investor protection and fair and
orderly market principles of Regulation
ATS have limited application to
Government Securities ATSs.5 For
1 ‘‘Regulation ATS’’ consists of 17 CFR 242.300
through 242.304 (Rules 300 through 304 under the
Exchange Act). See also Regulation ATS Adopting
Release, infra note 31.
2 The Commission adopted Rule 304 on July 18,
2018. See Securities Exchange Act Release No.
83663 (July 18, 2018), 83 FR 38768 (August 7, 2018)
(‘‘NMS Stock ATS Adopting Release’’).
3 The Commission adopted 12 CFR 242.1000
through 242.1007 (Regulation SCI) on November 19,
2014. See Securities Exchange Act Release No.
73639 (November 19, 2014), 79 FR 72252
(December 5, 2014) (‘‘Regulation SCI Adopting
Release’’).
4 See Securities Exchange Act Release No. 90019
(September 28, 2020), 85 FR 87106 (December 31,
2020).
5 For the purposes of this re-proposal, the term
‘‘Government Securities ATS’’ refers to an ATS that
trades government securities or repos and includes
ATSs that would be subject to Regulation ATS after
the effective date of any final rule. This term
includes three categories of ATSs. First, a
‘‘Currently Exempted Government Securities ATS’’
means an ATS that trades government securities or
repos, is operating as of the effective date of any
final rule, and was formerly not required to comply
with Regulation ATS under 17 CFR 240.3a1–1(a)(3)
(Exchange Act Rule 3a1–1(a)(3)) exemption prior to
the effective date of any final rule. Second, a
‘‘Current Government Securities ATS’’ means an
ATS that trades government securities or repos and
is operating pursuant to an initial operation report
on Form ATS on file with the Commission as of the
effective date of any final rule. Finally, when
referring to regulatory requirements after the
effective date of any final rule, the term
‘‘Government Securities ATS’’ also includes a
Communication Protocol System that trades U.S.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
example, an ATS that limits its
securities activities to government
securities or reverse repurchase
agreements on government securities
(‘‘repos’’) and registers as a brokerdealer or is a bank (i.e., a Currently
Exempted Government Securities ATS)
is exempt from exchange registration
and is not required to comply with
Regulation ATS. Further, ATSs that
trade both government securities and
non-government securities (e.g.,
corporate bonds) are subject to
Regulation ATS but are not required to
comply with many of its investor
protection and fair and orderly markets
provisions, including public
transparency rules and the obligation to
provide fair access to investors if the
ATS has significant trading volume. In
addition, ATSs that trade government
securities are not subject to the systems
integrity provisions of Regulation SCI.
To promote operational transparency,
investor protection, system integrity,
fair and orderly markets, and regulatory
oversight for Government Securities
ATSs, the Commission proposed in the
2020 Proposal to: Eliminate the
exemption from compliance with
Regulation ATS for Currently Exempted
Government Securities ATSs; require all
Government Securities ATSs to publicly
file Form ATS–G, on which they would
disclose information about their
operations and potential conflicts of
interest; provide a process for the
Commission to review Form ATS–G
disclosures for clarity, completeness,
and potential violations of law and, if
necessary, declare ineffective Form
ATS–G filings; and require an ATS that
has significant volume for U.S. Treasury
Securities or Agency Securities to: (1)
Establish reasonable standards for
access to the ATS and apply those
standards to all prospective and current
subscribers in a fair and nondiscriminatory manner pursuant Rule
301(b)(5) of Regulation ATS (‘‘Fair
Access Rule’’); and (2) comply with the
operational capability, security,
business continuity planning, incident
reporting, and related requirements
Government securities or repos on U.S. Government
securities and that chooses to operate as an ATS
after the effective date of any final rule. A
‘‘Communication Protocol System’’ would include
a system that offers protocols and the use of nonfirm trading interest to bring together buyers and
sellers of securities. The re-proposal also uses the
term ‘‘Legacy Government Securities ATS,’’ which
includes all ATSs that trade government securities
or repos and are operating as of the effective date
of any final rule, regardless of whether the ATSs are
operating pursuant to an initial operation report on
Form ATS on file with the Commission (i.e., all
Current Government Securities ATSs and Currently
Exempted Government Securities ATSs).
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
under Regulation SCI.6 The Commission
issued a concept release (‘‘Concept
Release’’) in addition to the 2020
Proposal on the regulation of fixed
income electronic trading platforms.7
The Concept Release requested
comments on a wide range of topics,
including the different regulatory
treatment among fixed income
electronic trading platforms that use
diverse trading protocols or business
models and various aspects of
government securities, corporate bonds,
and municipal securities trading,
including their operations, services,
fees, market data, and participants.
The Commission received comments
in response to the 2020 Proposal and
Concept Release.8 Commenters
expressed broad support for the 2020
Proposal. In general, commenters
supported the proposed requirements to
remove the exemption for Currently
Exempted Government Securities ATSs
and to require public disclosures on
Form ATS–G.9 However, some
commenters expressed concern
regarding aspects of the 2020 Proposal,
including the proposed enhanced
disclosure requirements and
6 The Commission also had proposed to amend
Regulation ATS to: Require that Form ATS and
Form ATS–R be filed with the Commission
electronically through the Electronic Data
Gathering, Analysis and Retrieval (EDGAR) system
and modernize both forms; eliminate confidential
treatment of the types of securities that an ATS
trades as disclosed on the ATS’s Form ATS and
Form ATS–R; update and correct Form ATS–N;
change the reasons for which the Commission could
extend the initial Form ATS–N review period;
require NMS Stock ATSs to post on their websites
the most recently disseminated Form ATS–N,
except for any amendment that the Commission has
declared ineffective or that has been withdrawn;
and remove the exclusion from compliance with the
Fair Access Rule and Rule 301(b)(6) under
Regulation ATS for an ATS that matches nondisplayed customer orders using prices
disseminated by an effective transaction reporting
plan.
7 See 2020 Proposal, supra note 4.
8 These comment letters are available at https://
www.sec.gov/comments/s7-12-20/s71220.htm and
discussed throughout this proposal.
9 See, e.g., letter from Marcia E. Asquith,
Executive Vice President & Corporate Secretary,
Financial Industry Regulatory Authority, Inc., dated
March 1, 2021 (‘‘FINRA Letter’’) at 2; letter from
Rob Toomey, Managing Director & Associate
General Counsel, Securities Industry and Financial
Markets Association, Chris Killian, Managing
Director, Securitization and Credit, Securities
Industry and Financial Markets Association, and
Leslie Norwood, Managing Director, Associate
General Counsel, Securities Industry and Financial
Markets Association, dated March 1, 2021 (‘‘SIFMA
Letter’’) at 2; letter from Elisabeth Kirby, Head of
U.S. Market Structure, Tradeweb Markets Inc.,
dated March 1, 2021 (‘‘Tradeweb Letter’’) at 2; letter
from Jennifer W. Han, Chief Counsel & Head of
Regulatory Affairs, Managed Funds Association,
dated March 1, 2021 (‘‘MFA Letter’’) at 2–3; and
Tyler Gellasch, Executive Director, Healthy Markets
Association, dated March 22, 2021 (‘‘Healthy
Markets Letter’’) at 7.
PO 00000
Frm 00003
Fmt 4701
Sfmt 4702
15497
effectiveness regime 10 and the proposal
to require Government Securities ATSs
that meet certain volume thresholds to
register as national securities
exchanges.11 In addition, commenters
who opined on the Fair Access Rule and
Regulation SCI had differing views
about whether and how to apply them
to Government Securities ATSs.12
In addition, the Commission received
substantial comment on the Concept
Release, in particular concerning the
regulatory framework for fixed income
electronic trading platforms. Many
commenters recognized that certain
electronic trading platforms for fixed
income securities are not regulated as
registered exchanges or ATSs despite
performing the same market function as
those regulated markets.13 Several
commenters expressed support for the
Commission to expand the scope of its
exchange regulation to encompass more
fixed income platforms,14 while several
other commenters believed that such
action is not necessary or appropriate.15
Advances in technology and
innovation since Regulation ATS was
adopted in 1998 16 have changed the
methods by which securities markets
bring together buyers and sellers of
10 See letter from Robert Laorno, General Counsel,
ICE Bonds Securities Corporation, dated March 8,
2021 (‘‘ICE Bonds Letter I’’) at 5.
11 See letter from Kathleen M. Cronin, Senior
Managing Director, General Counsel and Corporate
Secretary, CME Group Inc., dated February 26, 2021
(‘‘BrokerTec Letter’’) at 3–4.
12 See, e.g., SIFMA Letter at 5 (supporting the
proposed volume thresholds); Americans for
Financial Reform Education Fund, dated March 1,
2021 (‘‘AFREF Letter’’) at 3 (supporting the
proposed threshold with respect to Regulation SCI
and stating that they believe the proposed threshold
for the Fair Access Rule is too low); Healthy
Markets Letter at 10–11 (recommending a lower
threshold for Regulation SCI); letter from Gregory
Babyak, Global Head of Regulatory Affairs,
Bloomberg L.P., dated March 1, 2021 (‘‘Bloomberg
Letter’’) at 5–6 (stating that the proposed thresholds
are too high); ICE Bonds Letter I at 5 (suggesting a
20 percent threshold for application of Regulation
SCI); Tradeweb Letter at 3, 11 (recommending a
‘‘more material’’ threshold for applying Regulation
SCI). See also infra Sections III.B.4 and III.C.
13 See, e.g., letter from Stephen John Berger,
Managing Director, Global Head of Government and
Regulatory Policy, Citadel, dated March 1, 2021
(‘‘Citadel Letter’’); letter from Joanna Mallers,
Secretary, FIA Principal Traders Group, dated
March 1, 2021 (‘‘FIA PTG Letter’’) at 2; letter from
Robert Laorno, General Counsel, ICE Bonds
Securities Corporation, dated March 15, 2021 (‘‘ICE
Bonds Letter II’’) at 2–4; FINRA Letter at 6; MFA
Letter at 8; Tradeweb Letter at 4.
14 See, e.g., Citadel Letter; FIA PTG Letter; ICE
Bonds Letter II.
15 See, e.g., letter from Sarah A. Bessin, Associate
General Counsel, Investment Company Institute and
Nhan Nguyen, Counsel, Investment Company
Institute, dated March 1, 2021 (‘‘ICI Letter’’) at 2,
7; letter from Scott Pintoff, General Counsel,
MarketAxess, dated March 1, 2021 (‘‘MarketAxess
Letter’’) at 2–4; Bloomberg Letter at 17–20.
16 See Regulation ATS Adopting Release, infra
note 31.
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
15498
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
securities. As discussed further below,
innovations in trading protocols have
increased efficiencies and access to
discover liquidity and prices, search for
a counterparty, and agree upon the
terms of a trade. Instead of using
exchange markets that offer only the use
of firm orders and provide matching
algorithms, market participants are able
to connect to numerous Communication
Protocol Systems, which offer the use of
protocols and non-firm trading interest
to bring together buyers and sellers of
securities. Communication Protocol
Systems today perform similar market
place functions of bringing together
buyers and sellers as registered
exchanges and ATSs and have become
an increasingly preferred choice of
trading venue, particularly for fixed
income securities. However, as a
function of how Exchange Act Rule 3b–
16 currently defines the terms in
Section 3(a)(1) of the Exchange Act,
Communication Protocol Systems do
not fall within the definition of
exchange. As a result, Communication
Protocol Systems are not subject to the
same regulatory requirements as
registered exchanges and ATSs and the
investors using them do not receive the
investor protection, fair and orderly
markets, transparency, and oversight
benefits stemming from exchange
regulation. Further, by Communication
Protocol Systems falling outside the
definition of exchange, a disparity has
developed among similar markets that
bring together buyers and sellers of
securities, in which some are regulated
as exchanges and others are not. This
regulatory disparity can create a
competitive imbalance and a lack of
investor protections.17
Given the changing conditions among
markets to bring together buyers and
sellers of securities, and taking into
consideration comment letters
submitted in response to the 2020
Proposal and the Concept Release, the
Commission is proposing to amend
Exchange Act Rule 3b–16 regarding
what ‘‘shall be considered to constitute,
maintain, or provide ‘a market place or
facilities for bringing together
purchasers and sellers of securities or
for otherwise performing with respect to
securities the functions commonly
performed by a stock exchange’ as those
terms are used’’ in the statutory
definition of ‘‘exchange’’ under
Exchange Act Section 3(a)(1).18 The
proposed amendments to Exchange Act
Rule 3b–16(a) would include
Communication Protocol Systems that
make available for trading any type of
17 See
18 17
infra Section VIII.C.3.a.
CFR 240.3b–16(a).
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
security, including, among others,
government securities, corporate bonds,
municipal securities, NMS stocks,
equity securities that are not NMS
stocks, private restricted securities,
repurchase agreements and reverse
repurchase agreements, foreign
sovereign debt, and options. Including
Communication Protocol Systems
within the definition of ‘‘exchange’’
would appropriately regulate a market
place that brings together buyers and
sellers of securities, extend the benefits
of the exchange regulatory framework to
investors that use such systems, and
reduce regulatory disparities among like
markets.
In addition, because the Commission
is proposing to amend Exchange Act
Rule 3b–16 to include Communication
Protocol Systems within the definition
of exchange and taking into
consideration comments received in
response to the 2020 Proposal and the
Concept Release, the Commission is reproposing and revising previously
proposed amendments to Regulation
ATS and Regulation SCI for Government
Securities ATSs that include the
following: 19 (1) Re-proposing to
eliminate the exemption from
compliance with Regulation ATS for an
ATS that trades only government
securities or repos and is operated by a
broker-dealer or is a bank; (2) reproposing, with certain revisions, to
require a Government Securities ATS
that has significant volume for U.S.
Treasury Securities or Agency Securities
to comply with the Fair Access Rule
under Regulation ATS and Regulation
SCI; 20 (3) re-proposing to apply the
enhanced disclosure and filing
requirements of Rule 304 of Regulation
ATS, which are currently applicable to
NMS Stock ATSs, to all Government
Securities ATSs; (4) proposing to
require Government Securities ATSs to
file Form ATS–N, as revised, instead of
19 U.S.
Treasury Securities and Agency Securities
are not classes of securities for purposes of
Exchange Act Rule 3a1–1(b).
20 The Commission is re-proposing to amend
Regulation ATS to require that Form ATS and Form
ATS–R be filed with the Commission electronically
through EDGAR and to modernize both forms;
eliminate confidential treatment of the types of
securities that an ATS trades as disclosed on the
ATS’s Form ATS and Form ATS–R; and remove the
exclusion from compliance with the Fair Access
Rule and Rule 301(b)(6) under Regulation ATS for
an ATS that matches non-displayed customer
orders using prices disseminated by an effective
transaction reporting plan. Covered ATSs would
not be required to post on their websites the most
recently disseminated Form ATS–N, but would be
required to provide pursuant to Rule 304(b)(3)(i) a
direct URL hyperlink to the Commission’s website
that contains the documents made public by the
Commission under Rule 304(b)(2).
PO 00000
Frm 00004
Fmt 4701
Sfmt 4702
previously proposed Form ATS–G; 21 (5)
proposing several changes to Form
ATS–N that would be applicable to both
Government Securities ATSs and NMS
Stock ATSs, including questions about
the ATS’s interaction with related
markets, liquidity providers, and
activities the ATS undertakes to surveil
and monitor its market; (6) proposing
amendments to Form ATS–N that
would require existing NMS Stock ATSs
to file an amendment to their existing
disclosures on Form ATS–N; (7)
proposing to add a new type of
amendment to Form ATS–N to report
changes to fee disclosures; (8) proposing
to amend the Form ATS–N review and
effectiveness process to permit the
Commission to extend the review period
for Form ATS–N amendments; 22 (9)
proposing to make certain changes to
the Fair Access Rule that would apply
to all ATSs that are subject to the rule; 23
and (10) re-proposing electronic filing of
Form ATS–R and Form ATS and
proposing certain changes to the
categories of securities reported on
Form ATS–R.24
II. Proposed Amendments Regarding
the Definition of Exchange
A. Exchange Regulatory Framework
Exchange Act Section 3(a)(1) states
that the term ‘‘exchange’’ means any
organization, association, or group of
persons, whether incorporated or
unincorporated, which constitutes,
maintains, or provides a market place or
facilities for bringing together
purchasers and sellers of securities or
for otherwise performing with respect to
securities the functions commonly
performed by a stock exchange as that
term is generally understood, and
includes the market place and the
market facilities maintained by such
exchange.25
Section 5 of the Exchange Act 26
requires an organization, association, or
21 In the 2020 Proposal, the Commission
proposed that Government Securities ATSs file
proposed Form ATS–G. Given the significant
overlap between proposed Form ATS–G and
existing Form ATS–N, the Commission is now
proposing that Government Securities ATSs file
Form ATS–N, which is currently filed by NMS
Stock ATSs, and proposing to revise Form ATS–N
to apply disclosures for Government Securities
ATSs that would fall under the proposed definition
of ‘‘exchange.’’ See Appendix A for the proposed
revisions to Form ATS–N. The Commission
believes that this would limit the number of unique
forms and simplify filing requirements.
22 The Commission is also re-proposing to change
the reasons for which the Commission could extend
the initial Form ATS–N review period. See infra
Section IV.A.
23 See infra Section V.A.
24 See infra Section V.B.
25 See 15 U.S.C. 78c(a)(1).
26 15 U.S.C. 78e.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
group of persons that meets the
definition of ‘‘exchange’’ under Section
3(a)(1) of the Exchange Act,27 unless
otherwise exempt, to register with the
Commission as a national securities
exchange pursuant to Section 6 of the
Exchange Act.28 As discussed further
below, registered national securities
exchanges are self-regulatory
organizations (‘‘SROs’’),29 and must
comply with regulatory requirements
applicable to both national securities
exchanges and SROs.30
In the Exchange Act, Congress
provided a broad definition of the term
‘‘exchange,’’ permitting the Commission
to apply the definition flexibly as the
securities markets evolve over time.31 In
1998, the Commission adopted
Regulation ATS.32 At that time, the
Commission recognized that advances
in technology had increasingly blurred
the line between exchange and brokerdealer activities 33 and that ATSs that
existed then were used by market
participants as functional equivalents of
exchanges.34 To more accurately
describe the range of markets that
performed exchange functions at that
time, the Commission concurrently
adopted Exchange Act Rule 3b–16 to
27 See
infra note 31.
U.S.C. 78f. A ‘‘national securities exchange’’
is an exchange registered as such under Section 6
of the Exchange Act.
29 Section 3(a)(26) of the Exchange Act defines a
self-regulatory organization as any national
securities exchange, registered securities
association, registered clearing agency, or (with
limitations) the Municipal Securities Rulemaking
Board (‘‘MSRB’’). See 15 U.S.C. 78c(a)(26). See also
Securities Exchange Act Release No. 76474
(November 18, 2015), 80 FR 80998, 81025
(December 28, 2015) (‘‘NMS Stock ATS Proposing
Release’’) at 81000–01 nn.20–26 and accompanying
text (discussing certain differences between certain
obligations and benefits applicable to national
securities exchanges and those applicable to ATSs).
30 See, e.g., 15 U.S.C. 78f and 78s.
31 See Securities Exchange Act Release No. 40760
(December 8, 1998), 63 FR 70844, 70850 and 70898
(December 22, 1998) (‘‘Regulation ATS Adopting
Release’’). See also 15 U.S.C. 78e and 78f. The
Commission noted that it was recognized at the
time the Exchange Act was enacted that a regulatory
structure for securities exchanges would ‘‘be of
little value tomorrow if it is not flexible enough to
meet new conditions immediately as they arise and
demand attention in the public interest.’’ See
Regulation ATS Adopting Release at 70898, n.520
(citing Commission, Report of the Special Study of
the Securities Markets of the Securities and
Exchange Commission, H.R. Doc. No. 95, 88th
Cong., 1st Sess. Pt. 1 (1963) at 6 and S. Rep. No.
792, 73rd Cong., 2d Sess. (1934) at 5 (noting that
‘‘exchanges cannot be regulated efficiently under a
rigid statutory program,’’ and that ‘‘considerable
latitude is allowed for the exercise of administrative
discretion in the regulation of both’’)).
32 See Regulation ATS Adopting Release, supra
note 31, at 70850.
33 See id. at 70847.
34 See id.
jspears on DSK121TN23PROD with PROPOSALS2
28 15
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
define terms 35 used in the statutory
definition of ‘‘exchange’’ under
Exchange Act Section 3(a)(1).
In Exchange Act Rule 3b–16(a), the
Commission defined these terms, in
light of the markets that existed at that
time, to include any organization,
association, or group of persons that: (1)
Brings together the orders for securities
of multiple buyers and sellers; and (2)
uses established, non-discretionary
methods (whether by providing a
trading facility or by setting rules) under
which such orders interact with each
other, and the buyers and sellers
entering such orders agree to the terms
of a trade.36 Rule 3b–16(b) explicitly
excluded certain systems that the
Commission believed were not
exchanges.37 Accordingly, a system is
not included in the Commission’s
interpretation of ‘‘exchange’’ if: (1) The
system fails to meet the two-part test in
paragraph (a) of Rule 3b–16; (2) the
system falls within one of the
exclusions in paragraph (b) of Rule 3b–
16; or (3) the Commission otherwise
conditionally or unconditionally
exempts 38 the system from the
definition.
When the Commission adopted
Exchange Act Rule 3b–16, the
Commission also adopted Exchange Act
Rule 3a1–1(a) to exempt ATSs from the
definition of ‘‘exchange’’ under Section
3(a)(1) of the Exchange Act. Exchange
Act Rule 3a1–1(a)(2) 39 exempts from the
Exchange Act Section 3(a)(1) definition
of ‘‘exchange’’ an organization,
association, or group of persons that
complies with Regulation ATS,40 which
35 The Commission adopted Exchange Act Rule
3b–16 under Section 3(b) of the Exchange Act
(power to define terms). 15 U.S.C. 78c(b).
36 See 17 CFR 240.3b–16(a).
37 See Regulation ATS Adopting Release, supra
note 31, at 70852. Specifically, Rule 3b–16(b)
excludes from the definition of exchange systems
that perform only traditional broker-dealer
activities, including: Systems that route orders to a
national securities exchange, a market operated by
a national securities association, a broker-dealer for
execution, or systems that allow persons to enter
orders for execution against the bids and offers of
a single dealer if certain additional conditions are
met.
38 See 17 CFR 240.3b–16(e).
39 See 17 CFR 240.3a1–1(a)(2).
40 See id. Rule 3a1–1 also provides two other
exemptions from the definition of ‘‘exchange’’ for
any ATS operated by a national securities
association and any ATS not required to comply
with Regulation ATS pursuant to Rule 301(a) of
Regulation ATS. See 17 CFR 240.3a1–1(a)(1) and
(3).
Rule 3a1–1(b) provides an exception to the Rule
3a1–1(a) exemptions pursuant to which the
Commission may require a trading system that is a
substantial market to register as a national securities
exchange, if the Commission finds doing so is
necessary or appropriate in the public interest or
consistent with the protection of investors. See 17
CFR 240.3a1–1(b). See also Regulation ATS
Adopting Release, supra note 31, at 70857–58.
PO 00000
Frm 00005
Fmt 4701
Sfmt 4702
15499
requires, among other things, meeting
the definition of an ATS and registering
as a broker-dealer.41 Rule 300(a) of
Regulation ATS defines an ATS as any
organization, association, person, group
of persons, or system: (1) That
constitutes, maintains, or provides a
market place or facilities for bringing
together purchasers and sellers of
securities or for otherwise performing
with respect to securities the functions
commonly performed by a stock
exchange within the meaning of Rule
3b–16; and (2) that does not: (i) Set rules
governing the conduct of subscribers
other than the conduct of such
subscribers’ trading on such
organization, association, person, group
of persons, or system; or (ii) discipline
subscribers other than by exclusion
from trading.42 Governing the conduct
of or disciplining subscribers are
functions performed by an SRO that the
Commission believed should be
regulated as such.43 Accordingly,
pursuant to Rule 300(a), a trading
system that performs SRO functions or
functions common to national securities
exchanges, such as establishing listing
standards, is precluded from the
definition of ATS and would be
required to register as a national
securities exchange, be operated by a
national securities association, or seek
another exemption.44
As a result of the exemption, an ATS
that complies with Regulation ATS is
not required by Section 5 of the
Exchange Act to register as a national
securities exchange, is not an SRO, and,
therefore, is not required to comply with
regulatory requirements applicable to
national securities exchanges and
SROs.45 An ATS that fails to comply
with the requirements of Regulation
ATS would no longer qualify for the
exemption provided under Rule 3a1–
1(a)(2), and thus, risks operating as an
unregistered exchange in violation of
Section 5 of the Exchange Act.46
41 See 17 CFR 242.300(a); 17 CFR 242.301(a); and
17 CFR 242.301(b)(1). In addition to the other
requirements of Regulation ATS, to qualify for the
Rule 3a1–1(a) exemption, an organization,
association, or group of persons must otherwise
meet the definition of ‘‘exchange.’’
42 See 17 CFR 242.300(a).
43 See Regulation ATS Adopting Release, supra
note 31, at 70859.
44 See id.
45 See generally Sections 5, 6, and 19 of the
Exchange Act, 15 U.S.C. 78e, 78f, and 78s.
46 See 15 U.S.C. 78e.
E:\FR\FM\18MRP2.SGM
18MRP2
15500
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
B. Adopting the Definition of Exchange
for Evolving Market Places
1. Orders-Focused Markets Under
Current Rule 3b–16
jspears on DSK121TN23PROD with PROPOSALS2
When the Commission adopted
Exchange Act Rule 3b–16(a), the
Commission sought to more accurately
describe the range of markets that
performed exchange functions as those
were understood at that time.47 In the
Regulation ATS Adopting Release, the
Commission observed that ATSs at that
time provided services more akin to
exchange functions than broker-dealer
functions, such as matching
counterparties’ orders, executing trades,
operating limit order books, and
facilitating active price discovery.48
In the Regulation ATS Adopting
Release, the Commission identified two
elements of Exchange Act Rule 3b–16
that most accurately reflected the
functions and uses of exchange markets
at that time. These elements were the
bringing together of orders of multiple
buyers and sellers of securities and that
trading takes place according to
established, non-discretionary rules or
procedures.49 When considering what
constituted an exchange at that time, the
Commission focused on the
expectations of the participants
regarding how an execution would
occur without the discretion of the
operator. Because orders instruct a
trading system to carry out the intention
of participants in accordance with
programmed trading procedures, orders,
along with established, nondiscretionary methods, contribute to
how trading system participants could
understand and expect to receive an
execution.50 In addition, the
Commission stated that ‘‘an essential
indication of the non-discretionary
status of rules and procedures is that
those rules and procedures are
communicated to the systems users’’
and ‘‘[t]hus, participants have an
expectation regarding the manner of
execution—that is, if an order is
entered, it will be executed in
accordance with those procedures and
47 See Regulation ATS Adopting Release, supra
note 31, at 70900.
48 See id. at 70848.
49 See id. at 70900.
50 For example, the Commission stated in the
Regulation ATS Adopting Release that ‘‘an
alternative trading system that posts firm orders to
buy and sell a security does raise a certain
expectation of execution at those quoted prices’’
and that ‘‘[t]he expectation is based on the life of
the outstanding orders in the system, rather than
continuous two sided quotations published by
specialist and market makers.’’ See id. at 70899,
n.532.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
not at the discretion of a counterparty or
intermediary.’’ 51
Further, at the time Exchange Act
Rule 3b–16(a) was adopted, most ATSs
operating met the criteria of the rule in
that they offered the use of orders and
algorithms that matched orders.52 ATSs
at that time allowed broker-dealers to
place and execute orders on the system
and the systems functioned as limit
order books where orders are executed
according to time, price, and size
priority.53 Accordingly, orders and
established, non-discretionary methods
undergirded Exchange Act Rule 3b–16
to reflect functions of exchange markets
at that time. When discussing orders in
the Regulation ATS Adopting Release,
however, the Commission stated that
systems that displayed bona fide, nonfirm trading interest 54 or did not
establish rules or operate a trading
facility 55 would not fall within Rule 3b–
16(a).
2. Prevalence of Systems Offering NonFirm Trading Interest and Structured
Protocols
Advances in technology have
facilitated innovations and more
efficient or diverse methods to bring
together buyers and sellers of
securities.56 In the Commission’s
experience, Communication Protocol
Systems, which can use various
technologies and connectivity, generally
offer the use of non-firm trading interest
and establish protocols to prompt and
guide buyers and sellers to
communicate, negotiate, and agree to
the terms of the trade without relying
solely on the use of orders. Below is a
non-exhaustive list of some
Communication Protocol Systems.
One example of a Communication
Protocol System is a ‘‘Request-forQuote’’ (‘‘RFQ’’) system. RFQ systems
are designed to allow market
participants to obtain quotes for a
particular security by sending messages
to one or multiple potential respondents
on the system simultaneously. RFQ
51 See
id. at 70900.
id. at 70899–900, n.536.
53 See id. at 70899, n.525.
54 See id. at 70850. In the Regulation ATS
Adopting Release, the Commission stated,
‘‘[g]enerally, however, a system that displays bona
fide, non-firm indications of interest—including,
but not limited to indications of interest to buy or
sell a particular security without either prices or
quantities associated with those indications—will
not be displaying ‘‘orders’’ and, therefore, not fall
within Rule 3b–16.’’ See id.
55 See id. The Commission also stated that
‘‘[u]nless a system also establishes rules or operates
a trading facility under which subscribers can agree
to the terms of their trades, the system will not be
included within Rule 3b–16, even if it brings
together ‘orders.’ ’’ See id.
56 See id. at 70848.
52 See
PO 00000
Frm 00006
Fmt 4701
Sfmt 4702
systems may be ‘‘disclosed,’’ in which
case the participants with established
relationships interact only with each
other, or anonymous, in which case the
parties may not have established
relationships. The system provider
requires a participant to enter
information in a message, which may
include the name of the initiator,
Committee on Uniform Securities
ldentificalion Procedures (CUSIP)
number, side, and size. The system
provider also provides protocols for
participants to communicate with each
other and negotiate a price or size of a
trade. For example, participants
receiving an RFQ message can choose to
interact with the initiator by responding
within a time period designated by the
system provider with a priced quote.
These methods can serve the same
function as auctions where the
respondents compete to offer the best
price. The initiator can then select
among the quote responses that it
wishes to interact with through the
system by either accepting one of
multiple responses or rejecting all
responses within a period of time set by
the system provider. The match of the
request and response results in an
agreement to the terms of the trade
between a buyer and a seller, which
then proceeds to post-trade
processing.57 An RFQ list protocol
(‘‘RFQ List’’), which is a form of RFQ
protocol used commonly to trade U.S.
Treasury Securities, may include a
collection of RFQ inquiries that are
submitted as a group but priced as
individual items.58 The RFQ List
(defined by each system provider but
generally more than two listed items)
may be executed in its entirety, in
pieces, or not at all. A liquidity provider
that is responding to the list request
may apply a ‘‘good for’’ time that is
associated with the executable prices
provided.
A Communication Protocol System
could also include a system that
electronically displays continuous firm
or non-firm trading interest, or ‘‘stream
axes,’’ in a security or type of security
to participants on the system. Axes
typically represent an indication of
57 Communication Protocol Systems also may
offer a workup functionality or blotter scraping
functionality to gather non-firm trading interest and
facilitate the negotiation and execution of trades. In
a workup, a system may have a private phase,
where the two original contra-parties submitting
orders can negotiate, and a public phase where all
subscribers can submit orders at the workup price.
58 An RFQ List may be referred to as a Bid
Wanted in Competition (‘‘BWIC’’) or Offer Wanted
in Competition (‘‘OWIC’’) in the corporate bond
market. Both serve a similar purpose to the RFQ
List in allowing the submitter to solicit bids and
offers on a number of securities at one time.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
interest to sell or buy a bond (but can
include firm quotes), and can either
serve as a starting point for negotiation
between participants or be executed
immediately. Systems that stream axes
take many forms. Some system
providers provide connectivity and
protocols for participants to
electronically communicate and
negotiate the terms of a trade. Other
system providers offer participants more
automated processes, whereby
participants auto-execute against a
streamed quote and agree upon the
terms of a trade without negotiation.
Typically, the system is programmed
with permission options to allow
participants to decide who can or
cannot receive their axes. In such a case,
the trading interest exchanged between
the parties is typically firm and
functions as orders.
Conditional order systems may be
Communication Protocol Systems that
offer the use of trading interest that may
not be executable until after a user takes
subsequent action. For example, a
system provider may require
conditional orders to contain a symbol,
side, and size and provide protocols for
participants to send and receive
invitation messages to trade. The system
would be designed for conditional
orders to match with other trading
interest, which can either be a firm
order or another non-firm conditional
order.59 Upon a match, the system may
send a firm-up invitation messages to
both participants. The system protocols
may permit a participant using a
conditional order to either decline the
firm-up invite, accept the firm-up invite,
or counter the response to firm up.60
During the time that the parties’ trading
interest is matched until the invitation
to firm-up expires, is canceled, is
executed, or is declined, the system
protocols may require that the non-firm
trading interest be committed and the
shares cannot trade elsewhere.61 Using
59 Based on Commission staff experience, some
NMS Stock ATSs disclose protocols to allow
conditional orders to interact with the ATS’s limit
order book, thereby increasing the interaction
among potential buyers and sellers and access to
liquidity.
60 An order resting on an ATS limit order book
that can interact with a conditional order does not
receive a firm-up invite and therefore does not send
firm-up responses.
61 Many conditional order and RFQ systems
monitor their participants’ firm-up rates and may
limit or deny the use of the system by a participant
if the participant’s firm-up rate falls below a certain
percentage. While the system provider typically
monitors these firm-up rates to help ensure that
participants do not abuse the system, such
monitoring and actions taken against participants
for not firming-up may incentivize participants to
not back away. Thus, conditional orders or RFQs
can be firm in practice and in this way may meet
the definition of order under current Regulation
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
the system protocols, the matched
parties can modify the attributes of the
non-firm trading interest (i.e., price,
size) before accepting the firm-up
invitation. To the extent either a seller
or buyer changes the attributes, an
execution will only occur if each contraparty’s corresponding attributes will
still be met. If both matching parties
accept the firm-up invite, the parties
would agree upon the terms of the trade
and an execution would occur.
Other systems have developed to
bring together buyers and sellers of
securities through the use of bilateral
negotiation protocols and non-firm
trading interest. Negotiation systems
focus on providing a forum for buyers
and sellers to see displayed non-firm
trading interest, access liquidity, find a
counterparty, and negotiate a trade
through the use of their communication
technology. The system may allow
participants to select certain preapproved participants and then
exchange messages for purposes of
agreeing to the terms of a trade.
Negotiation systems may have fewer
parameters for communicating trading
interest than RFQ protocols; for
example, negotiation systems provide
features that are designed to prompt
participants to interact with each other
and provide parameters around that
interaction, such as time for responses
or requirements on the content of the
message. A system may ‘‘scrape’’ or
obtain the symbol of trading interest
that a participant is seeking from the
participant’s order management or
execution management system and use
that to alert other participants on its
system about potential contra-side
interest in seeking to initiate a
negotiation. The market participants
using negotiation systems may complete
a transaction outside of the system.
As trading in securities has become
more electronic, Communication
Protocol Systems perform the function
of a market place and have become a
preferred method for market
participants to discover prices, find a
counterparty, and execute a trade,
particularly for government securities
and other fixed income markets. One
commenter on the 2020 Proposal and
Concept Release, for example, stated
that multilateral trading venues using
RFQ protocols are some of the most
significant multilateral trading venues
operating in fixed income markets
regulated by the Commission, including
the U.S. Treasury market.62 This
commenter stated that RFQ trading
ATS. See 17 CFR 242.300(e) (‘‘any firm indication
of a willingness to buy or sell a security’’).
62 See Citadel Letter at 1–2.
PO 00000
Frm 00007
Fmt 4701
Sfmt 4702
15501
venues dominate the dealer-to-customer
segment of the U.S. Treasury market and
in the aggregate account for
approximately 50 percent of total
electronic trading volume on
multilateral U.S. Treasury trading
venues.63 Another large electronic
trading venue for fixed income products
estimated that its average daily volume
using an RFQ protocol increased from
$223 million in the second quarter of
2017 to $1.17 billion in the second
quarter of 2021.64 Systems offering
conditional order protocols have
increased over the past several years,
particularly for trading NMS stocks.
Today, 26 NMS Stock ATSs have
disclosed on their public Form ATS–N
that they send or receive messages
indicating trading interest, such as
conditional orders.
Communication Protocol Systems,
like registered exchanges and ATSs,
offer their participants several benefits,
including reducing counterparty search
costs, bringing together diverse market
participants, and making it efficient and
simple to find a counterparty and agree
upon the terms of a trade. These systems
improve price discovery from the voice
protocols that were used more widely in
the fixed income market in the past by
offering participants systems and
protocols that are specifically designed
to allow participants to contact, and
receive responses from, multiple
potential counterparties at one time, as
opposed to the more time-consuming
process of calling each potential
counterparty individually. RFQ
protocols, for example, allow an
initiator to share and attempt to trade its
entire trading interest all at once. In
contrast, under a limit order book
model, for example, the seeker of
liquidity may find it can only execute
its trading interest in a piecemeal
fashion. RFQs also allow initiators to
more easily demonstrate that they
attempted to achieve best execution by
showing that the initiator sent requests
for quotes to multiple dealers for a
security. In addition, participants may
find conditional orders attractive when
seeking to trade at size or to avoid
information leakage.
While Communication Protocol
Systems may bring together buyers and
sellers for all types of securities and
allow participants to negotiate a trade,
63 See id. This commenter noted that multilateral
RFQ trading venues are formally registered in other
asset classes and jurisdictions, and that there are
‘‘well-established precedents’’ to delineate the
scope of multilateral trading venues subject to
regulation.
64 Tradeweb Investor Presentation, July 2021,
available at: https://investors.tradeweb.com/staticfiles/e63caabf-d71d-46c0-9589-353fb8b93388.
E:\FR\FM\18MRP2.SGM
18MRP2
15502
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
they are particularly useful to market
participants to trade less liquid
securities, find counterparties for large
size trades, and minimize information
leakage and adverse impact of large size
trades. For example, market participants
can use Communication Protocol
Systems to post and see non-firm
trading interest on several trading
venues simultaneously, thereby
increasing their ability to find a
counterparty and reduce search costs.
When resting non-firm trading interest
on a trading venue, market participants
can use non-firm trading interest as a
tool to avoid the risk of doubleexecution.65 Participants that use
conditional orders, for example, may
place the same trading interest at
various trading centers in search of
liquidity because it would allow them to
accept or decline responses if they
receive more than one. Participants may
find locating a counterparty on a limit
order book system for less liquid
securities more difficult and choose
instead to use a Communication
Protocol System, such as an RFQ
system, because such system allows the
initiating participant to use non-firm
trading interest to solicit quotes from
multiple market participants for less
liquid securities and negotiate a size or
price for such securities.
jspears on DSK121TN23PROD with PROPOSALS2
3. Lack of Investor Protections and
Disparate Regulation Among Market
Places
Given the changes in methods for
bringing buyers and sellers together over
the past couple of decades, the contrast
between market place functions of
exchanges that offer the use of orders
and trading facilities and systems that
offer the use of trading interest and
protocols has become increasingly
blurred. Both types of systems share the
same business objectives and engage in
similar market activities; however, one
type of system is subject to the exchange
regulatory framework while the other is
not.66 Today, Communication Protocol
65 For example, a market participant that rests the
same non-firm trading interest on two trading
venues has the ability to back away from one if both
are lifted (i.e., preliminarily matched). In such case,
the market participant is able to complete one trade
and cancel or back away from the other.
66 See U.S. Securities and Exchange Commission
Fixed Income Market Structure Advisory
Committee (‘‘FIMSAC’’), Recommendation for the
SEC to Review the Framework for the Oversight of
Electronic Trading Platforms for Corporate and
Municipal Bonds (July 16, 2018), available at
https://www.sec.gov/spotlight/fixed-incomeadvisory-committee/fimsac-electronic-tradingplatforms-recommendation.pdf (expressing concern
about regulatory harmonization among fixed
income trading platforms, recognizing that some
firms were regulated as ATSs, while some were
regulated as broker-dealers or not regulated at all).
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Systems perform similar market place
functions as registered exchanges and
ATSs and have become venues for
investors to discover prices, find a
counterparty, and agree upon the terms
of a trade. Because Communication
Protocol Systems do not fall within the
definition of ‘‘exchange’’ and are thus
not required to register as national
securities exchanges, they are not
required to comply with the same
Federal securities laws and regulations
applicable to registered exchanges 67 or
ATSs.68 Market participants use
Communication Protocol Systems for
certain advantages that these market
places offer for trading securities;
however, when doing so, market
participants cannot avail themselves of
the same investor protections, fair and
orderly market principles, and
Commission oversight that apply to
today’s registered exchanges or ATSs.69
This regulatory gap also creates
disparities that affect competitive
balances among like market places for
securities.70 Consistent with the
statutory definition of ‘‘exchange’’ in
Exchange Act Section 3(a)(1), and as
discussed above, today Communication
Protocol Systems provide a ‘‘market
place’’ for bringing together purchasers
and sellers of securities.71 The current
proposal will use the flexibility granted
to the Commission by Congress to
update Exchange Act Rule 3b–16 to
address these developments in the
markets for securities, the
corresponding lack of investor
protections, and disparate regulation
among these markets.72
67 See
infra Section II.D.1.
infra Section II.D.2.
69 See infra Section II.D.
70 See infra Section VIII.C.3.a.
71 See supra Section II.A.
72 The Commission is not proposing to amend
Exchange Act Rule 3b–16(b), which excludes from
the definition of ‘‘exchange’’ systems that perform
only traditional broker-dealer activities, including:
Systems that route orders to a national securities
exchange, a market operated by a national securities
association, a broker-dealer for execution, or
systems that allow persons to enter orders for
execution against the bids and offers of a single
dealer if certain additional conditions are met.
These systems would continue to not fall within the
definition of ‘‘exchange.’’ As discussed below, and
consistent with the Commission’s views expressed
in the Regulation ATS Adopting Release, a brokerdealer’s exercise of discretion and judgment over its
customers’ orders or trading interest does not make
the broker-dealer an exchange. See Regulation ATS
Adopting Release, supra note 31, at 70851. See also
infra Section II.C.3. The Commission is proposing
to add an exclusion to Rule 3b–16(a) for systems
that allow issuers to sell their own securities to
investors. See infra Section II.C.2. Further, as
explained below, the Commission is not proposing
to include within the definition of ‘‘exchange’’ a
system that unilaterally displays trading interest
without offering a trading facility or communication
protocols to bring together buyers and sellers. Also,
68 See
PO 00000
Frm 00008
Fmt 4701
Sfmt 4702
Including Communication Protocol
Systems within the definition of
‘‘exchange’’ would provide market
participants that use these market places
with the investor protections, fair and
orderly market principles, and
Commission oversight provided by the
exchange regulatory framework.73 A
Communication Protocol System that
chooses to register as an exchange
would be an SRO and be subject to the
requirements of Section 6 of the
Exchange Act, as discussed further
below.74 However, the Commission
expects that many Communication
Protocol Systems would choose instead
to comply with the conditions of the
Regulation ATS exemption, which
includes registering as a broker-dealer.75
As discussed further below,
Communication Protocol Systems
complying with Regulation ATS would
also be subject to the Regulation ATS
investor protection provisions,
including the requirement to establish
written safeguards and procedures to
protect confidential subscriber trading
information 76 and operational
transparency requirements of Form
ATS–N for ATSs that trade NMS stocks
or government securities or repos.77
They would also be subject to fair and
orderly markets provisions under the
Fair Access Rule.78 Registering as a
broker-dealer would subject a
Communication Protocol System to
Commission and Financial Industry
Regulatory Authority (‘‘FINRA’’)
oversight.79 As a FINRA member, the
Communication Protocol System would
be subject to FINRA’s investor
protection and examination and market
surveillance programs and would be
required to comply with FINRA’s trade
reporting rules.
The proposal to include
Communication Protocol Systems
within the definition of exchange would
promote competition by reducing cost
disparities and creating a more level
competitive landscape.80 Several
commenters in response to the Concept
systems that provide general connectivity for
persons to communicate without protocols, such as
utilities or electronic web chat providers, would not
fall within the definition of exchange. See id.
73 See infra Section II.D.
74 See infra Section II.D.1.
75 See infra Section II.D.2.
76 See infra note 170 and accompanying text.
77 See infra notes 139–142 and accompanying
text. A Communication Protocol System that
operates as an ATS but trades securities other than
NMS stocks or government securities would file
Form ATS.
78 See infra notes 154–155 and accompanying
text.
79 See infra notes 131–133 and accompanying
text.
80 See infra Section VIII.C.3.a.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
Release expressed concerns regarding
the disparity in regulatory treatment
between exchanges, ATSs, and other
fixed income platforms.81 In addition,
FIMSAC expressed concern about the
lack of regulatory harmonization among
fixed income electronic trading
platforms, recognizing that some firms
are regulated as ATSs, while others are
regulated as broker-dealers or not at all,
and stated that these distinctions in
regulatory oversight complicate efforts
to improve the efficiency and resiliency
of the fixed income electronic trading
markets.82 In response to the Concept
Release, one commenter stated that the
current regulatory framework puts ATSs
at a competitive disadvantage to nonATS trading platforms, which are not
subject to the same regulatory
obligations designed to protect investors
and the integrity of the fixed income
markets.83 Another commenter stated its
belief that disparate regulatory
treatment across trading platforms
impacts market efficiency and
competition and introduces potential
resiliency risks.84 Another commenter
stated that electronic platforms for
bringing together buyers and sellers of
fixed income securities for the purpose
of effecting transactions should
generally be regulated the same
regardless of how they are structured
internally.85 The Commission
81 See, e.g., ICE Bonds Letter II at 2–4; Citadel
Letter at 2; MFA Letter at 6 (suggesting that to
ensure that similarly situated entities are treated
similarly in the trading of government securities,
the Commission should review the appropriateness
of similar regulation on multiple-to-multiple
trading venues with significant volume);
MarketAxess Letter at 1 (stating that there should
be a common regulatory framework for all
multilateral fixed income electronic trading
platforms that requires minimum standards of
conduct and oversight in areas such as trade
reporting, resiliency, cyber-security, operational
reporting, financial standards, examination,
surveillance, and confidentiality).
82 See supra note 66. The FIMSAC concerns were
highlighted by the Commission in the Concept
Release.
83 See ICE Bonds Letter II at 4 (stating that the
benefits of subjecting non-ATS trading platforms to
the same regulatory obligations as current ATSs
will be substantial).
84 See FIA PTG Letter at 2. See also Citadel Letter
at 2 (stating that excluding multilateral RFQ
platforms from the current regulatory framework
creates an unlevel regulatory field).
85 See letter from Michael Decker, Senior Vice
President for Public Policy, Bond Dealers of
America, dated March 1, 2021 (‘‘BDA Letter’’) at 2.
See also FINRA Letter at 6–10 (noting inconsistent
regulatory treatment among electronic and hybrid
fixed income trading platforms, as well as potential
regulatory gaps, flowing in part from the definitions
and guidance adopted in 1998 in Regulation ATS).
The commenter stated its belief that it would be
beneficial for the Commission to provide guidance
that specifically addresses the characteristics of
RFQ trading systems and evaluate whether they
meet the ‘‘exchange’’ definition for purposes of
Regulation ATS.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
recognizes that the regulatory costs
associated with registering and
operating as a registered exchange are
higher than the regulatory costs
associated with registering as a brokerdealer and complying with Regulation
ATS. However, Communication
Protocol Systems operating outside the
exchange regulatory framework are
subject to neither national securities
exchange nor ATS regulatory costs and
therefore have an advantage when
competing against other markets that
also bring together buyers and sellers of
securities.86 As discussed further in
Section VIII, a trading system that
performs an exchange market function
but is not subject to the exchange
regulatory regime could receive a
competitive advantage because such
systems are not subject to the
compliance costs to which regulated
exchanges are subject.
Amending Exchange Act Rule 3b–
16(a) to include non-firm trading
interest would eliminate the possibility
that systems may offer the use of nonfirm trading interest that, in practice,
functions as firm orders, so as to avoid
exchange registration or complying with
Regulation ATS. In the Regulation ATS
Adopting Release, the Commission
expressed concern that system providers
may label trading interest that is firm in
practice as non-firm.87 The providers of
such systems may take the position that
their systems arguably do not use
‘‘orders’’ and thus do not fall within the
criteria of Rule 3b–16. For example,
systems that offer the use of non-firm
trading interest may monitor
participants’ firm-up rates in response
to a quote they received and may
penalize a participant with a low firmup rate either economically or by
limiting its ability to use features of its
system. Such activities could cause
participants on the systems to believe
that trading interest that they submit or
receive is effectively firm and affect
their behavior on the system. The
difference between what is a firm order
and what is not requires careful scrutiny
of the design of the system, the trading
interest offered, and what actually takes
place among buyers and sellers
interacting on the systems. The
Commission believes, however, that the
use of firm or non-firm trading interest
by a system should no longer be a factor
in determining whether a system
performs the function of a market place
because both firm and non-firm trading
interest can be used by a system with
the same purpose and effect to bring
86 See
infra Section VIII.C.3.a.i.
Regulation ATS Adopting Release, supra
note 31, at 70850.
87 See
PO 00000
Frm 00009
Fmt 4701
Sfmt 4702
15503
together buyers and sellers of
securities.88
Finally, for clarity, Exchange Act Rule
3b–16(a) would continue to encompass
systems that make available for trading
any type of security. The definition of
‘‘exchange’’ under Section 3(a)(1) of the
Exchange Act and current Exchange Act
Rule 3b–16(a) applies to all securities,
including government securities,
corporate bonds, municipal securities,
NMS stocks, equity securities that are
not NMS stocks, private restricted
securities, repurchase agreements and
reverse repurchase agreements, foreign
sovereign debt, and options, and does
not exempt or exclude any security or
type of securities. The Commission
believes that it is important for any
system that falls within the criteria of
Rule 3b–16(a) to be subject to the
exchange regulatory framework,
notwithstanding how thinly traded or
novel a security may be, and
participants on such systems should be
able to avail themselves of the same
benefits that participants on registered
exchanges or ATSs receive.
Accordingly, the proposed amendments
to Rule 3b–16(a) do not change the
Commission’s interpretation of the
statutory definition of ‘‘exchange’’—that
is, it applies to all securities.
The Commission received several
comments in response to the Concept
Release expressing reservations about
revising Exchange Act Rule 3b–16 to
include certain fixed income markets
within the definition of exchange. One
commenter stated that doing so would
insert unnecessary intermediation
between dealers and their customers
and threaten to distort the market
structure by creating a one-size-fits-all
approach that is biased against the
trading of less-liquid instruments,
damaging liquidity formation.89
Another commenter expressed concern
about the Commission creating
additional regulatory obligations in the
fixed income space and believed the
Commission should undertake a more
in-depth review of fixed income trading,
engage in discussion with the industry,
and outline the problems that any
proposed regulations are intended to
solve before moving forward with any
such regulatory proposal.90 Likewise,
another commenter stated its belief that
the Commission should not impose
88 See
supra Section II.B.2.
Bloomberg Letter at 17–20. This
commenter specifically cited RFQs as a new
protocol that has helped in discovering less liquid
instruments.
90 See SIFMA Letter at 11. The commenter stated
its belief that systems that merely act as
informational conduits should remain outside the
scope of Regulation ATS.
89 See
E:\FR\FM\18MRP2.SGM
18MRP2
15504
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
Regulation ATS and the current
exchange framework on existing and
emerging electronic trading protocols
and functionalities that do not meet the
existing definition of an ATS or an
exchange 91 because such rules are
better suited for regulating systems and
trading practices in the equity
markets.92 In addition, one commenter
stated that there are a variety of trading
protocols that have developed within
the fixed income market—such as those
that are primarily order-driven (such as
retail-focused order books) and others
that are driven by price requests (such
as RFQs)—and that the market
continues to innovate.93 This
commenter stated its belief that the
Commission should take into account
these distinctions and apply a lighter
regulatory approach in order to avoid
stifling innovation.94
The Commission notes that these
comments focused on the fixed income
market exclusively. However, these
comments have aided in the formulation
of this proposal for revising the
Commission interpretation of the
definition of ‘‘exchange,’’ and the
Commission looks forward to receiving
more comments to aid in its
deliberations. As a preliminary response
to the comment letters summarized in
this section, the Commission does not
believe that the proposed amendments
to Exchange Act Rule 3b–16 would
create a one-size-fits-all model,
imposing unnecessary intermediation
between dealers and their customers,95
or import concepts from the equity
markets onto emerging electronic
trading protocols that would damage the
market structure in the fixed income
markets.96 Form ATS and Form ATS–N
do not impose or favor any specific
market structure or manner of trading,
and the Commission is proposing to
amend Form ATS–N to accommodate
the operations of Communication
Protocol Systems. Further, the
Commission preliminarily does not
believe that regulating fixed income
systems, or systems for other asset
classes of securities, under the exchange
regulatory framework, particularly
Regulation ATS, would stifle innovation
or be biased against less-liquid
instruments using an RFQ protocol.
Regulation ATS is designed to be
91 See ICI Letter at 2, 7. This commenter stated
that, for example, tools that facilitate trade-related
communications between market participants
should not be subject to rules that are better-suited
for order book protocols.
92 See id. at 8.
93 See MarketAxess Letter at 2–4.
94 See id.
95 See Bloomberg Letter at 17–20.
96 See ICI Letter at 8.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
flexible enough to accommodate the
evolving technology of ATSs and allow
for systems to continue to innovate
without the regulatory obligations of
registered exchanges, which are SROs.97
In the years since its adoption in 1998,
many systems that chose to operate
under the Regulation ATS exemption
have had varied business models,
including offering RFQ protocols as part
of their overall ATS services, for trading
different types of securities, including,
among others, government securities,
corporate bonds, municipal securities,
NMS stocks, equity securities that are
not NMS stocks, private restricted
securities, repurchase agreements and
reverse repurchase agreements, foreign
sovereign debt, and options.
The Commission seeks public
comment on all aspects its proposal to
amend Exchange Act Rule 3b–16(a), the
Communication Protocol Systems that
would fall within the definition of
‘‘exchange,’’ and the existing exchange
regulatory requirements that would
apply to a Communication Protocol
System.
C. Proposed Amendments to Exchange
Act Rule 3b–16
Today, Exchange Act Rule 3b–16
provides that an organization,
association, or group of persons meets
the definition of ‘‘exchange’’ if it doesn’t
meet one of the exceptions of the rule
and it: (1) Brings together the orders for
securities of multiple buyers and sellers;
and (2) uses established, nondiscretionary methods (whether by
providing a trading facility or by setting
rules) under which such orders interact
with each other, and the buyers and
sellers entering such orders agree to the
terms of the trade.
The Commission is proposing to
amend Exchange Act Rule 3b–16 to,
among other things, include non-firm
indications of a willingness to buy or
sell a security, in addition to orders,
within the interpretation, define
‘‘trading interest,’’ add ‘‘communication
protocols’’ as an established method
that an organization, association, or
group of persons can provide to bring
together buyers and sellers of securities,
simplify and align the rule text with the
statutory definition of exchange under
Section 3(a)(1) of the Exchange Act, and
add an exclusion under Exchange Act
Rule 3b–16(b). Accordingly, the
Commission is proposing to amend
Exchange Act Rule 3b–16 to provide
that an organization, association, or
group of persons would be considered
to constitute, maintain, or provide an
97 See Regulation ATS Adopting Release, supra
note 31, at 70846.
PO 00000
Frm 00010
Fmt 4701
Sfmt 4702
exchange if it is not subject to an
exception under Rule 3b–16(b) and it:
(1) Brings together buyers and sellers of
securities using trading interest; and (2)
makes available established, nondiscretionary methods (whether by
providing a trading facility or
communication protocols, or by setting
rules) under which buyers and sellers
can interact and agree to the terms of a
trade.
1. Trading Interest; Brings Together
Buyers and Sellers
The Commission is proposing to add
a definition of the term ‘‘trading
interest’’ to Exchange Act Rule 3b–16
and amend the rule to replace ‘‘orders’’
with ‘‘trading interest.’’ The definition
of trading interest would allow for clear
and consistent application of the revised
functional test for ‘‘exchange’’ under
Rule 3b–16.
Under the proposal, Exchange Act
Rule 3b–16(a) would continue to apply
to systems that use orders, as that term
is currently defined and applied in Rule
3b–16(c), to bring together buyers and
sellers because the term ‘‘orders’’ would
be included in the definition of ‘‘trading
interest.’’ ‘‘Trading interest,’’ as
proposed, would include ‘‘orders,’’ as
the term is defined under Rule 3b–16(c),
or any non-firm indication of a
willingness to buy or sell a security that
identifies at least the security and either
quantity, direction (buy or sell), or
price.98 Based on Commission staff
experience, generally, trading systems
have offered non-firm trading interest
that included the symbol and one of the
following: Quantity, direction, or price.
For example, a message that is sent to
system participants for an NMS stock
that only identifies the NMS stock
symbol and quantity that the participant
seeks to trade would be considered
trading interest. A message sent by a
participant of a corporate bond system
to five potential counterparties that only
identifies the CUSIP for a bond and an
instruction to buy would be considered
trading interest, as proposed, because it
contains the symbol and direction. If the
same initiating participant only
provided the symbol and requested a
two-sided quote in response, the
response would constitute trading
interest as it would identify the symbol
98 In conjunction with adding the defined term
‘‘trading interest’’ to Rule 3b–16, the Commission
is proposing to add the definition of ‘‘trading
interest’’ to Rule 300 of Regulation ATS. See
proposed Rule 300(q). In addition, to encompass
persons who transact in trading interest, and not
only orders, the Commission is also proposing to
change the definition of ‘‘Subscriber’’ in Rule 300(b)
to include any person submitting, disseminating, or
displaying ‘‘trading interest.’’ See Rule 300(b), as
proposed to be revised.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
and a price. Indeed, Commission staff
has observed that ATSs that offer a
negotiation functionality to bring
together buyers and sellers offer the use
of non-firm trading interest that
includes the symbol and one of the
following: Quantity, direction, or price.
In addition, there are instances where
systems offer the use of non-firm trading
interest, such as an indication of
interest, that includes the symbol and
direction but does not explicitly include
a quantity or price, which can be
inferred from the facts and
circumstances accompanying the
trading interest.99 The Commission
believes that a system that offers the use
of a message that identifies the security
and either the quantity, direction, or
price would provide sufficient
information to bring together buyers and
sellers of securities because it allows a
market participant to communicate its
intent to trade and a reasonable person
receiving the information to decide
whether to trade or engage in further
communications with the sender.100
On the other hand, the Commission
preliminarily believes that a message
that only indicates the security to be
traded without more information would
not be trading interest and a system that
only offers the use of such messages
would be unlikely to bring together
buyers and sellers and does not warrant
the regulatory oversight accompanying
classification as an exchange.
Nevertheless, if a system is designed to
permit an initiating participant to
submit a message that only contains a
symbol, yet a responding participant
can submit a message that contains a
symbol and either quantity, direction, or
price that the initiator can accept, the
message by the responding participant
and acceptance by the initiator would
be trading interest because each of these
contain the symbol and at least
direction, size, or price. As proposed,
the revised criteria of Exchange Act
Rule 3b–16(a) that include ‘‘trading
interest,’’ as defined herein, would
capture the vast majority of systems that
bring together buyers and sellers to
agree to the terms of a trade despite not
including systems where solely the
security is identified. If adopted,
however, the Commission would
continue to monitor market
99 See Regulation ATS Adopting Release, supra
note 31, at 70850.
100 A system that uses trading interest to bring
together buyers and sellers would not meet the
definition of ‘‘exchange,’’ however, unless it also
met all the elements of Rule 3b–16(a), including the
element ‘‘makes available established, nondiscretionary methods (whether by providing a
trading facility or communication protocols, or by
setting rules) under which buyers and sellers can
interact and agree to the terms of a trade.’’
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
developments to ascertain whether such
systems may warrant further regulation
in the future.
The Commission is also proposing to
amend Rule 3b–16(a)(1) to change the
reference to a system that ‘‘brings
together the orders’’ to ‘‘brings together
buyers and sellers of securities using
trading interest.’’ Systems that use nonfirm trading interest allow participants
to communicate their trading intentions,
either on a bilateral or multilateral basis,
to negotiate a trade. Unlike orders, nonfirm trading interest typically does not
interact with other non-firm trading
interest without further action by the
potential counterparties. Rather, the
potential counterparties submitting nonfirm trading interest interact with each
other through the use of communication
protocols. To provide for the use of both
firm order interaction and participants’
interaction through non-firm trading
interest, the Commission is proposing to
amend Rule 3b–16(a) to replace ‘‘brings
together orders’’ with ‘‘brings together
buyers and sellers of securities using
trading interest.’’ The phrase ‘‘brings
together buyers and sellers of securities
using trading interest’’ still captures
systems that use orders. The
Commission is not proposing to change
the meaning of ‘‘to bring together’’ as
defined in the Regulation ATS Adopting
Release 101 nor is the Commission
proposing to exclude from Rule 3b–
16(a) systems that use orders to bring
together buyers and sellers of
securities—such systems would still be
subject to Rule 3b–16.
The Commission is proposing to
amend Exchange Act Rule 3b–16(a)(2) to
simplify the rule text and align the rule
text with the proposed changes to Rule
3b–16(a)(1). Specifically, the
Commission is proposing to replace
‘‘under which such orders interact with
each other and the buyers and sellers
entering such orders agree to the terms
of a trade’’ with ‘‘under which buyers
and sellers can interact and agree to the
terms of a trade.’’ As explained above,
because the Commission is proposing to
amend Rule 3b–16(a) to include trading
interest, and is no longer limiting the
application of the rule to orders, the
focus on ‘‘interaction’’ should be
between buyers and sellers rather than
orders. For similar reasons, the
Commission is proposing to delete from
the rule text the phrase ‘‘the buyers and
sellers entering such orders.’’ This
proposed change is designed to simplify
the rule text and remove the reference
to orders because the proposed
amendments to Rule 3b–16(a) also
101 See
PO 00000
id. at 70849.
Frm 00011
Fmt 4701
Sfmt 4702
15505
include non-firm trading interest in
addition to orders.
2. Multiple; Exclusion for Issuer
Systems
The Commission is proposing to
remove the reference to securities of
‘‘multiple’’ buyers and sellers from
Exchange Act Rule 3b–16(a)(1) and is
proposing to codify in Rule 3b–16(b)(3)
an example the Commission provided in
the Regulation ATS Adopting Release
for systems that allow issuers to sell
their own securities to investors. These
proposed changes are not intended to
change the existing scope of Rule 3b–
16(a) but only to clarify its application.
The term ‘‘multiple’’ was added to
Rule 3b–16(a) to help reinforce that
single counterparty systems were not
included in the definition of
‘‘exchange.’’ 102 These systems primarily
included systems used by issuers to sell
their own securities and systems used
by market makers registered with an
SRO, which are currently specifically
excluded from Rule 3b–16(a) under Rule
3b–16(b)(2). The Commission believes
that the term ‘‘multiple’’ could be
misconstrued to mean that RFQ
systems, for example, do not meet the
criteria of Rule 3b–16(a) because a
transaction request typically involves
one buyer and multiple sellers or one
seller and multiple buyers.103
Under current Rule 3b–16(a), whether
a system meets the ‘‘multiple’’ prong
depends on whether the system, when
viewed in its entirety, includes more
than one buyer and more than one seller
and is not determined on a transactionby-transaction basis. A system, such as
an RFQ system, that is designed to
provide the ability of more than one
buyer to request quotes from more than
one seller in securities at the same or
different times would meet the
‘‘multiple’’ prong of Rule 3b–16(a)
because such systems do not include a
single counterparty.104 Because RFQ
systems have more than one buyer and
more than one seller, such systems do
not have a single counterparty and thus
102 See
id.
commenter on the 2020 Proposal and
Concept Release stated its belief that RFQ platforms
do not meet the criteria of Rule 3b–16 because such
platforms do not offer ‘‘multiple-to-multiple’’ order
interaction among participants and that the RFQ
platforms instead facilitate trading between an
individual market participant (requester) and
potential liquidity providers (responders). See ICI
Letter at 2, 7.
104 The mere interpositioning of a designated
counterparty to provide for the anonymity of
counterparties to a trade or for settlement purposes
after the purchasing and selling counterparties to a
trade have been matched would not, by itself, mean
the system does not have multiple buyers and
sellers. See Regulation ATS Adopting Release,
supra note 31, at 70849.
103 One
E:\FR\FM\18MRP2.SGM
18MRP2
15506
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
would meet the standard of ‘‘multiple
buyers and sellers’’ under Rule 3b–
16(a)(1). Nevertheless, removing the
term ‘‘multiple’’ would mitigate
confusion and the potential to
misconstrue the application of Rule 3b–
16(a) to systems with non-firm trading
interest, including RFQ systems, and
aligns the rule with the statutory
definition of ‘‘exchange.’’ 105
The Commission is proposing to
amend Rule 3b–16(b) to add an
exclusion from Rule 3b–16(a) for
systems that allow an issuer to sell its
securities to investors. The Commission
stated in the Regulation ATS Adopting
Release that systems for issuers to sell
their own securities would not fall
within Rule 3b–16(a) because such
systems have a single counterparty that
is selling its securities.106 The
Commission continues to believe that
such systems do not meet the criteria of
Rule 3b–16(a) because the systems do
not bring together multiple buyers and
multiple sellers. Given the proposal to
remove the term ‘‘multiple’’ from Rule
3b–16(a)(1), adding the exclusion for
issuer systems would clarify that such
systems do not fall within the criteria of
Rule 3b–16(a).
3. Established Methods; Communication
Protocols
The Commission is proposing to
amend Rule 3b–16(a)(2) to replace ‘‘uses
established, non-discretionary methods’’
with the phrase ‘‘makes available
established, non-discretionary
methods.’’ The proposed change to use
the word ‘‘makes available’’ rather than
‘‘uses’’ is designed to capture
established, non-discretionary methods
that an organization, association, or
group of persons may provide, whether
directly or indirectly, for buyers and
sellers to interact and agree upon terms
of a trade. In contrast to the term ‘‘uses,’’
the Commission believes the term
‘‘makes available’’ would be applicable
to Communication Protocol Systems
because such systems take a more
passive role in providing to their
participants the means and protocols to
interact, negotiate, and come to an
agreement.
The term ‘‘makes available’’ is also
intended to make clear that, in the event
that a party other than the organization,
association, or group of persons
performs a function of the exchange, the
105 The use of plural terms in ‘‘buyers and sellers’’
in Rule 3b–16(a) and ‘‘purchasers and sellers’’
(emphasis added) in the statutory definition of
‘‘exchange’’ makes sufficiently clear that an
exchange need only have more than one buyer and
more than one seller participating on the system to
meet this prong.
106 See supra note 102 and accompanying text.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
function performed by that party would
still be captured for purposes of
determining the scope of the exchange
under Exchange Act Rule 3b–16. In the
Regulation ATS Adopting Release, the
Commission stated that it will attribute
the activities of a trading facility to a
system if that facility is offered by the
system directly or indirectly (such as
where a system arranges for a third
party or parties to offer the trading
facility).107 The Commission has further
recognized how a system may consist of
various functionalities, mechanisms, or
protocols that operate collectively to
bring together the orders for securities of
multiple buyers and sellers using nondiscretionary methods under the criteria
of Rule 3b–16(a), and how, in some
circumstances, these various
functionalities, mechanisms, or
protocols may be offered or performed
by another business unit of the
registered broker-dealer or government
securities broker or government
securities dealer that operates the ATS
(‘‘broker-dealer operator’’) or by a
separate entity.108 These principles
equally apply to an organization,
association, or group of persons that
arranges with another party to provide,
for example, a trading facility or
communication protocols, or parts
thereof, to bring together buyers and
sellers and perform a function of a
system under Rule 3b–16. Using the
term ‘‘makes available’’ will help ensure
that the investor protection and fair and
orderly markets provisions of the
exchange regulatory framework apply to
all the activities that consist of the
system that meets the criteria of Rule
3b–16(a), notwithstanding whether
those activities are performed by a party
other than the organization that is
providing the market place.109
The Commission is not proposing to
delete the term ‘‘non-discretionary’’
from Rule 3b–16(a)(2). The term ‘‘nondiscretionary’’ was added to Rule 3b–
16(a)(2) to modify ‘‘methods’’ to
distinguish the activities of an exchange
from the activities of a broker-dealer.110
As discussed in the Regulation ATS
107 See Regulation ATS Adopting Release, supra
note 31, at 70852.
108 See NMS Stock ATS Adopting Release, supra
note 2, at 38844 (citing Regulation ATS Adopting
Release, 63 FR 70852).
109 Depending on the activities of the persons
involved with the market place, a group of persons,
who may each perform a part of the 3b–16 system,
can together provide, constitute, or maintain a
market place or facilities for bringing together
purchasers and sellers of securities and together
meet the definition of exchange. In such a case, the
group of persons would have the regulatory
responsibility for the exchange.
110 See Regulation ATS Adopting Release, supra
note 31, at 70863.
PO 00000
Frm 00012
Fmt 4701
Sfmt 4702
Adopting Release, broker-dealers
exercise control, judgement, or
discretion over their customers’ orders
or trading interests 111 while an
exchange operates pursuant to
programmed procedures or set rules and
does not exercise discretion over orders
or trading interest entered into the
system.112 The Commission continues
to believe that the distinction between
an exchange and a broker-dealer
explained in the Regulation ATS
Adopting Release is appropriate and the
Commission is not proposing to amend
Exchange Act Rule 3b–16(a) to include
activities of broker-dealers within the
definition of ‘‘exchange.’’ 113
The term ‘‘non-discretionary’’ should
not be misconstrued to mean that a
system does not meet the definition of
exchange if it permits buyers or sellers
using the system to exercise discretion
with regard to the use of the system.
Under current Rule 3b–16(a)(2), the
phrase ‘‘uses established, nondiscretionary methods’’ applies to the
organization, association, or group of
persons that provides the means—the
trading facility or rules—under which
orders interact. Thus, an organization
that meets the definition of ‘‘exchange’’
does not exercise any discretion in the
matching of buyers and sellers or their
orders and buyers and sellers
participating on an exchange can use
their own discretion in finding and
selecting a counterparty.114 The phrase
111 See
id. at 70851.
id. at 70850.
113 If a system meets the criteria of Exchange Act
Rule 3b–16(a) but includes in that system the ability
of the system operator to apply its discretion for
handling trading interest, these activities employing
discretion by the system operator would be
included in the system that meets the criteria of
Rule 3b–16(a) and be subject to Federal securities
laws and rules applicable to a registered exchange
or ATS (including, for example, requirements to
provide disclosures about the system operator’s
activities on Form ATS or ATS–N and, if the ATS
is subject to the Fair Access Rule, include in its
written standards why the activities of the system
operator that result in the different treatment of
subscribers are fair and not unreasonably
discriminatory).
114 One commenter on the 2020 Proposal and
Concept Release stated their belief that ‘‘unlike an
ATS on which trading takes place on a nondiscretionary basis, trading discretion is a defining
feature of these protocols; a requesting participant
can choose the number and identity of participants
that will receive the RFQ, while participants who
receive an RFQ can choose whether to respond.’’
See ICI Letter at 7. See also Bloomberg Letter at 23
(describing that an RFQ ‘‘consists of discretionary
directed order communication network messaging’’
and stating its belief that such messaging is not an
ATS function because RFQs lack a nondiscretionary commitment to trade) and
MarketAxess Letter at n.2 (stating its belief that an
RFQ trading requestor’s trading discretion puts the
protocol outside the requirement that the platform
use ‘‘established, non-discretionary methods under
which such orders interact with each other’’). The
‘‘established, non-discretionary methods’’ element
112 See
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
‘‘established, non-discretionary
methods’’ continues to convey that the
system provider is providing the trading
facility or communication protocols or
setting rules and is not applying its
discretion in matching counterparties
on the system.115
The Commission is proposing to
amend Rule 3b–16(a)(2) to add
‘‘communication protocols’’ as an
established method that an organization,
association, or group of persons can
provide to bring together buyers and
sellers of securities. Systems that bring
together buyers and sellers of securities
may function as exchange market places
of securities without orders or a trading
facility for orders to interact. In the
Commission’s experience,
communication protocols, which can be
applied to various technologies and
connectivity, generally use non-firm
trading interest as opposed to orders to
prompt and guide buyers and sellers to
communicate, negotiate, and agree to
the terms of the trade. For example, if
an entity makes available a chat feature,
which requires certain information to be
included in a chat message (e.g., price,
quantity) and sets parameters and
structure designed for participants to
communicate about buying or selling
securities, the system would have
established communication protocols.
While Communication Protocol
Systems may not match counterparties’
trading interest, buyers and sellers using
these can be brought together to interact,
either on a bilateral or multilateral basis,
and agree upon the terms of the trade.
Protocols that a system offers may take
many forms and could include: Setting
minimum criteria for what messages
must contain; setting time periods under
which buyers and sellers must respond
to messages; restricting the number of
persons a message can be sent to;
limiting the types of securities about
which buyers and sellers can
communicate; setting minimums on the
size of the trading interest to be
of Rule 3b–16(a)(2) pertains to the discretion
applied by the system provider to bring together
buyers and sellers and not discretion that
participants may apply. For example, a system
provider that matches buyers and sellers using its
judgement or discretion would not be using
established, non-discretionary methods. As the
Commission stated in the Regulation ATS Adopting
Release, where customers of a broker-dealer
exercise control over their own orders in a trading
system operated by the broker-dealer, that brokerdealer is unlikely to be viewed as using
discretionary methods in handling the order. See
Regulation ATS Adopting Release, supra note 31,
at 70851.
115 See id. (describing that, for example, the
Commission does not believe that block trading
desks, which generally retain some discretion in
determining how to execute a customer’s order, and
frequently commit capital to satisfy their customers’
needs, use established, non-discretionary methods).
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
negotiated; or organizing the
presentation of trading interest, whether
firm or non-firm, to participants. These
examples are not exhaustive, and the
determination of whether the system
meets Rule 3b–16(a)(2) would depend
on the particular facts and
circumstances of each system.
Nevertheless, as proposed, the
Commission would take an expansive
view of what would constitute
‘‘communication protocols’’ under this
prong of Rule 3b–16(a).116
The Commission preliminarily
believes that certain systems would not
fall within the criteria of Exchange Act
Rule 3b–16(a), as proposed to be
amended, because the organization,
association, or group of persons would
not be considered to be providing a
trading facility or communication
protocol and therefore would not be
considered to be making available
established, non-discretionary methods
under Rule 3b–16(a)(2).117 The
116 One commenter suggested a litmus test to
assist the Commission in determining whether a
fixed-income trading platform for corporate bonds
and municipal securities meets the criteria that
warrant registration as an exchange or ATS.
According to the commenter, the most relevant
criteria were: Whether the system provides
multilateral trading, whether the technology
provider has any influence on picking the
counterparties, whether the system enables any
sharing of real-time information across multiple
counterparties, whether the system provider has
any access to real-time information, and whether
the transactions happen on the technology platform.
See letter from Vijay Kedia, President and CEO,
FlexTrade Systems, dated March 1, 2021
(‘‘FlexTrade Systems Letter’’) at 2. As discussed
above, the Commission believes that conditions
have changed whereby systems that offer the use
trading interest and protocols to bring together
buyers and sellers of securities perform an exchange
market place function similar to systems that offer
the use of orders and trading facilities. As proposed,
a Communication Protocol System can still meet
the criteria of Exchange Act Rule 3b–16 even if it
has no role in matching counterparties nor displays
trading interest. In addition, neither the current rule
nor the proposed amendments require that, for a
system to be an exchange, an execution occur on
the system; rather, that the buyers and sellers agree
to the terms of the trade on the system is sufficient.
See Regulation ATS Adopting Release, supra note
31, at 70852 (stating ‘‘whether or not the actual
execution of the order takes place on the system is
not a determining factor of whether the system falls
under Rule 3b–16’’). Also, applying some of the
criteria that the commenter suggested (whether
system provider have any access to real-time
information; whether the transactions happen on
the technology platform) could result in the
exclusion of certain RFQ platforms from the
definition of exchange.
117 To the extent that a system is currently
operating consistently with the circumstances
described in a staff no-action letter, a system that
falls within the scope of Rule 3b–16(a) and seeks
to rely on the ATS exemption would need to
register as a broker-dealer to comply with the
broker-dealer registration requirement under
Regulation ATS, regardless of any prior staff
statement. Upon the adoption of any final rule,
some letters and other staff statements, or portions
thereof, may be moot, superseded, or otherwise
PO 00000
Frm 00013
Fmt 4701
Sfmt 4702
15507
Commission continues to believe that
systems that passively display trading
interest, such as systems referred to in
the industry as bulletin boards, but do
not provide means for buyers and sellers
to contact each other and agree to the
terms of the trade on the system would
not be encompassed by Rule 3b–16(a) as
proposed to be amended.118 For
example, the Commission does not
believe that a system that unilaterally
displays trading interest without
offering a trading facility or
communication protocols to bring
together buyers and sellers would be
considered to be making available
established, non-discretionary
methods.119 In the Regulation ATS
Adopting Release, the Commission
stated that ‘‘[u]nless a system also
establishes rules and operates a trading
facility under which subscribers can
agree to the terms of their trades, the
system will not be included within Rule
3b–16 even if it brings together
‘orders.’ ’’ 120 These systems may display
trading interest to potential buyers and
sellers, but the system provider is not
making available established methods
for buyers and sellers to interact and
agree upon terms of a trade. If adopted,
however, the Commission would
continue to monitor market
developments to ascertain whether such
systems may warrant further regulation
in the future.
Similarly, a system that displays
trading interest and provides only
connectivity among participants
without providing a trading facility to
match orders or providing protocols for
participants to communicate and
interact would not meet the criteria of
Rule 3b–16(a) because such system
would not be considered to be making
available established, non-discretionary
methods. For example, systems that
only provide general connectivity for
persons to communicate without
protocols, such as utilities or electronic
web chat providers, would not fall
within the communication protocols
prong of the proposed rule because such
providers are not specifically designed
inconsistent with the final rule and, therefore,
would be withdrawn or modified.
118 See Regulation ATS Adopting Release, supra
note 31, at 70850. See also FINRA Letter at 9–10
(requesting the Commission provide additional
guidance on the regulatory classification of bulletin
boards).
119 See SIFMA Letter at 11 (stating that systems
that merely act as informational conduits should
remain outside the scope of Regulation ATS);
FlexTrade Systems Letter at 2–4 (stating that
software vendors that provide functionality for
displaying prices do not meet the definition of an
exchange).
120 See Regulation ATS Adopting Release, supra
note 31, at 70850.
E:\FR\FM\18MRP2.SGM
18MRP2
15508
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
to bring together buyers and seller of
securities or provide procedures or
parameters for buyers and sellers for
securities to interact. To the extent that
such systems are designed for securities
and provide communication protocols
for buyers and sellers to interact and
agree to the terms of a trade, such
systems would fall within the criteria of
Exchange Act Rule 3b–16(a) as proposed
to be revised.
jspears on DSK121TN23PROD with PROPOSALS2
D. Exchange Registration or ATS
Exemption for Communication Protocol
Systems Under the Proposed Rules
The proposed amendments to
Exchange Act Rule 3b–16(a) would
scope Communication Protocol Systems
into the definition of ‘‘exchange,’’ in
which case, the systems may decide
between registering as a national
securities exchange or registering as a
broker-dealer and complying with
Regulation ATS. The Commission
believes that many Communication
Protocol Systems would likely choose to
be regulated as an ATS because of the
lighter regulatory requirements imposed
on them, as compared to the regulatory
requirements of registered exchanges,
which are SROs. Unlike a national
securities exchange, an ATS can trade
any type of security and its users are not
limited to broker-dealers. In addition, an
ATS is not an SRO, is not subject to
Section 6 of the Exchange Act, and does
not require Commission approval for its
activities. Complying with Regulation
ATS would therefore allow
Communication Protocol Systems more
flexibility in the operation of their
business than registering as an
exchange.121
Further, many Communication
Protocol Systems make available for
trading fixed income securities that are
only traded over-the-counter and are not
typically registered and approved for
listing on an exchange.122 Unless a
121 ATSs have more flexibility in the operation of
their business than exchanges insofar as ATSs are
not subject to Section 6 of the Exchange Act and
are not required to comply with the statutory
standards with respect to unfair discrimination,
burdens on competition, and the equitable
allocation of reasonable fees.
122 Section 12(a) of the Exchange Act makes it
unlawful for any member, broker, or dealer to effect
any transaction in any security (other than an
exempted security) on a national securities
exchange unless a registration statement has been
filed with the Commission and is in effect as to
such security for such exchange in accordance with
the provisions of the Exchange Act and the rules
and regulations thereunder. 15 U.S.C. 78l(a).
Section 12(b) of the Exchange Act, 15 U.S.C. 78l(b),
contains procedures for the registration of securities
on a national securities exchange. Section 12(a)
does not apply to an exchange that the Commission
has exempted from registration as a national
securities exchange. See, e.g., Securities Exchange
Act Release No. 28899 (February 20, 1991), 56 FR
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
national securities exchange receives an
exemption to trade unregistered debt
securities,123 it may only list and trade
registered debt securities, whereas
Communication Protocol Systems need
not receive such an exemption to trade
unregistered debt securities.
Notwithstanding, the Commission
discusses the regulatory requirements
for both regulatory alternatives below.
The Commission is not proposing to
make changes to the regulatory structure
for exchanges or the requirements for
national securities exchanges. The
proposed changes to the regulatory
requirements under Regulation ATS are
discussed in more detail below.124
1. National Securities Exchange
Registration
A Communication Protocol System
that chooses to register as a national
securities exchange would be required
to do so pursuant to Sections 5 and 6
of the Exchange Act. A national
securities exchange is an SRO and must
set standards of conduct for its
members, administer examinations for
compliance with these standards,
coordinate with other SROs with respect
to the dissemination of consolidated
market data, and generally take
responsibility for enforcing its own
rules and the provisions of the Exchange
Act and the rules and regulations
thereunder. Before a national securities
exchange may commence operations,
the Commission must approve its
application for registration filed on
Form 1.125 Section 6(b) of the Exchange
Act requires, among other things, that
the national securities exchange be so
organized and have the capacity to carry
out the purposes of the Exchange Act
and to comply and enforce compliance
by its members, and persons associated
with its members, with the Federal
securities laws and the rules of the
exchange.126 Pursuant to Section 6 of
the Exchange Act, national securities
8377 (February 29, 1991). See also Regulation ATS
Adopting Release, supra note 31, at 70886.
123 See, e.g., Securities Exchange Act Release No.
54767 (November 16, 2006), 71 FR 67680
(November 22, 2006) (SR–NYSE–2004–69) (issuing
exemption permitting NYSE to trade unregistered
debt securities on its bonds platform, now known
as NYSE Bonds).
124 See infra Section III.B.2 (discussing proposed
changes to Rule 301(b)(1) of Regulation ATS),
Section IV (discussing proposed changes to Rule
304 and Form ATS–N), Section V.A (discussing
proposed changes to Rule 301(b)(5) and 301(b)(6)),
and Section V.C (discussing proposed changes to
Rule 301(b)(2)(vii)).
125 See 15 U.S.C. 78f.
126 See Section 6(b)(1) of the Exchange Act, 15
U.S.C. 78f(b)(1). The Commission must also find
that the national securities exchange has rules that
meet certain criteria. See generally Exchange Act
Section 6(b)(2) through (10), 15 U.S.C. 78f(b)(2)
through (10).
PO 00000
Frm 00014
Fmt 4701
Sfmt 4702
exchanges must establish rules that
generally: (1) Are designed to prevent
fraud and manipulation, promote just
and equitable principles of trade, and
protect investors and the public interest;
(2) provide for the equitable allocation
of reasonable fees; (3) do not permit
unfair discrimination; (4) do not impose
any unnecessary or inappropriate
burden on competition; and (5) with
limited exceptions, allow any brokerdealer to become a member.127
After approval of its application for
registration, a national securities
exchange must file with the
Commission any proposed changes to
its rules.128 The initial application on
Form 1, amendments thereto, and filings
for proposed rule changes, in
combination, publicly disclose
important information about national
securities exchanges, such as trading
services and fees. The Commission’s
order approving the application is also
public. The Commission oversees the
exchanges under the Exchange Act
through, among other things, its
examination authority under Section 17,
its enforcement authority under
Sections 19(h)(1) and 21C, its authority
to approve and disapprove rules under
Section 19(b), and its rulemaking
authority under various Exchange Act
provisions. Under the Exchange Act,
securities traded on a national securities
exchange must be registered with the
Commission and approved for listing on
an exchange. National securities
exchanges can only have broker-dealer
members. As an SRO, a national
securities exchange enjoys certain
unique benefits, such as limited
immunity from private liability with
respect to its regulatory functions and
the ability to receive consolidated
revenue under the national market
system plans for equity market data (i.e.,
Consolidated Tape Association (CTA)/
Consolidated Quotation (CQ) and
Unlisted Trading Privilege (UTP)),129
among others.
2. Regulation ATS Exemption; BrokerDealer Registration
A Communication Protocol System
may choose to operate as an ATS
pursuant to Regulation ATS, which
exempts an ATS from the definition of
‘‘exchange’’ on the condition that the
ATS is in compliance with the
requirements of Regulation ATS. An
ATS that fails to comply with the
requirements of Regulation ATS would
127 See
Section 6(b) of the Exchange Act.
generally Section 19(b) of the Exchange
Act, 15 U.S.C. 78s(b).
129 Details and the history of each plan can be
found at https://www.ctaplan.com/plans; and
https://www.utpplan.com.
128 See
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
no longer qualify for the ATS exemption
and thus risks operating as an
unregistered exchange in violation of
Section 5 of the Exchange Act.
To operate under the exemption, an
ATS must register as a broker-dealer
under Exchange Act Section 15 or as a
government securities broker or
government securities dealer under
Exchange Act Section 15C(a)(1)(A),130
and comply with the filing and conduct
obligations associated with being a
registered broker-dealer, including
membership in an SRO, such as
FINRA,131 and compliance with the
SRO’s rules.132 Requiring
Communication Protocol Systems to
register as broker-dealers and be a
member of an SRO would ensure that
they are subject to SRO examination and
market surveillance, trade reporting
obligations, and certain investor
protection rules. Broker-dealer
registration provides important investor
protections under the Federal securities
laws and FINRA rules, such as: (1)
Various disclosure and supervision
obligations; (2) anti-money laundering
obligations (including suspicious
activity reporting); (3) FINRA over-thecounter (OTC) trade reporting
requirements, including requirements to
maintain membership in, or maintain an
effective clearing arrangement with a
participant of, a clearing agency
registered under the Exchange Act; and
(4) Commission examinations and
FINRA examinations and surveillance of
members and markets that its members
operate.
In addition, ATSs are subject to
certain reporting and disclosure
requirements, as applicable. ATSs other
than NMS Stock ATSs or, as proposed,
Government Securities ATSs, would be
required, pursuant to Rule 301(b)(2) of
Regulation ATS, to file an initial
operation report with the Commission
on Form ATS 133 at least 20 days before
130 The Commission is proposing to amend Rule
301(b)(1) to allow an ATS to register as a
government securities broker or government
securities dealer under Exchange Act Section
15C(a)(1)(A). See infra notes 272–278 and
accompanying text.
131 See Section 15(b)(8) of the Exchange Act; 15
U.S.C. 78o(b)(8).
132 See Regulation ATS Adopting Release, supra
note 31, at 70903.
133 Form ATS and the Form ATS Instructions are
available at https://www.sec.gov/about/forms/
formats.pdf. Form ATS would require, among other
things, that the ATS (other than a Government
Securities ATS or NMS Stock ATS) provide
information about: Classes of subscribers and
differences in access to the services offered by the
ATS to different groups or classes of subscribers;
securities the ATS expects to trade; any entity other
than the ATS involved in its operations; the manner
in which the system operates; how subscribers
access the trading system; procedures governing
entry of trading interest and execution; and trade
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
commencing operations or, in the case
of Newly Designated ATSs,134 no later
than 30 calendar days after the effective
date of any final rule.135 Form ATS
provides the Commission with the
opportunity to identify problems that
might impact investors before the
system begins to operate.136 Unlike a
Form 1 filed by a national securities
exchange, a Form ATS is not approved
by the Commission.137 Also unlike a
Form 1 application, a Form ATS is
deemed confidential when filed.138
Requiring Communication Protocol
Systems to file Form ATS and
amendments thereto will help the
reporting, clearance and settlement of trades on the
ATS. See infra Section V.B (describing proposed
changes to Form ATS). Regulation ATS provides
that a report on Form ATS or Form ATS–R shall
be considered filed upon receipt by the Division of
Trading and Markets, at the Commission’s principal
office in Washington, DC (i.e., in paper form), and
that information filed by an ATS on Form ATS is
deemed confidential when filed. See 17 CFR
242.301(b)(2)(vii). See also infra Section V.C.
134 ‘‘Newly Designated ATSs’’ would be defined
as ATSs operating as of the effective date of any
final rule that meet the criteria under Rule 3b–16(a)
as of the effective date of any final rule but did not
meet the criteria under Rule 3b–16(a) in effect prior
to the effective date of any final rule. See Rule
300(r).
135 See infra note 180 and accompanying text.
The Commission is also proposing changes to Rule
301(b)(2)(i) to clarify that the requirement to file
Form ATS does not apply to Covered ATSs or
Covered Newly Designated ATSs. See proposed
Rule 301(b)(2)(i). See also proposed Rule 300(s)
(defining ‘‘Covered Newly Designated ATS’’).
136 See Regulation ATS Adopting Release, supra
note 31, at 70864.
137 Form ATS provides the Commission with
notice about an ATS’s operations prior to
commencing operations. An ATS is also required to
notify the Commission of any changes in its
operations by filing an amendment to its initial
operation report. There are three types of
amendments to an initial operation report. First, if
any material change is made to its operations, the
ATS must file an amendment on Form ATS at least
20 calendar days before implementing such change.
See 17 CFR 242.301(b)(2)(ii). A ‘‘material change,’’
includes, but is not limited to, any change to the
operating platform, the types of securities traded, or
the types of subscribers. In addition, the
Commission has stated that ATSs implicitly make
materiality decisions in determining when to notify
their subscribers of changes. See Regulation ATS
Adopting Release, supra note 31, at 70864. Second,
if any information contained in the initial operation
report becomes inaccurate for any reason and has
not been previously reported to the Commission as
an amendment on Form ATS, the ATS must file an
amendment on Form ATS correcting the
information within 30 calendar days after the end
of the calendar quarter in which the system has
operated. See 17 CFR 242.301(b)(2)(iii). Third, an
ATS must promptly file an amendment on Form
ATS correcting information that it previously
reported on Form ATS after discovery that any
information was inaccurate when filed. See 17 CFR
242.301(b)(2)(iv). An ATS is required to promptly
file a cessation of operations on Form ATS. See 17
CFR 242.301(b)(2)(v).
138 See 17 CFR 242.301(b)(2)(vii); Form ATS at 3,
General Instructions A.7.
PO 00000
Frm 00015
Fmt 4701
Sfmt 4702
15509
Commission monitor and oversee such
ATSs’ operations.
NMS Stock ATSs and, as proposed,
Government Securities ATSs, would be
subject to enhanced filing and
disclosure requirements under Rule 304
of Regulation ATS. NMS Stock ATSs or
Government Securities ATSs would, in
lieu of Form ATS, be required to file
public Form ATS–N in EDGAR, in
which they must disclose detailed
information about the manner in which
their trading systems operate and the
potential for conflicts of interest and
information leakage.139 Form ATS–N is
subject to a Commission review and
effectiveness process.140 An NMS Stock
ATS or Government Securities ATS
would not be permitted to operate
pursuant to the Rule 3a1–1(a)(2)
exemption until its Form ATS–N has
become effective.141 In addition, the
ATS would be required to file
amendments on Form ATS–N to
provide notice of changes to its
operations and broker-dealer and
affiliate relationships.142 Form ATS–N
and the Commission review and
effectiveness process, which is
described in detail below,143 would
provide operational transparency and
regulatory oversight of Communication
Protocol Systems that are NMS Stock
ATSs or Government Securities ATSs.
In addition, all ATSs are required to
periodically, by paper submission,
report certain information about
transactions in the ATS and information
about certain activities on Form ATS–R
within 30 calendar days after the end of
each calendar quarter in which the
market has operated, pursuant to Rule
301(b)(9).144 Form ATS–R requires
quarterly volume information for
specified categories of securities, as well
as a list of all securities traded in the
ATS during the quarter and a list of all
subscribers that were participants
during the quarter,145 and for ATSs
subject to the Fair Access Rule to
provide certain additional
139 See
proposed changes to 17 CFR 242.304.
infra Section IV.A.
141 See Rule 304(a)(1)(i).
142 See infra Section IV.A.
143 See infra Section IV.
144 See 17 CFR 242.301(b)(9)(i). Form ATS–R and
the Form ATS–R Instructions are available at
https://www.sec.gov/about/forms/formats-r.pdf. See
also Section V.B (describing proposed changes to
Form ATS–R).
145 See Form ATS–R at 4, Items 1 and 2
(describing the requirements for Exhibit A and
Exhibit B of Form ATS–R). ATSs must also
complete and file Form ATS–R within 10 calendar
days after ceasing to operate. See 17 CFR
242.301(b)(9)(ii); Form ATS–R at 2, General
Instructions A.2 to Form ATS–R.
140 See
E:\FR\FM\18MRP2.SGM
18MRP2
15510
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
information.146 Like Form ATS, Rule
301(b)(2)(vii) and the instructions to
Form ATS–R provide that Form ATS–R
is deemed confidential when filed.147
The information reported on Form
ATS–R by Communication Protocol
Systems would permit the Commission
to monitor the trading on these ATSs for
compliance with the Exchange Act and
applicable rules thereunder and enforce
the Fair Access Rule.148
NMS Stock ATSs must comply with
certain order display and execution
access obligations 149 under Rule
301(b)(3) if the ATS displays subscriber
orders in an NMS stock to any person
(other than an employee of the ATS)
and meets certain volume
requirements.150 These order display
and execution access obligations were
adopted by the Commission with the
expectation they would promote
additional market integration and
further discourage two-tier markets
when trading in an NMS stock on an
ATS reaches a certain level.151 In
146 Form ATS–R also requires an ATS that is
subject to the fair access obligations under Rule
301(b)(5) of Regulation ATS to provide a list of all
persons granted, denied, or limited access to the
ATS during the period covered by the ATS–R and
designate for each person each of the following:
Whether the person was granted, denied, or limited
access; the date the ATS took such action; the
effective date of such action; and the nature of any
denial or limitation of access. See Form ATS–R at
6, Item 7 (explaining requirements for Exhibit C).
147 See 17 CFR 242.301(b)(2)(vii); Form ATS–R at
2, General Instruction A.7.
148 See Regulation ATS Adopting Release, supra
note 31, at 70874 and 70878.
149 An ATS that displays orders and meets the
volume requirements must provide to a national
securities exchange or national securities
association the prices and sizes of the orders at the
highest buy price and the lowest sell price for such
NMS stock, displayed to more than one person in
the ATS, for inclusion in the quotation data made
available by the national securities exchange or
national securities association pursuant to Rule 602
under Regulation NMS. See 17 CFR
242.301(b)(3)(ii). With respect to any such
displayed order, the ATS must provide to any
broker-dealer that has access to the national
securities exchange or national securities
association to which the ATS provides the prices
and sizes of displayed orders pursuant to Rule
301(b)(3)(ii), the ability to effect a transaction with
such orders that is equivalent to the ability of such
broker-dealer to effect a transaction with other
orders displayed on the exchange or by the
association; and at the price of the highest priced
buy order or lowest priced sell order displayed for
the lesser of the cumulative size of such priced
orders entered therein at such price, or the size of
the execution sought by such broker-dealer. See 17
CFR 242.301(b)(3)(iii).
150 An ATS that displays subscriber orders in an
NMS stock must comply with Rule 301(b)(3) if,
during at least four of the preceding six calendar
months, it had an average daily trading volume of
5% or more of the aggregate average daily share
volume for that NMS stock, as reported by an
effective transaction reporting plan. See 17 CFR
242.301(b)(3)(i).
151 See Regulation ATS Adopting Release, supra
note 31, at 70867.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
addition, an NMS Stock ATS must not
charge any fee to broker-dealers that
access the ATS through a national
securities exchange or national
securities association that is
inconsistent with the equivalent access
to the NMS Stock ATS that is required
under Rule 301(b)(3)(iii).152 This
requirement is designed to promote
equal access to ATSs.
As discussed in more detail below,153
ATSs are required to comply with the
Fair Access Rule 154 under Rule
301(b)(5) if the ATS meets volume
thresholds in NMS stocks, equity
securities that are not NMS stocks and
for which transactions are reported to an
SRO, municipal securities, or corporate
debt securities.155 The Commission is
proposing to apply the requirements of
the Fair Access Rule to trading of U.S.
Treasury Securities and Agency
Securities on ATSs.156
Additionally, under Rule 301(b)(6)
(‘‘Capacity, Integrity, and Security
Rule’’), an ATS that trades only
municipal securities or corporate fixed
income debt with 20% or more of the
average daily volume traded in the U.S.
during at least four of the preceding six
calendar months would be required to
comply with capacity, integrity, and
security standards 157 with respect to
152 See 17 CFR 242.301(b)(4). In addition, if the
national securities exchange or national securities
association to which an ATS provides the prices
and sizes of orders under Rules 301(b)(3)(ii) and
(iii) establishes rules designed to assure consistency
with standards for access to quotations displayed
on such national securities exchange, or the market
operated by such national securities association, the
ATS shall not charge any fee to members that is
contrary to, that is not disclosed in the manner
required by, or that is inconsistent with any
standard of equivalent access established by such
rules. See id.
153 See infra Section III.B.4 and Section V.A.
154 An ATS subject to the Fair Access Rule, as
proposed to be revised, must: Establish and apply
reasonable written standards for granting, limiting,
and denying access to the services of the ATS; make
and keep records of all grants of access including,
for all participants, the reasons for granting such
access, and all denials or limitations of access and
reasons, for each applicant and participant, for
denying or limiting access; and report on Form
ATS–R a list of persons granted, denied, and
limited access to the ATS. See infra Section V.A.
155 See 17 CFR 242.301(b)(5).
156 See infra Section III.B.4.
157 An ATS that meets the volume requirements
must, with respect to those systems that support
order entry, order routing, order execution,
transaction reporting, and trade comparison,
establish reasonable current and future capacity
estimates; conduct periodic capacity stress tests of
critical systems to determine such system’s ability
to process transactions in an accurate, timely, and
efficient manner; develop and implement
reasonable procedures to review and keep current
its system development and testing methodology;
review the vulnerability of its systems and data
center computer operations to internal and external
threats, physical hazards, and natural disasters;
establish adequate contingency and disaster
PO 00000
Frm 00016
Fmt 4701
Sfmt 4702
those systems that support order entry,
order routing, order execution,
transaction reporting, and trade
comparison.158 Information provided
under the Capacity, Integrity, and
Security Rule would enable the
Commission staff to better understand
the operation of certain Communication
Protocol Systems and to identify
potential problems and trends that may
require attention.
NMS Stock ATSs, ATSs that trade
non-NMS equity securities that are
reported to an SRO, and Government
Securities ATSs that meet certain
trading thresholds would be subject to
Regulation SCI. Regulation SCI
superseded and replaced Rule 301(b)(6)
requirements with regard to ATSs that
trade NMS stocks and non-NMS
stocks.159 The Commission is proposing
to apply Regulation SCI to Government
Securities ATSs, as discussed below.160
Regulation SCI is designed to help
address the technological
vulnerabilities, and improve the
Commission’s oversight of the core
technology of key entities.
All ATSs, regardless of the volume
traded on their systems, are required,
pursuant to Rule 301(b)(7),161 to permit
the examination and inspection of their
premises, systems, and records, and
cooperate with the examination,
inspection, or investigation of
subscribers, whether such examination
is being conducted by the Commission
or by an SRO of which such subscriber
is a member. Because an ATS subscriber
to whom the Commission’s inspection
authority may not extend could use the
ATS to manipulate the market in a
security, the requirement is designed to
require that ATSs cooperate in all
inspections, examinations, and
investigations.
ATSs are also required, pursuant to
Rule 301(b)(8),162 to make and keep
current the records specified in Rule
302 of Regulation ATS 163 and preserve
recovery plans; on an annual basis, perform an
independent review, in accordance with established
audit procedures and standards, of the ATS’s
controls for ensuring that the above requirements
are met, and conduct a review by senior
management of a report containing the
recommendations and conclusions of the
independent review; and promptly notify the
Commission and its staff of material systems
outages and significant systems changes. See 17
CFR 242.301(b)(6)(ii).
158 See 17 CFR 242.301(b)(6)(i).
159 Regulation SCI does not apply to ATSs that
trade only municipal securities or corporate debt
securities. See infra notes 351–356 and
accompanying text. See also Regulation SCI
Adopting Release, supra note 3, at 72262.
160 See infra Section III.C.
161 See 17 CFR 242.301(b)(7).
162 See 17 CFR 242.301(b)(8).
163 See 17 CFR 242.302. Rule 302 requires all
ATSs to make and keep current certain records,
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
the records specified in 17 CFR
242.303.164 The Commission is
proposing to amend Rule 302 of
Regulation ATS to require
recordkeeping related to ‘‘trading
interest.’’ Rule 302 requires that an ATS
shall make and keep certain records,
which the rule enumerates.
Communication Protocol Systems that
choose to comply with Regulation ATS
would be required to keep the records
enumerated in Rule 302. The
Commission is proposing to revise
certain of these enumerated records that
relate to ‘‘orders’’ to require such
records related to ‘‘trading interest,’’
which would include both firm orders
and non-firm trading interest.165 This
would include time-sequenced records
of trading interest information in the
ATS.166 The recordkeeping
requirements would require
Communication Protocol Systems to
make and keep certain records for an
audit trail of trading activity that would
allow the Commission to detect and
investigate potential market
irregularities, examine whether the ATS
is in compliance with Federal securities
laws, and ensure investor
protections.167
In addition, ATSs are required to
establish adequate written safeguards
and written procedures 168 to protect
including: A record of subscribers to the ATS; daily
summaries of trading in the ATS; and timesequenced records of order information in the ATS.
See 17 CFR 242.302.
164 See Rule 303 of Regulation ATS. In the
Regulation ATS Adopting Release, the Commission
stated that these requirements to make, keep, and
preserve records are necessary to create a
meaningful audit trail and to permit surveillance
and examination to help ensure fair and orderly
markets. See Regulation ATS Adopting Release,
supra note 31, at 70877–78.
165 See supra note 98 and accompanying text.
166 Specifically, the Commission is proposing to
revise Rule 302(c)(1) (date and time (expressed in
terms of hours, minutes, and seconds) that the
trading interest was received); (c)(3) (the number of
shares, or principal amount of bonds, to which the
trading interest applies); (c)(5) (the designation of
the trading interest as buy or sell trading interest);
(c)(8) (any limit or stop price prescribed by the
trading interest); (c)(9) (the date on which the
trading interest expires and, if the time in force is
less than one day, the time when the trading
interest expires); (c)(10) (the time limit during
which the trading interest is in force); (c)(11) (any
instructions to modify or cancel the trading
interest); (c)(12) (the type of account for which the
trading interest is submitted); (c)(13) (date and time
that the trading interest was executed); (c)(14) (price
at which the trading interest is executed); and
(c)(15) (size of the trading interest executed).
167 See Regulation ATS Adopting Release, supra
note 31, at 70878.
168 These written safeguards and written
procedures must include: Limiting access to the
confidential trading information of subscribers to
those employees of the ATS who are operating the
system or responsible for its compliance with these
or any other applicable rules; and implementing
standards controlling employees of the ATS trading
for their own accounts.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
confidential trading information and to
separate ATS functions from other
broker-dealer functions, including
principal and customer trading pursuant
to Rule 301(b)(10).169 Furthermore, all
ATSs must adopt and implement
adequate written oversight procedures
to ensure that the above written
safeguards and procedures are
followed.170 These requirements are
designed to help prevent the potential
for abuse of subscriber confidential
trading information.171
In addition, an ATS must not use in
its name the word ‘‘exchange,’’ or any
derivation of the word ‘‘exchange’’
pursuant to Rule 301(b)(11).172 The
Commission believes that the use of the
word ‘‘exchange’’ by an ATS would be
deceptive and could lead investors to
believe incorrectly that such ATS is
registered as a national securities
exchange.173
The Commission is proposing
amendments to facilitate an orderly
transition for Communication Protocol
Systems to comply with the applicable
conditions of the Regulation ATS
exemption.174 The Commission
understands that some Communication
Protocol Systems are not currently
registered as broker-dealers.175 To
become a registered broker-dealer, these
Communication Protocol Systems
would be required to file Form BD with
the Commission and complete FINRA’s
processes for new members.176 The
Commission is proposing to allow
Communication Protocol Systems that
are not registered as broker-dealers at
the time the proposed rule would be
effective, if adopted, to provisionally
operate pursuant to the Rule 3a1–1(a)(2)
exemption while their broker-dealer
169 See 17 CFR 242.301(b)(10); NMS Stock ATS
Adopting Release, supra note 2, Section VI.
170 See 17 CFR 242.301(b)(10)(ii).
171 See NMS Stock ATS Adopting Release, supra
note 2, at 38864.
172 See 17 CFR 242.301(b)(11); Regulation ATS
Adopting Release, supra note 31, Section II.C.
173 See Securities Exchange Act Release No.
39884 (April 17, 1998), 63 FR 23504, 23523 (April
29, 1998) (‘‘Regulation ATS Proposing Release’’).
174 For purposes of the rule text, the Commission
is proposing to apply the transitional rules to
‘‘Newly Designated ATSs.’’
175 A registered broker-dealer that operates a
Communication Protocol System and is currently a
FINRA member may, under FINRA rules, be
required to file a Continuing Membership
Application with FINRA noticing material changes
to business operations in connection with its
operation of an ATS.
176 After receiving a substantially complete
application package, FINRA must review and
process it within 180 calendar days. See ‘‘How to
Become a Member—Member Application Time
Frames’’ available at https://www.finra.org/
registration-exams-ce/broker-dealers/how-becomemember-membership-application-time-frames. See
also FINRA Rule 1014.
PO 00000
Frm 00017
Fmt 4701
Sfmt 4702
15511
registration is pending until the earlier
of (1) the date the ATS registers as a
broker-dealer under Section 15 of the
Exchange Act or Section 15C(a)(1)(A) of
the Exchange Act and becomes a
member of a national securities
association or (2) the date 210 calendar
days after the effective date of any final
rule.177 The 210 calendar day period is
designed to provide time for a
Communication Protocol System to
submit its broker-dealer registration
application, or continuing membership
application, as applicable, and for
FINRA to conduct its review of new
member application and continuing
member application. The proposed
transition period is designed to provide
a Communication Protocol System that
is not a registered broker-dealer
adequate time to comply with the
necessary broker-dealer registration
requirements under Regulation ATS
without disrupting its market or its
participants.
Proposed Rule 301(b)(2)(i) requires
ATSs (other than Covered ATSs) 178 to
file an initial operation report on Form
ATS at least 20 days before commencing
operations; however, Communication
Protocol Systems that seek to operate as
ATSs already will be operating when
the proposed rule, if adopted, becomes
effective. To avoid disruption of the
services of the ATS, the Commission is
proposing to amend Rule 301(b)(2)(i) to
require Communication Protocol
Systems (other than those that are
Covered ATSs) 179 to file an initial
operation report on Form ATS no later
than 30 calendar days after the effective
date of any final rule.180 The
Commission is also proposing changes,
as discussed below, to Rule
301(b)(2)(viii) and Rule 304 to facilitate
the transition for Communication
Protocol Systems that are Covered ATSs
to file Form ATS–N.181 Requiring
Communication Protocol Systems to file
a Form ATS with the Commission at the
proposed time would provide the
Commission with information about its
177 See proposed revisions to Rule 301(b)(1). This
transition period for the proposed rule, if adopted,
would also apply to Currently Exempted
Government Securities ATSs (i.e., Legacy
Government Securities ATSs formerly not required
to comply with Regulation ATS pursuant to the
exemption under § 240.3a1–1(a)(3) prior to effective
date of any final rule) not registered as a brokerdealer. See infra note 283.
178 ‘‘Covered ATS’’ is defined infra note 257. The
Commission is proposing changes to Rule
301(b)(2)(i) to clarify that the requirement to file
Form ATS does not apply to ATSs other than
Covered ATSs. See proposed Rule 301(b)(2)(i).
179 The rule text uses the term ‘‘Covered Newly
Designated ATS.’’
180 See proposed changes to Rule 301(b)(2)(i).
181 See infra note 300 and Section IV.A.
E:\FR\FM\18MRP2.SGM
18MRP2
15512
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
operations and facilitate oversight of the
systems.
Request for Comment
1. Should the Commission amend
Exchange Act Rule 3b–16 as proposed?
Should the Commission adopt a more
expansive or limited interpretation of
the definition of ‘‘exchange’’? Do
commenters agree that, in the current
market, Communication Protocol
Systems function as market places that
conduct similar activities as exchanges
do? Would any systems that conduct
similar activities as exchanges that
should be included in proposed Rule
3b–16 be excluded? Are there any asset
classes or types of securities that should
be excluded from the definition of
exchange? If so, why?
2. What are commenters’ views on the
potential consequences of expanding or
limiting the definition of ‘‘exchange’’
under Exchange Act Rule 3b–16? What
are commenters’ views on how changing
Rule 3b–16 could benefit or harm
investors and market participants? Are
new systems that meet the definition of
exchange likely to choose to operate as
ATSs instead of national securities
exchanges?
3. Should the Commission adopt the
proposed definition of ‘‘trading interest’’
under Exchange Act Rule 3b–16?
Should the definition of ‘‘trading
interest’’ require attributes to be
identified in addition to at least the
security and either quantity, direction
(buy or sell), or price? Alternatively,
would only one of the security,
quantity, direction (buy or sell), or price
be adequate to indicate trading interest?
Should the definition of ‘‘exchange’’
continue to be limited to systems that
use orders? If so, why?
4. Should the Commission revise
Exchange Act Rule 3b–16 to focus on
bringing together buyers and sellers,
rather than bringing together orders (or
trading interest)? Would the proposed
revisions to the rule appropriately
describe systems that use non-firm
trading interest to allow participants to
communicate their trading interest?
5. Should the Commission revise
Exchange Act Rule 3b–16(a)(2) to
describe a system that ‘‘makes available
established, non-discretionary methods’’
under which buyers and sellers interact?
Should the Commission revise the
language further to clarify that a system
provider that makes available a trading
facility or communication protocol by
way of a third party or affiliate would
fall within the criteria of Rule 3b–
16(a)(2)? Should there be any minimum
or baseline to the established methods a
system must have to qualify as an
exchange? If so, what are they? Do
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
commenters agree that making available
communication protocols, as discussed
herein, is sufficient to be an established,
non-discretionary method under which
buyers and sellers can interact?
6. Should the Commission remove the
reference to ‘‘multiple’’ in Rule 3b–
16(a)(1))? If so, why? If not, why not?
7. Should Communication Protocol
Systems that choose to comply with
Regulation ATS be subject to all of the
requirements of Regulation ATS? Are
there certain requirements of Regulation
ATS that should or should not be
applicable to Communication Protocol
Systems, or certain Communication
Protocol Systems? For example, are the
current Regulation ATS recordkeeping
requirements appropriate for
Communication Protocol Systems?
Should the Commission require a
Communication Protocol System that
chooses to operate as an ATS to create
and maintain records that are not
otherwise required by Rule 301(b)(8) of
Regulation ATS? Is there anything that
is not currently among the conditions to
the Regulation ATS exemption that a
Communication Protocol System and/or
an existing ATS should comply with as
part of Regulation ATS? And if so, why?
8. Should the Commission amend
Regulation ATS, Form ATS, Form ATS–
R, or Form ATS–N in any way to be
more tailored to Communication
Protocol Systems? If so, how?
9. Are the proposed transition periods
for Communication Protocol Systems
appropriate? Should the Commission
provide Communication Protocol
Systems more or less time to comply
with any of the requirements of
Regulation ATS? Please explain.
10. Is the Commission’s proposal that
a Newly Designated ATS must file an
initial operation report on Form ATS no
later than 30 calendar days after the
effective date of any final rule, if
adopted, appropriate? If not, should the
Commission provide more time or less
time for a Newly Designated ATS to file
an initial Form ATS?
11. Should the Commission allow a
Newly Designated ATS that is not
registered as a broker-dealer to operate
pursuant to the Rule 3a1–1(a)(2)
exemption on a provisional basis? Does
the proposal to allow such ATSs a
maximum 210 calendar days to comply
with the broker-dealer registration
requirement provide an appropriate
amount of time to register as a brokerdealer? If not, what, if any, transition
period would be appropriate and why?
PO 00000
Frm 00018
Fmt 4701
Sfmt 4702
III. Proposed Changes Applicable to
Government Securities ATSs
A. ATS Markets for Government
Securities
Government securities 182 play a
critical role in the U.S. and global
economies. Among other things, for
example, Treasury rates are a
fundamental benchmark for pricing
virtually all other financial assets.183
Systems currently operating as ATSs,
particularly those that operate in the
secondary interdealer markets for the
most-recently issued (‘‘on-the-run’’) U.S.
Treasury Securities, have become a
significant location of trading interest
for government securities.184
Specifically, most interdealer trading
takes place on electronic platforms
provided by interdealer brokers that
operate limit order books, with
electronic interdealer trading being
182 Under the Exchange Act, government
securities are defined as, among other things,
securities which are direct obligations of, or
obligations guaranteed as to principal or interest by,
the United States. See 15 U.S.C. 78c(42)(A).
Government securities include U.S. Treasury
securities, debt securities issued or guaranteed by
a U.S. executive agency, as defined in 5 U.S.C. 105,
or government-sponsored enterprise, as defined in
2 U.S.C. 622(8), and Agency Mortgage-Backed
Securities (‘‘MBSs’’). Government securities also
include securities which are issued or guaranteed
by the Tennessee Valley Authority or by
corporations in which the United States has a direct
or indirect interest and which are designated by the
Secretary of the Treasury for exemption as
necessary or appropriate in the public interest or for
the protection of investors; securities issued or
guaranteed as to principal or interest by any
corporation the securities of which are designated,
by statute specifically naming such corporation, to
constitute exempt securities within the meaning of
the laws administered by the Commission; and any
put, call, straddle, option, or privilege on one of the
aforementioned (subject to limited exceptions). 15
U.S.C. 78c(42)(B)–(C).
183 See Group of Thirty Working Group on
Treasury Market Liquidity, U.S. Treasury Markets:
Steps Toward Increased Resilience. Group of Thirty
at 1 (2021) (‘‘G30 Report’’), available at https://
group30.org/publications/detail/4950.
184 See Recent Disruptions and Potential Reforms
in the U.S. Treasury Market: A Staff Progress
Report, at 32, available at https://
home.treasury.gov/system/files/136/IAWGTreasury-Report.pdf (‘‘November 2021 IAWG
Report’’). The November 2021 IAWG Report is a
joint report issued by the Inter-Agency Working
Group for Treasury Market Surveillance (‘‘IAWG’’),
which consists of staff from the U.S. Department of
the Treasury, the Board of Governors of the Federal
Reserve System, the Federal Reserve Bank of New
York, the Commission, and the Commodity Futures
Trading Commission. Among other things, the
November 2021 IAWG report provides an overview
of the current structure of the Treasury market and
a detailed analysis of the recent disruptions to the
Treasury market at the onset of the COVID–19
pandemic in March 2020 as well as other recent
disruptions to the Treasury market. The report also
sets forth what the IAWG believes are the six
guiding principles for the Treasury market and
provides an update about the work streams for
specific policy analysis being undertaken by the
members of the IAWG.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
concentrated in on-the-run Treasury
securities.185 In July 2021, average daily
trading in government securities totaled
$978 billion, or roughly 95 percent of all
fixed income trading volume in the
U.S.186
Legacy Government Securities ATSs
now operate with complexity similar to
that of markets that trade NMS stocks in
terms of use of technology and speed of
trading, the use of limit order books,
order types, algorithms, connectivity,
data feeds, and the active participation
of principal trading firms (‘‘PTFs’’).187
For example, based on the
Commission’s review of Form ATS
filings by ATSs that trade government
securities and discussions with market
participants, the Commission believes
that Legacy Government Securities
ATSs often offer subscribers a variety of
order types to pursue both aggressive
and passive trading strategies and low
latency, high-speed connectivity to the
ATS. These ATSs frequently use
automated systems to match orders
anonymously on a price/time priority
basis. Some Legacy Government
Securities ATSs also segment orders
into categories by participants or allow
participants the ability to interact with
specific counterparty groups in the ATS
and facilitate order interaction and
execution.188 Likewise, Communication
Protocol Systems are increasingly used
as electronic means to bring together
buyers and sellers for government
securities and are particularly prevalent
185 See
id. at 3.
SIFMA Fixed Income Trading Volume,
available at https://www.sifma.org/resources/
research/us-fixed-income-trading-volume/. This
includes U.S. Treasury Securities, Agency
Mortgage-Backed Securities, and Federal Agency
Securities.
187 See November 2021 IAWG Report, supra note
184, at 31. See also NMS Stock ATS Adopting
Release, supra note 2, at 38771 for a discussion
about the current operational complexities of NMS
Stock ATSs.
188 See also November 2021 IAWG Report, supra
note 184, at 31; Joint Staff Report: The U.S.
Treasury Market on October 15, 2014, at 11, 35–36,
available at https://www.sec.gov/files/treasurymarket-volatility-10-14-2014-joint-report.pdf
(‘‘October 15 Staff Report’’); Department of the
Treasury Release No. 2015–0013 (January 22, 2016),
Notice Seeking Public Comment on the Evolution
of the Treasury Market Structure, 81 FR 3928
(January 22, 2016) (‘‘Treasury Request for
Information’’). This evolution in the interdealer
secondary cash markets for U.S. Treasury Securities
was also highlighted in the October 15 Staff Report,
the Treasury Request for Information, and public
comment received by the Commission. The October
15 Staff Report is a joint report about the unusually
high level of volatility and rapid round-trip in
prices that occurred in the U.S. Treasuries market
on October 15, 2014. Among other things, the
October 15 Staff Report provides an overview of the
market structure, liquidity, and applicable
regulations of the U.S. Treasury market, as well as
the broad changes to the structure of the U.S.
Treasury market that have occurred over the past
two decades.
jspears on DSK121TN23PROD with PROPOSALS2
186 See
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
in the dealer-to-customer market for
U.S. Treasury and markets for off-therun 189 U.S. Treasury Securities, Agency
Securities,190 and repos.
The most liquid and commonly
traded government securities are U.S.
Treasury Securities, which are direct
obligations of the U.S. Government
issued by the U.S. Department of the
Treasury (‘‘Treasury Department’’). The
Treasury Department issues several
different types of securities, including
Treasury bills, nominal coupons notes
and bonds, Floating Rate Notes, and
Treasury Inflation Protected Securities.
Treasury nominal coupon notes and
bonds, as well as Treasury Inflation
Protected Securities, may also be
separated into principal and interest
payments and traded as STRIPS.191 For
each security type, the on-the-run
securities are generally considered the
most liquid in the secondary market.192
Market participants commonly refer to
securities issued prior to ‘‘on-the-run’’
securities as ‘‘off-the-run’’ securities.193
Market participants use U.S. Treasury
Securities as an investment instrument,
hedging vehicle, and to source orders
and trading interest, among other things.
189 See infra note 193 for a description of ‘‘off-therun’’ securities.
190 See James Collin Harkrader and Michael
Puglia, Fixed Income Market Structure: Treasuries
vs. Agency MBS, Board of Governors of the Federal
Reserve System: FEDS NOTES (August 25, 2020),
available at https://www.federalreserve.gov/
econres/notes/feds-notes/fixed-income-marketstructure-treasuries-vs-agency-mbs-20200825.htm
(‘‘August 25th FEDS Notes’’) (explaining the recent
evolution of the government securities market
structure).
191 STRIPS is the acronym for Separate Trading of
Registered Interest and Principal of Securities.
STRIPS let investors hold and trade the individual
interest and principal components of eligible
Treasury notes and bonds as separate securities.
STRIPS are Treasury securities that don’t make
periodic interest payments. Market participants
create STRIPS by separating the interest and
principal parts of a Treasury note or bond. STRIPS
can only be bought and sold through a financial
institution, broker, or dealer and held in the
commercial book-entry system. See TreasuryDirect,
STRIPS, available at https://
www.treasurydirect.gov/instit/marketables/strips/
strips.htm.
192 On-the-run U.S. Treasury Securities are the
most recently issued nominal coupon securities.
Nominal coupon securities pay a fixed semi-annual
coupon and are currently issued at original
maturities of 2, 3, 5, 7, 10, 20, and 30 years. These
standard maturities are commonly referred to as
‘‘benchmark’’ securities because the yields for these
securities are used as references to price a number
of private market transactions.
193 Off-the-run or ‘‘seasoned’’ U.S. Treasury
Securities are the issues that preceded the current
on-the-run securities. The U.S. Treasury Securities
market also comprises futures and options on U.S.
Treasury Securities, and securities financing
transactions in which U.S. Treasury Securities are
used as collateral. See Treasury Request for
Information, supra note 188, at 3928. For the
purpose of this proposal, the Commission focuses
on the secondary cash market.
PO 00000
Frm 00019
Fmt 4701
Sfmt 4702
15513
U.S. banks commonly own U.S.
Treasury Securities due to their low risk
and strong liquidity characteristics.
Additionally, U.S. Treasury Securities
are often used as collateral in lending
arrangements or as margin on other
financial transactions.
For U.S. Treasury Securities, the
secondary market is bifurcated between
the dealer-to-customer market, in which
dealers trade with their customers (e.g.,
investment companies, pension funds,
insurance companies, corporations, or
retail), and the interdealer market, in
which dealers and specialty firms trade
with one another.194 Customers, also
referred to as ‘‘end users,’’ have not
traditionally traded directly with other
end users.195 Rather, end users
primarily trade with dealers, and
dealers use the interdealer market as a
source of liquidity to help facilitate their
trading with clients in the dealer-tocustomer market. Trading in the U.S.
Treasury Securities dealer-to-customer
market is generally—and has
historically been—conducted bilaterally
using voice, and more recently,
electronically through the use of
Communication Protocol Systems, most
commonly using an RFQ protocol.
Broker-dealers also internalize a portion
of their customer flow, although the
extent to which broker-dealers
internalize is unclear.196
In the interdealer market, the majority
of trading in on-the-run U.S. Treasury
Securities currently occurs on ATSs
using limit order books supported by
advanced electronic trading
technology.197 Furthermore, interdealer
trading for on-the-run U.S. Treasury
Securities is generally concentrated
within a very small number of ATSs,
especially when compared to the market
for NMS stocks, which is dispersed
among many trading venues.198 While
194 See
id.
id.
196 See id. For the purposes of this proposal,
internalization refers to a broker filling a customer
order either from the firm’s own inventory or by
matching the order with other customer order flow,
instead of sending the order to an interdealer
market for execution. See id. at 3928 n.5.
197 See October 15 Staff Report, supra note 188,
at 11, 35–36. See also Bloomberg Letter at 5, stating
that liquid on-the-run government securities are
mostly traded on limit order books.
198 The growth of electronic trading has
contributed to a marked shift in the composition of
the interdealer cash market for U.S. Treasury
Securities over time. Traditionally, interdealer
brokers only allowed primary dealers to access their
trading venues. After 1992, however, interdealer
brokers expanded access to all entities that were
netting members of the Government Securities
Clearing Corporation (which is now the Fixed
Income Clearing Corporation’s Government
Securities Division). Thereafter, other entities
gained access to these trading venues through their
195 See
E:\FR\FM\18MRP2.SGM
Continued
18MRP2
15514
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
trading in the most liquid NMS stocks
occur on a variety of trading venues
(e.g., exchanges, ATSs, single-dealer
broker platforms), the majority of overall
trading in the interdealer secondary
market for on-the-run U.S. Treasury
Securities occurs on ATSs.199 For
example, during the first nine months of
2021, one ATS accounted for $14.9
trillion in total dollar volume in all
government securities, the majority of
which were on-the-run U.S. Treasury
Securities.200 For off-the-run U.S.
Treasury Securities,201 the majority of
interdealer trading occurs via
transactions through traditional voiceassisted interdealer broker platforms
and Communication Protocol Systems
that offer various trading protocols to
bring together buyers and sellers,202
though some interdealer trading of offthe-run U.S. Treasury Securities does
occur on ATSs.203
Another type of government securities
is Agency Securities. Agency Securities
include securities issued by or
guaranteed by U.S. Government
corporations or U.S. Government
sponsored enterprises (‘‘GSEs’’).204
prime brokers, who themselves had access, and in
recent years the trading venues granted direct
access to an even wider range of participants,
including non-dealers, which account for more than
half of the trading activity in the futures and
electronically brokered interdealer cash markets.
See October 15 Staff Report, supra note 188, at 36.
See also Treasury Request for Information, supra
note 188, at 3928.
199 See infra Table VIII.2 and accompanying text.
200 For an additional discussion of trading volume
in the U.S. bond market as a whole and U.S.
Treasury Securities, see infra Section VIII.B.2.
201 Also, as noted in the October 15 Staff Report
issued by the Treasury Department, Board of
Governors of the Federal Reserve System, Federal
Reserve Bank of New York, the Commission, and
U.S. Commodity Futures Trading Commission,
trading in off-the-run U.S. Treasury Securities has
always been less active than trading in on-the-run
U.S. Treasury Securities, and price discovery in the
cash markets primarily occurs in on-the-run
securities. See October 15 Staff Report, supra note
188 at n.7.
202 See November 2021 IAWG Report, supra note
184, at 3. See also Bloomberg Letter at 5, stating that
less liquid off-the-run government securities are
mostly traded using methods other than limit order
books.
203 While trading in on-the-run securities likely
accounts for more than half of total daily trading
volumes, off-the-run U.S. Treasury Securities make
up over 95 percent of the outstanding marketable
U.S. Treasury Securities. See G30 Report, supra
note 183, at 1, n.2.
204 See U.S. Department of the Treasury Resource
Center, ‘‘Fixed Income: Agency Securities,’’
available at https://www.treasury.gov/resourcecenter/faqs/Markets/Pages/fixedfederal.aspx. For
example, the Government National Mortgage
Association (‘‘Ginnie Mae’’) is a U.S. Government
corporation that issues mortgage-backed securities
guaranteed by the full faith and credit of the U.S.
Government. The assets collateralized into the
securities issued by Ginnie Mae are federally
insured and guaranteed mortgage loans. Agency
Securities issued by GSEs include those issued by
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Agency Securities, which may not be
backed by the full faith and credit of the
U.S. Government, are generally
considered to be very liquid and offer
state and local tax advantages to the
holder. Market participants can use
ATSs to buy and sell Agency Securities,
although, based on the Commission’s
review of Form ATS–R filings,
transaction volume of Agency Securities
is not as large as that of U.S. Treasury
Securities on ATSs.205 Investors, banks,
and other market participants often
acquire Agency Securities in the
secondary market to support various
investing strategies, such as hedging
against other more risky investments in
a given portfolio. Agency Securities also
trade on Communication Protocol
Systems where buyers and sellers can
use RFQ protocols, for example, to
engage in price discovery, find a
counterparty, and negotiate and execute
a transaction.
Repos provide short-term financing
(often overnight) to help fund the
borrower’s (usually a broker-dealer)
trading or lending activities. However,
the collateral is sold to the lender, and
the repo obligates the borrower to
repurchase the collateral. U.S. Treasury
Securities are frequently used as the
underlying collateral of a repo. Several
ATSs have provided notice on their
Form ATS disclosures that they
facilitate the trading of repos. Much like
the markets for U.S. Treasury Securities
and Agency Securities, repo trading has
historically been conducted bi-laterally
by voice; however, over the past decade,
electronic trading of repos on
Communication Protocol Systems has
increased significantly. Electronic
trading of repos is primarily conducted
via RFQ protocols, and many systems
for trading in repos now offer electronic
trading options.
With regard to the interdealer
secondary markets for on-the-run U.S.
Treasury Securities, the continued
growth of electronic trading has
contributed to an increased presence of
PTFs in the market place.206 Currently,
the Federal Home Loan Banks (‘‘FHLBs’’), the
Federal National Mortgage Association (‘‘Fannie
Mae’’), the Federal Home Loan Mortgage
Corporation (‘‘Freddie Mac’’), and the Student Loan
Marketing Association (‘‘Sallie Mae’’). Agency
Securities issued by GSEs are not normally backed
by the full faith and credit of the U.S. Government
and therefore, may present some default and credit
risk.
205 Additionally, repos on government securities
are also traded on some ATSs.
206 PTFs are not, however, very active in the
electronic markets for Agency Securities. See
August 25th FEDS Notes, supra note 190 (‘‘Though
parts of the agency MBS market have moved from
voice-based to screen-based trading since the early
2000s, algorithmic high-frequency electronic
trading still does not comprise a meaningful share
PO 00000
Frm 00020
Fmt 4701
Sfmt 4702
PTFs account for the majority of trading
and provide top-of-the-book liquidity
for on-the-run U.S. Treasury Securities
on electronic interdealer trading
venues.207 From January 1, 2021 to June
30, 2021, PTFs traded on 13
Government Securities ATSs accounting
for approximately 48.6 percent of total
on-the-run Government Securities ATS
trading volume.208 PTFs usually have
direct access to electronic interdealer
trading venues for U.S. Treasury
Securities, and as is the case with the
equity markets, PTFs trading on the
electronic interdealer trading venues for
on-the-run U.S. Treasury Securities
often employ automated algorithmic
trading strategies that rely on speed and
allow the PTFs to cancel or modify
quotes in response to perceived market
events.209 Furthermore, most PTFs
trading U.S. Treasury Securities on
these trading venues for on-the-run U.S.
Treasury Securities also restrict their
activities to principal trading and do not
hold positions long term, while dealers
use the interdealer market as a source of
orders and trading interest to help
facilitate their trading with clients in the
dealer-to-customer market.210 As
explained in the October 15 Staff
Report, the increase in trading by PTFs
in the interdealer market may affect the
amount of liquidity available to end
users in the dealer-to-customer
market.211
In response to the 2020 Proposal, the
Commission received several comments
that broadly supported expanding the
regulatory framework under Regulation
ATS with respect to Government
Securities ATSs.212 Commenters stated
that ATSs have become increasingly
important in the government securities
market.213 One commenter stated that,
given that Government Securities ATSs
closely resemble NMS Stock ATSs, it
would be appropriate to impose similar
regulatory oversight, including
regulatory oversight by the Commission
of average daily volume and the market remains
devoid of PTF participation.’’).
207 See November 2021 IAWG Report, supra note
184, at 5. See also October 15 Staff Report, supra
note 188, at 36; Remarks of Deputy Secretary Justin
Muzinich at the 2019 U.S. Treasury Market
Structure Conference (September 23, 2019),
available at https://home.treasury.gov/news/pressreleases/sm782.
208 See infra Table VIII.2. (ATS PTF volume/ATS
volume) × 100 = PTF share of ATS volume (%).
209 See October 15 Staff Report, supra note 188,
at 32, 35–36, 39.
210 See November 2021 IAWG Report, supra note
184, at 5; October 15 Staff Report, supra note 188,
at 38.
211 See October 15 Staff Report, supra note 188,
at 37.
212 See, e.g., BrokerTec Letter, SIFMA Letter,
AFREF Letter.
213 See FINRA Letter.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
and FINRA.214 Likewise, another
commenter stated that many of the
concerns surrounding potential conflicts
of interest that arise between an ATS
and the activities of its bank/brokerdealer operator and affiliates—and the
transparency of an ATS’s operations—
are equally relevant with respect to
ATSs that transact in government
securities as to NMS Stock ATSs.215 In
addition, one commenter stated that
critical intermediaries in the U.S.
Treasury market are ‘‘effectively
unregulated’’ as trading venues or
dealers, and this hampers availability of
information concerning trading in these
critical markets, and that oversight of
the core ‘‘plumbing’’ of these critical
markets, which determines their
resiliency, is lacking.216 This
commenter stated that several ATSs
now dominate the trading of U.S.
Treasury Securities and agency
mortgage backed securities, and that
ensuring that Regulation ATS and
Regulation SCI apply to these entities
will provide for additional data and
create more transparency into the
trading around those critical markets.217
This commenter also stated that
expanding Regulation ATS with respect
to ATSs that trade U.S. Treasuries has
also become important as the role of
PTFs has become more significant in the
U.S. Treasury markets and related repo
markets.218
B. Heightened Regulatory Requirements
Under Regulation ATS for Government
Securities ATSs
The vast majority of ATSs that operate
today do so pursuant to the exemption
provided by Exchange Act Rule 3a1–
1(a)(2), which requires the ATSs to be
in compliance with Regulation ATS,
which includes, among other things,
registering as broker-dealers. Currently
Exempted Government Securities ATSs,
however, operate pursuant to Exchange
Act Rule 3a1–1(a)(3) 219 and Rule
301(a)(4)(ii)(A).220 These provisions
currently exempt an ATS from
compliance with the requirements in
Rule 301(b) of Regulation ATS 221 if, in
relevant part, the ATS (1) is registered
as a broker-dealer under Sections
214 See
SIFMA Letter at 2.
also MFA Letter at 4.
216 See AFREF Letter at 1.
217 See id.
218 See id. at 2 (stating that the growing role of
PTFs means that much trading activity is not
coming from long-term investors but rather
proprietary trading firms who may trade in-and-out
of their positions several times in a day and are
likely to react sharply to market volatility).
219 17 CFR 240.3a1–1(a)(3).
220 17 CFR 242.301(a)(4)(ii)(A).
221 17 CFR 242.301(b).
jspears on DSK121TN23PROD with PROPOSALS2
215 See
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
15(b) 222 or 15C 223 of the Exchange Act,
or is a bank, and (2) limits its securities
activities to government securities (as
defined in Section 3(a)(42) of the
Exchange Act), repos, any puts, calls,
straddles, options, or privileges on
government securities, other than puts,
calls, straddles, options, or privileges
that: (i) Are traded on one or more
national securities exchanges; or (ii) for
which quotations are disseminated
through an automated quotation system
operated by a registered securities
association, and commercial paper.224
Accordingly, such Currently Exempted
Government Securities ATSs are not
required to register as a national
securities exchange or comply with
Regulation ATS.225 To the
Commission’s knowledge, most
Currently Exempted Government
Securities ATSs operating pursuant to
this exemption register as broker-dealers
with the Commission.226
ATSs that do not limit their securities
activities solely to government
securities or repos, trading for example
corporate bonds or municipal securities,
cannot use this exemption. Such ATSs
must either register as an exchange or
comply with Regulation ATS pursuant
to Exchange Act Rule 3a1–1(a)(2), which
includes, among other things,
registering as a broker-dealer under
Section 15 of the Exchange Act.227
Government Securities ATSs that are
currently subject to Regulation ATS
must report transactions in U.S.
Treasury Securities and Agency
222 See 15 U.S.C. 78o(b) (pertaining to the
registration and regulation of brokers and dealers).
223 See 15 U.S.C. 78o–5 (pertaining to the
registration and regulation of government securities
brokers and dealers).
224 See 15 U.S.C. 78c(a)(42). The definition of
‘‘government securities’’ in Section 3(a)(42) of the
Exchange Act (and, therefore, references to
‘‘government securities’’ throughout this proposal)
includes certain puts, calls, straddles, options, or
privileges on government securities, other than
puts, straddles, options, or privileges that: Are
traded on one or more national securities
exchanges; or for which quotations are
disseminated through an automated quotation
system operated by a registered securities
association. See supra note 182.
225 See 17 CFR 242.301(a)(4)(i) and (a)(4)(ii)(A).
Although not required to register as a national
securities exchange or comply with Regulation
ATS, a Currently Exempted Government Securities
ATS may need to register as a broker-dealer under
Section 15(b) or as a government securities broker
or government securities dealer pursuant to
Exchange Act Section 15C, and comply with the
associated regulatory requirements. See, e.g., 17
CFR chapter IV, subchapter A—Regulations under
Section 15C of the Securities Exchange Act of 1934.
226 Some ATSs that are eligible for the exemption
voluntarily comply with Regulation ATS, even
though ATSs that trade only government securities
are not required to comply with Regulation ATS at
all.
227 See supra notes 130–131 and accompanying
text.
PO 00000
Frm 00021
Fmt 4701
Sfmt 4702
15515
Securities to the Trade Reporting and
Compliance Engine (‘‘TRACE’’),228 and
FINRA publicly disseminates data about
these transactions. Currently, FINRA
publishes weekly aggregated transaction
information on U.S. Treasury Securities
and disseminates certain transaction
information on Agency Securities
immediately upon receipt of a
transaction report.229 Today, Legacy
Government Securities ATSs are subject
only to certain provisions of Regulation
ATS because not all the provisions are
applicable to trading in government
securities.230 In particular, government
securities are not included in any
category of securities under the Fair
Access Rule.231 Today, the categories of
securities under the Fair Access Rule
only include NMS stocks, equity
securities that are not NMS stocks and
for which transactions are reported to an
SRO, municipal securities, and
corporate debt securities.232 In addition,
Regulation SCI does not apply to ATSs
with respect to their trading in
228 See FINRA Rule 6730(a)(1) requires FINRA
members to report transactions in TRACE-Eligible
Securities, which FINRA Rule 6710 defines to
include U.S. Treasury Securities and Agency
Securities. For each transaction in U.S. Treasury
Securities and Agency Securities, a FINRA member
would be required to report the CUSIP number or
similar numeric identifier or FINRA symbol; size
(volume) of the transaction; price of the transaction
(or elements necessary to calculate price); symbol
indicating whether transaction is a buy or sell; date
of trade execution (‘‘as/of’’ trades only); contraparty’s identifier; capacity (principal or agent); time
of execution; reporting side executing broker as
‘‘give-up’’ (if any); contra side introducing broker
(in case of ‘‘give-up’’ trade); the commission (total
dollar amount), if applicable; date of settlement; if
the member is reporting a transaction that occurred
on an ATS pursuant to FINRA Rule 6732, the ATS’s
separate Market Participant Identifier (‘‘MPID’’);
and trade modifiers as required. For when-issued
transactions in U.S. Treasury Securities, a FINRA
member would be required to report the yield in
lieu of price. See FINRA Rule 6730(c).
229 FINRA Rule 6750(a) requires FINRA to
disseminate information on all transactions on
certain securities, including Agency Securities (but
excluding U.S. Treasury Securities), immediately
upon receipt of the transaction report. FINRA is
permitted to publish or distribute weekly
aggregated transaction information and statistics on
U.S. Treasury Securities, and has stated that it
intends to publish weekly volume information
aggregated by U.S. Treasury subtype (e.g., Bills,
Floating Rate Notes, Treasury Inflation-Protected
Securities, and Nominal Coupons). See Securities
Exchange Release No. 87837 (December 20, 2019),
84 FR 71986 (December 30, 2019) (approving a
proposed rule change to allow FINRA to publish or
distribute aggregated transaction information and
statistics on U.S. Treasury Securities).
230 See 17 CFR 242.301(b)(1), (2), and (7) through
(11). The order display and execution access
provisions under Rule 301(b)(3) and the related fee
restrictions of Rule 301(b)(4) of Regulation ATS
only apply to an ATS’s NMS stock activities. See
17 CFR 242.301(b)(3) and (4). See also supra
Section II.D.2 (discussing the requirements for
compliance with the Regulation ATS exemption).
231 17 CFR 242.301(b)(5). See also supra notes
153–157 and accompanying text.
232 See 17 CFR 242.301(b)(5).
E:\FR\FM\18MRP2.SGM
18MRP2
15516
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
government securities.233 The Capacity,
Integrity, and Security Rule under Rule
301(b)(6) 234 also does not apply to the
government securities activities of an
ATS.235
Finally, Government Securities ATSs
are not required to comply with rules
applicable to ATSs that trade NMS
stocks, including the obligation to file a
public Form ATS–N pursuant to Rule
304 of Regulation ATS.236 ATSs that
transact in government securities or
repos are also not required to comply
with the order display and execution
access provisions under Rule
301(b)(3) 237 and the related fee
restrictions of Rule 301(b)(4),238 both of
which only apply to an ATS’s NMS
stock activities.
Despite the critical role of government
securities in the U.S. and global
economy, the significant volume in
government securities transacted on
ATSs, and these ATSs’ growing
importance to investors and overall
securities market structure, Currently
Exempted Government Securities ATSs
are exempt from exchange registration
and are not required to comply with
Regulation ATS. In addition,
Communication Protocol Systems that
transact in government securities and/or
repos, but do not currently meet the
definition of ‘‘exchange,’’ are not subject
to exchange registration requirements
and are likewise not required to comply
with Regulation ATS.239 Furthermore,
ATSs that trade both government
securities and non-government debt
securities (e.g., corporate bonds) are not
subject to all the provisions of
Regulation ATS. Market participants
today have limited access to information
that permits them to adequately
compare and contrast how they can use
a Government Securities ATS or how
their trading interest would be handled
by Government Securities ATSs.240 In
addition, Government Securities ATSs
are not currently subject to the Fair
Access Rule and Regulation SCI, which
would help ensure the fair treatment of
subscribers and address technological
vulnerabilities, and improve the
Commission’s oversight, of the core
technology of key entities in the markets
233 See infra Section III.C (describing the types of
entities that are currently subject to the
requirements of Regulation SCI).
234 17 CFR 242.301(b)(6).
235 See supra notes 157–158 and accompanying
text.
236 17 CFR 242.304. See also supra notes 139–143
and accompanying text.
237 See supra notes 149–151 and accompanying
text.
238 See supra note 152 and accompanying text.
239 See supra Section II.A.
240 See, e.g., 2020 Proposal, supra note 4, at
87125.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
for government securities.241 Given
these concerns, and comments received
on the 2020 Proposal, the Commission
is re-proposing and revising the
amendments described below.
1. Proposed Definition of Government
Securities ATS
The Commission is re-proposing to
amend Rule 300 of Regulation ATS to
define ‘‘Government Securities ATS’’ to
mean an alternative trading system, as
defined in Rule 300(a), that trades
government securities, as defined in
section 3(a)(42) of the Exchange Act (15
U.S.C. 78c(a)(42)), or repurchase and
reverse repurchase agreements on
government securities.242 To meet the
definition of a Government Securities
ATS, the organization, association,
person, group of persons, or system
must meet the definition of an
alternative trading system under Rule
300(a) of Regulation ATS.243 The
Commission is also re-proposing that a
Government Securities ATS shall not
trade securities other than government
securities or repos 244 and that trading of
securities other than government
securities or repos would require the
separate filing of a Form ATS or a Form
ATS–N, depending on the types of
securities traded.245 Other than
complying with Rule 304 and filing
Form ATS–N, this amendment would
not, however, impose new compliance
requirements on ATSs that currently
trade government securities in addition
to non-government securities.246 Under
the proposal, if a broker-dealer operator
currently operates an ATS for
government securities and nongovernment securities (for example,
corporate bonds), the broker-dealer
operator would separately be required to
241 See id. at Section III.B.4 (discussing the Fair
Access Rule) and III.C (discussing Regulation SCI).
242 See proposed Rule 300(l).
243 17 CFR 242.300(a). See Regulation ATS
Adopting Release, supra note 31, at 70851–52.
244 See proposed Rule 300(l).
245 An ATS that does not trade NMS stocks or
government securities, as proposed, must file Form
ATS. If the broker-dealer operates an ATS that
trades NMS stocks and an ATS that trades
government securities, it would be required to file
a separate Form ATS–N for each of the NMS Stock
ATS and Government Securities ATS.
246 Broker-dealers that operate Government
Securities ATSs that are currently subject to
Regulation ATS already must have established
written safeguards and written procedures to
protect subscribers’ confidential trading
information, pursuant to Rule 301(b)(10), and
already must make and keep records pursuant to
Rule 301(b)(8) that are tailored to the types of
securities the ATS trades and the subscribers that
trade those securities on the ATS. The Commission
believes the proposal is broadly consistent with the
manner in which broker-dealers that operate NMS
Stock ATSs and non-NMS Stock ATSs currently
comply with Regulation ATS. For further
discussion, see infra Section III.B.3.
PO 00000
Frm 00022
Fmt 4701
Sfmt 4702
comply with Regulation ATS for: (1) A
Government Securities ATS that would
trade government securities, which
would be subject to Rule 304, and file
disclosures on Form ATS–N, as
proposed to be revised and (2) a nonGovernment Securities ATS (that, for
example, would trade corporate bonds),
which would not be subject to Rule 304,
and file disclosures on its existing Form
ATS, as amended to remove references
to government securities.
In response to the 2020 Proposal, the
Commission received one comment
letter opposing the proposed definition
of Government Securities ATS.247 This
commenter stated that separating
trading activity in government securities
and repos from non-NMS stock trading
activity could impose administrative
and operational burdens on both
Government Securities ATSs and
subscribers.248 The commenter stated
that the Commission did not explain
why requiring a Government Securities
ATS to separate its operations from
other non-NMS Stock ATS trading
activity would improve Commission
oversight or other regulatory goals.249
The proposed definition of
Government Securities ATS, however,
would not require operational
separation by a Government Securities
ATS, and the operational costs that the
commenter described would therefore
not apply.250 The proposed definition
would not, for example, require the
Government Securities ATS to develop
a new matching engine nor require
changes with regard to how subscribers
enter trading interest into the ATS.
Other than requiring the Government
Securities ATS to separately comply
with the requirements of Regulation
ATS (and, as applicable, Regulation
SCI), the proposed definition does not
create new compliance requirements on
247 See
ICE Bonds Letter I at 5.
id. The commenter stated that the initial
set-up of a new Government Securities ATS would
require, among other things, the development of a
matching engine, separate connectivity for
subscribers, new clearing connectivity, additional
personnel to support trading operations of the
Government Securities ATS, and regulatory
controls (e.g., Rule 15c3–5). The commenter further
stated that these requirements would ultimately
lead to fewer venues for subscribers to trade and
hedge and concentrate trading among a few large
Government Securities ATSs, as smaller Legacy
Government Securities ATSs may determine that
this separation requirement is cost prohibitive. In
addition, the commenter stated that if a subscriber
has to execute a corporate bond on one ATS and
sell the treasury on a different ATS, there is an
administrative and operational burden placed on
the subscriber, as well as additional economic and
market risk to the subscriber as the price on the
other venue may move by the time the hedge trade
is initiated.
249 See id.
250 See id.
248 See
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Government Securities ATSs.251 Under
the proposed rule, a broker-dealer
operator for an ATS that currently
trades both government securities and
corporate debt securities, for example,
would be required to file a Form ATS–
N for the trading of government
securities on a Government Securities
ATS and a separate Form ATS for
trading of corporate debt securities on
an ATS. In this example, the brokerdealer operator for a Government
Securities ATS and non-Government
Securities ATS may be required to
disclose certain information on Form
ATS–N about the non-Government
Securities ATS. For example, to the
extent that any persons support both the
operation of the Government Securities
ATS and the ATS that trades corporate
debt securities and have access to
subscriber confidential trading
information for the Government
Securities ATS, the Government
Securities ATS would need to disclose
that on Part II, Item 7 of Form ATS–
N.252 In addition, the Government
Securities ATS would be required to
provide under Part III, Item 11
information about interaction with nongovernment securities markets (e.g.,
futures, currencies, swaps, corporate
bonds).253
Further, the Commission believes that
by stating that a Government Securities
ATS trades only government securities,
the definition of Government Securities
ATS clarifies which regulatory
requirements are applicable for trading
activity in government securities and
non-government securities. For
example, a Government Securities ATS
would file a Form ATS–N specifically
disclosing information regarding its
trading in government securities, which
would enable market participants to
understand the ATS’s government
securities operations and readily
compare the ATS against other
Government Securities ATSs.
To provide that the same approach
applies to broker-dealers that operate
NMS Stock ATSs and non-NMS Stock
ATSs, and to clarify requirements
applicable to NMS Stock ATSs, the
Commission is proposing to amend the
definition of ‘‘NMS Stock ATS’’ to state
that an NMS Stock ATS shall not trade
securities other than NMS stocks.254
Today, securities other than NMS stocks
are not traded in any NMS Stock ATS
and the proposed amendment to the
definition of NMS Stock ATS would
have no impact on any existing ATS nor
251 See
supra note 246.
infra Section IV.D.4.f.
253 See infra Section IV.D.5.k.
254 See proposed Rule 300(k).
252 See
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
on the requirements applicable to
existing NMS Stock ATSs. Broker-dealer
operators of NMS Stock ATSs are
currently required to file a Form ATS–
N for NMS Stock ATS operations and a
separate Form ATS for any non-NMS
Stock ATS operations.255 This would
not change under this proposal. In
addition, to facilitate the orderly
transition to the heightened
requirements for Government Securities
ATSs that are currently operating, the
Commission is defining such ATSs as
Legacy Government Securities ATSs.256
To help specify which ATSs are
subject to Rule 304 requirements, the
Commission is proposing to define
‘‘Covered ATS’’ as an NMS Stock ATS
or Government Securities ATS, as
applicable.257 The Commission is also
proposing to define ‘‘Covered Newly
Designated ATS’’ to mean a Newly
Designated ATS that is a Government
Securities ATS or NMS Stock ATS,
which the Commission believes would
facilitate the transition of
Communication Protocol Systems that
are NMS Stock ATSs or Government
Securities ATSs to the regulatory
requirements of Regulation ATS.258
The Commission is also proposing to
add definitions of ‘‘U.S. Treasury
Security’’ and ‘‘Agency Security’’ for
purposes of Regulation ATS.259 ‘‘U.S.
Treasury Security’’ would mean a
security issued by the U.S. Department
of the Treasury. ‘‘Agency Security’’
would mean a debt security issued or
guaranteed by a U.S. executive agency,
as defined in 5 U.S.C. 105, or
government-sponsored enterprise, as
defined in 2 U.S.C. 622(8). The
proposed definitions are designed to
provide the scope of securities a
Government Securities ATS must
include when calculating whether the
fair access requirements set forth in
Rule 301(b)(5) are applicable and to
facilitate compliance with the Fair
Access Rule.260
Request for Comment
12. Should the Commission adopt a
more limited or expansive definition of
Government Securities ATS than the
definition that is being proposed? Given
that, unlike the 2020 Proposal, the
definition of Government Securities
255 See
current Rule 301(b)(2)(viii).
proposed Rule 300(n). See also supra note
5. See infra notes 433–439 and accompanying text
for a description of the filing and effectiveness rules
applicable to Legacy Government Securities ATSs.
257 See proposed Rule 300(m).
258 See proposed Rule 300(s).
259 See proposed Rule 300(o)–(p).
260 See infra Section III.B.4. The proposed
definitions are similar to those in FINRA’s rules.
See FINRA Rules 6710(l) and 6710(p).
256 See
PO 00000
Frm 00023
Fmt 4701
Sfmt 4702
15517
ATS would now include
Communication Protocol Systems that
transact in government securities and/or
repos, do commenters believe that the
definition of Government Securities
ATS should be limited or expanded?
13. Should the Commission cite to the
section 3(a)(42) (15 U.S.C. 78c(a)(42))
definition of government securities for
purposes of defining Government
Securities ATS? Should the securities
encompassed by the definition (e.g.,
certain options on government
securities) be considered ‘‘government
securities’’ for purposes of this
regulation?
14. Should the Commission modify
the proposed definitions of U.S.
Treasury Securities and Agency
Securities in any way? For example,
should the proposed definitions of U.S.
Treasury Securities and Agency
Securities be based on definitions in any
other existing rules?
15. The proposed amendments to the
definitions of NMS Stock ATS and
Government Securities ATS are not
designed to limit a broker-dealer
operator for an NMS Stock ATS or
Government Securities ATS with
respect to other types of securities that
the broker-dealer operator may make
available for trading in an ATS that is
subject to Rule 301(b)(2) of Regulation
ATS or how the broker-dealer operator
may structure the operations of its ATS
businesses. Would the proposed
amendments to the definitions of NMS
Stock ATS and Government Securities
ATS impose any operational or other
burdens on the broker-dealer operator,
other than those related to filing Form
ATS, Form ATS–R, or Form ATS–N, as
applicable?
16. Should the Commission require an
ATS that currently trades government
securities and non-government
securities, such as corporate bonds, to
comply with Rule 304, including filing
a Form ATS–N, with respect to the
ATS’s corporate bond activities as well
as its government securities activities?
2. Proposed Elimination of the
Exemption for ATSs That Limit
Securities Activities to Government
Securities and Repos
The Commission is re-proposing
amendments to Regulation ATS that
would require a Currently Exempted
Government Securities ATS that seeks
to operate pursuant to the exemption
from the definition of an ‘‘exchange’’
under Exchange Act Rule 3a1–1(a)(2),
and thus not be required to be registered
as a national securities exchange, to
comply with Regulation ATS. The
Commission is proposing to eliminate
the exemption under Rule 301(a)(4) of
E:\FR\FM\18MRP2.SGM
18MRP2
15518
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
Regulation ATS, which exempts from
the definition of an ‘‘exchange’’ under
Section 3(a)(1) of the Exchange Act an
ATS that is operated by a registered
broker-dealer or a bank that solely
trades government securities or
repos.261 As a result, Currently
Exempted Government Securities ATSs
would either have to register as an
exchange or operate pursuant to an
exemption to such registration, such as
the exemption under Regulation
ATS.262 A Currently Exempted
Government Securities ATS that opts to
comply with Regulation ATS would
then be subject to the conditions to the
exemption from exchange registration
that are designed to provide its
subscribers with investor protections
and enable Commission oversight,
including the surveillance and
examination of ATSs, and to help assure
fair and orderly markets.263 The
Commission is also proposing to subject
Currently Exempted Government
Securities ATSs to the enhanced public
transparency requirements of Rule 304
and Form ATS–N.
In response to the 2020 Proposal,
several commenters expressed support
for eliminating the exemption for ATSs
that both (1) limit their securities
activities to government securities or
repos and (2) either register as brokerdealers or are banks.264 Commenters
stated such requirements would help
impose regulatory oversight,265 and one
commenter stated that the requirements
could promote market transparency,
resiliency, and integrity.266 One
commenter stated that requiring
Currently Exempted Government
261 See 17 CFR 240.3a1–1(a)(3) and 17 CFR
242.301(a)(4).
262 The Commission is proposing to delete the
text of Rule 301(a)(4)(ii)(A)–(C) and replace each
paragraph with the term ‘‘Reserved.’’ Based on
Commission staff experience, ATSs generally do not
trade commercial paper, and the Commission is not
proposing to eliminate Rule 301(a)(4)(ii)(D), which
exempts an ATS from compliance with Regulation
ATS if the ATS limits its securities activities to
commercial paper. Accordingly, the only ATSs that
would continue to be exempt under Rule 301(a)(4)
would be ATSs that are registered broker-dealers or
are banks and limit their securities activities to
commercial paper.
263 See Regulation ATS Adopting Release, supra
note 31, at 70878. See also infra notes 287–297 and
accompanying text.
264 See, e.g., SIFMA Letter at 2 (stating that given
that Government Securities ATSs closely resemble
ATSs that trade NMS stocks, it would be
appropriate to impose similar regulatory oversight
over such trading venues); FINRA Letter at 2;
BrokerTec Letter at 2; ICE Bonds Letter I at 2.
265 See SIFMA Letter at 2; FINRA Letter at 2; MFA
Letter at 3; ICE Bonds Letter I at 2; and AFREF
Letter at 2–3 (stating that the regulatory extension
would help to discourage some of the deceptive and
manipulative trading practices that occur in
government securities markets).
266 See Citadel Letter.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Securities ATSs to adopt written
safeguards and procedures to protect
subscriber confidential trading
information could help protect the
integrity of a subscriber’s confidential
trading information that could
otherwise be at risk of unauthorized
disclosure and subject to potential
misuse.267 In addition, commenters
specifically expressed support for the
requirement that all Government
Securities ATSs register as brokerdealers, stating that such requirement
would provide regulatory oversight with
regard to risk management and
regulatory controls.268
One commenter suggested the
Commission consider subjecting ATSs
for a class of securities to an enhanced
regime if the ATSs trading in that asset
class are ‘‘significant’’; the commenter
suggested that the Commission may
recognize 30 percent as the threshold for
‘‘significant’’ threshold, and noted that
equity-NMS Stock ATSs were matching
about 30 percent of the total share
volume when Regulation ATS was
implemented.269 The commenter
suggested that the Commission apply
this test when considering removing the
exemption for Currently Exempted
Government Securities ATSs and that
the Commission make proposed Form
ATS–G public when the ATSs are
‘‘significant’’ with respect to trading
volume.270 The Commission is not,
however, proposing a specific trading
volume test to determine whether to
remove the exemption for Currently
Exempted Government Securities ATSs.
In addition to the significant volume in
government securities transacted on
ATSs (as well as Communication
Protocol Systems),271 the Commission
also recognizes that government
securities have a critical role in the U.S.
and global economy and ATSs have
grown in importance to investors and
overall securities market structure for
purposes of the execution and pricing of
government securities.
The Commission is also proposing to
amend Rule 301(b)(1) of Regulation
ATS, which currently requires an ATS
to register as a broker-dealer under
Section 15 of the Exchange Act,272 to
allow an ATS to register either as a
267 See
MFA Letter at 3.
SIFMA Letter at 2.
269 See Bloomberg Letter at 4.
270 See id.
271 See, e.g., supra note 197 and accompanying
text (describing that, on the interdealer market, the
majority of trading currently occurs on ATSs). See
also infra note 840 and accompanying text
(describing that Communication Protocol Systems
account for approximately 30 to 40 percent of total
electronic trading volume on multilateral U.S.
Treasury trading venues).
272 15 U.S.C. 78o.
268 See
PO 00000
Frm 00024
Fmt 4701
Sfmt 4702
broker-dealer under Exchange Act
Section 15 or a government securities
broker or government securities dealer
under Exchange Act Section
15C(a)(1)(A).273 Registration pursuant to
Section 15C(a)(1)(A) specifically applies
to government securities brokers and
dealers other than registered brokerdealers or financial institutions.274
Registration as a broker-dealer under
Section 15 or government securities
broker or government securities dealer
under Section 15C(a)(1)(A) of the
Exchange Act is important because,
among other things, it requires
membership in an SRO, such as
FINRA.275 Because ATSs that register as
broker-dealers or government securities
brokers or dealers do not have selfregulatory responsibilities, the
Commission believes it is important for
these ATSs to be members of an SRO
and thus subject to SRO examination
and market surveillance,276 trade
reporting obligations,277 and certain
investor protection rules.278 Like ATSs
registered as broker-dealers under
Section 15, an ATS registered as a
government securities broker or
government securities dealer under
Section 15C(a)(1)(A) would be subject to
oversight and market surveillance by an
SRO.279
273 See 15 U.S.C. 78o–5. Exchange Act Section
15C(a)(1)(A) makes it unlawful for a government
securities broker or government securities dealer
(other than a registered broker or dealer or a
financial institution) to make use of the mails or
any means or instrumentality of interstate
commerce to effect a transaction in any government
securities unless the government securities broker
or government securities dealer is registered with
Commission pursuant to Exchange Act Section
15C(a)(2). See 15 U.S.C. 78o–5(a)(1)(A). Section
15C(e) in turn generally requires that a government
securities broker or government securities dealer
that is registered or required to be registered under
Section 15C(a)(1)(A) must be a member of a
registered national securities exchange or registered
securities association such as FINRA.
274 Broker-dealers that limit their activity to
government securities require specialized
registration under Section 15C of the Exchange Act
and do not have to register as general-purpose
broker-dealers under Section 15(b). See 15 U.S.C.
78o–5.
275 See Regulation ATS Adopting Release, supra
note 31, at 70863 (discussing the importance of an
ATS being a member of an SRO because ATSs
registered as broker-dealers will not have selfregulatory responsibilities). As noted above, Section
15C(e) generally requires SRO membership for a
government securities broker or government
securities dealer that is registered or required to be
registered under Section 15C(a)(1)(A). Similarly,
Section 15(b)(8) generally requires a registered
broker-dealer to be a member of a registered
securities association such as FINRA.
276 See, e.g., FINRA Rule 1000 Series, FINRA
Rules 4140, 4510, 4520, 4530, and 8210.
277 See, e.g., FINRA Rule 6730.
278 See, e.g., FINRA Rules 3110, 4370, 5210, 5220,
5230, 5310, and 5340.
279 See Regulation ATS Adopting Release, supra
note 31, at 70863.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
In contrast, SRO membership is not
required for a bank or other financial
institution that registers as a
government securities broker or
dealer.280 Accordingly, the amendment
to Regulation ATS would not permit a
bank or other financial institution to
satisfy the broker-dealer registration
requirement by registering as a
government securities broker or
government securities dealer under
Section 15C(a)(1)(B) of the Exchange
Act.281 The Commission believes it is
important for an ATS to be a member of
an SRO, and unlike registrants under
Sections 15 and 15C(a)(1)(A), a bank or
other financial institution that registers
under Section 15C(a)(1)(B) is not
required to be a member of an SRO.282
As a result, a bank-operated ATS that
trades only government securities or
repos would be unable to rely on the
exemption provided by Regulation ATS,
as proposed to be amended, and could
not otherwise operate unless registered
as a national securities exchange as
required by Section 5 of the Exchange
Act. However, this is the case currently
with respect to bank-operated ATSs that
trade securities other than government
securities, and it is the Commission’s
understanding that these ATSs often are
operated by bank affiliates that are
themselves registered broker-dealers,
rather than by the banks themselves.
The Commission believes that a bank
that operates an ATS that trades only
government securities might adopt a
similar registered affiliate structure for
280 Unlike registered broker-dealers (Section
15(b)(8)) and government securities brokers or
government securities dealers that are registered or
required to be registered under Section 15C(a)(1)(A)
(Section 15C(e)), there is no statutory requirement
of SRO membership for banks. Because banks
typically operate in reliance on exceptions from
broker or dealer status, they are not required to
become a member of an SRO, such as FINRA. In
this regard, Exchange Act Section 3(a)(4)(B)(iii)(II)
excludes from the definition of ‘‘broker’’ a bank that
effects transactions in ‘‘exempted securities’’ such
as government securities. 15 U.S.C.
78c(a)(4)(B)(iii)(II). See Exchange Act Section
3(a)(12) (defining ‘‘exempted securities’’ to include
‘‘government securities’’ as defined in Section
3(a)(42) of the Exchange Act). Exchange Act Section
3(a)(5)(C)(i)(II) similarly excepts from the definition
of ‘‘dealer’’ a bank that buys or sells exempted
securities. 15 U.S.C. 78c(a)(5)(C)(i)(II).
281 Exchange Act Section 15C(a)(1)(B) makes it
unlawful for any government securities broker or
government securities dealer that is a registered
broker or dealer or a financial institution to make
use of the mails or any means or instrumentality of
interstate commerce to effect any transaction in, or
to induce or attempt to induce the purchase or sale
of, any government security unless such
government securities broker or government
securities dealer has filed with the appropriate
regulatory agency written notice that it is a
government securities broker or government
securities dealer. 15 U.S.C. 78o–5(a)(1)(B)(i).
282 See Exchange Act Sections 3(a)(6) (defining
‘‘bank’’) and 3(a)(46) (defining ‘‘financial
institution’’).
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
its government securities operations,
such as by moving its ATS operations
into a new or existing broker-dealer
affiliate of the bank.
In addition to Rule 301(b)(1) of
Regulation ATS, which most Currently
Exempted Government Securities ATSs
already satisfy,283 a Currently Exempted
Government Securities ATS would be
required to comply with other
conditions of the Regulation ATS
exemption, as proposed to be amended.
This includes Rule 304, which would
require that Government Securities
ATSs file Form ATS–N. Government
Securities ATSs would not, however, be
subject to the order display and
execution access provisions under Rule
301(b)(3) or the fees provision of Rule
301(b)(4) that are applicable only to
NMS Stock ATSs.284 The Commission is
proposing to require Government
Securities ATSs that meet a certain
volume threshold to comply with the
Fair Access Rule with respect to trading
in U.S. Treasury Securities and Agency
Securities.285 Because the Commission
is proposing to apply Regulation SCI to
certain Government Securities ATSs
that trade U.S. Treasury Securities and/
or Agency Securities, the Capacity,
Integrity, and Security Rule under Rule
301(b)(6) would not apply to the trading
of government securities on ATSs.286
The Commission believes that it is
important that all Government
Securities ATSs, including Currently
Exempted Government Securities ATSs,
be subject to the conditions of the
Regulation ATS exemption, which are
designed to protect investors and to
facilitate Commission oversight.
Accordingly, the Commission is reproposing that a Currently Exempted
Government Securities ATS must:
• Permit the examination and
inspection of its premises, systems, and
records, and cooperate with the
examination, inspection, or
investigation of subscribers, whether
such examination is being conducted by
the Commission or by an SRO of which
283 See
supra text accompanying note 226 (stating
that most Currently Exempted Government
Securities ATSs register as broker-dealers with the
Commission). For those Currently Exempted
Government Securities ATSs that are operating as
banks and not registered broker-dealers, the
Commission is proposing to amend Rule 301(b)(1)
to provide a transition period to allow them to
operate without interruption while their brokerdealer registration is pending until the earlier of the
date the alternative trading system registers as a
broker-dealer under section 15 of the Act or section
15C(a)(1)(A) of the Act and becomes a member of
a national securities association; or the date 210
calendar days after effective date of any final rule.
See supra note 177.
284 See 17 CFR 242.301(b)(3)–(4).
285 See infra Section III.B.4.
286 See infra Section III.C.
PO 00000
Frm 00025
Fmt 4701
Sfmt 4702
15519
such subscriber is a member, pursuant
to Rule 301(b)(7).287 The Commission
believes that because subscribers to
whom the Commission’s inspection
authority may not extend could use a
Currently Exempted Government
Securities ATS to manipulate the
market in a security, it is important that
these ATSs cooperate in all inspections,
examinations, and investigations.288
• Make and keep certain records
specified in Rule 302 289 and preserve
records specified in Rule 303,290
pursuant to Rule 301(b)(8).291 The
recordkeeping requirements would
require the Currently Exempted
Government Securities ATSs to make
and keep certain records for an audit
trail of trading activity that would allow
the Commission to examine whether the
ATS is in compliance with Federal
securities laws.292
• Periodically report certain
information about transactions in the
ATS and information about certain
activities on Form ATS–R within 30
calendar days after the end of each
calendar quarter in which the market
has operated pursuant to Rule
301(b)(9).293 The information reported
on Form ATS–R by Currently Exempted
Government Securities ATSs will
permit the Commission to monitor the
trading on these ATSs for compliance
with the Exchange Act and applicable
rules thereunder and enforce the Fair
Access Rule.294
• Adopt written safeguards and
written procedures to protect
confidential trading information and to
separate ATS functions from other
broker-dealer functions, including
principal and customer trading pursuant
to Rule 301(b)(10).295 The Commission
believes that applying the requirements
of Rule 301(b)(10) to Currently
Exempted Government Securities ATSs
will help prevent the potential for abuse
287 See 17 CFR 242.301(b)(7). See also Regulation
ATS Adopting Release, supra note 31, Section
IV.A.2.f.
288 See Regulation ATS Adopting Release, supra
note 31, at 70877.
289 See supra note 163.
290 See supra notes 164 and 166.
291 See 17 CFR 242.301(b)(8). See also Regulation
ATS Adopting Release, supra note 31, Section
IV.A.2.g.
292 See Regulation ATS Adopting Release, supra
note 31, at 70878.
293 See 17 CFR 242.301(b)(9). See also supra notes
144–148 and infra Section III.B.4.
294 See Regulation ATS Adopting Release, supra
note 31, at 70874 and 70878.
295 See 17 CFR 242.301(b)(10); infra note 168;
NMS Stock ATS Adopting Release, supra note 2,
Section VI.
E:\FR\FM\18MRP2.SGM
18MRP2
15520
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
of subscriber confidential trading
information.296
• Not use in its name the word
‘‘exchange,’’ or any derivation of the
word ‘‘exchange’’ pursuant to Rule
301(b)(11).297 The Commission believes
that the use of the word ‘‘exchange’’ by
an ATS, including a Currently
Exempted Government Securities ATS,
would be deceptive and could lead
investors to believe incorrectly that such
ATS is registered as a national securities
exchange.298
Request for Comment
17. Should the Commission amend
Regulation ATS to eliminate the
exemption from compliance with
Regulation ATS under Rule
301(a)(4)(ii)(A) for all Currently
Exempted Government Securities ATS,
including those operated by banks?
18. Should the proposed elimination
of the exemption from compliance with
Regulation ATS only apply to
Government Securities ATSs that trade
a certain type of government security
(e.g., only U.S. Treasury Securities or
only Agency Securities)? Should the
proposed elimination of the exemption
from compliance with Regulation ATS
only apply to Government Securities
ATSs that trade government securities
(and not repos)? If so, for which type of
Government Securities ATS should the
exemption be eliminated?
19. Should Government Securities
ATSs seeking to operate pursuant to the
exemption provided by Regulation ATS
have the alternative option to satisfy
broker-dealer registration with the
Commission pursuant to Section
15C(a)(1)(A)?
20. Should the Commission adopt any
alternatives to requiring Government
Securities ATSs to register with the
Commission as broker-dealers under
Section 15 or Section 15C(a)(1)(A)? For
example, should the Commission
amend Rule 301(b)(1) of Regulation ATS
to include an alternative for a bank to
register as a government securities
broker or dealer pursuant to Section
15C(a)(1)(B), which would not require
the bank to become a member of an
SRO?
21. Should there be a transition
period for Currently Exempted
Government Securities ATSs that are
currently operated by banks to comply
with the proposed amendments to Rule
301(b)(1), including ATSs provided and
operated by an affiliate of the bank?
296 See NMS Stock ATS Adopting Release, supra
note 2, at 38864.
297 See 17 CFR 242.301(b)(11); Regulation ATS
Adopting Release, supra note 31, Section II.C.
298 See Regulation ATS Proposing Release, supra
note 173.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Should the Commission allow a
Currently Exempted Government
Securities ATS that is not registered as
a broker-dealer to operate pursuant to
the Rule 3a1–1(a)(2) exemption on a
provisional basis? Does the proposal to
allow such ATSs a maximum 210
calendar days from the effective date to
comply with the broker-dealer
registration requirement provide an
appropriate amount of time to register as
a broker-dealer? If not, what, if any,
transition period would be appropriate?
For Currently Exempted Securities
ATSs that are currently operated by
banks, should there be a different
transition period? If so, why?
22. Should there be a transition
period for Currently Exempted
Government Securities ATSs or Covered
Newly Designated ATSs to comply with
all or some of the requirements of
Regulation ATS? If so, which
requirements would require such a
transition period, and how long should
such transition period be?
23 Should the Commission amend
Regulation ATS to remove the
exemption from Regulation ATS for
ATSs that limit their securities activities
to commercial paper? Do market
participants use ATSs to trade
commercial paper? If so, how is
commercial paper traded on an ATS?
Should the Commission remove any
other exemption from Regulation ATS
available under Rule 301?
24. Should the Commission require
Currently Exempted Government
Securities ATSs to comply with all of
the requirements of Regulation ATS
applicable to all ATSs that are currently
required to comply with Regulation
ATS? If not, which requirements should
a Currently Exempted Government
Securities ATS not be required to
comply with and why?
3. Filing Requirements for BrokerDealers That Operate ATSs That Trade
Government Securities and NonGovernment Securities
The Commission is re-proposing to
revise Rule 301(b)(2)(viii) 299 of
299 17 CFR 242.301(b)(2)(viii). Current Rule
301(b)(2)(viii) provides that NMS Stock ATSs must
file with the Commission the reports and
amendments required by Rule 304 and that NMS
Stock ATSs are not subject to Rule 301(b)(2). NMS
Stock ATSs or entities seeking to operate as NMS
Stock ATSs would continue to file reports pursuant
to Rule 304. Because the Commission review period
for all Forms ATS–N filed by Legacy NMS Stock
ATSs ended in October 2019, the Commission is
proposing to delete references in Rule 301(b)(2)(viii)
to Legacy NMS Stock ATSs. The Commission is
also proposing to consolidate the current provisions
of Rule 301(b)(2)(viii) applicable to NMS Stock
ATSs to state that NMS Stock ATSs or entities
seeking to operate as an NMS Stock ATS shall not
be subject to the requirements of Rule 301(b)(2)(i)
through (vii) and would be subject to Rule 304.
PO 00000
Frm 00026
Fmt 4701
Sfmt 4702
Regulation ATS to provide that a Legacy
Government Securities ATS that is
operating pursuant to a Form ATS as of
the effective date of any final rule will
continue to be subject to the Rule
301(b)(2) requirements to file a Form
ATS. However, once the ATS files a
Form ATS–N, it will no longer be
subject to Rule 301(b)(2)(i) through (vii)
and will instead be subject to the
reporting requirements under Rule 304,
which provides the rules for filing of
Form ATS–N. The Commission is also
proposing to provide that as of the
effective date of any final rule, an entity
seeking to operate as a Government
Securities ATS will not be subject to the
requirements of Rule 301(b)(2)(i)
through (vii) and will instead be
required to file reports under Rule 304.
In addition, the Commission is
proposing rules to make clear that a
Currently Exempted Government
Securities ATS would be subject to Rule
304 and would not be subject to Rule
301(b)(2)(i) through (viii). These rules
are designed to prevent Government
Securities ATSs from being subject to
potentially duplicative requirements in
Rule 304 and Rule 301(b)(2).
The Commission is proposing to
amend Rule 301(b)(2)(viii) to make clear
that Covered ATSs are required to file
reports pursuant to § 242.304 and ATSs
that are not Covered ATSs are subject to
Rule 301(b)(2).300 Today, there are some
broker-dealers that operate multiple
types of ATSs that trade different types
of securities (e.g., NMS Stock ATS and
non-NMS Stock ATS) or operate
multiple ATSs that trade the same type
of securities but are separate and
distinct from each other (e.g., a brokerdealer registered for, and operates, two
NMS Stock ATSs, each of which
maintains a separate book of orders that
is governed by distinct priority and
order interaction rules for one type of
security).301 In both instances, each of
the ATSs must comply with Regulation
ATS.302 The Commission is proposing
to add to Rule 301(b)(2)(viii) to provide
that each NMS Stock ATS or
Government Securities ATS that is
operated by a broker-dealer that is the
300 The Commission is also proposing to amend
Rule 301(b)(2)(viii) to state that Covered Newly
Designated ATSs will be subject to Rule 304.
301 The Commission is proposing that, for the
purposes of calculating volume thresholds for the
Fair Access Rule, the average trading volume of
ATSs that are operated by a common broker-dealer,
or ATSs operated by affiliated broker-dealers, will
be aggregated. See infra Section V.A.2.
302 See Rule 3a1–1(a)(2) (providing that an
organization, association, or group of persons shall
be exempt from the definition of ‘‘exchange’’ if it
is in compliance with Regulation ATS) and Rule
301(a) (providing that an ATS shall comply with
the requirements of Rule 301(b)).
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
registered broker-dealer for more than
one ATS must comply with Regulation
ATS, including the filing requirements
of Rule 304. The Commission believes
that the proposed language makes clear
that the proposal would not require
compliance with the heightened
transparency requirements of Regulation
ATS for ATSs that are not NMS Stock
ATSs or Government Securities ATSs.
Under the proposal, a broker-dealer
operator, for example, for an ATS that
noticed on its initial operation report on
Form ATS that the ATS trades
government securities and corporate
debt securities would be the brokerdealer operator for two types of ATSs
that would be separate from each other
with regard to trading these types of
securities and each would comply with
Regulation ATS. These two types of
ATSs would be (1) a Government
Securities ATS that would file a Form
ATS–N with respect to government
securities and (2) a non-Government
Securities ATS that would file a Form
ATS with respect to corporate debt.303
In addition, each of the two ATSs would
be required to comply with the
conditions to Regulation ATS,
including, among other things, adopting
written safeguards and written
procedures to protect subscriber
confidential trading information for the
ATS pursuant to Rule 301(b)(10) and
making and keeping records for the ATS
pursuant to Rule 301(b)(8).304
The Commission also is proposing to
amend Rule 301(b)(9) of Regulation
ATS.305 This rule requires an ATS to
report transaction volume in various
types of securities, including
government securities and repos, on
Form ATS–R on a quarterly basis and
within 10 calendar days after it ceases
operation.306 As discussed above, the
Commission is proposing to define
‘‘Government Securities ATS’’ and to
303 Under the proposed rules, a broker-dealer
operator for an ATS that currently trades
government securities and corporate bonds, for
example, would file a Form ATS–N to disclose its
government securities activities for the Government
Securities ATS. The broker-dealer operator would
disclose the corporate bond activities of its existing
ATS by filing with the Commission a material
amendment to its Form ATS pursuant to Rule
301(b)(2)(ii) of Regulation ATS to remove
information regarding government securities
activities. See Regulation ATS Adopting Release,
supra note 31, at 70864 (discussing circumstances
under which an ATS would file a material
amendment to Form ATS pursuant to Rule
301(b)(2), which, among other things, includes
changes to the operating platform, the types of
securities traded, or types of subscribers).
304 See supra note 246 and accompanying text.
305 See 17 CFR 242.301(b)(9).
306 The information filed on Form ATS–R permits
the Commission to monitor trading on an ATS. See
Regulation ATS Adopting Release, supra note 31,
at 70878.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
clarify the definition of ‘‘NMS Stock
ATS’’ to make clear that a Government
Securities ATS cannot trade securities
other than government securities or
repos and that an NMS Stock ATS
cannot trade securities other than NMS
stocks.307 For example, a Government
Securities ATS operated by a brokerdealer that is also the registered brokerdealer for a non-Government Securities
ATS would be required to file a Form
ATS–R for the Government Securities
ATS and a separate Form ATS–R for the
non-Government Securities ATS. The
Commission is proposing to amend Rule
301(b)(9) by removing language stating
that an ATS must ‘‘separately file’’ a
Form ATS–R for transactions in NMS
stocks and for transactions in securities
other than NMS stocks to simplify the
text and convey that each ATS, even if
operated by a broker-dealer that
operates other ATSs, must file a Form
ATS–R. This is consistent with the
current Form ATS–R filing process for
a broker-dealer that operates an NMS
Stock ATS and non-NMS Stock ATS.308
Request for Comment
25. Should an NMS Stock ATS or
Government Securities ATS that is
operated by a broker-dealer that is a
registered broker-dealer for more than
one ATS be subject to Rule 304
independent of any other ATS operated
by its broker-dealer?
26. Should a broker-dealer that is the
registered broker-dealer for more than
one ATS be required to file separate
Forms ATS–R for each of the ATSs it
operates?
27. Should a broker-dealer that is the
registered broker-dealer for an ATS that
trades government securities or repos
and an ATS that trades NMS stocks be
required to file separate Forms ATS–N
for each of the ATSs it operates?
28. Should the Commission allow a
broker-dealer operator of an NMS Stock
ATS or a Government Securities ATS to
disclose on its Form ATS–N its nongovernment securities or non-NMS
stock activities, in addition to its
government securities or NMS stock
activities, on a voluntary basis?
29. Do commenters believe that
additional changes or requirements to
the ATS framework are needed? For
example, should the Commission
propose amendments to Regulation ATS
to require ATSs that trade equity
securities other than NMS stocks,
corporate debt securities, municipal
securities, or any other category of
307 See supra notes 244 and 254 and
accompanying text.
308 See NMS Stock ATS Adopting Release, supra
note 2, Section III.B.5.
PO 00000
Frm 00027
Fmt 4701
Sfmt 4702
15521
securities to comply with Rule 304,
including filing with the Commission
public Form ATS–N and requiring their
Forms ATS–N to be subject to
Commission review and effectiveness
processes?
4. Application of Fair Access to
Government Securities ATSs
The Fair Access Rule, as proposed to
be amended and as described in detail
below,309 requires an ATS to, among
other things, establish and apply
reasonable written standards for
granting access on its system. Today, the
Fair Access Rule only applies if an
ATS’s trading volume for certain
securities or a certain type of securities
exceeds an average daily volume
threshold during a period time set forth
in the rule. Currently, the Fair Access
Rule only applies to the trading of NMS
stocks, equity securities that are not
NMS stocks and for which transactions
are reported to an SRO, municipal
securities, and corporate debt securities,
but not to trading in government
securities.310
The Fair Access Rule was designed to
ensure that qualified market
participants have fair access to the
significant sources of liquidity in the
U.S. securities markets. When
Regulation ATS was adopted, the
Commission explained that the fair
treatment by ATSs of potential and
current subscribers is particularly
important when an ATS captures a large
percentage of trading volume in a
security, because viable alternatives to
trading on such a system are limited.311
The Commission further explained that
if an ATS has a significantly large
percentage of the volume of trading in
a security or type of security, unfairly
discriminatory actions can hurt
investors lacking access to that ATS.312
Currently, however, Regulation ATS
does not provide a mechanism to
prevent unfair denials or limitations of
access by ATSs that trade U.S. Treasury
Securities or Agency Securities or
regulatory oversight of such denials or
limitations of access. Today, the
principles undergirding the Fair Access
Rule are equally relevant to a
Government Securities ATS, and
amending the Fair Access Rule to
include the trading of U.S. Treasury
Securities and Agency Securities would
help ensure the fair treatment of
potential and current subscribers to
ATSs that consist of a large percentage
309 See infra Section V.A. See also proposed Rule
301(b)(5)(iii).
310 See 17 CFR 242.301(b)(5)(i).
311 See Regulation ATS Adopting Release, supra
note 31, at 70872.
312 See id.
E:\FR\FM\18MRP2.SGM
18MRP2
15522
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
of trading volume in these two types of
securities.313
In the 2020 Proposal, the Commission
proposed that a Government Securities
ATS would be subject to the Fair Access
Rule if during at least four of the
preceding six calendar months, the
Government Securities ATS had: (1)
With respect to U.S. Treasury Securities,
five percent or more of the average
weekly dollar volume traded in the
United States as provided by the SRO to
which such transactions are reported; or
(2) with respect to Agency Securities,
five percent or more of the average daily
dollar volume traded in the United
States as provided by the SRO to which
such transactions are reported.
In response to the 2020 Proposal,
commenters generally supported
amending Regulation ATS to apply the
Fair Access Rule for Government
Securities ATSs that meet certain
trading thresholds.314 Some commenters
stated that the proposed amendments
would ensure that market participants
are not unreasonably denied access from
important sources of liquidity for a
particular security,315 and prevent
discriminatory actions that could hurt
investors, and potentially result in
higher trading costs and a reduction in
trading efficiency.316 One commenter
stated that the Commission should, as
was proposed in the 2020 Proposal,
apply the thresholds to all types of U.S.
Treasury Securities and Agency
Securities, each on an aggregate basis.317
313 Under the proposal, the Fair Access Rule
would not apply to trading of repos, including
repos on U.S. Treasury Securities and Agency
Securities. The Commission notes FINRA does not
require ATSs to report transactions for repos. The
Commission is requesting comment on its
preliminary assessment and on whether the
Commission should amend Regulation ATS to
require Government Securities ATSs that meet
certain volume thresholds for the trading of repos,
including repos on U.S. Treasury Securities and
Agency Securities, to be subject to the requirements
of the Fair Access Rule.
314 See, e.g., SIFMA Letter; MFA Letter; ICE
Bonds Letter I; and Healthy Markets Letter.
315 See SIFMA Letter at 4. See also ICI Letter at
4 (stating that funds generally are not able to
directly access liquidity on most of these platforms,
and that applying the fair access requirements
would enhance the ability of funds to onboard and
participate on these platforms directly and would
generally enhance market structure for U.S.
Treasury Securities and benefit fund shareholders);
FIA PTG Letter at 2 (stating that the requirements
will ensure qualified market participants have
access to the government securities market).
316 See MFA Letter at 4. See also ICI Letter at 4
(stating that the fair access requirements would
enable the Commission to evaluate ATS standards
and determine whether they are being applied in an
unfair or discriminatory manner).
317 See Tradeweb Letter at 3 (stating that the
Commission should not, for example, distinguish
between on-the-run and off-the-run U.S. Treasury
Securities, and that a broader measure of market
significance is preferable in order to provide for
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
One commenter, however, suggested
that the Commission may apply the fair
access thresholds to on-the-run
securities that are ‘‘likely’’ to trade on
an ATS as off-the-run securities are less
liquid and tend to trade using other
methods.318
The Commission is re-proposing to
apply the Fair Access Rule to the
trading of government securities on an
ATS with certain revisions. After
considering comments received,
proposed changes to Exchange Act Rule
3b–16, and further analysis of the U.S.
Treasury Securities markets, as
explained further below, the
Commission is proposing to revise the
average weekly trading volume
percentage for ATSs trading U.S.
Treasury Securities from the threshold
proposed in the 2020 Proposal.
Accordingly, the Commission is
proposing that a Government Securities
ATS will be subject to the Fair Access
Rule if, during at least four of the
preceding six calendar months: (1) It
had three percent or more of the U.S.
Treasury Securities average weekly
dollar volume traded in the United
States as provided by the SRO to which
such transactions are reported; or (2) it
had five percent or more of the Agency
Securities average daily dollar volume
traded in the United States as provided
by the SRO to which such transactions
are reported.
First, the Commission is re-proposing
that the thresholds include only
securities for which transactions are
reported to an SRO, and the volume
thresholds are based on how the SRO
subsequently reports that volume to the
public. FINRA publishes weekly
aggregate data on U.S. Treasury
Securities based on the mandatory
transaction reports of its members to
TRACE, and disseminates transaction
data about Agency Securities
immediately upon receipt of a
transaction report.319 Currently, FINRA
neither provides individual trade
reports nor aggregates daily volume data
for U.S. Treasury Securities transactions
to TRACE subscribers (or to the public).
FINRA, however, provides individual
trade reports for all Agency Securities
transactions to TRACE subscribers.320
more stable application of the Fair Access Rule);
ICE Bonds Letter I at 5.
318 See Bloomberg Letter at 5 (noting that FINRA’s
aggregated weekly data report currently segments
the data into on-the-run/off-the-run and dealer-todealer and dealer-to-customer transactions).
319 See supra note 229.
320 The Commission believes that the vast
majority—and likely, all—broker-dealer operators of
Legacy Government Securities ATSs that trade
Agency Securities currently subscribe to TRACE.
Communication Protocol Systems that are not
currently FINRA members, however, are not
PO 00000
Frm 00028
Fmt 4701
Sfmt 4702
Accordingly, because weekly dollar
volume data about transactions in U.S.
Treasury Securities and daily dollar
volume data about transactions in
Agency Securities are publicly available
via TRACE, Government Securities
ATSs will be able to readily calculate
whether they meet the applicable
thresholds.321
Second, the Commission continues to
believe that separate volume thresholds
for U.S. Treasury Securities and Agency
Securities would best advance the
investor protection goals of the Fair
Access Rule.322 The proposed volume
thresholds would help ensure that the
Fair Access Rule is appropriately
tailored so that it only applies to the
category of security for which an ATS
has significant trading volume.323 The
Commission believes that it would be
unnecessary and overly burdensome to
require a Government Securities ATS to
comply with the Fair Access Rule for a
category of government security for
which that ATS does not have
significant volume. Furthermore, the
Commission now proposes different
trading volume thresholds for U.S.
Treasury Securities and Agency
Securities. As such, the Commission
believes it would be impractical for the
Fair Access Rule to combine trading
volume in these two types of securities
to determine whether a Government
Securities ATS has triggered its
requirements.
Third, the Commission believes that it
is appropriate to determine these
volume thresholds on a category
basis.324 Given that U.S. Treasury
required to report to TRACE. The Commission is
requesting public comment on the extent to which
Government Securities ATSs (which may include
Legacy Government Securities ATSs and
Communication Protocol Systems) have access to
TRACE trade reports for Agency Securities.
321 In response to the 2020 Proposal, one
commenter stated that the proposal would need to
be based on ‘‘weekly par value traded’’ because
FINRA publishes volume data on a weekly basis.
See Bloomberg Letter at 6. The Commission
believes that data to calculate the proposed
threshold, which is based on dollar volume
published by FINRA on a weekly basis, would be
readily available.
322 In response to the 2020 Proposal, one
commenter stated that it supports applying the Fair
Access Rule to all types of U.S. Treasury Securities
and all types of Agency Securities, each on an
aggregate basis. See Tradeweb Letter at 3.
323 For example, suppose a Government
Securities ATS has significant trading volume in
U.S. Treasury Securities but not Agency Securities.
In this example, the proposed rule would help
ensure that investors receive fair access to the
ATS’s services with respect to U.S. Treasury
Securities, but it would not require the ATS to
provide fair access for its Agency Securities
services.
324 In response to the 2020 Proposal, some
commenters stated that they support applying the
thresholds on an aggregate basis. See ICE Bonds
Letter at 6 and Tradeweb Letter at 3. One
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
Securities and Agency Securities are
types of debt securities, doing so would
be consistent with the Fair Access
Rule’s application to other categories of
fixed income securities (i.e., corporate
bonds and municipal securities). The
Fair Access Rule applies on a securityby-security basis for NMS stocks and
equity securities that are not NMS
stocks, and on a category basis for
corporate bonds and municipal
securities.
Fourth, the Commission is proposing
that a Government Securities ATS
would be required to comply with the
Fair Access Rule only if it has met at
least one of the applicable volume
thresholds during at least four of the
preceding six calendar months.325 For
ATSs that trade Agency Securities, this
is the same time period for evaluating
the applicability of the Fair Access Rule
that is currently applied to ATSs that
trade NMS stocks, equity securities that
are not NMS stocks and for which
transactions are reported to an SRO,
municipal securities, and corporate debt
securities.
Fifth, the Commission is proposing a
three percent threshold to apply the Fair
Access Rule for Government Securities
ATSs that trade U.S. Treasury
Securities. The Commission received
several comments on the threshold
proposed in the 2020 Proposal, which
expressed differing opinions. One
commenter stated that it would support
a threshold of three percent of daily
market volume, observing that such a
threshold would apply the Fair Access
Rule to only four ATSs for U.S. Treasury
Securities and one for Agency
Securities, and stating that these ATSs
are ‘‘leading exchanges’’ whose
customers deserve fair access.326 On the
other hand, one commenter stated that
an ATS should be subject to the Fair
Access Rule only if it is a ‘‘significant’’
source of liquidity and that it believed
that most market participants view 10
percent of the par value traded in the
asset class as the market share threshold
commenter stated that Commission should not, for
example, distinguish between on-the-run and offthe-run Treasuries in applying the Fair Access Rule
because a broader measure of market significance is
preferable in order to provide for a more stable
application of the Fair Access Rule. See Tradeweb
Letter at 3.
325 However, if, for example, during the six month
period from January to June, the Government
Securities ATS met the threshold for U.S. Treasury
Securities only during January and April and met
the threshold for Agency Securities only during
February and May, the Government Securities ATS
would not be subject to the Fair Access Rule in July
because the ATS would not have met the threshold
for either type of security during at least four of the
preceding six months in either U.S. Treasury
Securities or Agency Securities.
326 See AFREF Letter at 3.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
where an ATS’s liquidity is
significant.327 Another commenter
supported the previously-proposed five
percent thresholds.328
While public comment on what
constitutes a significant market center
for U.S. Treasury Securities is split, the
Commission believes that a three
percent average weekly trading volume
threshold would encompass the
significant markets for and advance the
policy goals of the Fair Access Rule. The
Commission believes that the policy
goals behind the Fair Access Rule are of
particular importance in the U.S.
Treasury Securities market. Market
participants must have reasonable
access to significant sources of liquidity
in the secondary markets for U.S.
Treasury Securities because, among
other things, U.S. Treasury Securities
play a vital and irreplaceable role in
both the U.S. and global economies. In
addition, ATSs that operate in the
secondary interdealer markets for onthe-run U.S. Treasury Securities have
become a significant source of trading
interest for government securities. Also,
under this proposal, RFQ systems will
now be subject to Regulation ATS.
Given that RFQ systems make up over
half of secondary trading in the U.S.
Treasury market,329 the Fair Access
Rule’s policy goals would be advanced
by requiring RFQs that facilitate a
significant percentage of U.S. Treasury
trading to provide fair access to market
participants. Additionally, when
compared to the application of the Fair
Access Rule to NMS Stock ATSs,
denying fair access to services of an
ATS for U.S. Treasury Securities under
this proposal would be particularly
impactful. The Fair Access Rule would
be applied categorically for government
securities rather than on a security-bysecurity basis like in the NMS equities
market. Thus, a market participant being
denied access to a significant U.S.
Treasury Securities ATS could be
denied access to the system’s entire
portfolio of U.S. Treasury Securities
operations.
Based on the current market, a three
percent volume threshold would help
ensure appropriate access for market
participants, particularly retail and
other non-broker-dealer investors who
rely on liquidity in the government
securities markets. Specifically, under
the proposed three percent threshold,
327 See
Bloomberg Letter at 6.
SIFMA Letter at 5.
329 See Treasury Market Practices Group (TMPG),
White Paper on Clearing and Settlement in the
Secondary Market for U.S. Treasury Securities (July
2019), available at https://www.newyorkfed.org/
medialibrary/Microsites/tmpg/files/CS_FinalPaper_
071119.pdf.
328 See
PO 00000
Frm 00029
Fmt 4701
Sfmt 4702
15523
based on volume currently required to
be reported to TRACE, the Commission
estimates that seven Legacy Government
Securities ATSs that trade U.S. Treasury
Securities (including four Legacy
Government Securities ATSs with
greater than three percent market share
and three affiliated ATSs with which
their volume would be aggregated under
the proposed changes to the Fair Access
Rule) 330 would be subject to the Fair
Access Rule.331 Under the previously
proposed five percent threshold, an
estimated three ATSs trading U.S.
Treasury Securities (including two
Legacy Government Securities ATSs
with greater than five percent market
share and one affiliated ATS) would be
subject to the Fair Access Rule.332 As
such, a three percent threshold would
result in market participants having fair
access to an estimated nearly eight
percent more of the U.S. Treasury
Securities market than they would
under a five percent threshold, based on
volume currently reported to TRACE.333
Furthermore, applying the Fair Access
Rule to ATSs that meet a three percent
threshold in U.S. Treasury Securities
would result in the Fair Access Rule
applying to Legacy Government
Securities ATSs transacting in
approximately 32 percent of market
volume currently reported to FINRA in
U.S. Treasury Securities. ATSs that
trade U.S. Treasury Securities that
would be subject to the Fair Access Rule
under the proposed three percent
threshold would comprise
approximately 94 percent of U.S.
Treasury Securities volume traded on
ATSs.334 Accordingly, the Commission
believes that the three percent threshold
would provide investors with access to
330 See infra Section V.A. See also infra Table
VIII.1. For purposes of estimating the number of
unique affiliated ATSs that would meet the
proposed three percent threshold, the data in Table
VIII.1 (stating a total of nine ‘‘grouped-affiliated
ATSs’’ would be affected) has been adjusted based
on the Commission’s knowledge of current ATS
operations.
331 Based on Coalition Greenwich’s Greenwich
MarketView data from April 2021 through
September 2021, approximately two currently
operating Communication Protocol Systems would
be subject to the Fair Access Rule using a three
percent threshold in U.S. Treasury Securities. This
would remain unchanged if the Commission used
the previously-proposed five percent threshold.
332 See infra Table VIII.1. For purposes of
estimating the number of unique affiliated ATSs
that would meet a five percent threshold, the data
in Table VIII.1 (stating a total of five ‘‘groupedaffiliated ATSs’’ would be affected) has been
adjusted based on the Commission’s knowledge of
current ATS operations.
333 See id.
334 Data is based on the regulatory version of
TRACE for U.S. Treasury Securities from April 1,
2021 through September 30, 2021.
E:\FR\FM\18MRP2.SGM
18MRP2
15524
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
markets that are important venues for
trading in U.S. Treasury Securities.
Sixth, the five percent threshold set
forth in the 2020 Proposal for Agency
Securities is being re-proposed
unchanged. Because the U.S. Treasury
Securities market is one of the deepest
and most liquid in the world, and
because of the vital role that U.S.
Treasury Securities play in the U.S. and
global economies, it is particularly
important to ensure that investors have
access to ATSs with significant volume
in U.S. Treasury Securities. The Agency
Securities market, however, does not
share the unique qualities of the U.S.
Treasury Securities market, and
accordingly, the Commission is reproposing for Agency Securities a five
percent threshold that is consistent with
the current volume threshold applicable
to corporate bonds and municipal
securities.335 Furthermore, based on
volume currently reported to TRACE,
the estimated one Legacy Government
Securities ATS that would exceed the
proposed five percent threshold for
Agency Securities accounts for nearly
12 percent of volume reported in
TRACE in Agency Securities.336
The Commission is proposing a
compliance period for Communication
Protocol Systems, which seek to operate
as ATSs, and Legacy Government
Securities ATSs that become subject to
the Fair Access Rule. Under the
proposal, a Communication Protocol
System or a Legacy Government
Securities ATS that becomes subject to
the Fair Access Rule would be required
to comply with the Fair Access Rule one
month from the date that the
Communication Protocol System or the
Legacy Government Securities ATS
initially triggers any of the fair access
thresholds.337 The Commission believes
that it is appropriate to provide the onemonth compliance period to allow the
Communication Protocol System or the
Legacy Government Securities ATS to
establish and apply reasonable written
standards for granting, limiting, and
denying access to the ATS services, as
proposed, and, for those that would be
NMS Stock ATSs and Government
335 See
Rule 301(b)(5)(i)(A)–(D).
ATS would also meet the proposed
threshold for trading in U.S. Treasury Securities.
337 See proposed Rule 301(b)(5)(i)(G). The rule
text uses the term ‘‘Newly Designated ATS’’ to refer
to a Communication Protocol System. See supra
note 134. Under this proposal, an ATS that triggers
the fair access threshold for a security (for NMS
stocks or equity securities that are not NMS stocks)
or a category of security (for municipal securities,
corporate debt securities, U.S. Treasury Securities,
or Agency Securities) would not be able to avail
itself to the one-month compliance period for
triggering the fair access threshold for another
security or another category of securities.
jspears on DSK121TN23PROD with PROPOSALS2
336 This
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Securities ATSs, to prepare responses to
Item 24 of Form ATS–N.338 The
additional compliance period is
designed to provide the Communication
Protocol Systems and the Legacy
Government Securities ATSs sufficient
time to transition into the new ATS
regulatory regime and prevent any
disruptions to the operation of these
systems and their participants.
Request for Comment
30. Should any other type of
government securities be included as a
category of securities under Rule
301(b)(5)? Should the Commission
apply Rule 301(b)(5) to all Government
Securities ATSs? What would be the
costs and benefits associated with such
a requirement?
31. Should the proposed three percent
fair access threshold for U.S. Treasury
Securities be applied to all types of U.S.
Treasury Securities or to subset
categories of U.S. Treasury Securities?
For example, should the three percent
fair access threshold be applied to
transaction volume in only on-the-run
U.S. Treasury Securities? Should the
five percent fair access threshold be
applied to all Agency Securities or to
subset categories? If so, why or why not?
32. Should the proposed three percent
fair access threshold for U.S. Treasury
Securities be set higher or lower than
three percent? Should the proposed five
percent fair access threshold for Agency
Securities be set higher or lower than
five percent? If so, what should the
percentage thresholds be? Should there
be no thresholds so that the Fair Access
Rule would apply to all Government
Securities ATSs that trade U.S. Treasury
Securities or Agency Securities
regardless of volume transacted on the
ATS? Please support your views. Are
the five percent and three percent
thresholds appropriate thresholds to
capture ATSs that are significant
markets for trading in U.S. Treasury
Securities and Agency Securities,
respectively? Would the proposed
thresholds capture ATSs that are not
significant markets for U.S. Treasury
Securities and Agency Securities? If
there should be a percent threshold for
a category finer than all U.S. Treasury
Securities, for example on-the-run U.S.
Treasury Securities or off-the-run U.S.
Treasury Securities, what should that
threshold should be?
33. Should the fair access threshold
be based on average weekly dollar
volume traded in the United States for
U.S. Treasury Securities and daily
dollar volume traded in the United
States for Agency Securities?
338 See
PO 00000
infra Section V.A.3.
Frm 00030
Fmt 4701
Sfmt 4702
34. Would the proposed four out of
six month period be an appropriate
period to measure the volume
thresholds for U.S. Treasury Securities
and Agency Securities? With respect to
calculating the appropriate thresholds,
would Government Securities ATSs
have available appropriate data with
which to determine whether the
proposed thresholds have been met?
Would ATSs that trade U.S. Treasury
Securities be able to readily calculate
whether they meet the volume
thresholds in at least four out of the
preceding six months, given that U.S.
Treasury Securities are disseminated on
a weekly, rather than daily basis? Would
it be appropriate for the Commission to
change the proposed four out of six
month period to a time period measured
in weeks (e.g., at least 16 out of the
preceding 24 weeks) with respect to
U.S. Treasury Securities? What effect
would any such change have on the
likelihood that ATSs trading U.S.
Treasury Securities would meet the
volume thresholds?
35. If the average weekly dollar
volumes were to include transactions
for U.S Treasury Securities by nonFINRA members, which currently are
not reported to, or collected by, the SRO
that makes public average weekly dollar
volume statistics, should the fair access
threshold change? If so, what should be
the appropriate threshold?
36. Would it be appropriate to use five
percent of average daily dollar volume
traded in the United States as a fair
access threshold for Agency Securities?
Do ATSs that trade Agency Securities
currently subscribe to TRACE and,
therefore, receive TRACE trade reports
for Agency Securities? If not, what
percentage of these ATSs do not
currently subscribe to TRACE?
37. Should the requirements under
the Fair Access Rule be amended
specifically for Government Securities
ATS? If so, how?
38. Are there any unique challenges
for ATSs that would be required to
comply with the requirements under the
Fair Access Rule for the first time? If so,
please explain.
39. Do commenters believe that it is
appropriate to provide to
Communication Protocol Systems and
Legacy Government Securities ATSs a
one-month compliance period to
comply with the Fair Access Rule?
Should the proposed compliance period
be longer or shorter? Should the
eligibility for the compliance period be
expanded to ATSs that are currently
operating or limited in any way? Please
explain.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
C. Application of Regulation SCI to
Government Securities ATS
The Commission is re-proposing to
amend Regulation SCI to expand the
definition of ‘‘SCI alternative trading
system’’ to include Government
Securities ATSs that meet a specified
volume threshold. A Government
Securities ATS that meets the proposed
amended definition of ‘‘SCI alternative
trading system’’ would fall within the
definition of ‘‘SCI entity’’ and, as a
result, would be subject to the
requirements of Regulation SCI.
Because the proposed amendments to
Exchange Act Rule 3b–16(a) would
cause Communication Protocol Systems
to fall within the definition of
‘‘exchange,’’ 339 Communication
Protocol Systems that transact in U.S.
Treasuries or Agency Securities that
choose to register as a broker-dealer and
comply with Regulation ATS would, if
they meet the proposed volume
threshold, also meet the proposed
amended definition of ‘‘SCI alternative
trading system’’ and become subject to
the requirements of Regulation SCI. The
proposed amendments to Exchange Rule
3b–16(a) likewise would cause
Communication Protocol Systems that
transact in NMS stocks and equity
securities that are not NMS stocks to fall
within the current definition of SCI
alternative trading system if they
reached the current volume thresholds
within the definition, and become
subject to the requirements of
Regulation SCI.340 As discussed in
detail below, the Commission believes
that extending the requirements of
Regulation SCI to Government
Securities ATSs that trade a significant
volume in U.S. Treasury Securities or
Agency Securities would help to
address any technological
vulnerabilities, and improve the
jspears on DSK121TN23PROD with PROPOSALS2
339 See
supra Section II.
340 A Communication Protocol System that
chooses to register as a national securities exchange
would also be subject to Regulation SCI under the
definition of ‘‘SCI entity’’ which includes SROs
such as national securities exchanges. As discussed
above, Communication Protocol Systems, such as
RFQ systems, that use trading interest and protocols
to bring together buyers and sellers perform an
exchange market place function similar to systems
that offer the use of orders and trading facilities.
These systems allow market participants to use
non-firm trading interest to seek and negotiate a
trade. Accordingly, the Commission preliminarily
believes that such systems, whether they are
systems of a registered national securities exchange
or an ATS that is an SCI entity, would be covered
by the definition of ‘‘SCI systems’’ under Regulation
SCI because they directly support trading. See 17
CFR 242.1000 and infra note 348 and
accompanying text. As detailed further below, the
Commission is requesting comment on whether
Communication Protocol Systems of SCI entities
would meet the definition of ‘‘SCI systems’’ under
Regulation SCI.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Commission’s oversight, of the core
technology of key entities in the markets
for government securities.
The Commission adopted Regulation
SCI in November 2014 to strengthen the
technology infrastructure of the U.S.
securities markets.341 As discussed in
the Regulation SCI Adopting Release, a
number of factors contributed to the
Commission’s proposal and adoption of
Regulation SCI. These factors included:
The evolution of the markets becoming
significantly more dependent upon
sophisticated, complex, and
interconnected technology; the
successes and limitations of the
Automation Review Policy (‘‘ARP’’)
Inspection Program; a significant
number of, and lessons learned from,
systems issues at exchanges and other
trading venues; 342 and increased
concerns over the potential for ‘‘single
points of failure’’ in the securities
markets.343 Regulation SCI is designed
to strengthen the infrastructure of the
U.S. securities markets, reduce the
occurrence of systems issues in those
markets, improve their resiliency when
technological issues arise, and
implement an updated and formalized
regulatory framework, thereby helping
to ensure more effective Commission
oversight of such systems.344
The key market participants that are
currently subject to Regulation SCI are
called ‘‘SCI entities’’ and include certain
SROs (including stock and options
exchanges, registered clearing agencies,
FINRA and the MSRB) (‘‘SCI SROs’’),
alternative trading systems that trade
NMS and non-NMS stocks exceeding
specified volume thresholds (‘‘SCI
ATSs’’), the exclusive SIPs (‘‘plan
processors’’), certain exempt clearing
agencies, and SCI competing
consolidators.345 ATSs trading NMS or
non-NMS stocks that are currently
subject to Regulation SCI are heavily
reliant on trading technology and
represent a significant pool of liquidity
for NMS and non-NMS stocks. As
discussed in further detail below,
Regulation SCI requires these SCI
entities to, among other things,
establish, maintain, and enforce written
policies and procedures reasonably
designed to ensure that their key
automated systems have levels of
capacity, integrity, resiliency,
availability, and security adequate to
maintain their operational capability
and promote the maintenance of fair
341 See Regulation SCI Adopting Release, supra
note 3, at 72252–56 for a discussion of the
background of Regulation SCI.
342 See id. at 72253–56.
343 See id. at 72277–79.
344 Id. at 72253, 72256.
345 See 17 CFR 242.1000.
PO 00000
Frm 00031
Fmt 4701
Sfmt 4702
15525
and orderly markets, and that such
systems operate in accordance with the
Exchange Act and the rules and
regulations thereunder and the entities’
rules and governing documents, as
applicable.346 Broadly speaking,
Regulation SCI also requires SCI entities
to take appropriate corrective action
when systems issues occur, provide
certain notifications and reports to the
Commission regarding systems
problems and systems changes, inform
members and participants about systems
issues, conduct business continuity and
disaster recovery testing, conduct
annual reviews of their automated
systems, including penetration testing,
and make and keep certain books and
records.347
Regulation SCI applies primarily to
the systems of SCI entities, whether
operated by SCI entities or on their
behalf, that directly support any one of
six key securities market functions—
trading, clearance and settlement, order
routing, market data, market regulation,
and market surveillance (‘‘SCI
systems’’).348 With respect to security,
Regulation SCI also applies to systems
that, if breached, would be reasonably
likely to pose a security threat to SCI
systems (‘‘indirect SCI systems’’).349 In
addition, certain systems whose
functions are critical to the operation of
the markets, including those that
represent single points of failure
(defined as ‘‘critical SCI systems’’), are
subject to certain heightened
requirements.350
When the Commission adopted
Regulation SCI, the Commission
departed from its proposal to apply
Regulation SCI to fixed income ATSs
that trade municipal and corporate
debt.351 Explaining this departure, the
Commission differentiated ATSs trading
346 See
347 See
17 CFR 242.1001; infra notes 397–398.
17 CFR 242.1002–1007; infra notes 400–
411.
348 See
17 CFR 242.1000.
349 Id.
350 Id. See also Regulation SCI Adopting Release,
supra note 3, at 72277. Paragraph (1) of the
definition of ‘‘critical SCI systems’’ in Rule 1000 of
Regulation SCI specifically enumerates certain
systems to be within its scope, including those that
directly support functionality relating to: Clearance
and settlement systems of clearing agencies;
openings, reopenings, and closings on the primary
listing market; trading halts; initial public offerings;
the provision of consolidated market data; or
exclusively-listed securities. The second prong of
the definition provides a broader catch-all for
systems that ‘‘[p]rovide functionality to the
securities markets for which the availability of
alternatives is significantly limited or nonexistent
and without which there would be a material
impact on fair and orderly markets.’’ 17 CFR
242.1000 (definition of ‘‘critical SCI system’’).
351 See Regulation SCI Proposing Release,
Securities Exchange Act Release No. 69077 (Mar. 8,
2013), 78 FR 18084, 18093–95 (Mar. 25, 2013).
E:\FR\FM\18MRP2.SGM
18MRP2
15526
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
municipal and corporate debt securities
from those trading equity securities,
stating generally that fixed income
markets rely much less on automation
and electronic trading than markets that
trade NMS stocks or non-NMS stocks.352
The Commission also stated that the
municipal and corporate debt markets
tend to be less liquid than the equity
markets, with slower execution times
and less complex routing strategies.353
At the same time, the Commission
stated that it would ‘‘monitor and
evaluate the implementation of
Regulation SCI, the risks posed by the
systems of other market participants,
and the continued evolution of the
securities markets, such that it may
consider, in the future, extending the
types of requirements in Regulation SCI
to additional categories of market
participants.’’ 354
In the 2020 Proposal, where the
Commission was addressing
Government Securities ATSs
specifically, the Commission stated that,
in light of the increasing automation of
the government securities market and
the operational similarities between
many Government Securities ATSs and
NMS Stock ATSs, it believed that it was
appropriate to propose to apply the
requirements of Regulation SCI to
Government Securities ATSs that meet
certain volume thresholds, and noted
again that while technological
developments provide many benefits to
the U.S. securities markets, they also
have increased the risk of operational
problems that have the potential to
cause a widespread impact on the
securities market and its participants.355
Therefore, the Commission stated in the
2020 Proposal that application of
Regulation SCI to Government
Securities ATSs that trade a significant
volume of U.S. Treasury Securities or
Agency Securities would further help to
address those technological
vulnerabilities, and improve the
Commission’s oversight, of the core
technology used by key U.S. securities
markets participants.356
A number of commenters on the 2020
Proposal supported applying the
requirements of Regulation SCI to
Government Securities ATSs above a
specified volume threshold.357 These
352 See Regulation SCI Adopting Release, supra
note 3, at 72270.
353 See id.
354 See id.
355 See 2020 Proposal, supra note 4, at 87152. See
also supra Section II.B; Regulation SCI Adopting
Release, supra note 3, at 72253.
356 See 2020 Proposal, supra note 4, at 87152.
357 See SIFMA Letter at 5; MFA Letter at 5;
AFREF Letter at 2, 4; Healthy Markets Letter at 9–
11; and ICE Bonds Letter II at 5 (stating that it
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
commenters stated that such
requirements could promote the
integrity and resiliency of the key
automated systems of Government
Securities ATSs and ensure Commission
oversight.358 One commenter added that
extending Regulation SCI to
Government Securities ATSs could
reduce the potential for systems issues,
as well as reduce the frequency,
severity, and duration of any systems
issues that may occur.359 As support for
the 2020 Proposal, some commenters
cited the increased automation in the
government securities markets and/or
operational similarities with NMS stock
ATSs,360 with one commenter stating
that the distinctions that the
Commission made between stock
market ATSs and fixed income ATSs in
its adoption of Regulation SCI have not
‘‘stood up well against the rapid
evolution of the markets.’’ 361 One
commenter asserted that the government
securities markets are more systemically
significant than the equity markets, to
which Regulation SCI already
applies.362
Other commenters on the 2020
Proposal opposed requiring Government
Securities ATSs above a volume
threshold to comply with Regulation
SCI.363 These commenters advocated for
applying the narrower technology and
resiliency requirements of Rule
301(b)(6), rather than Regulation SCI.364
Some of these commenters expressed
concerns regarding the costs and
burdens of complying with Regulation
SCI.365 One commenter distinguished
the equities markets from the market for
government securities, asserting that the
would support application of Regulation SCI to
fixed income ATSs if the threshold was set at the
20% volume threshold test currently used under
Rule 301(b)(6)). Commenters on the 2020 Proposal
that generally supported the application of
Regulation SCI expressed varying views as to the
appropriate threshold level that the Commission
should adopt. See discussion infra regarding
comments pertaining to threshold levels.
358 See SIFMA Letter at 5; MFA Letter at 5;
AFREF Letter at 2, 4; and Healthy Markets Letter
at 10–11.
359 See MFA Letter at n.13.
360 See MFA Letter at 5; and Healthy Markets
Letter at 9.
361 See Healthy Markets Letter at 10. See also
infra note 367 and accompanying text (discussing
MarketAxess’s comment with respect to stock
market ATSs and fixed income ATSs).
362 See AFREF Letter at 2.
363 See Tradeweb Letter at 3, 11; BrokerTec Letter
at 5–9; and MarketAxess Letter at 11. The
Commission notes that MarketAxess focused its
comments specifically on corporate and municipal
bonds, rather than government securities, but we
have included such comments here for
completeness.
364 See Tradeweb Letter at 11; BrokerTec Letter at
5–9; and MarketAxess Letter at 11.
365 See Tradeweb Letter at 3, 11; and BrokerTec
Letter at 8–9.
PO 00000
Frm 00032
Fmt 4701
Sfmt 4702
government securities markets do not
have the same type of linkages among
trading venues that increase the risk of
a systems issue in one market spreading
to another and causing significant
market impact.366 As such, this
commenter argued that applying
Regulation SCI would only increase
costs without materially increasing the
integrity or security of the government
securities markets. Another commenter,
while focusing its comments on the
corporate and municipal bond markets,
argued that, when the Commission
adopted Regulation SCI, it did not
include fixed-income ATSs within the
scope of the regulation out of a concern
that it could discourage greater
automation in the fixed-income markets
and that this concern still exists
today.367
Acknowledging comment letters on
the 2020 Proposal, the Commission
continues to believe that the inclusion
of Government Securities ATSs meeting
specified volume thresholds in
Regulation SCI would be appropriate
because such Government Securities
ATSs (inclusive of Communication
Protocol Systems, as proposed), are
heavily reliant on technology and
represent significant pools of liquidity,
as the Commission has determined to be
the case for current SCI ATSs.368 The
Commission believes that, particularly
in light of the evolution of the
government securities markets, it is
important to impose the requirements of
Regulation SCI to help ensure that the
technology systems of such Government
Securities ATSs are reliable and
resilient.369
The focus of the Commission’s
discussion in the Regulation SCI
366 See
Tradeweb Letter at 3, 11.
MarketAxess Letter at 11.
368 Some commenters on the 2020 Proposal also
provided views on whether the Commission should
extend application of Regulation SCI to additional
entities beyond Government Securities ATSs. See,
e.g., Healthy Markets Letter at 9 (stating that the
Commission should expand the scope of Regulation
SCI to include not just government securities ATSs,
but other essential market participants in equities,
futures, and fixed income markets); and SIFMA
Letter at 5 (arguing that the Commission should not
extend Regulation SCI to broker-dealers more
generally at this time). As the Commission stated
in the Regulation SCI Adopting Release, the
Commission will continue to monitor and evaluate
the risks posed by the systems of other market
participants and the continued evolution of the
securities markets to determine whether it would be
appropriate to extend the requirements of
Regulation SCI to additional categories of entities in
the future. See Regulation SCI Adopting Release,
supra note 3, at 72259.
369 As discussed in detail above and as
commenters have stated, the structure of the U.S.
Treasury market has evolved in recent years and
electronic trading has become an increasingly
important feature of the interdealer market for U.S.
Treasury Securities. See supra Section II.B and
notes 62–63, 187 and accompanying text.
367 See
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
Adopting Release regarding the fixed
income markets was on the corporate
and municipal bond markets, not the
government securities markets.370 As
discussed in detail below, given the
evolution of the government securities
markets, the Commission now believes
that there are Government Securities
ATSs that operate with similar
complexity as SCI ATSs that are
currently subject to Regulation SCI, and
that Government Securities ATSs with
significant trading volume play an
important role in the government
securities markets and face similar
technological vulnerabilities as existing
SCI entities. Several commenters on the
2020 Proposal stated that 371 the
application of Regulation SCI would
help the Commission improve its
oversight of the market for government
securities, thereby continuing its efforts
to address technological vulnerabilities
of the core technology systems of key
U.S. securities markets entities.
The Commission explained in the
Regulation SCI Adopting Release that it
adopted Regulation SCI to expand upon,
update, and modernize the requirements
of Rule 301(b)(6) for those ATSs trading
NMS stocks and non-NMS stocks that it
had identified as playing a significant
role in the securities markets.372 As
stated above, because Government
Securities ATSs with significant trading
volume play an important role in the
government securities markets and
present similar risks to the market as
SCI ATSs, the re-proposal of the broader
set of requirements and safeguards of
Regulation SCI is more appropriate for
such entities than proposing to amend
the older and more limited requirements
of Rule 301(b)(6).373
370 See Regulation SCI Adopting Release, supra
note 3, at 72270.
371 See generally SIFMA Letter at 5, MFA Letter
at 5, and AFREF Letter at 2.
372 See Regulation SCI Adopting Release, supra
note 3, at 72264.
373 See 17 CFR 242.301(b)(6). At the same time,
as specified below, the Commission continues to
request comment on whether Government
Securities ATSs that meet the proposed volume
thresholds for SCI ATSs should be governed by
Rule 301(b)(6) instead of being defined as SCI
entities. The requirements of Rule 301(b)(6) are less
rigorous than the requirements of Regulation SCI.
Among other things, Rule 301(b)(6) requires an ATS
to notify the Commission staff of material systems
outages and significant systems changes and that
the ATS establish adequate contingency and
disaster recovery plans. See id. Regulation SCI
expanded upon these requirements, by, for
example, expanding the requirements to a broader
set of systems, imposing new requirements for
information dissemination regarding SCI events,
and requiring Commission notification for
additional types of events, among others. Rule
301(b)(6) currently applies to an ATS that trades
only municipal securities or corporate debt
securities with 20 percent or more of the average
daily volume traded in the United States during at
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
In discussing the costs and burdens of
Regulation SCI, one commenter on the
2020 Proposal characterized the
requirements of Regulation SCI as being
prescriptive and ‘‘one size fits all.’’ 374
This commenter argued that many
Government Securities ATSs already
align with industry standards that are
more flexible and achieve many of the
same goals of Regulation SCI without
additional compliance costs. Regulation
SCI specifically incorporates, and
provides that SCI entities can look to,
industry standards to comply with the
policies and procedures requirement
under Regulation SCI.375 As the
Commission emphasized at the time of
adoption, Regulation SCI is not
intended to be a ‘‘one-size-fits-all’’
regulation, but rather takes a risk-based
approach pursuant to which an SCI
entity’s policies and procedures could
be tailored to a particular system’s
criticality and risk, and includes other
rules and definitions that similarly
incorporated risk-based
considerations.376
Accordingly, the Commission is reproposing to expand the definition of
‘‘SCI ATSs’’ to include Government
Securities ATSs that meet certain
volume thresholds with respect to U.S.
Treasury Securities and/or Agency
Securities.377 Specifically, the definition
of ‘‘SCI ATS’’ would be revised to
include those ATSs which, during at
least four of the preceding six calendar
months, had, with respect to U.S.
Treasury Securities, five percent or
more of the average weekly dollar
volume traded in the United States as
provided by the SRO to which such
transactions are reported; or had, with
respect to Agency Securities, five
percent or more of the average daily
dollar volume traded in the United
States as provided by the SRO to which
such transactions are reported.
Several commenters on the 2020
Proposal discussed the specific
least four of the preceding six calendar months.
Currently, there are no ATSs that are subject to
requirements of Rule 301(b)(6) of Regulation ATS.
374 See BrokerTec Letter at 6.
375 Specifically, 17 CFR 242.1001(a)(4) (Rule
1001(a)(4)) provides that the policies and
procedures required under Rule 1001(a) shall be
deemed to be reasonably designed if they are
consistent with current SCI industry standards. See
Rule 1001(a)(4) of Regulation SCI. ‘‘SCI industry
standards’’ are those standards comprising
information technology practices that are widely
available to information technology professionals in
the financial sector and issued by an authoritative
body that is a U.S. governmental entity or agency,
association of U.S. governmental entities or
agencies, or widely recognized organization.
376 See Regulation SCI Adopting Release, supra
note 3, at 72259–60, 72290–91.
377 See paragraphs (3) and (4) of the definition of
‘‘SCI ATS’’ under Rule 1000 of Regulation SCI.
PO 00000
Frm 00033
Fmt 4701
Sfmt 4702
15527
proposed volume thresholds for
Government Securities ATSs to become
subject to Regulation SCI. One
commenter stated that the five percent
threshold level represents a reasonable
level for the systemic integrity issues
targeted by Regulation SCI,378 while
other commenters expressed support for
the application of Regulation SCI as
proposed without specifically
commenting on the threshold level.
Other commenters offered alternative
standards for determining which
Government Securities ATSs should be
included within the scope of Regulation
SCI. For example, one commenter
recommended that the Commission
adopt a lower (i.e., more stringent)
threshold level and incorporate a
threshold based on a dollar amount.379
Other commenters on the 2020
Proposal suggested adoption of a higher
threshold level for the application of
Regulation SCI to Government
Securities ATSs. For example, one
commenter stated that it would support
the application of Regulation SCI
instead of Rule 301(b)(6) to fixed
income ATSs if the Commission
adopted the 20 percent volume
threshold test currently used under Rule
301(b)(6).380 One commenter who
generally opposed the 2020 Proposal
also urged the Commission to adopt a
higher threshold if it, in fact, extended
application of Regulation SCI to
Government Securities ATSs.381
Another commenter suggested that
application of Regulation SCI should
depend on whether the ATS itself is a
‘‘significant’’ source of liquidity,
recommending that this determination
could, for example, be based on whether
the ATS’s par value traded in the asset
class, for four months over the prior six
months, averaged at least 10 percent of
par value traded in the asset class.382
378 See
AFREF Letter at 2 and 4.
this commenter stated that
Regulation SCI should apply to any family of
related trading venues for government or agency
securities with combined notional average daily
values over the lesser of one percent of the overall
market share on an appropriate dollar threshold,
e.g., $25 billion. See Healthy Markets Letter at 10–
11. In contrast, two commenters advocated for the
application of Rule 301(b)(6) rather than Regulation
SCI to Government Securities ATSs, but stated that
the current 20 percent threshold in Rule 301(b)(6)
is too high. See MarketAxess Letter at 10 (noting
that 20 percent is not an appropriate threshold to
capture ATSs with a significant percentage of
trading volume in corporate or municipal debt); and
BrokerTec Letter at 8 (recommending that Rule
301(b)(6) should apply to all Government Trading
Securities regardless of trading volume).
380 See ICE Bonds Letter II at 5.
381 See Tradeweb Letter at 3, 11. This commenter
stated that the threshold should be raised to a
‘‘more material percentage’’ such as 25 percent.
382 See Bloomberg Letter at 5.
379 Specifically,
E:\FR\FM\18MRP2.SGM
18MRP2
15528
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
The Commission is re-proposing the
five percent thresholds for Government
Securities ATSs, consistent with the
2020 Proposal. Although some
commenters provided suggestions for
different thresholds or recommended
applying Rule 301(b)(6) instead, the
Commission believes that the proposed
five percent thresholds for applying
Regulation SCI to Government
Securities ATSs (inclusive of
Communication Protocol Systems, as
now proposed) would be appropriate
measures to identify those ATSs that
have the potential to significantly
impact investors and the market should
a systems issue occur and thus warrant
the protections and requirements of
Regulation SCI.383 At the same time, as
detailed further below, the Commission
is requesting additional comment on
whether these proposed volume
thresholds should be set higher or lower
for ATSs trading government securities.
The Commission has analyzed the
number of entities it believes are likely
to be covered by the thresholds it is
proposing and believes that, currently,
approximately two Legacy Government
Securities ATSs trading U.S. Treasury
Securities would be subject to
Regulation SCI under the five percent
volume thresholds, one of which would
also meet the volume thresholds for
trading Agency Securities.384 In
addition, the Commission believes that
approximately two currently operating
Communication Protocol Systems
would likely be subject to Regulation
383 Regulation SCI would not apply to
Government Securities ATSs that trade repos,
including repos on U.S. Treasury Securities and
Agency Securities. The Commission notes FINRA
does not require ATSs to report transactions for
repos. See supra note 313. Based on information
available to the Commission, the Commission does
not believe that ATSs today capture a significant
market share for trading repos nor do they rely on
the same use of technology as ATSs that trade U.S.
Treasury Securities or Agency Securities, but below
requests comment on whether Government
Securities ATSs that trade repos, including repos on
U.S. Treasury Securities and Agency Securities
should be subject to Regulation SCI.
384 See supra Section II.D and infra Section
X.B.1a. As discussed above with regard to the Fair
Access Rule, the ATS with the largest market
volume in U.S. Treasury Securities has
approximately 14 percent of market volume, while
the second largest has approximately six percent of
market share, and the third and fourth largest both
have a little less than four percent market share.
The one Legacy Government Securities ATS that
would also exceed the threshold for Agency
Securities accounts for roughly 11 percent of
volume in Agency Securities. See infra Table VIII.1.
If the proposed volume thresholds were ten percent,
only one Legacy Government Securities ATS would
be subject to Regulation SCI, meeting the threshold
levels for both U.S. Treasury Securities and Agency
Securities. However, the Commission believes that
there would still be approximately two currently
operating Communication Protocol Systems subject
to Regulation SCI using a ten percent threshold in
U.S. Treasury Securities. See id.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
SCI under the proposed five percent
threshold in U.S. Treasury Securities.
The Commission believes that the
proposed volume thresholds to apply
Regulation SCI to a Government
Securities ATS that trades U.S. Treasury
Securities and Agency Securities are
reasonable compared to volume
thresholds that would subject an ATS to
Rule 301(b)(6) under Regulation ATS for
the ATS’s trading of corporate bonds
and municipal securities. Currently, an
ATS that trades corporate bonds or
municipal securities is subject to Rule
301(b)(6) if its trading volume reaches
20 percent or more of the average daily
volume traded in the United States for
either corporate bonds or municipal
securities. As discussed in detail above,
when the Commission adopted
Regulation SCI, it decided not to apply
Regulation SCI and its lower volume
thresholds to the fixed income markets,
concluding that a systems issue in fixed
income markets would not have had as
significant or widespread an impact as
in the equities market.385 Among other
things, the Commission reasoned that
the fixed income markets at the time
relied much less on electronic trading
than the equities markets, and that the
municipal securities and corporate bond
fixed income markets tended to be less
liquid than the equity markets, with
slower execution times and less
complex routing strategies.386 As
explained above, however, ATSs for
government securities now operate with
complexity similar to that of markets
that trade NMS stocks in terms of use of
technology and speed of trading, the use
of limit order books, order types,
algorithms, connectivity, data feeds, and
the active participation of PTFs, and
Communication Protocol Systems are
increasingly used as electronic means to
bring together buyers and sellers using
non-firm trading interest for government
securities, being particularly prevalent
in the dealer-to-customer market for offthe-run U.S. Treasury securities, Agency
Securities, and repos.387 Given the
critical role government securities play
in the U.S. and global economies,388 the
385 See Regulation SCI Adopting Release, supra
note 3, at 72270.
386 See id.
387 See supra notes 187–190 and accompanying
text.
388 See supra notes 182–186 and accompanying
text. One commenter, while arguing that
Government Securities ATSs should be subject to
Rule 301(b)(6) in lieu of expanding Regulation SCI,
in fact similarly emphasized the fundamental
importance of the U.S. Treasury market and the
need to take appropriate steps to enhance the
resilience of the market, arguing that all
Government Securities ATSs should be subject to
technology and resiliency requirements regardless
of volume. See BrokerTec Letter at 8.
PO 00000
Frm 00034
Fmt 4701
Sfmt 4702
Commission believes that, due to their
increased reliance on electronic trading
and the important role played by
Government Securities ATSs in today’s
markets, an ATS whose government
securities volume falls between five
percent and 20 percent of trading
volume could significantly impact
investors and the market should a
systems issue occur. By proposing to
apply Regulation SCI to Government
Securities ATSs with a threshold of five
percent, the Commission seeks to
impose the protections of Regulation
SCI to these ATSs because of their
importance and potential technological
risks to the U.S. securities markets.389
While the Commission acknowledges
that, as one commenter on the 2020
Proposal suggested,390 the government
securities markets may not have the
same type of linkages between trading
venues as exists in the equities markets
today, as described above, Government
Securities ATSs with significant trading
volume have the potential to
significantly impact investors, the
overall market, and the trading of
individual securities should an SCI
event occur, similar to SCI ATSs
currently subject to Regulation SCI. In
addition, a system outage at a significant
Government Securities ATS could
disrupt trading at another significant
Government Securities ATS even if
these Government Securities ATSs are
not connected. For example, if a
significant Government Securities ATS
is experiencing a system outage, there
could be a sudden surge in message
traffic (e.g., quoting activities) and
trading at another significant
Government Securities ATS, which
could exceed the system capacity of
such Government Securities ATS and
potentially result in a systems issue
and/or a disruption of trading on that
ATS as well. Further, the Commission
did not base its determination regarding
which entities played a significant role
in the market and should be included
within the scope of the regulation on the
linkages that exist in the equities
markets. In adopting Regulation SCI, the
Commission acknowledged that a
temporary outage at an ATS might not
lead to a widespread systemic
disruption and stated that ‘‘Regulation
SCI is not designed to solely address
389 The Commission also recognizes that ATSs for
corporate bonds and municipal securities are
becoming increasingly electronic and as part of the
2020 Proposal, the Commission requested comment
on, among other things, whether the 20 percent
volume threshold under Rule 301(b)(6) of
Regulation ATS should be amended to capture
ATSs that might be critical markets for those
securities.
390 See Tradeweb Letter at 3, 11.
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
systems issues that cause widespread
systemic disruption, but also to address
more limited systems malfunctions that
can harm market participants.’’ 391 The
Commission believes that, without
appropriate safeguards in place for these
Government Securities ATSs,
technological vulnerabilities could lead
to the potential for failures, disruptions,
delays, and intrusions, which could
place government securities market
participants at risk and interfere with
the maintenance of fair and orderly
markets.
The Commission believes that the
proposed volume thresholds to apply
Regulation SCI to a Government
Securities ATS that trades U.S. Treasury
Securities and Agency Securities are
reasonable as compared to the volume
thresholds for applying Regulation SCI
to ATSs that trade NMS stocks and
ATSs that trade equities that are not
NMS stocks. First, an ATS that trades
NMS stocks is subject to Regulation SCI
if its trading volume reaches: (i) Five
percent or more in any single NMS
stock and one-quarter percent or more
in all NMS stocks of the average daily
dollar volume reported by applicable
transaction reporting plans; or (ii) one
percent or more in all NMS stocks of the
average daily dollar volume reported by
applicable transaction reporting plans.
With respect to non-NMS equity
securities, an ATS is subject to
Regulation SCI if its trading volume is
five percent or more of the average daily
dollar volume (across all non-NMS
equity securities) as calculated by the
SRO to which such transactions are
reported. These thresholds reflect the
Commission’s determination as to what
constitutes a material pool of liquidity
traded by ATSs in the respective asset
classes: One percent for NMS stocks and
five percent for non-NMS equity
securities. The proposed five percent
SCI volume thresholds for Government
Securities ATSs would be similar to
those for ATSs that trade non-NMS
equity securities. Basing the thresholds
on volume as provided to the SRO to
which such transactions are reported is
reasonable given that there is no
transaction reporting plan for
government securities and thus, the
trading figures are based on dollar
volume traded in the United States as
provided by the SRO to which such
transactions are reported.
With regard to one commenter’s
suggestion that the threshold should be
based on combined notional average
daily values of any family of related
trading venues, the Commission
391 See Regulation SCI Adopting Release, supra
note 3, at 72263.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
requests comment, as set forth below, on
whether it would be appropriate to
aggregate the volumes of ATSs that
trade the same security or category of
securities and are operated by a
common broker-dealer, or operated by
affiliated broker-dealers, and treat the
ATSs market places as a single ATS for
purposes of determining whether the
ATSs meet the threshold levels in the
definition of SCI ATS.392
One commenter on the 2020 Proposal
urged the Commission to apply the
deferred compliance period in the
current definition of ‘‘SCI ATS’’ to
Government Securities ATSs and asked
for clarification as to whether this
provision would be applicable.393
Specifically, the definition of SCI ATS
currently provides that an SCI ATS shall
not be required to comply with the
requirements of Regulation SCI until six
months after satisfying the thresholds
for NMS or non-NMS stocks for the first
time. The Commission believes that it is
appropriate to provide Government
Securities ATS that meet the volume
threshold in the definition of ‘‘SCI ATS’’
for the first time a period of time before
they are required to comply with the
requirements of Regulation SCI. Thus,
the Commission is providing
clarification that the deferred
compliance period would be applicable
to Government Securities ATSs.394
Accordingly, Rule 1000 would provide
that, like ATSs trading NMS stocks and
non-NMS stocks, a Government
Securities ATS would not be required to
comply with the requirements of
Regulation SCI until six months after
satisfying the U.S. Treasury Securities
or Agency Securities thresholds in the
definition for the first time.395 The
Commission believes that this sixmonth additional compliance period is
appropriate to allow a Government
Securities ATS the time needed to take
steps to meet the requirements of the
rules, rather than requiring compliance
immediately upon meeting the
threshold level.
Government Securities ATSs trading
U.S. Treasury Securities and/or Agency
Securities that meet the volume
thresholds under the proposed revised
definition of SCI ATS would be subject
to the requirements of Regulation SCI,
392 See
supra note 379.
BrokerTec Letter at 9–10.
394 As in the 2020 Proposal, the Commission is
proposing to amend the last paragraph in the
definition of ‘‘SCI alternative trading system or SCI
ATS’’ (newly redesignated paragraph (5)), which
provides for the 6-month deferred compliance
period, to apply it to Government Securities ATSs.
395 See Rule 1000 of Regulation SCI.
393 See
PO 00000
Frm 00035
Fmt 4701
Sfmt 4702
15529
as broadly described below.396 The
provision at 17 CFR 242.1001(a)
requires SCI entities to establish,
maintain, enforce and periodically
update policies and procedures
reasonably designed to ensure that their
SCI systems and, for purposes of
security standards, indirect SCI systems,
have levels of capacity, integrity,
resiliency, availability, and security
adequate to maintain their operational
capability and promote the maintenance
of fair and orderly markets, and
includes certain minimum requirements
for those policies and procedures
relating to capacity planning, stress
tests, systems development and testing
methodology, the identification of
vulnerabilities, business continuity and
disaster recovery plans (including
geographic diversity and resumption
goals), market data, and monitoring.397
Rule 1001(b) of Regulation SCI
requires that each SCI entity establish,
maintain, enforce and periodically
update written policies and procedures
reasonably designed to ensure that its
SCI systems operate in a manner that
complies with the Exchange Act and the
rules and regulations thereunder and
the entity’s rules and governing
documents, as applicable, and specifies
certain minimum requirements for such
policies and procedures.398
Rule 1001(c) of Regulation SCI
requires SCI entities to establish,
maintain, enforce periodically update
reasonably designed written policies
and procedures that include the criteria
for identifying responsible SCI
personnel, the designation and
documentation of responsible SCI
personnel, and escalation procedures to
quickly inform ‘‘responsible SCI
personnel’’ of potential SCI events.399
Under 17 CFR 242.1002, SCI entities
have certain obligations related to SCI
events. Specifically, when any
responsible SCI personnel has a
reasonable basis to conclude that an SCI
event has occurred, the SCI entity must
396 In the 2020 Proposal, the Commission
requested comment on whether all of the
obligations in Regulation SCI should apply to
Government Securities ATSs that would be SCI
ATSs, or whether only certain requirements should
be imposed, such as those requiring written policies
and procedures, notification of systems problems,
business continuity and disaster recovery testing
(including testing with subscribers of ATSs), and
penetration testing. While, as discussed above,
some commenters argue that Rule 301(b)(6) would
be more appropriate framework for Government
Securities ATSs (see supra note 364), no
commenters advocate for applying only a subset of
the requirements of Regulation SCI to Government
Securities ATSs.
397 17 CFR 242.1001(a) (Rule 1001(a) of
Regulation SCI).
398 17 CFR 242.1001(b)(1)–(2).
399 17 CFR 242.1001(c).
E:\FR\FM\18MRP2.SGM
18MRP2
15530
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
begin to take appropriate corrective
action which must include, at a
minimum, mitigating potential harm to
investors and market integrity resulting
from the SCI event and devoting
adequate resources to remedy the SCI
event as soon as reasonably
practicable.400 Rule 1002(b) provides
the framework for notifying the
Commission of SCI events including,
among other things, to: Immediately
notify the Commission of the event;
provide a written notification within 24
hours that includes a description of the
SCI event and the system(s) affected,
with other information required to the
extent available at the time; provide
regular updates regarding the SCI event
until the event is resolved; and submit
a final detailed written report regarding
the SCI event.401 Rule 1002(c) of
Regulation SCI also requires that SCI
entities disseminate information to their
members or participants regarding SCI
events.402 These information
dissemination requirements are scaled
based on the nature and severity of an
event. 403
The provison at 17 CFR 242.1003(a)
requires SCI entities to provide
quarterly reports to the Commission
relating to system changes.404 Rule
1003(b) of Regulation SCI also requires
that an SCI entity conduct an ‘‘SCI
review’’ not less than once each
calendar year.405 ‘‘SCI review’’ is
defined in Rule 1000 of Regulation SCI
to mean a review, following established
procedures and standards, that is
performed by objective personnel
having appropriate experience to
conduct reviews of SCI systems and
indirect SCI systems, and which review
contains: A risk assessment with respect
to such systems of an SCI entity; and an
assessment of internal control design
and effectiveness of its SCI systems and
indirect SCI systems to include logical
and physical security controls,
development processes, and information
technology governance, consistent with
400 See 17 CFR 242.1002(a) (Rule 1002(a) of
Regulation SCI).
401 See 17 CFR 242.1002(b). For any SCI event
that ‘‘has had, or the SCI entity reasonably estimates
would have, no or a de minimis impact on the SCI
entity’s operations or on market participants,’’ Rule
1002(b)(5) provides an exception to the general
Commission notification requirements under Rule
1002(b). Instead, an SCI entity must make, keep,
and preserve records relating to all such SCI events,
and submit a quarterly report to the Commission
regarding any such events that are systems
disruptions or systems intrusions.
402 See 17 CFR 242.1002(c).
403 See id.
404 See 17 CFR 242.1003(a) (Rule 1003(a) of
Regulation SCI).
405 See 17 CFR 242.1003(b).
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
industry standards.406 Under Rule
1003(b)(2)–(3), SCI entities are also
required to submit a report of the SCI
review to their senior management, and
must also submit the report and any
response by senior management to the
report, to their board of directors as well
as to the Commission.407
The provision at 17 CFR 242.1004 sets
forth the requirements for testing an SCI
entity’s business continuity and disaster
recovery plans with its members or
participants.408
SCI entities are required by 17 CFR
242.1005 to make, keep, and preserve
certain records related to their
compliance with Regulation SCI 409 and
by 17 CFR 242.1006 to make required
filings electronically, on Form SCI.410
Finally, 17 CFR 242.1007 contains
requirements relating to a written
undertaking when records required to
be filed or kept by an SCI entity under
Regulation SCI are prepared or
maintained by a service bureau or other
recordkeeping service on behalf of the
SCI entity.411
Request for Comment
40. Should Regulation SCI apply to
Government Securities ATSs that meet
the proposed definition of SCI ATS? If
so, are the proposed revisions to the
definition of SCI ATS appropriate? If
not, please specifically explain how the
policy goals of Regulation SCI would be
achieved for such systems without
application of the regulation.
41. What are the risks associated with
systems issues at a significant
Government Securities ATS? What
impact would a systems issue have on
the trading of government securities and
the maintenance of fair and orderly
markets? Do the government securities
markets have the same types of linkages
between trading venues as the equities
markets? If not, what kind of linkages
between trading venues exist in the
406 See 17 CFR 242.1000. Rule 1003(b)(1) of
Regulation SCI also states that penetration test
reviews of an SCI entity’s network, firewalls, and
production systems must be conducted at a
frequency of not less than once every three years,
and assessments of SCI systems directly supporting
market regulation or market surveillance must be
conducted at a frequency based upon the risk
assessment conducted as part of the SCI review, but
in no case less than once every three years. See 17
CFR 242.1003(b)(1)(i)–(ii).
407 See 17 CFR 242.1003(b)(2)–(3).
408 See 17 CFR 242.1004 (Rule 1004 of Regulation
SCI).
409 See 17 CFR 242.1005 (Rule 1005 of Regulation
SCI). Rule 1005(a) of Regulation SCI relates to
recordkeeping provisions for SCI SROs, whereas
Rule 1005(b) relates to the recordkeeping provision
for SCI entities other than SCI SROs.
410 See 17 CFR 242.1006 (Rule 1006 of Regulation
SCI).
411 See 17 CFR 242.1007 (Rule 1007 of Regulation
SCI).
PO 00000
Frm 00036
Fmt 4701
Sfmt 4702
government securities markets? How
does this impact the risk of an SCI event
at a Government Securities ATS on the
market and/or market participants?
Should all of the requirements set forth
in Regulation SCI apply to Government
Securities ATSs that meet the proposed
definition of SCI ATS?
42. Should Government Securities
ATSs that meet the proposed volume
thresholds for SCI ATSs be governed by
the Capacity, Integrity, and Security
Rule instead of being defined as SCI
entities? Are there Government
Securities ATSs that play a significant
role in the secondary market for U.S.
Treasury Securities but do not meet the
proposed volume thresholds for SCI
ATSs for which a different threshold
should be established to mandate
compliance with the Capacity, Integrity,
and Security Rule? If yes, what
additional regulatory requirements, if
any, should be imposed on such ATSs?
What would be the costs and benefits
associated with applying Rule 301(b)(6)
to Government Securities ATSs that are
not SCI ATSs?
43. Should the Commission amend
Regulation ATS to require Government
Securities ATSs to comply with Rule
301(b)(6) but adopt a threshold that is
lower or higher than 20 percent? For
example, should the Commission
amend Rule 301(b)(6) to subject
Government Securities ATSs, or certain
Government Securities ATSs, to the
requirements of the rule if the
Government Securities ATS reaches a 5
percent, 7.5 percent, 10 percent, or 15
percent volume threshold?
44. Should the volume threshold to
meet the definition of SCI ATS include
trading in U.S. Treasury Securities and
Agency Securities? Should Regulation
SCI be applied to ATSs for any other
type of government securities? Should
Regulation SCI be applied to ATSs that
trade repos or reverse repos on
government securities, including repos
or reverse repos on U.S. Treasury
Securities, Agency Securities, or both?
45. Should the proposed five percent
threshold test for U.S. Treasury
Securities be applied to all types of U.S.
Treasury Securities or to a subset of U.S.
Treasury Securities? For example,
should the five percent volume test only
be applied to transaction volume in onthe-run U.S. Treasury Securities?
Should the five percent threshold be
applied to transaction volume in all
Agency Securities or to a subset of
Agency Securities? If so, why or why
not?
46. Is the proposed five percent
threshold an appropriate threshold to
apply Regulation SCI to Government
Securities ATSs (inclusive of
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Communication Protocol Systems, as
proposed), as significant markets for
trading in U.S. Treasury Securities or
Agency Securities? If commenters
believe that there should be a percent
threshold for a subset of U.S. Treasury
Securities, such as on-the-run U.S.
Treasury Securities or off-the-run U.S.
Treasury Securities, what should that
threshold be?
47. Should the Commission adopt a
percent volume threshold that is lower
than five percent for U.S. Treasury
Securities, Agency Securities, or both? If
so, what percent threshold should the
Commission adopt for U.S. Treasury
Securities and Agency Securities? For
example, should the Commission adopt
a threshold that is four percent, three
percent, two percent, or one percent for
U.S. Treasury Securities? Should the
Commission adopt a threshold that is
four percent, three percent, two percent,
or one percent for Agency Securities?
Should there be no threshold for U.S.
Treasury Securities? Should there be no
threshold for Agency Securities? Please
support your views.
48. Should the Commission adopt a
percent volume threshold that is higher
than five percent for U.S. Treasury
Securities, Agency Securities, or both?
For example, should the Commission
adopt a threshold that is 7.5 percent, 10
percent, 15 percent, or 20 percent for
U.S. Treasury Securities? Should the
Commission adopt a threshold that is
7.5 percent, 10 percent, 15 percent, or
20 percent for Agency Securities?
49. Is it appropriate to use five
percent of average weekly dollar volume
traded in the United States as a
threshold for application of Regulation
SCI requirements to U.S. Treasury
Securities? If the average weekly dollar
volumes were to include transactions in
the secondary cash market for U.S
Treasury Securities by non-FINRA
members, which currently are not
reported to, or collected by, the SRO
that makes public average weekly dollar
volume statistics, should the Regulation
SCI threshold change? If so, what
should be the appropriate threshold?
Please support your views.
50. Is it appropriate to use five
percent of average daily dollar volume
traded in the United States as a
threshold for the application of
Regulation SCI requirements to Agency
Securities?
51. Would the proposed four out of
six month period be an appropriate
period to measure the volume
thresholds for U.S. Treasury Securities
and Agency Securities for purposes of
Regulation SCI? With respect to
calculating the appropriate thresholds,
would Government Securities ATSs
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
have available appropriate data with
which to determine whether the
proposed thresholds have been met?
Would ATSs that trade U.S. Treasury
Securities be able to readily calculate
whether they meet the volume
thresholds in at least four out of the
preceding six months, given that U.S.
Treasury Securities are disseminated on
a weekly, rather than daily basis? If not,
what data or information is missing?
Would it be appropriate for the
Commission to change the proposed
four out of six month period to a time
period measured in weeks (e.g., at least
16 out of the preceding 24 weeks) with
respect to U.S. Treasury Securities?
What effect would any such change
have on the likelihood that ATSs
trading U.S. Treasury Securities would
meet the volume thresholds?
52. Should the proposed Regulation
SCI volume threshold measurement for
Government Securities ATSs take into
account whether Government Securities
ATSs are operated by a common brokerdealer, or operated by affiliated brokerdealers? 412 For example, should the
Commission aggregate the Treasury
volume of two Government Securities
ATSs that are each operated by a
common broker-dealer, or operated by
affiliated broker-dealers, for purposes of
determining whether the threshold test
has been satisfied and, if it has, apply
Regulation SCI to each ATS? Why or
why not?
53. Should only certain provisions of
Regulation SCI apply to Government
Securities ATSs that meet the proposed
definition of SCI ATS? For example,
should they only be subject to certain
aspects of Regulation SCI? If so, which
provisions should apply? Do
commenters believe that different or
unique requirements should apply to
the systems of such Government
Securities ATSs? What should they be
and why?
54. In what instances, if at all, should
the systems of Government Securities
ATSs that meet the proposed definition
of SCI ATS be defined as ‘‘critical SCI
systems’’? Please describe.
55. Which subscribers or types of
subscribers should Government
Securities ATSs that meet the proposed
definition of SCI ATS consider as
‘‘designated members or participants’’
that should be required to participate in
the annual mandatory business
continuity and disaster recovery testing?
Please describe.
56. Should Government Securities
ATSs that meet the proposed definition
of SCI ATS not be defined as SCI
entities but instead be required to
comply with provisions comparable to
provisions of Regulation SCI?
57. What are the current practices of
Government Securities ATSs with
respect to the subject matter covered by
Regulation SCI? To what extent do
Government Securities ATSs have
practices that are consistent or
inconsistent with the requirements
under Regulation SCI? Please describe
and be specific. Would the application
of Regulation SCI or the Capacity,
Integrity, and Security Rule weaken
ATSs’ existing capacity, integrity, and
security programs?
58. Are there characteristics specific
to the government securities market that
would make applying Regulation SCI
broadly or any specific provision of
Regulation SCI to Government
Securities ATSs unduly burdensome or
inappropriate?
59. As commenters think about
whether and how to apply Regulation
SCI to Government Securities ATSs, are
there any lessons commenters can draw
from the market stress during Spring
2020, including, for example, lessons
learned regarding business continuity or
capacity planning?
60. Are there characteristics specific
to Communication Protocol Systems
that would make applying Regulation
SCI broadly or any specific provision of
Regulation SCI to such systems unduly
burdensome or inappropriate? For these
entities, do commenters believe that
Communication Protocol Systems
would have systems that meet the
definition of ‘‘SCI systems’’? Why or
why not? Are there certain types of
Communication Protocol Systems that
would have systems that meet the
definition while others would not, for
example, RFQ, BWIC, or conditional
order systems? Please describe. Are
there certain features or systems
functionalities of Communication
Protocol Systems that would not meet
the definition of SCI systems, but that
should be subject to Regulation SCI as
SCI systems? Please describe. Should
only certain provisions of Regulation
SCI apply to Communication Protocol
Systems? If so, which provisions should
apply? Do commenters believe that
different or unique requirements should
apply to Communication Protocol
Systems? What should they be and
why?
412 See Section V.A.2, infra, discussing the
proposed aggregation of volume of affiliated ATSs
for purposes of application of the Fair Access Rule.
PO 00000
Frm 00037
Fmt 4701
Sfmt 4702
15531
E:\FR\FM\18MRP2.SGM
18MRP2
15532
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
IV. Revised Form ATS–N: Changes
Applicable to Government Securities
ATSs and NMS Stock ATSs
jspears on DSK121TN23PROD with PROPOSALS2
A. Proposed Filing and Effectiveness
Requirements for Government Securities
ATSs and NMS Stock ATSs
The Commission is re-proposing to
amend Rule 304(a) to require that a
Covered ATS, which would include a
Government Securities ATS, must
comply with Rules 300 through 304 of
Regulation ATS, as applicable, to be
exempt from the definition of
‘‘exchange’’ pursuant to Rule 3a1–
1(a)(2).413 Rule 304, as proposed to be
amended, would require all Government
Securities ATSs to file Form ATS–N, as
revised. In addition, Communication
Protocol Systems that choose to comply
with Regulation ATS would be required
to meet all applicable requirements of
Regulation ATS, including filing a Form
ATS–N if they trade NMS stocks,
government securities, or repos. The
Commission is proposing to make
changes to current Form ATS–N,
including by adding questions about
interaction with related markets,
liquidity providers, and surveillance
and monitoring, and by making
organizational and other changes that
would make the form more relevant for
Government Securities ATSs inclusive
of Communication Protocol Systems, as
proposed.414 These changes would be
applicable to both Government
Securities ATSs and NMS Stock ATSs
and would require NMS Stock ATSs to
file amendments to their existing
form.415
Each Form ATS–N would be subject
to an effectiveness process, which
would allow the Commission to review
disclosures on Form ATS–N and declare
the Form ATS–N ineffective if the
Commission finds, after notice and
opportunity for hearing, that such action
is necessary and appropriate in the
public interest and the protection of
investors. The effectiveness process is
not merit-based, but is designed to
facilitate the Commission’s oversight of
Covered ATSs, and address, for
example, material deficiencies with
respect to the accuracy, currency, and
completeness of disclosures on Form
ATS–N.416 The Commission is
413 As proposed, references to ‘‘NMS Stock ATSs’’
throughout Rule 304 would be changed to refer to
‘‘Covered ATSs,’’ which would encompass
Government Securities ATSs. See supra Section
III.B.
414 See infra Section IV.D.
415 See infra Section IV.D.1.
416 In the NMS Stock ATS Adopting Release, the
Commission stated that, while it will review Form
ATS–N filings, its review ‘‘is not designed to verify
the accuracy of the disclosures nor designed as an
independent investigation of whether all aspects of
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
proposing to apply the same filing and
effectiveness process to Government
Securities ATSs that is applicable to
NMS Stock ATSs filing Form ATS–N.
However, the Commission is proposing
changes, as described below, to the
processes that would apply to both NMS
Stock ATSs and Government Securities
ATSs, including with regard to
extensions of the Commission review
period for initial Form ATS–N and
Form ATS–N amendments and the
filing of amendments related to fees.
Commenters on the 2020 Proposal
generally supported the requirement
that Government Securities ATSs file
Form ATS–G.417 Although one
commenter stated that the requirement
to file Form ATS–G is unnecessarily
burdensome for Government Securities
ATSs with limited volume,418 another
commenter stated it does not support
requiring different levels of public
disclosure by Government Securities
ATSs depending on their trading
volume, as it could result in a complex
and confusing system of disclosure for
market participants.419 The Commission
is proposing the requirement to file a
public Form ATS–N, as revised, for all
Government Securities ATSs, regardless
of their volume, as this requirement is
designed to allow market participants to
compare Government Securities ATSs,
and excluding low volume Government
Securities ATSs from this requirement
would undermine the goal of
transparency and the ability of market
participants to use Form ATS–N to
assess Government Securities ATSs to
select the most appropriate trading
venue for their needs.
The Commission is proposing to
apply to Government Securities ATSs
the existing provisions of current Rule
304(a) for the filing and Commission
review of an initial Form ATS–N with
a modification to the circumstances
under which the Commission can
extend the review period for an initial
Form ATS–N.420 The Commission
the NMS Stock ATS operations or the ATS-related
activities of the broker-dealer operator are disclosed
on Form ATS–N.’’ See NMS Stock ATS Adopting
Release, supra note 2, at 38851. This would equally
apply to the Commission’s review of Forms ATS–
N filed by Government Securities ATSs, as
proposed.
417 See, e.g., MFA Letter at 5; AFREF Letter, at 3;
BrokerTec Letter at 2. One commenter, which
expressed general support for the enhanced filing
requirements and urged the Commission to move
forward with finalization and implementation of
the proposal, stated that applying Regulation ATS
to Government Securities ATSs that meet certain
volume thresholds would increase public
operational transparency. See FIA PTG Letter at 2.
418 See ICE Bonds Letter I at 4–5.
419 See MFA Letter at 5.
420 See infra notes 430–432 and accompanying
text. The proposed amendment to Rule 304(a)
PO 00000
Frm 00038
Fmt 4701
Sfmt 4702
believes that the review process is
appropriate for the same reasons stated
in the NMS Stock ATS Adopting
Release,421 will facilitate the
Commission’s oversight of Government
Securities ATSs, and will help ensure
that information is disclosed in a
complete and comprehensible manner.
The differences between Form ATS–N
filed by Government Securities ATSs
and Form ATS–N filed by NMS Stock
ATSs should not warrant a different
review and effectiveness process and
hence the Commission is proposing to
apply the same provisions that are
applicable to NMS Stock ATSs to
Government Securities ATSs, which
include the following:
• No exemption is available to a
Government Securities ATS pursuant to
Exchange Act Rule 3a1–1(a)(2) unless
the Government Securities ATS files
with the Commission an initial Form
ATS–N,422 and the initial Form ATS–N
is effective.423
• The Commission will, by order,
declare ineffective an initial Form ATS–
N no later than 120 calendar days from
the date of filing with the Commission,
or, if applicable, the end of the extended
Commission review period.424 During
the Commission review period, the
Government Securities ATS shall
amend its initial Form ATS–N by filing
updating amendments, correcting
amendments, and fee amendments 425 as
applicable.426
• An initial Form ATS–N will
become effective, unless declared
ineffective, upon the earlier of: (1) The
completion of review by the
Commission and publication pursuant
to Rule 304(b)(2)(i); or (2) the expiration
of the Commission review period, or, if
applicable, the end of the extended
review period.427
• The Commission will, by order,
declare an initial Form ATS–N
would also apply to the review of initial Form
ATS–N filed by NMS Stock ATSs.
421 See NMS Stock ATS Adopting Release, supra
note 2, at 38782.
422 The Commission staff may reject a Form ATS–
N filing that is defective because, for example, it is
missing sections or missing responses to any subquestions, or does not comply with the electronic
filing requirements. This is a separate process from
the determination to declare a Form ATS–N
ineffective. See NMS Stock ATS Adopting Release,
supra note 2, at 38791.
423 See Rule 304(a)(1)(i).
424 See proposed Rule 304(a)(1)(ii). See also infra
note 430.
425 See infra note 451.
426 As proposed, to make material changes to its
initial Form ATS–N during the Commission review
period, the Government Securities ATS shall
withdraw its filed initial Form ATS–N and may
refile an initial Form ATS–N pursuant to Rule
304(a)(1). See Rule 304(a)(1)(ii)(B).
427 See proposed Rule 304(a)(1)(iii)(A).
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
ineffective if it finds, after notice and
opportunity for hearing, that such action
is necessary or appropriate in the public
interest, and is consistent with the
protection of investors.428 If the
Commission declares an initial Form
ATS–N ineffective, the Government
Securities ATS shall be prohibited from
operating as a Government Securities
ATS pursuant to Exchange Act Rule
3a1–1(a)(2). An initial Form ATS–N
declared ineffective does not prevent
the Government Securities ATS from
subsequently filing a new Form ATS–
N.429
The Commission is re-proposing to
amend Rule 304(a)(1)(ii)(A)(1), which
currently provides that the Commission
may extend the initial Form ATS–N
review period for an additional 90
calendar days if the Form ATS–N is
unusually lengthy or raises novel or
complex issues that require additional
time for review, to provide that the
Commission may extend the review
period if it finds that an extension is
appropriate.430 The proposed standard
is the same standard for extending the
Commission review period for SRO rule
filings under Section 19 of the Exchange
Act.431 This would apply to Form ATS–
N filed by Government Securities ATSs
as well as NMS Stock ATSs. The
Commission believes that extending the
428 Like the review process for Form ATS–N for
NMS Stock ATSs, the Commission’s review of Form
ATS–N for Government Securities ATSs would not
be merit-based; instead it would focus on the
completeness and comprehensibility of the
disclosures. See NMS Stock ATS Adopting Release,
supra note 2, at 38790. In the NMS Stock ATS
Adopting Release, the Commission discussed the
circumstances under which the Commission would
declare a Form ATS–N amendment ineffective.
Such circumstances would also apply to the
Commission’s review of an amendment to Form
ATS–N filed by a Government Securities ATS. For
example, the Commission believes it would be
necessary or appropriate in the public interest, and
consistent with the protection of investors, to
declare ineffective a Form ATS–N if, for example,
the Commission finds, after notice and opportunity
for a hearing, the Form ATS–N was filed by an
entity that does not meet the definition of a
Government Securities ATS; one or more
disclosures reveal non-compliance with Federal
securities laws, or the rules or regulations
thereunder, including Regulation ATS; or one or
more disclosures on Form ATS–N are materially
deficient with respect to their completeness or
comprehensibility. For further discussion, see infra
Section IV.B.2.
429 See Rule 304(a)(1)(iii)(B).
430 See Rule 304(a)(1)(ii)(A)(1). The rule provides
that the Commission extends the review period, it
will notify the Government Securities ATS in
writing within the initial 120-calendar day review
period and will briefly describe the reason for the
determination for which additional time for review
is required. The Commission may also extend the
initial Form ATS–N review period for any extended
review period to which a duly authorized
representative of the Form ATS–N agrees in writing.
See Rule 304(a)(1)(ii)(A)(2).
431 See 15 U.S.C. 78s(b)(2)(A)(ii).
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Commission review period for Form
ATS–N if it finds that an extension is
appropriate would facilitate an effective
review process.432 For example, if an
ATS’s disclosures on an initial Form
ATS–N are difficult to understand or
appear to be incomplete, the
Commission may need additional time
to discuss the disclosures with the ATS
to ascertain whether to declare the Form
ATS–N ineffective, even if the form is
not unusually lengthy or does not raise
novel or complex issues. Rather than
moving to declare an initial Form ATS–
N ineffective because of material
deficiencies with respect to
completeness and comprehensibility,
the Commission could extend the
review period to allow the filer to
resolve the deficiencies. As under
current Rule 304(a)(1)(ii)(A)(1), in such
case, the Commission will notify the
Covered ATS in writing within the
initial 120-calendar day review period
and will briefly describe the reason for
the determination for which additional
time for review is required.
The Commission is also re-proposing
a process for Legacy Government
Securities ATSs that have a Form ATS
on file with the Commission as of the
effective date of any final rule to
continue to operate during the
Commission’s review period.433 In
addition, to allow a Currently Exempted
Government Securities ATS or Covered
Newly Designated ATS to continue to
operate without disruption while its
initial Form ATS–N is under
Commission review, the Commission is
proposing to amend Rule 304(a)(1)(i) to
provide that a Currently Exempted
Government Securities ATS or Covered
Newly Designated ATS may continue to
operate pursuant to Regulation ATS
until its initial Form ATS–N becomes
effective. The Commission believes that
all Legacy Government Securities
ATSs—whether they are operating
pursuant to a Form ATS or whether they
432 In the Commission staff’s experience
reviewing Form ATS–N filed by NMS Stock ATSs,
the Commission review period was extended (either
by the Commission or by the agreement of a duly
authorized representative of the ATS) for 33 of the
43 Forms ATS–N that the Commission has
reviewed and published. In its review of each Form
ATS–N, the Commission staff engaged in extensive
conversations with the NMS Stock ATS with regard
to the NMS Stock ATS’s disclosures on its initial
Form ATS–N.
433 See proposed Rule 304(a)(1)(iv). Other than
the differences discussed below, the proposed
process is similar to the process currently provided
under Rule 304(a)(1)(iv) for Legacy NMS Stock
ATSs. ‘‘Legacy NMS Stock ATSs’’ are NMS Stock
ATSs that were operating pursuant to an initial
operation report on Form ATS on file with the
Commission as of January 7, 2019. The Commission
is proposing to delete references to Legacy NMS
Stock ATSs throughout the rule text, as the
transition period for such ATSs has ended.
PO 00000
Frm 00039
Fmt 4701
Sfmt 4702
15533
have operated as a Currently Exempted
Government Securities ATS—should be
permitted to continue to operate during
the Commission review period. The
Commission further believes Covered
Newly Designated ATSs should be
permitted to operate without disruption
to their participants and the market. A
Government Securities ATS or Covered
Newly Designated ATS would file with
the Commission an initial Form ATS–N
no later than the date 90 calendar days
after the effective date of any final rule.
An initial Form ATS–N filed by a
Legacy Government Securities ATS
would supersede and replace a
previously filed Form ATS of the Legacy
Government Securities ATS. A Legacy
Government Securities ATS that fails to
comply with the requirements of
Regulation ATS by filing Form ATS–N
by the 90th calendar day from the
effective date of any final rule and
continues operating as a Government
Securities ATS would no longer qualify
for the exemption provided under Rule
3a1–1(a)(2), and thus, risks operating as
an unregistered exchange in violation of
Section 5 of the Exchange Act. If a
Legacy Government Securities ATS that
has a Form ATS on file with the
Commission seeks to trade, for example,
government securities and corporate
bonds fails to file a Form ATS–N by the
90th calendar day, the ATS must either
file a cessation of operations report on
Form ATS or file a material amendment
on Form ATS to remove information
related to government securities. A
Legacy Government Securities ATS or
Newly Designated Covered ATS would
be permitted to operate, on a provisional
basis, pursuant to the filed initial Form
ATS–N, and any amendments thereto,
while the Commission reviews the
initial Form ATS–N.
The Commission is proposing the
initial Commission review period (not
including any extension) for an initial
Form ATS–N filed by a Legacy
Government Securities ATS or Newly
Designated Covered ATS to be 180
calendar days. Based on Commission
staff experience reviewing initial Form
ATS–N filings during the transition
period for Form ATS–N, the
Commission believes it would be
appropriate to provide a 180 calendar
day review period rather than the 120
calendar day review period that was
applicable to initial filings by Legacy
NMS Stock ATSs and that would be
applicable to a new Covered ATSs
under Rule 304(a)(1)(ii)(A).434 The 180
calendar day review period is designed
to provide Commission staff with
adequate time to review filings, discuss
434 See
E:\FR\FM\18MRP2.SGM
supra note 424 and accompanying text.
18MRP2
15534
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
disclosures with Covered ATSs, and
address any deficiencies.
For the same reasons discussed
above,435 the Commission is proposing
to amend Rule 304(a)(1)(iv)(B) to
provide that the Commission can extend
the initial Form ATS–N review period
for Legacy Government Securities ATSs
by an additional 120 calendar days 436 if
it determines that a longer period is
appropriate.
Other than the proposed changes to
the circumstances under which the
Commission may extend the
Commission review period, the
Commission is also proposing that the
process for the Commission to review
and declare ineffective, if necessary, an
initial Form ATS–N filed by a Legacy
Government Securities ATS would be
the same as the process for an initial
Form ATS–N filed by a Legacy NMS
Stock ATS.437 Given the proposed
intended uses of Form ATS–N to allow
the Commission to monitor
developments and carry out its
oversight functions over Government
Securities ATSs and to enable market
participants to make more informed
decisions about how their trading
interest will be handled by the ATSs,
the Commission believes that it is
important for a Government Securities
ATS to maintain an accurate, current,
and complete Form ATS–N.438
Providing the Commission with the
opportunity to review Form ATS–N
disclosures helps ensure that
435 See
supra notes 430–432 and accompanying
jspears on DSK121TN23PROD with PROPOSALS2
text.
436 Consistent with the process for Legacy NMS
Stock ATSs today, Rule 304(a)(1)(iv) would permit
the Commission to extend the initial Form ATS–N
review period for Legacy Government Securities
ATSs for an additional 120-calendar days. See infra
note 437.
437 See Rule 301(b)(2)(viii). Rule 304(a)(1)(iv)(B),
as proposed, would provide that the Commission
may, by order, as provided in Rule 304(a)(1)(iii),
declare an initial Form ATS–N filed by a Legacy
Government Securities ATS or Covered Newly
Designated ATS ineffective no later than 180
calendar days from the date of filing with the
Commission, or, if applicable, the end of the
extended review period. As proposed, the
Commission may extend the initial Form ATS–N
review period for a Legacy Government Securities
ATS or Covered Newly Designated ATS for: An
additional 120 calendar days if the Commission
determines that a longer period is appropriate, in
which case the Commission will notify the Legacy
Government Securities ATS or Covered Newly
Designated ATS in writing within the initial 180calendar day review period and will briefly
describe the reason for the determination for which
additional time for review is required; or any
extended review period to which a duly-authorized
representative of the Legacy Government Securities
ATS agrees in writing.
438 See NMS Stock ATS Proposing Release, supra
note 29 (discussing the proposed process for
amendments to, and Commission review of, Form
ATS–N filed by NMS Stock ATSs).
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
information is disclosed in a complete
and comprehensible manner.439
As the intended uses of Form ATS–
N filed by Government Securities ATS
and Form ATS–N disclosures filed by
NMS Stock ATSs are similar, the
Commission is proposing the same
filing requirements that are currently
applicable to Form ATS–N amendments
filed by NMS Stock ATSs to Form ATS–
N amendments filed by Government
Securities ATSs. Like an NMS Stock
ATS, a Government Securities ATS
would be required to amend Form ATS–
N:
• At least 30 calendar days, or the
length of any extended review period,
prior to the date of implementation of a
material change to the operations of the
Government Securities ATS or to the
activities of the broker-dealer operator
or its affiliates that are subject to
disclosure on the Form ATS–N, other
than changes related to order display or
fair access, which will be contingent
amendments reported pursuant to Rule
304(a)(2)(i)(D), or fees, which will be fee
amendments reported pursuant to Rule
304(a)(2)(E) (‘‘material amendment’’).440
• No later than 30 calendar days after
the end of each calendar quarter to
correct information that has become
inaccurate or incomplete for any reason
and was not required to be reported to
the Commission as a material
amendment, correcting amendment,
contingent amendment, or fee
amendment (‘‘updating
amendment’’).441
• Promptly to correct information in
any previous disclosure on the Form
ATS–N, after discovery that any
information previously filed on a Form
ATS–N was materially inaccurate or
incomplete when filed (‘‘correcting
amendment’’).442
• No later than the date that
information required to be disclosed in
Part III, Item 23 on Form ATS–N, which
addresses fair access, has become
inaccurate or incomplete (‘‘contingent
amendment’’). Because the order
display and execution access rule under
Rule 301(b)(3) does not apply to
Government Securities ATSs,
Government Securities ATSs would not
be required to disclose information
pertaining to order display and
439 See NMS Stock ATS Adopting Release, supra
note 2, Section IV.A.3.
440 See Rule 304(a)(2)(i)(A). The Commission is
proposing revisions to Rule 304(a)(2)(i)(A) to
reference fee amendments and to clarify the
language of the provision. See also infra note 451.
441 See Rule 304(a)(2)(i)(B). See also infra note
451.
442 See Rule 304(a)(2)(i)(C). For a discussion of
when an ATS should file a correcting amendment,
see NMS Stock ATS Adopting Release, supra note
2, at 38806.
PO 00000
Frm 00040
Fmt 4701
Sfmt 4702
execution access. Accordingly, for
Government Securities ATSs, Rule
304(a)(2)(i)(D) would only apply to the
fair access disclosure on Form ATS–
N.443
• No later than after the date that
information required to be disclosed in
Part III, Item 18 on Form ATS–N has
become inaccurate or incomplete (‘‘fee
amendment’’).
In the NMS Stock ATS Adopting
Release, the Commission provided
examples of scenarios that are
particularly likely to implicate a
material change.444 In consideration of
Commission staff’s experience with
Form ATS–N, the proposed change to
include Communication Protocol
Systems in the definition of ‘‘exchange,’’
and the proposed changes to Form
ATS–N, the Commission is reiterating
and adding to the list of scenarios
particularly likely to implicate a
material change, which would include,
but are not limited to: (1) A brokerdealer operator or its affiliates beginning
to trade on the Covered ATS; (2) a
change to the broker-dealer operator’s
policies and procedures governing the
written safeguards and written
procedures to protect the confidential
trading information of subscribers
pursuant to Rule 301(b)(10)(i) of
Regulation ATS, including types of
persons that have access to confidential
trading information; 445 (3) a change to
the types of participants on the Covered
ATS or the eligibility to participate in
the ATS; (4) the introduction or removal
of, or change to, an order type or type
of message that subscribers can receive
or send; (5) the introduction of, or
change to, requirements, conditions, or
restrictions to send, receive, or view
trading interest; (6) a change to the
interaction of trading interest
(including, for example, procedures
related to how participants send,
receive, respond to, counter, and firmup trading interest) and priority
443 The Commission is re-proposing to revise Rule
304 to replace references to ‘‘Order Display and Fair
Access Amendments’’ with ‘‘Contingent
Amendments.’’ The term ‘‘Contingent Amendment’’
would apply to amendments related to Form ATS–
N disclosures regarding order display and fair
access, as applicable, under Rule 304(a)(2)(i)(D) to
Form ATS–N filed by both NMS Stock ATSs and
Government Securities ATSs.
444 See NMS Stock ATS Adopting Release, supra
note 2, at 38803.
445 In the Commission’s experience, a change in
ownership of the broker-dealer operator that does
not result in the change in the registered entity
nevertheless may be likely to implicate a material
change, in that, among other things, it may result
in a change to the persons who have access to
confidential trading information. A change in the
broker-dealer operator, however, would require the
Covered ATS to cease operations and file a new
Form ATS–N. See infra notes 527–528 and
accompanying text.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
procedures; (7) any change to ATS
functionalities or procedures that affect
pricing of trading interest; (8) a change
that would impact a subscriber’s ability
to send or interact with trading interest,
including a change to the segmentation
of orders and participants; (9) a change
to the manner in which the Covered
ATS displays or makes known trading
interest, including to limit or expand
the trading interest that subscribers can
view or interact with; (10) a change of
a service provider to the operations of
the Covered ATS that has access to
subscribers’ confidential trading
information; and (11) a change to
introduce or stop routing or sending
away trading interest. A Covered ATS
that notifies subscribers, or certain
subscribers, about potential changes to
ATS operations or ATS activities of the
broker-dealer operator or its affiliates in
advance of filing a Form ATS–N
amendment demonstrates that the ATS
determines such information to be
important to subscribers and may likely
be material. In addition, from the
Commission staff’s experience, if a
Covered ATS removes an important
functionality or no longer makes a
functionality available to subscribers or
certain groups of subscribers, the
removal of such functionality could be
a material change.
This list is not intended to be
exhaustive, and does not mean to imply
that other changes to the operations of
a Covered ATS or the activities of the
broker-dealer operator or its affiliates
would not constitute material changes.
Further, the Covered ATS should
generally consider whether the
cumulative effect of a series of changes
to the operations of the Covered ATS or
the activities of the broker-dealer
operator or its affiliates with regard to
the Covered ATS is material. In
addition, in determining whether a
change is material, an ATS generally
should consider whether such change
would affect: (1) The competitive
dynamics among ATS subscribers; (2)
the execution quality or performance of
the orders of any subscriber or category
of subscribers; (3) the nature or
composition of counterparties with
which any subscriber or category of
subscribers interact; and (4) the relative
speed of access or execution of any
subscriber or group of subscribers.446
446 For further discussion, see NMS Stock ATS
Adopting Release, supra note 2, Section IV.B.1.a. In
the NMS Stock ATS Adopting Release, the
Commission stated that in determining whether a
change is material, an ATS should generally
consider whether such change would affect ‘‘the
fees that any subscriber or category of subscribers
would pay to access and/or use the ATS.’’ See id.
at 38803. As discussed below, the Commission is
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
The Commission is proposing a new
amendment type—fee amendments—
that is not currently provided for under
Rule 304(a)(2), but would be filed by
both NMS Stock ATSs and Government
Securities ATSs. The Covered ATS
would be required to file a fee
amendment no later than the date it
makes a change that makes information
reported on Part III, Item 18, inaccurate
or incomplete.447 Part III, Item 18 of
Form ATS–N would require disclosure
of fee-related information, including,
among other things, a description of the
types of fees, structure of fees, variables
that impact fees, differentiation among
fees among types of subscribers, the
range of fees, and rebates or discounts,
for use of ATS services or services that
are bundled with the subscriber’s use of
non-ATS services or products offered by
the broker-dealer operator or its
affiliates.448 Changes that would trigger
a fee amendment would include, among
other things, a change to the range of
fees, a change to the factors that affect
the fees that the ATS charges, or any
other change to the fee disclosure in
Part III, Item 18. In the Commission
staff’s experience reviewing Form ATS–
N amendments, NMS Stock ATSs have
taken varied approaches to the reporting
of fees. In some cases, NMS Stock ATSs
have treated fee changes as material
changes, and filed amendments on Form
ATS–N at least 30 calendar days before
implementing the changes. In other
cases, NMS Stock ATSs have filed
updating amendments no later than 30
days from the end of the calendar
quarter in which the ATS implemented
the fee change. The Commission
believes that fee changes should be
transparent and that both potential and
current subscribers and customers of
subscribers, generally, should be timely
informed of a change to a Covered
ATS’s fees, as required to be reported on
Form ATS–N. The Commission notes
that today, pursuant to Section 19(b) of
the Exchange Act,449 national securities
exchanges file proposed rule changes
with the Commission that may take
effect upon filing with the Commission
proposing a new amendment type for fee
amendments, and as a result, changes to
information in the fee disclosure in Part III, Item 18
would not be material changes for purposes of Rule
304(a)(2).
447 If the Covered ATS files a fee amendment in
advance to notice a change of a fee, for example,
the Covered ATS should provide the effective date
for the fee so that subscribers can understand when
the fee will be effective and thus impact them. The
Covered ATS must subsequently file an updating
amendment on Form ATS–N to remove the
outdated effective date and any fees no longer in
effect to ensure that the disclosures on Form ATS–
N are current and accurate.
448 See infra Section IV.D.5.r.
449 15 U.S.C. 78s(b).
PO 00000
Frm 00041
Fmt 4701
Sfmt 4702
15535
if the rule change is ‘‘establishing or
changing a due, fee, or other charge
applicable only to a member,’’ no matter
the materiality of the rule change.450
NMS Stock ATSs, which compete with
national securities exchanges, are not
subject to this provision to the Exchange
Act, and are required to file a material
amendment to Form ATS–N, and thus
wait 30 calendar days before
implementing a fee change, if the fee
change is material. Given this difference
between national securities exchanges
and NMS Stock ATSs, the Commission
believes that requiring Covered ATSs to
file a fee amendment no later than the
date it makes a change to a fee or fee
disclosure would provide the public
with sufficient notice about a fee change
while allowing the ATS to act nimbly to
make fee changes to respond to, for
example, competitive pressures from
other trading venues. The Commission
is also making conforming changes in
Rule 304 that would, among other
things, allow Covered ATSs to file fee
amendments to initial Form ATS–N
while the initial Form ATS–N is under
Commission review.451
Like Form ATS–N filed by NMS Stock
ATSs, the Commission would, by order,
declare ineffective any Form ATS–N
amendment filed by Government
Securities ATSs pursuant to Rule
304(a)(2)(i)(A) through (E) if it finds that
such action is necessary or appropriate
in the public interest and is consistent
with the protection of investors.452
However, the Commission is proposing
to amend Rule 304(a)(2)(ii), which
currently provides that the Commission
would declare any Form ATS–N
amendment ineffective no later than 30
calendar days from filing with the
Commission, to permit the Commission
to extend the Form ATS–N amendment
review period by an additional 30
calendar days if the Commission finds
that a longer period is appropriate. The
ability to extend the review period for
amendments to Form ATS–N by an
additional 30 calendar days would
allow the Commission additional time
to review and discuss the amendment
with the filer, and, if necessary, declare
the Form ATS–N amendment
450 17
CFR 240.19b–4(f)(2).
proposed changes to Rule 304(a)(1)(ii)(B)
and Rule 304(a)(1)(iv)(C). In addition, the
Commission is proposing to revise the definition of
‘‘Material Amendment’’ to state that it would not
include a fee amendment required to be filed
pursuant to Rule 304(a)(2)(i)(E) and to reorder the
language in Rule 304(a)(1)(ii)(A) to improve the
readability of the provision. See Rule
304(a)(2)(i)(A). The Commission is also proposing
to revise the definition of ‘‘Updating Amendment’’
to state that it would not include a fee amendment.
See Rule 304(a)(2)(i)(B).
452 See Rule 304(a)(2)(ii).
451 See
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
15536
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
ineffective. Based on the Commission
staff’s experience reviewing Form ATS–
N amendments, amendments on Form
ATS–N vary in length, complexity, as
well as comprehensibility and clarity.
The Commission staff frequently
engages in extensive discussions with
NMS Stock ATSs about their disclosures
in an amendment, and as a result of
these discussions, ATSs often amend a
filed amendment to address deficiencies
within the Commission review period.
To date, NMS Stock ATSs have resolved
such deficiencies within the
Commission review period, and the
Commission has not declared a Form
ATS–N amendment ineffective.
However, in several circumstances,
NMS Stock ATSs have submitted draft
amendments to the Commission staff,
which has provided the staff and NMS
Stock ATSs with additional time to
resolve potential deficiencies. NMS
Stock ATSs, however, have no
obligation to provide such a draft to the
Commission, nor does the Commission
staff have any obligation to review such
a draft.
In the event a Covered ATS is unable
to address deficiencies within the initial
30-day review period, the Commission
believes that, rather than moving to
declare a Form ATS–N amendment
ineffective, it would be appropriate to
extend the review period and allow the
filer more time to address such
deficiencies. The Commission believes
that 30 additional calendar days will
give the Covered ATS sufficient time to
address any such concerns. If the
Covered ATS is unable to resolve the
deficiencies within the extended review
period, the Commission will declare the
Form ATS–N amendment ineffective if
it finds that such action is necessary or
appropriate in the public interest, and is
consistent with the protection of
investors. The Commission is therefore
proposing that the Commission may
extend the Form ATS–N amendment
review period by an additional 30
calendar days if the Commission finds
that a longer period is appropriate, or to
any extended review period to which a
duly-authorized representative of the
ATS agrees in writing. The Commission
is also proposing to amend Rule
304(a)(2)(i)(A) to provide that a Covered
ATS may not implement a material
change before the end of the 30 calendar
day review period or the length of any
extended review period under proposed
Rule 301(a)(2)(ii)(A).453 Today, an NMS
453 See proposed Rule 304(a)(2)(i)(A) (stating that
a Covered ATS shall amend a Form ATS–N at least
30 calendar days, or the length of any extended
review period pursuant to Rule 304(a)(2)(ii)(A),
prior to the date of implementation of a material
change (other than a correcting amendment) to the
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Stock ATS may not implement a
material change until the expiration of
the 30-calendar day Commission review
period. Likewise, as a result of the
proposed change, in the event of an
extension of the Commission review
period, the Covered ATS would
therefore not implement the material
change until the review period has
expired. As discussed below, the
Commission would disseminate the
material amendment following the
expiration of the review period or any
extended review period.454
The Commission is also re-proposing
to apply current Rule 304(a)(3) to
require a Government Securities ATS to
notice its cessation of operations on a
Form ATS–N at least 10 business days
prior to the date it will cease to operate
as a Government Securities ATS.455
Filing such a notice would cause the
Form ATS–N to become ineffective on
the date designated by the Government
Securities ATS. In addition, the
Commission is re-proposing to apply
Rule 304(a)(4) to Government Securities
ATSs, which would allow the
Commission to order to suspend (for a
period not exceeding twelve months),456
limit, or revoke a Covered ATS’s
exemption pursuant to Rule 3a1–1(a)(2)
if the Commission finds, after notice
and opportunity for hearing, that such
action is necessary or appropriate in the
public interest.457 Rule 304(a)(4)(ii)
would provide that if the exemption for
a Government Securities ATS is
suspended or revoked pursuant to Rule
304(a)(4)(i), the Government Securities
ATS would be prohibited from
operating pursuant to the Rule 3a1–
1(a)(2) exemption.458 If the exemption
operations of the Covered ATS or to the activities
of the broker-dealer operator or its affiliates that are
subject to disclosure on the Form ATS–N).
454 See infra note 463 and accompanying text.
455 See Rule 304(a)(3).
456 The proposed limitation on the time frame for
suspension is consistent with Federal securities law
provisions pursuant to which the Commission may
suspend the activities or registration of a regulated
entity. See, e.g., Exchange Act Section 15(b)(4) (15
U.S.C. 78o(b)(4)) and 15B(c)(2) (15 U.S.C. 78o–
4(c)(2)). See NMS Stock ATS Proposing Release,
supra note 29, at 81031 n.322.
457 See proposed Rule 304(a)(4)(i).
458 See Rule 304(a)(4). In making a determination
as to whether suspension, limitation, or revocation
of a Government Securities ATS’s exemption is
necessary or appropriate in the public interest, and
is consistent with the protection of investors, the
Commission would, for example, take into account
whether the entity no longer meets the definition
of Government Securities ATS under Rule 300(l),
does not comply with the conditions to the
exemption (in that it fails to comply with any part
of Regulation ATS, including Rule 304), or
otherwise violates any provision of Federal
securities laws. For further discussion of such
examples as applied to NMS Stock ATSs, see NMS
Stock ATS Proposing Release, supra note 29, at
81032.
PO 00000
Frm 00042
Fmt 4701
Sfmt 4702
for a Government Securities ATS is
limited pursuant to Rule 304(a)(4)(i), the
Government Securities ATS shall be
prohibited from operating in a manner
otherwise inconsistent with the terms
and conditions of the Commission
order.
In addition, Rule 304(a)(4) would
provide that prior to issuing an order
suspending, limiting, or revoking a
Government Securities ATS’s
exemption pursuant to Rule 304(a)(4)(i),
the Commission will provide notice and
opportunity for hearing to the
Government Securities ATS, and make
the findings specified in Rule
304(a)(4)(i) described above, that, in the
Commission’s opinion, the suspension,
limitation, or revocation is necessary or
appropriate in the public interest and is
consistent with the protection of
investors.459
Request for Comment
61. Should Government Securities
ATSs be required to file Form ATS–N,
as revised, instead of Form ATS?
Should Government Securities ATSs be
required to file a form different from
Form ATS–N?
62. As an alternative to requiring
Government Securities ATSs to file
Form ATS–N, should Form ATS, or
parts thereof, for Government Securities
ATSs be made available to the public?
If made available to the public, is
current Form ATS sufficient to provide
information to the public about the
operations of Government Securities
ATSs?
63. Do commenters believe that
broker-dealers operators of ATS that
trade only government securities or
repos might choose to modify their
business models so that they would not
be required to comply with enhanced
regulatory or operational transparency
requirements for Government Securities
ATSs?
64. Should Government Securities
ATSs be subject to Rule 304(a), in whole
or in part?
65. Should Rule 304(a) be amended to
provide that an initial Form ATS–N be
made effective by Commission order or
any other means instead of upon
publication by the Commission?
66. Should Rule 304(a) only apply to
Government Securities ATSs that trade
a certain type of government security
459 Pursuant to the Commission’s current
information sharing practices with the Department
of the Treasury, the Commission expects to provide
the Department of the Treasury with prompt notice
in certain cases, such as when the Commission is
declaring a Form ATS–N ineffective under Rule
304(a)(1)(iii)(b), or suspending, limiting, or revoking
the exemption of a Government Securities ATS
under Rule 304(a)(4).
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
(e.g., U.S. Treasury Securities, Agency
Securities)? If so, to which type of
Government Securities ATS should Rule
304 apply (e.g., Government Securities
ATSs that trade U.S. Treasury Securities
or Government Securities ATSs that
trade Agency Securities)?
67. Should the Commission require a
Currently Exempted Government
Securities ATS to file Form ATS–N and
comply with the requirements of Rule
304 to qualify for the exemption from
the definition of exchange?
68. Would the proposal to require a
Currently Exempted Government
Securities ATS or Covered Newly
Designated ATS to file Form ATS–N by
the date 90 calendar days after the
effective date of any final rule provide
the ATS sufficient time to transition to
compliance with Regulation ATS and
the proposed requirements under Rule
304? If the Commission were to provide
more time for a Covered Newly
Designated ATS and/or Currently
Exempted Government Securities ATS
to file Form ATS–N, should the
Commission require the Covered Newly
Designated ATS and/or Currently
Exempted Government Securities ATS
to file an initial operation report on
Form ATS to provide notice of its
operations to the Commission before it
is required to file a Form ATS–N?
Would the proposal to require a Current
Government Securities ATS to file a
Form ATS–N by the date 90 calendar
days after the effective date of any final
rule provide the ATS sufficient time to
transition to compliance with Rule 304?
69. Should the Commission be
permitted to extend the initial Form
ATS–N review period if it finds that it
is appropriate to extend such review
period?
70. Should a Legacy Government
Securities ATS or Covered Newly
Designated ATS be allowed to continue
operations during the Commission’s
review of its initial Form ATS–N?
71. Should the Commission require
amendments to Part III, Item 18 of Form
ATS–N to be filed no later than the date
that the information on such item
becomes inaccurate or incomplete? Or
should the Commission require
amendments to Part III, Item 18, or any
specific required disclosure on such
Item to be required in advance of
implementation of the change? And if
so, how far in advance of
implementation and why? Alternatively,
should the Commission allow Covered
ATSs more or less time to file a fee
amendment?
72. Should the rule provide that the
Commission may extend the Form ATS–
N amendment review period by an
additional 30 calendar days if the
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Commission finds that a longer period
is appropriate? Should such extended
review period be longer or shorter?
Should the Commission only extend
such review period under certain
circumstances? If so, under what
circumstances should the Commission
extend the review period for a Form
ATS–N amendment?
73. Are there any aspects of Rule
304(a)(2) relating to the filing and
review of amendments that should be
modified specifically for Form ATS–N
amendments filed by Government
Securities ATSs?
74. What changes or types of changes
to a Covered ATS’s operations or the
activities of the broker-dealer operator
or its affiliates do commenters believe
are particularly likely to be material so
as to require a material amendment to
Form ATS–N?
75. Should the Commission consider
any other factors in determining
whether a Form ATS–N filed by a
Government Securities ATS should
become effective or ineffective? If so,
what are they and why?
76. Should the Commission adopt the
current process for the Commission to
suspend, limit, or revoke an NMS Stock
ATS’s exemption from the definition of
‘‘exchange’’ for Government Securities
ATSs?
B. Public Disclosure of Form ATS–N for
Government Securities ATSs and
Related Commission Orders
The Commission would make public
certain Form ATS–N reports filed by
Government Securities ATSs pursuant
to Rule 304(b).460 Commission orders
related to the effectiveness of revised
Form ATS–N would also be publicly
posted on the Commission’s website.
The Commission would apply to
Government Securities ATSs the same
rules regarding public disclosure that
are currently applicable to NMS Stock
ATSs. Applying existing Rule 304(b) to
Government Securities ATSs would
mandate greater public disclosure of the
operations of these ATSs through the
publication of Form ATS–N and related
filings available on the Commission’s
website. Accordingly, the Commission
is proposing that Form ATS–N filed by
Government Securities ATSs would be
subject to the following:
• Every Form ATS–N filed pursuant
to Rule 304 shall constitute a ‘‘report’’
within the meaning of Sections 11A,
17(a), 18(a), and 32(a) and any other
460 See Rule 304(b)(1) (providing that every Form
ATS–N filed pursuant to Rule 304 shall constitute
a ‘‘report’’ within the meaning of Sections 11A,
17(a), 18(a), and 32(a) and any other applicable
provisions of the Exchange Act).
PO 00000
Frm 00043
Fmt 4701
Sfmt 4702
15537
applicable provisions of the Exchange
Act.461
• The Commission will make public
via posting on the Commission’s
website, each: (1) Effective initial Form
ATS–N, as amended; (2) order of
ineffective initial Form ATS–N; (3)
Form ATS–N amendment to an effective
Form ATS–N; (4) order of ineffective
Form ATS–N amendment; (5) notice of
cessation; and (6) order suspending,
limiting, or revoking the exemption for
a Government Securities ATS from the
definition of an ‘‘exchange’’ pursuant to
Exchange Act Rule 3a1–1(a)(2).462
The Commission is proposing to make
amendments to current Rule 304(b),
which would apply to all Covered
ATSs. As the Commission is proposing
to amend Rule 304(a)(2)(i)(A) to allow
extensions of the Commission review
period, the Commission is proposing to
amend Rule 304(b)(2)(iii) to state that
material amendments would be made
public following the expiration of the
review period ‘‘or any extended review
period.’’ 463 As a result, the entire Form
ATS–N amendment would not be made
public until the review period has
expired, at which time the ATS may
implement the change described in the
amendment. The Commission is also
proposing to amend Rule
304(b)(2)(iii)(B) to provide that fee
amendments would be made public by
the Commission upon filing, consistent
with the treatment of updating,
correcting, and contingent amendments,
all of which are intended to describe the
ATS as it currently operates.
The Commission received several
comments on the 2020 Proposal
supporting public disclosure of Form
ATS–G and amendments thereto.464 For
example, one commenter stated that
public disclosure could improve
investors’ ability to select trading
venues and as a result, lower trading
costs and increase execution quality.465
Another commenter, however, stated
that Government Securities ATSs
should not be required to make public
commercially sensitive information on
Form ATS–G, and that similar investor
protection benefits can be achieved
without negative impact by requiring a
461 See
Rule 304(b)(1).
Rule 304(b)(2).
463 See proposed Rule 304(b)(2)(iii).
464 See, e.g., SIFMA Letter at 3–4; BrokerTec
Letter at 2; AFREF Letter at 3; Bloomberg Letter at
7; Healthy Markets Association Letter at 7; MFA
Letter at 5 (stating that any alternative that would
limit disclosure requirements would be detrimental
to achieving the Commission’s transparency goals
and that requiring different levels of disclosure
among Government Securities ATSs based on their
trading volume could result in a complex and
confusing system of disclosure).
465 See FINRA Letter at 2.
462 See
E:\FR\FM\18MRP2.SGM
18MRP2
15538
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Government Securities ATS to make
such information available upon request
to subscribers, potential subscribers,
and the Commission.466 The
Commission believes that the vast
majority of information responsive to
Form ATS–N would not be proprietary
or commercially sensitive for ATSs to
disclose.467
The Commission is re-proposing to
make Form ATS–N publicly available
for all Government Securities ATSs,
regardless of their volume. The
Commission believes that most market
participants have limited access to
information to adequately assess ATSs
that trade government securities and
understand how different ATSs operate.
Today, Government Securities ATSs
that are currently subject to Regulation
ATS file a Form ATS that is deemed
confidential when filed under Rule
301(b)(2)(vii) of Regulation ATS,468 and
Currently Exempted Government
Securities ATSs are not subject to
Regulation ATS and not required to file
a Form ATS. The only information the
Commission currently makes publicly
available regarding Government
Securities ATSs that are currently
subject to Regulation ATS is a monthly
list of the names and locations of ATSs
with a Form ATS on file with the
Commission.469 In the case Government
Securities ATSs make information about
their operations voluntarily available,
such information is limited, and the
lack of uniformity or standardization
makes it difficult to compare disclosures
across ATSs. Accordingly, through
Form ATS–N, the Commission is
proposing disclosures that will provide
466 See
Tradeweb Letter at 11.
the Commission staff’s experience
reviewing disclosures on current Form ATS–N for
NMS Stock ATSs and discussing ATS operations
and the requirements of the form with NMS Stock
ATSs, the Commission staff has observed that the
information responsive to the form is not
proprietary or commercially sensitive. In the NMS
Stock ATS Adopting Release, the Commission
stated that it designed Form ATS–N to not seek
disclosure of certain information that could be
proprietary or commercially sensitive. See NMS
Stock ATS Adopting Release, supra note 2, at
38812. In response to commenter concerns
regarding disclosure of proprietary or commercially
sensitive information, the Commission revised the
wording of relevant requests in originally proposed
Form ATS–N to mitigate such concerns or provided
guidance regarding the scope of certain disclosure
requests and to require ‘‘summary’’ information.
See id. at 38825. The Commission stated that, in a
vast majority of cases, the level of detail required
by Form ATS–N should not require the public
disclosure of commercially sensitive information.
See id. at 38825. See also, e.g., infra Section
IV.D.4.d (describing that Form ATS–N requires a
‘‘summary’’ narrative of products and services to
avoid disclosure of commercially sensitive
information).
468 See 17 CFR 240.301(b)(2)(vii).
469 See Alternative Trading System List, https://
www.sec.gov/foia/docs/atslist.htm.
jspears on DSK121TN23PROD with PROPOSALS2
467 In
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
information that market participants can
use to evaluate an ATS as a potential
trading venue. Requiring public
disclosure, rather than Government
Securities ATSs responding to
individual disclosure requests from
subscribers or potential subscribers, will
help to ensure uniformity and
standardization of the information
Government Securities ATSs make
available.
As proposed, Government Securities
ATSs would also be subject to Rule
304(b)(3), which would require each
Government Securities ATS that has a
website to post a direct URL hyperlink
to the Commission’s website that
contains the documents enumerated in
Rule 304(b)(2), which would include the
Government Securities ATS’s Form
ATS–N filings.470
Request for Comment
77. Should the requirements of Rule
304(b) apply to Form ATS–N reports
filed by Government Securities ATSs, in
whole or in part? Should the
Commission modify Rule 304(b) in any
way for all Covered ATSs?
78. Should Rule 304(b) only apply to
Government Securities ATSs that trade
a type of government securities (e.g.,
U.S. Treasury Securities, Agency
Securities)? If so, to which type of
Government Securities ATS should Rule
304 apply?
79. Are there any other requirements
that should apply to making public a
Form ATS–N report filed by a
Government Securities ATS? Please
support your arguments, and if so,
please list and explain such procedures
in detail.
80. Should Rule 304(b) apply to Form
ATS–N reports filed by a Currently
Exempted Government Securities ATS?
If not, which aspects of Rule 304(b)
should not apply and why?
C. Form ATS–N Requirements
The Commission is not re-proposing
the use of Form ATS–G for Government
Securities ATSs but is proposing that all
Covered ATSs file Form ATS–N as
revised. The Commission believes that,
instead of proposing Form ATS–G for
Government Securities ATSs, given the
significant overlap between proposed
Form ATS–G and existing Form ATS–N,
it is appropriate to require all Covered
ATSs to file Form ATS–N, and thus
limit the number of unique forms and
simplify filing requirements.
470 Unlike the 2020 Proposal, the Commission is
not proposing to amend Rule 304(b)(3) to require
each Covered ATS to post on its website the most
recently disseminated Form ATS–N within one
business day after publication on the Commission’s
website.
PO 00000
Frm 00044
Fmt 4701
Sfmt 4702
Accordingly, the Commission is
proposing to apply existing Rule 304(c)
to Government Securities ATSs, which
would require Government Securities
ATSs to file a Form ATS–N, as revised,
in accordance with the form’s
instructions. The Commission is
proposing to revise the current Form
ATS–N instructions by including
references to Government Securities
ATSs or Covered ATSs, as applicable,
replacing references to order display
and fair access amendments with
references to contingent amendments,
revising the relevant compliance dates,
adding instructions related to fee
amendments, and revising the
instructions regarding describing the
applicability of amendments. The
instructions require, among other
things, that a Covered ATS provide all
the information required by Form ATS–
N, including responses to each Item, as
applicable, and the Exhibits, and
disclose information that is accurate,
current, and complete.471 Given that the
Commission expects market participants
to use Form ATS–N to decide which
trading venue is best for them, it is
important that Form ATS–N filings
comply with the instructions and that
the information provided on Form ATS–
N is accurate, current, and complete. As
it is today, Form ATS–N 472 would be
required to be filed electronically
through EDGAR.
The Commission is proposing to
apply Rule 304(c)(2) to Government
Securities ATSs, which provides that
any report required under Rule 304
shall be filed on a Form ATS–N, and
include all information as prescribed in
the Form ATS–N and the instructions to
Form ATS–N. Rule 304(c)(2) would
provide that a Form ATS–N be executed
at, or prior to, the time the Form ATS–
N is filed and shall be retained by the
Government Securities ATS in
accordance with Rules 302 and 303, and
the instructions in Form ATS–N. In the
Regulation ATS Adopting Release, the
Commission stated that the
requirements to make and preserve
records set forth in Regulation ATS are
necessary to make and keep certain
records for an audit trail of trading
activity and permit surveillance and
examination to help ensure fair and
orderly markets.473 Expanding Rule
304(c) to encompass Government
Securities ATSs would further these
goals.
471 See Item A.3 of the Instructions to Form ATS–
N (as revised).
472 See NMS Stock ATS Adopting Release, supra
note 2, Section VII.
473 See Regulation ATS Adopting Release, supra
note 31, at 70877–78.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Request for Comment
81. Should Rule 304(c) be applied, in
whole or in part, to Government
Securities ATSs?
82. Should Rule 304(c) only apply to
Government Securities ATSs that trade
a certain type of government security
(e.g., U.S. Treasury Securities, Agency
Securities)? If so, to which type of
Government Securities ATS should it
apply and why?
jspears on DSK121TN23PROD with PROPOSALS2
D. Form ATS–N Disclosures
Form ATS–N is a public report that
provides detailed information about the
ATS-related activities of the brokerdealer operator and its affiliates and the
manner of operations of the ATS.
Because the Commission is proposing to
require Government Securities ATSs to
file a Form ATS–N instead of previously
proposed Form ATS–G,474 the
Commission is proposing amendments
to Form ATS–N to solicit disclosures
that may be most relevant to market
participants that trade government
securities on these markets. In addition,
because the Commission is amending
Exchange Act Rule 3b–16 to include
Communication Protocol Systems, the
Commission is proposing to amend
Form ATS–N to solicit disclosures about
unique operational aspects to those
systems. The Commission believes that
it is important to revise Form ATS–N to
provide investors with important
information about the operations of all
ATSs that trade NMS stocks and, as
proposed, government securities.
The Commission is proposing that the
amendments to Form ATS–N be
applicable to both NMS Stock ATSs and
Government Securities ATSs, and any
differences between how the form
requirements would apply to these
ATSs are noted below. Given the similar
level of complexity/sophistication
between NMS Stock ATSs and
Government Securities ATSs, the
Commission believes that requiring both
types of ATSs to file Form ATS–N is
appropriate; however, as described
below, certain requests have been
tailored for the differences between
NMS Stock ATSs and Government
Securities ATSs. The Commission is
proposing to revise Form ATS–N to
include information it previously
proposed on Form ATS–G, including a
question requiring information about
interaction with related markets.475 The
Commission is also proposing to
reorganize certain questions on Form
ATS–N and to require disclosure about
any surveillance and monitoring that is
474 See
475 See
2020 Proposal, supra note 4.
infra Section IV.D.5.k.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
conducted with respect to the ATS.476
In response to the 2020 Proposal, one
commenter stated that the proposed
Form ATS–G disclosures were similar to
those on Form ATS–N, in that they
would be categorized in a more
standardized manner than Form ATS,
which would allow for better
comparisons between ATSs, and
enhance the Commission’s and SRO’s
regulatory oversight of Government
Securities ATSs.477 The proposed
revisions to Form ATS–N would
continue to allow such comparisons,
and applying Form ATS–N to
Government Securities ATSs would
better help enable market participants to
compare Government Securities ATSs.
The Commission is proposing certain
amendments to Form ATS–N that
would apply globally to Form ATS–N
unless otherwise noted below. First, as
Form ATS–N would be applicable to
both Government Securities ATSs and
NMS Stock ATSs, the Commission is
proposing to replace references to ‘‘NMS
Stock ATSs’’ throughout the form to
‘‘Covered ATSs’’ or ‘‘ATSs.’’ 478 Second,
the Commission is proposing to replace
references to ‘‘orders’’ throughout Form
ATS–N to reference ‘‘trading interest,’’
which would encompass non-firm
trading interest.479 Third, Form ATS–N
would include an instruction at the
beginning of Part III to require that the
Covered ATS identify and explain any
differences among and between
subscribers, persons whose trading
interest is entered into the ATS by a
subscriber or the broker-dealer operator,
the broker-dealer operator, and any
affiliates of the broker-dealer.480
Because this disclosure would be
integrated in each Item, the Commission
is proposing to delete the separate subquestions in Part III that ask about
whether services and functionalities and
conditions or requirements related to
such services and functionalities are the
same for all subscribers and the brokerdealer operator.481 Fourth, the
Commission is proposing to change
references to ‘‘Trading Centers’’ to
‘‘trading venues,’’ which would include
trading centers, but also include venues
476 See
infra Section IV.D.5.i.
FINRA Letter at 4.
478 The Form ATS–N Cover Page (Type of
Covered ATS), Part I, Item 8.a, and Part III, Items
23, 24(a), and 24(d)(i) will refer to ‘‘NMS Stock
ATSs’’ because such requests are applicable only to
NMS Stock ATSs.
479 See infra note 496 and accompanying text. See
proposed revisions to Form ATS–N, Part II, Items
1(a), 1(c), 2(a), 2(c), 3(a), 3(b), 4(a), 5(a), and 5(c);
Part III, Items 4, 5(a), 5(b), 10(a), 12, 13(a), 13(c),
13(d), 14(a), 15, 16(a), 16(b), 17, and 22.
480 See supra notes 563–564 and accompanying
text.
481 See infra note 565.
477 See
PO 00000
Frm 00045
Fmt 4701
Sfmt 4702
15539
relevant to the trading of government
securities and repos and
Communication Protocol Systems.482
The term ‘‘trading venue’’ encompasses
a broader group of entities that could,
for example, result in an execution or
affect the handling of a subscriber’s
trading interest. The Commission
explains below each requirement of
Form ATS–N and why the Commission
is proposing to apply that requirement
to Government Securities ATSs. To the
extent that the Commission is proposing
a change to the requirement of Form
ATS–N that would affect the reporting
obligation of an NMS Stock ATS, the
Commission identifies that change and
the information the NMS Stock ATS
would be required to disclose. In
addition, to use consistent terminology
throughout Form ATS–N, the
Commission is proposing to change
certain references to activity ‘‘in’’ the
ATS to activity ‘‘on’’ the ATS.483
The Commission believes that Form
ATS–N’s public disclosures would
provide important information to
market participants that would help
them better understand these
operational facets of Covered ATSs and
select the best trading venue based on
their needs. The Commission believes
that the vast majority of responsive
information in Form ATS–N, as
proposed to be revised, would not be
proprietary or commercially
sensitive.484
1. Amendments to Form ATS–N for
NMS Stock ATSs
If the revisions to Form ATS–N were
adopted and become effective, an NMS
Stock ATS with an effective Form ATS–
N or a Form ATS–N that is under
Commission review would be required
to file an amendment to its Form ATS–
N so that its disclosures, as amended,
meet all the requirements of Form ATS–
N, as revised. If the proposed revisions
to Form ATS–N become effective, a
NMS Stock ATS would be required, in
accordance with the instructions of the
form, to amend its Form ATS–N so that
it is complete.485 An NMS Stock ATS is
required, pursuant to Rule 304(a)(2)(B),
to file an updating amendment no later
than 30 days after the end of each
calendar quarter to correct information
that has become inaccurate or
incomplete for any reason. Specifically,
482 See infra note 497 and accompanying text. See
proposed revisions to Form ATS–N Part II, Item 4
and Part III, Item 7.
483 See proposed changes to Part II, Items 1 and
2 and Part III, Items 4(a), Item 22(a), Item 24(d)(ii).
484 See infra Section IV. See also supra note 467.
485 See Instruction A.3 of Form ATS–N (requiring
that a Form ATS–N filing is accurate, current, and
complete).
E:\FR\FM\18MRP2.SGM
18MRP2
15540
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
an NMS Stock ATS with an effective
Form ATS–N, or an NMS Stock ATS
whose Form ATS–N is under
Commission review, would be required
to, among other things, amend its Form
ATS–N to disclose new identifying
information and types of securities
traded required by Part I, and to provide
information responsive to new requests
regarding new categories of types of
subscribers (Part III, Item 1), monitoring
and surveillance (proposed Part III, Item
9), interaction with related markets
(proposed Part III, Item 11), the identity
of liquidity providers (Part III, Item 12),
and post-trade processing (proposed
Part III, Item 21).
In addition, the NMS Stock ATS
would be required to amend its Form
ATS–N to reorganize responses,
including, among others, to move
disclosures related to the activities of
employees of the broker-dealer operator
or its affiliates that service the
operations of the ATS and another
business unit of the broker-dealer
operator or affiliate to proposed Part II,
Item 7(a), and move discussion of afterhours use of orders from current Part III,
Item 18 to proposed Part III, Item 4(b)–
(c). In addition, the NMS Stock ATS
would be required to separately discuss
information relevant to trading facilities
or rules for bringing together orders of
buyers and sellers in proposed Part III,
Item 7 and information related to use of
non-firm trading interest in proposed
Part III, Item 8. The NMS Stock ATS
would also be required to amend its
responses to disclose any differences in
treatment among subscribers, persons
whose trading interest is entered into
the ATS by a subscriber or the brokerdealer operator, the broker-dealer
operator, and any affiliates of the
broker-dealer operator as relevant
throughout the responses to Part III
rather than disclosing differences in
treatment between any subscribers and
the broker-dealer in specific sub-parts of
Part III, as required by current Form
ATS–N.
2. Definitions
The Commission is proposing to
amend certain definitions in the
instructions to Form ATS–N. The
Commission is re-proposing to replace
the current definition of ‘‘person’’ in
Form ATS–N, which is provided by the
Investment Advisers Act of 1940
(‘‘Advisers Act’’) 486 with the different
definition of ‘‘person’’ as defined under
the Exchange Act.487 Because
486 15 U.S.C. 80a–2(a)(28) (defining ‘‘person’’ as
‘‘a natural person or a company’’).
487 15 U.S.C. 78c(a)(9) (defining the term
‘‘person’’ as a natural person, company,
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Regulation ATS is a Commission
regulation under the Exchange Act, the
Commission believes that it is more
appropriate to apply the definition of
‘‘person’’ under the Exchange Act than
the Advisers Act, which is not
applicable to ATSs. Although the
definitions are not identical, the
Commission believes the differences
between the definitions are unlikely to
result in differences to the disclosures
required by Form ATS–N.488 To the
extent ATSs might have found
ambiguous the Commission’s use of the
Advisers Act definition in the context of
an Exchange Act rule, the Commission
believes that this proposed change will
mitigate any such concerns.
The Commission is also proposing to
change the definition of ‘‘NMS Stock
ATS’’ in the instructions to the form to
conform to the proposed changes to the
definition in Rule 300 and state that
NMS Stock ATSs shall not trade
securities other than NMS stocks.489
The Commission is also proposing to
add definitions of ‘‘Agency
Security,’’ 490 ‘‘Government
Security,’’ 491 ‘‘Government Securities
ATS,’’ 492 ‘‘Legacy Government
Securities ATS,’’ 493 and ‘‘Trading
Interest’’ 494 and conform the definition
of ‘‘Broker-Dealer Operator’’ to the
proposed revisions in Rule 301(b)(1).495
As proposed, the term ‘‘Trading
Interest’’ would be the same definition
provided in proposed Rule 300(q) and
Rule 3b–16(e), which would include
both orders as defined under Rule 3b–
16(c) and non-firm trading interest.496 In
addition, the Commission is proposing
to replace the term ‘‘Trading Center’’
with ‘‘trading venue.’’ A ‘‘trading
venue’’ would mean a national
securities exchange or national
securities association that operates an
SRO trading facility, an ATS, an
exchange market maker, an OTC market
maker, a futures or options market, or
any other broker- or dealer-operated
platform for executing trading interest
government, or political subdivision, agency, or
instrumentality of a government).
488 The Exchange Act’s inclusion of a
‘‘government, or political subdivision, agency or
instrumentality of a government’’ under the
definition of ‘‘person’’ is unlikely to result in any
changes to the disclosures required by the items in
Form ATS–N that use the word ‘‘Person’’ as, in the
Commission’s experience, these entities are
generally not involved in the operations of ATSs as
subscribers or otherwise.
489 See supra note 254 and accompanying text.
490 See supra note 242 and accompanying text.
491 See supra note 259 and accompanying text.
492 See id.
493 See supra note 256 and accompanying text.
494 See supra Section II.C.1.
495 See supra note 273 and accompanying text.
496 See proposed Rule 3b–16(e) and Rule 300(q).
PO 00000
Frm 00046
Fmt 4701
Sfmt 4702
internally by trading as principal or
crossing orders as agent.497 The
proposed definition of ‘‘trading venue’’
would encompass ‘‘trading centers’’ as
defined under 17 CFR 242.600(b)(78)
(Rule 600(b)(78) of Regulation NMS),
futures and options markets, which the
Commission believes may be relevant to
the trading of government securities and
repos, and also would encompass
broker- or dealer-operated platforms for
executing trading interest by trading as
a principal or crossing orders as an
agent.498
3. Cover Page and Part I; Information
About the Broker-Dealer Operator
To make clear that the Commission
would not be conducting a merit-based
review of Form ATS–N disclosures filed
with the Commission, the Form ATS–N
cover page states that the Commission
has not passed upon the merits or
accuracy of the disclosures in the filing.
On the cover page of Form ATS–N, the
Covered ATS would be required to
identify whether it is an NMS Stock
ATS or a Government Securities ATS.
To indicate whether the ATS is subject
to the transitional rules for Legacy
Government Securities ATSs and Newly
Designated ATSs,499 the ATS would be
required to disclose whether it is a
Legacy Government Securities ATS or
Newly Designated ATS.500 In addition,
the Covered ATS would indicate the
type of filing by marking the appropriate
checkbox.501
If the Covered ATS is filing an
amendment, the ATS would be required
to indicate the Part and Item number of
the Form ATS–N that is the subject of
the change(s), provide a brief summary
of the substance of the change(s), and
state whether or not the change(s)
applies to (1) all subscribers and the
497 See revised Form ATS–N, Explanation of
Terms.
498 This is broader than the definition of ‘‘trading
center’’ under Rule 600(b)(78), which includes ‘‘any
other broker or dealer than executes orders
internally by trading as principal orders as agent.’’
499 See Rule 304(a)(1)(iv), as proposed to be
revised.
500 The Commission is proposing to delete the
checkbox on the cover page of Form ATS–N that
requires an NMS Stock ATS to select whether the
NMS Stock ATS currently operates pursuant to a
Form ATS. Rules 304 and 301(b)(2)(viii) required an
NMS Stock ATS to file a Form ATS–N no later than
January 7, 2019. After January 7, 2019, this
checkbox became obsolete.
501 The proposed cover page for Form ATS–N
would provide that a filing may be an initial Form
ATS–N, or a Form ATS–N material amendment,
updating amendment, correcting amendment,
contingent amendment, or fee amendment. The
Commission is proposing to rename ‘‘order display
and fair access amendments’’ to ‘‘contingent
amendments’’ throughout the form. In addition, the
Commission is proposing a new fee amendment
type. See supra Section IV.A.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
broker-dealer operator; (2) only the
broker-dealer operator; (3) only
subscribers; (4) only certain subscribers,
subsets of subscribers, or customers of
subscribers and the broker-dealer
operator; or (5) only certain subscribers,
subsets of subscribers, or customers of
subscribers.502 In addition, the Covered
ATS would be required to provide the
EDGAR accession number for the Form
ATS–N filing to be amended so that
market participants can identify the
filing that is being amended. Pursuant to
Rule 304(b)(2)(iii), the Commission
would make public the cover page of a
filed Form ATS–N material amendment
upon filing and then make public the
entirety of the material amendment
following the expiration of the review
period pursuant to Rule 304(a)(2)(ii).
For updating, correcting, contingent,
and fee amendments, which would be
made public upon filing, the
Commission believes that the
information in the narrative could assist
market participants in understanding
the general nature of the change that the
Covered ATS is implementing.
If the filing is a cessation of
operations, the cover page of Form
ATS–N would require the Covered ATS
to provide the date that the ATS will
cease to operate. The cover page
includes a checkbox where the ATS
could indicate whether it wishes to
withdraw a previously-filed Form ATS–
N filing and provide the EDGAR
accession number for the filing to be
withdrawn. The instructions to Form
ATS–N state that an ATS may withdraw
an initial Form ATS–N or an
amendment before the end of the
applicable Commission review period.
In addition, a Covered ATS could
withdraw a notice of cessation of
502 See Instruction A.7.h of Form ATS–N. If a
change subject to the amendment would equally
apply to all subscribers and the broker-dealer
operator, the Covered ATS would indicate that the
change applies to all subscribers and the brokerdealer operator equally. If a change would apply
differently among subscribers or types of
subscribers, between subscribers and the brokerdealer operator, or between the broker-dealer
operator and its affiliates (which may be subscribers
to the ATS), the Covered ATS would state so and
describe the differences in treatment. This is the
same as how NMS Stock ATSs currently describe
in Form ATS–N and would be required to describe
in Form ATS–N whether or not a change applies to
all subscribers and the broker-dealer operator in
amendments on Form ATS–N. As required by the
instruction, a filer must provide a brief summary of
all changes to the form. Such summary should
enable market participants to understand the nature
of the changes being made. For example, if the ATS
is adding a new order type, the ATS should state
that it is adding a new order type and provide a
brief description of unique aspects of the order
type. The Commission is proposing to clarify in
Instruction A.7.h that changes made in Part IV of
Form ATS–N should not be described, as Part IV
is non-public. See infra Section IV.D.6.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
operations at any time before the date
that the ATS indicated it intended to
cease operating.503
Part I of revised Form ATS–N would
be substantively the same as that for
current Form ATS–N with certain
exceptions, as described below. Form
ATS–N would require a Covered ATS to
identify the registered broker-dealer that
operates the ATS and state whether the
filer is a broker-dealer registered with
the Commission. The Commission is
proposing new Part I, Item 1(b) of Form
ATS–N to require the Covered ATS to
indicate whether the registered brokerdealer is authorized by a national
securities association to operate an ATS
under the rules of the national securities
association. Proposed Part I, Item 1(b)
would facilitate compliance with and
Commission oversight of the
requirement that an ATS must register
as a broker-dealer and become a member
of an SRO.504 The Commission is also
proposing that the Covered ATS provide
the name of the registered broker-dealer
or government securities broker or
government securities dealer for the
ATS (i.e., the broker-dealer operator), as
it is stated on Form BD, in Part I, Item
2 of Form ATS–N.505
To the extent that a commercial or
‘‘DBA’’ (doing business as) name or
names are used to identify the Covered
ATS to the public, the Commission, or
its SRO, or if a registered broker-dealer
operates multiple Covered ATSs, Form
ATS–N would require the full name(s)
of the Covered ATS under which
business is conducted, if different, in
Part I, Item 3 of Form ATS–N. Part I,
Item 4 of Form ATS–N would require
the Covered ATS to provide the brokerdealer operator’s SEC File Number and
Central Registration Depository (‘‘CRD’’)
Number.
In addition, the Commission is
proposing to require Covered ATSs to
provide the broker-dealer operator’s
Legal Entity Identifier (‘‘LEI’’) in Part I,
Item 4, if the broker-dealer operator has
an LEI.506 If a broker-dealer operator of
503 See
Instruction A.9 of Form ATS–N.
15 U.S.C. 78o(b)(8). See also NMS Stock
ATS Adopting Release, supra note 2, at 38773.
505 As discussed above, Rule 301(b)(1) currently
requires that the ATS register as a broker-dealer
under Section 15 of the Exchange Act. As proposed,
Rule 301(b)(1) would require an ATS to register as
a broker-dealer under Exchange Act Section 15 or
a government securities broker or government
securities dealer under Exchange Act Section
15C(a)(1)(A). See supra note 273 and accompanying
text.
506 Current Form ATS–N does not include this
Item, and as proposed, NMS Stock ATSs would also
be subject to this proposed requirement. An LEI is
a 20-character reference code that uniquely
identifies legally distinct entities that engage in
financial transactions and is used by numerous
domestic and international regulatory regimes. See
504 See
PO 00000
Frm 00047
Fmt 4701
Sfmt 4702
15541
the ATS has an LEI, the information
may be useful to market participants as
a globally standardized identifier. The
Commission, however, is not proposing
to require broker-dealer operators that
do not have an LEI to obtain such an
identifier. In addition, the Commission
is proposing to add a question to Part I,
Item 4(d) that would require the ATS to
provide the MPID of its broker-dealer
operator. Although Part I, Item 5(c) of
Form ATS–N requires the ATS to
disclose the MPID of the ATS, the
Commission is also requiring the ATS to
provide the MPID of the broker-dealer
operator because a broker-dealer
operator may have a unique MPID.
Because the broker-dealer operator
could potentially use such a unique
MPID to conduct trading and routing
activity that affects the ATS, it would be
useful to market participants and
regulators to require the ATS to state the
broker-dealer operator’s MPID as it will
help them identify the broker-dealer
operator and better understand the
scope of activities of the broker-dealer
operator.507
Part I, Item 5 of Form ATS–N would
require the Covered ATS to provide the
full name of the national securities
association of which the broker-dealer
operator is a member, the effective date
of the broker-dealer operator’s
membership with the national securities
Securities Act Release No. 10425, 82 FR 50988,
51005 (November 2, 2017) (stating that LEIs are
intended to improve market transparency by
providing clear identification of participants).
Although several existing ATS broker-dealer
operators currently have an LEI, not all brokerdealer operators have an LEI. In the 2020 Proposal,
the Commission asked commenters whether they
believe a Government Securities ATS should be
required to disclose the broker-dealer operator’s
LEI. One commenter supported requiring disclosure
of the LEI on Form ATS, Form ATS–R, Form ATS–
N, and previously proposed Form ATS–G, stating,
among other things, that it is a global standard for
legal entity identification and that it enables
publicly accessible information about an entity’s
ownership structure. This commenter stated that
LEI should not replace the CRD, which serves a
purpose in identifying broker-dealers and their
affiliates, but should serve as a complimentary
identifier. See letter from Stephan Wolf, CEO,
Global Legal Entity Identifier Foundation, dated
March 1, 2021 (‘‘GLEIF Letter’’). Another
commenter stated that the utility of asking brokers
to obtain another identification number is unclear
if the LEI does not replace FINRA assigned
identification numbers. See Bloomberg Letter at 7.
507 The Commission understands that, in certain
instances, a broker-dealer operator for an ATS may
use the ATS MPID in connection with its routing
activities when the routing functionality is within
the ATS. See FINRA Trade Reporting Guidance,
Example 7, available at https://www.finra.org/sites/
default/files/ATS%20OATS%20and%20Trade
%20Reporting%20Guidance%209-2-14_0_0_0_
0.pdf. To the extent that the broker-dealer uses the
ATS MPID in connection with its routing activities,
or its routing functionality is inside the ATS, such
activities and functionality would be subject to
Regulation ATS, including the disclosure
requirements of Form ATS–N.
E:\FR\FM\18MRP2.SGM
18MRP2
15542
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
association, and the MPID of the ATS.
Pursuant to FINRA rules, each ATS is
required to use a unique MPID in its
reporting to FINRA, such that its
volume reporting is distinguishable
from other transaction volume reported
by the broker-dealer operator of the
ATS, including volume reported for
other ATSs or trading desks operated by
the broker-dealer operator.508 The
broker-dealer operator would provide
the unique MPID for the Covered ATS
and assess the functionalities related to
trading under that MPID and describe
them, as applicable, in response to the
information requests on Form ATS–N.
Providing the name of the Covered ATS
or DBAs and its MPID would identify
the ATS to the public and the
Commission. The name, identity of the
broker-dealer operator, any ‘‘DBA’’
name, and the ATS’s MPID are basic
information critical to market
participants for identifying the ATS and
should be disclosed.
Proposed Part I, Item 6 of Form ATS–
N would require the Covered ATS to
provide a URL address for the website
of the ATS. Proposed Part I, Item 7 of
Form ATS–N would require the ATS to
provide the primary physical street
address of the ATS matching system
and indicate whether the ATS has a
secondary matching system that may be
used in the event that the primary
matching system is not available. If yes,
the ATS would be required to provide
the secondary address of the matching
system.
To inform market participants about
the types of securities that a Covered
ATS makes available for trading, the
Commission is proposing to require a
Covered ATS to disclose in Part I, Item
8 of Form ATS–N the types of securities
it trades. Part I, Item 8(a) would require
an NMS Stock ATS, but not a
Government Securities ATS, to indicate
whether the ATS makes available for
trading all NMS stocks.509 If not, the
ATS would identify the securities or
types of securities that it does not make
available for trading.510 Part I, Item 8(b)
would require a Government Securities
ATS, but not an NMS Stock ATS, to
select the categorical types of
government securities the ATS trades
(i.e., U.S. Treasury Securities, Agency
508 See
FINRA Rules 6160, 6170, 6480, and 6720.
the NMS Stock ATS suspends trading in
securities under certain circumstances, the ATS
should indicate so under Part III, Item 19. See infra
Section IV.D.5.r.
510 The Commission notes that most, if not all,
NMS Stock ATSs currently disclose whether they
trade all NMS stocks in Part III, Item 11(a) of Form
ATS–N.
509 If
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Securities, repos, or other).511 If the
Government Securities ATS trades U.S.
Treasury Securities, it would be
required to select whether it trades
bills,512 notes,513 bonds,514 TIPS,515
STRIPS,516 and/or floating rate notes 517
and indicate whether each type of
security traded is on-the-run, off-therun, and/or when-issued.518 If the
Government Securities ATS trades
Agency Securities, it would be required
to indicate whether it trades Agency
Mortgage-Backed Securities 519 and/or
511 The types of securities traded would be
limited to government securities (15 U.S.C.
78c(a)(42)) and repos. See proposed Rule 300(l).
512 Treasury bills are short-term securities that
mature in one year or less from their issue date.
Bills are purchased for a price less than or equal
to their par (face) value, and when they mature,
Treasury Department pays their par value. See
TreasuryDirect, The Basics of Treasury Securities,
available at https://www.treasurydirect.gov/instit/
research/faqs/faqs_basics.htm#tbills (last visited
September 15, 2021).
513 Treasury notes are securities that pay a fixed
rate of interest every six months until the security
matures, which is when Treasury Department pays
the par value. Treasury notes mature in more than
a year, but not more than 10 years from their issue
date. See id.
514 Treasury bonds are securities that pay a fixed
rate of interest every six months until the security
matures, which is when Treasury Department pays
the par value. Bonds mature in more than 10 years
from their issue date. See id.
515 Treasury Inflation-Protected Securities
(‘‘TIPS’’) pay interest every six months and the
principal value of TIPS is adjusted to reflect
inflation or deflation as measured by the Consumer
Price Index. The semi-annual interest payments and
maturity payment are calculated based on the
inflation-adjusted principal value of the security.
See id.
516 See supra 191.
517 A floating rate note security that has an
interest payment that can change over time. As
interest rates rise, the security’s interest payments
will increase. Similarly, as interest rates fall, the
security’s interest payments will decrease. This
security makes use of an index (or reference) rate
(in this case, tied to the most recent 13-week bill
rate, prior to the lockout period) and spread
(determined at auction) to calculate an interest rate.
The index rate changes periodically, in this
instance every week, causing the interest rate to
change or ‘‘float.’’ The notes may be of varying
original maturities. See TreasuryDirect, Frequently
Asked Questions, available at https://
www.treasurydirect.gov/indiv/help/TDHelp/
faq.htm.
518 A ‘‘when-issued’’ transaction is a transaction
in a U.S. Treasury Security that is executed before
the issuance of the security.
519 Agency Mortgage-Backed Securities include (i)
a type of securitized product issued in conformity
with a program of a U.S. executive agency, as
defined in 5 U.S.C. 105 or a government-sponsored
enterprise, as defined in 2 U.S.C. 622(8), for which
the timely payment of principal and interest is
guaranteed by the executive agency or GSE,
representing ownership interest in a pool (or pools)
of mortgage loans structured to ‘‘pass through’’ the
principal and interest payments to the holders of
the security on a pro rata basis; and (ii) a type of
securitized product backed by a securitized product
described in (i). See also FINRA Rules 6710(m),
6710(v), 6710(dd).
PO 00000
Frm 00048
Fmt 4701
Sfmt 4702
Federal Agency Securities.520 In
addition, if the Government Securities
ATS trades repos, the ATS would
indicate whether it trades triparty 521
and/or bilateral repos,522 and whether
such securities are repurchase
agreements or reverse repurchase
agreements and are centrally cleared 523
or non-centrally cleared.524 If the
Government Securities ATS trades any
other government securities, it would be
required to mark ‘‘other’’ via checkbox
and identify the types of government
securities that the ATS makes available
for trading. Requiring a Covered ATS to
publicly disclose the types of securities
that it trades would identify to potential
subscribers and regulators the securities
that the ATS offers for trading and help
potential subscribers decide whether
they would want to engage the ATS.
Proposed Part I, Items 9 and 10 525
would require a Covered ATS to attach
the most recently filed or amended
Schedule A of the broker-dealer
operator’s Form BD disclosing
information related to direct owners and
executive officers, and the most recently
filed or amended Schedule B of the
broker-dealer operator’s Form BD
disclosing information related to
indirect owners as Exhibits 1 and 2,
respectively. In lieu of attaching those
schedules, the Covered ATS can
indicate, via a checkbox, that the
information under those schedules is
available on its website and is accurate
as of the date of the filing of the Form
520 Federal Agency Securities include all Agency
Securities except Agency Mortgage-Backed
Securities. See supra note 519.
521 A triparty repo involves a third party, which
is a clearing bank that provides support to both
parties in the trade by settling the repo on its books
and ensuring that the details of the repo agreement
are met. See Viktoria Baklanova, Adam Copeland &
Rebecca McCaughrin, Federal Reserve Bank of New
York Staff Reports, Reference Guide to U.S. Repo
and Securities Lending Markets (September 2015) at
5–6, 8–10, available at https://
www.newyorkfed.org/medialibrary/media/research/
staff_reports/sr740.pdf (‘‘New York Fed Staff
Report’’).
522 A bilateral repo involves two parties agreeing
on the terms of trade, including the principal
amount of the repo, the interest rate paid by the
collateral provider, the type of securities delivered,
the haircut to be applied for the collateral pledged,
and the maturity of the repo, and each
counterparty’s custodian bank clears and settles the
trade. See New York Fed Staff Report, supra note
521, at 5–7.
523 Centrally cleared would mean any transaction
that uses a central counterparty, as defined in 17
CFR 240.17Ad–22(a)(2) (Rule 17Ad–22(a)(2) under
the Exchange Act).
524 Non-centrally cleared would mean any
transaction that does not use a central counterparty,
as defined in Rule 17Ad–22(a)(2) under the
Exchange Act. See id.
525 These items are numbered as Part I, Items 8
and 9 in current Form ATS–N, but would be
renumbered as Items 9 and 10.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
ATS–N.526 The Commission is
proposing to include in Part I, Items 9
and 10 that, if the ATS selects to make
the information available on its website
in lieu of attaching it to its filing, the
ATS will maintain its website in
accordance with the rules for amending
Form ATS–N pursuant to Rule
304(a)(2)(i) to reflect any changes to
Schedule A or Schedule B, as
applicable, to the Form BD of the
broker-dealer operator. This would
require an ATS checking the box to
update its website as if it were Form
ATS–N, and therefore, to update the
information no later than 30 calendar
days after the end of any calendar
quarter in which its broker-dealer
operator’s Schedule A or Schedule B of
Form BD becomes inaccurate or
incomplete.
When an ATS is purchased by
another entity and operated by a brokerdealer that is not the ATS’s current
broker-dealer operator, the new brokerdealer typically commences operating
the ATS using its personnel, processes,
and procedures. To avoid disruptions to
operations of the ATS or its subscribers,
the existing Covered ATS would file a
Notice of Cessation at least 10 business
days prior to the official change of
broker-dealer operator (e.g., the date of
closing for an acquisition) pursuant to
Rule 304(a)(3) 527 and the new brokerdealer operator would file an initial
Form ATS–N in advance of the Notice
of Cessation, which must become
effective before it may operate the
Covered ATS pursuant to Rule
304(a)(1)(i).528
In addition, Part I, Item 11 of Form
ATS–N would require the Covered ATS,
for filings made pursuant to Rule
304(a)(2)(i) (i.e., Form ATS–N
amendments), to attach as Exhibit 3 a
marked document to indicate changes to
‘‘yes’’ or ‘‘no’’ answers and additions or
deletions from any Item in Part I, Part
526 Part I, Items 9 and 10 and Part III, Item 25 (see
infra Section IV.D.5.y) are the only requests for
information that would allow a Covered ATS to
cross-reference to information on the ATS’s website
instead of providing it in the form disclosures.
Form ATS–N disclosures would be the vehicle for
disseminating to the public information about the
operations of the ATS and the ATS-related
activities of the broker-dealer operator and its
affiliates under Rule 304, which are required to be
kept current, accurate, and complete by the ATS.
Accordingly, ATSs would be required to provide
information required by the form in the Form ATS–
N disclosures and not cross-reference to other
sources.
527 See supra note 455 and accompanying text.
528 See supra Section IV.A. To facilitate the
review of the initial Form ATS–N for the new
Covered ATS, the broker-dealer operator for the
new ATS may provide a draft initial Form ATS–N
to the staff for consideration.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
II, and Part III, as applicable.529 The
Commission is proposing to revise Part
I, Item 11 to state that the ATS must
include in such marked document any
changes to Exhibits 1, 2, and 5. The
requirement for the ATS to provide a
marked document or ‘‘redline’’ showing
changes helps market participants and
regulators easily review changes the
ATS is making in an amendment. The
Commission is not proposing Form
ATS–N to require a marked document
showing changes to Exhibit 4, which
includes aggregate platform-wide order
flow and execution statistics of the ATS,
because such statistics may frequently
change, and showing such changes
could be burdensome for ATSs and
would not be particularly useful for
market participants or regulators.
However, the ATS should be required to
provide a marked document to show
changes to the list and explanation of
categories or metrics for such aggregate
platform-wide order flow and execution
statistics on Exhibit 5, as highlighting
such changes would be useful for
market participants in understanding
any aggregate platform-wide order flow
and execution statistics the ATS
provides. In addition, to ensure the
changes in the marked document are
clear and readily identifiable, the
Commission is proposing to clarify that
the ATS must indicate the Part and Item
number for all Items that are changing.
Request for Comment
83. Should Covered ATSs be required
to provide any additional identifying
information on Part I of Form ATS–N?
Are the proposed information requests
on Part I of Form ATS–N necessary, or
are certain information requests not
necessary and why?
84. Should the Commission require
Covered ATSs to provide types of
securities that they trade (or do not
trade) in Part I, Item 8 of Form ATS–N?
Would the proposed categories and
classifications of government securities
in Part III, Item 8(b) be helpful to market
participants? What, if any, additional or
alternative categories or classifications
would commenters suggest? Is there any
other information about types of
securities an ATS trades that should be
required by Form ATS–N?
4. Part II: Broker-Dealer Operator and Its
Affiliates Activities
The Commission believes that the
disclosures on Form ATS–N about the
conflicts of interest that might arise
from the business structures of the
529 This Item is currently numbered as Part I, Item
10, but would be renumbered as Item 11. The
Commission proposes to make a minor change to
this Item to clarify that ‘‘II’’ refers to Part II.
PO 00000
Frm 00049
Fmt 4701
Sfmt 4702
15543
Covered ATS and the ATS-related
activities of the broker-dealer operator
and its affiliates are designed to help
participants protect their interests when
using the services of the ATS.530 As the
Commission has previously stated, the
broker-dealer operator controls all
aspects of the ATS’s operations and the
broker-dealer operator’s non-ATS and
ATS functions may overlap.531
Currently, market participants have
limited information about conflicts of
interest that might arise from the nonATS activities of the broker-dealer
operator of a Government Securities
ATS or a Communication Protocol
System, and different classes of
participants may have different levels of
information about the operations of the
ATS or the Communication Protocol
System.532 Because of potential overlap
between a broker-dealer’s ATS
operations and its other operations,
there is a risk of information leakage of
subscribers’ confidential trading
information to other business units of
the broker-dealer operator or its
affiliates. The Commission believes that
some market participants would want to
consider the trading activity of the
broker-dealer operator, or its affiliates,
when evaluating potential conflicts of
interest on a Covered ATS and may also
want to be aware of the range of services
and products that the broker-dealer
operator or its affiliates offer for use in
the ATS because such services or
products may have an impact on access
to, or trading on, the ATS. In addition,
disclosures on Form ATS–N would
better inform the Commission and other
regulators about the activities of
Covered ATSs and their role in the
government securities and NMS stock
markets, which would facilitate better
oversight of these ATSs to the benefit of
investors.
The Commission continues to believe
that the interests of the broker-dealer
operator or its affiliates can sometimes
compete against the interests of those
that use the Covered ATS’s services.
These competing interests, at times, may
give rise to conflicts of interest for the
broker-dealer operator and its affiliates
or the potential for information leakage
of subscribers’ confidential trading
information. For example, trading by the
broker-dealer operator or its affiliates on
a Covered ATS controlled and operated
by the broker-dealer operator presents a
conflict of interest whereby the brokerdealer operator has the opportunity to
place its interest ahead of participants
530 See
infra Section IV.D.4.
NMS Stock ATS Proposing Release, supra
note 29, at 81010, 81041.
532 See id. at 81010.
531 See
E:\FR\FM\18MRP2.SGM
18MRP2
15544
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
trading in the ATS that the brokerdealer controls and operates. Part II of
Form ATS–N is designed to provide
market participants with information
about these competing interests, and
inform them about: (1) The operation of
the Covered ATS—regardless of the
corporate structure of the ATS—and of
its broker-dealer operator, or any
arrangements the broker-dealer operator
may have made, whether contractual or
otherwise, pertaining to the operation of
its ATS; and (2) ATS-related activities of
the broker-dealer operator and its
affiliates that may give rise to conflicts
of interest for the broker-dealer operator
and its affiliates or the potential for
information leakage of subscribers’
confidential trading information. The
public disclosure about potential
conflicts of interest on Covered ATSs
would advance the same policy and
investor protection objectives.
Furthermore, Part II of Form ATS–N
does not require public disclosure of
activities or affiliate relationships of the
broker-dealer operator that do not relate
to the Covered ATS. Many broker-dealer
operators of NMS Stock ATSs, and, to
a lesser extent, Government Securities
ATSs, engage in broker-dealer or other
activities that are unrelated to their
operations of the ATS. The Commission
believes that Form ATS–N should
exclude requests that would solicit
information about a broker-dealer
operator’s activities unrelated to its ATS
operations.
The Commission is proposing to use
the same definitions of ‘‘affiliate’’ and
‘‘control’’ in revised Form ATS–N as are
used in current Form ATS–N.533 These
terms are intended to encompass all
relevant affiliate relationships between
the broker-dealer operator and other
entities that the Commission believes
would help market participants’
533 Form ATS–N would define ‘‘affiliate’’ as, with
respect to a specified person, any person that,
directly or indirectly, controls, is under common
control with, or is controlled by, the specified
person. ‘‘Control’’ would be defined to mean the
power, directly or indirectly, to direct the
management or policies of the broker-dealer
operator of an alternative trading system, whether
through ownership of securities, by contract, or
otherwise. In this proposal, the Commission is
proposing to update the definition of ‘‘person’’ for
the purposes of Form ATS–N. A ‘‘person’’ is
presumed to control the broker-dealer operator of
an alternative trading system if that person: Is a
director, general partner, or officer exercising
executive responsibility (or having similar status or
performing similar functions); directly or indirectly
has the right to vote 25 percent or more of a class
of voting securities or has the power to sell or direct
the sale of 25 percent or more of a class of voting
securities of the broker-dealer operator of the
alternative trading system; or in the case of a
partnership, has contributed, or has the right to
receive upon dissolution, 25 percent or more of the
capital of the broker-dealer operator of the
alternative trading system. See infra Section V.D.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
dealer, using its own discretion, directs
the trading interest of the asset manager
into the affiliated ATS, the ATS would
a. Items 1 and 2: Broker-Dealer Operator
not be required to list the affiliated asset
and Its Affiliate Trading Activities in
manager under Item 2(a); under such
the Covered ATS
circumstances, the affiliate would not be
Part II, Items 1(a) and 2(a) of Form
‘‘directing’’ trading interest to the ATS
ATS–N are designed to disclose
because the third-party broker-dealer is
information about whether business
using its discretion to direct the
units of the broker-dealer operator or its affiliate’s trading interest.
affiliates,535 respectively, are permitted
Currently, Part II, Items 1(a) and 2(a)
to enter or direct the entry of trading
only require an NMS Stock ATS to list
interest into the Covered ATS. If the
business units or affiliates, respectively,
person that operates and controls a
that enter or direct the entry of orders
Covered ATS is also able to trade on
and trading interest into the ATS.537
that ATS, there may be an incentive to
Based on the Commission staff’s
design the operations of the ATS to
experience, some NMS Stock ATSs have
favor the trading activity of the operator opted to list all of the internal business
of the ATS or affiliates of the operator.
units and affiliates that could trade in
An operator of a Covered ATS that also
the ATS and not only the internal
trades in the ATS it operates would
business units and affiliates that
likely have informational advantages
actively enter orders and trading interest
over others trading in the ATS, such as
into the ATS. This additional
a better understanding of the manner in information can also help market
which the system operates or who is
participants evaluate the types of
trading in the ATS. In the most
potential conflicts of interest on an NMS
egregious case, the operator of the ATS
Stock ATS by providing the entire
might use the confidential trading
universe of potential contra-side trading
information of other traders to
interest that users of the ATS might
advantage its own trading on or off of
view as a conflict of interest.
536
the ATS.
Accordingly, while not required to do
If a Covered ATS permits the brokerso, a Covered ATS would meet the
dealer operator or its affiliates to enter
respective requirements of Part II, Items
trading interest in the ATS, whether on
1(a) and 2(a) by listing all of the internal
an agency, principal, or riskless
business units and affiliates that could
principal basis, the ATS would be
trade in the ATS.
required to only list the business units
The Commission is proposing that
or affiliates that actually enter or direct
Form ATS–N specify the types of
the entry of trading interest into the
information that a Covered ATS must
ATS. Part II, Items 1(a) and 2(a) of Form provide with regard to business units or
ATS–N would require the ATS to list
affiliates of the broker-dealer operator.
the business unit or affiliate if, for
Specifically, Item 1(a) would require the
example, a trading desk of the brokerATS to name and describe each type of
dealer operator or an affiliate uses a
business unit of the broker-dealer
direct connection to the ATS or
operator that enters or directs the entry
algorithm to submit trading interest into of trading interest into the ATS (e.g.,
the ATS. Likewise, if an affiliated asset
another Covered ATS, type of trading
manager of the broker-dealer operator
desks, market maker, sales or client
uses the services of a third-party broker- desk) and, for each business unit, to
dealer to direct trading interest to the
provide the applicable MPID and list the
ATS (i.e., the asset manager instructs the capacity of its trading interest (e.g.,
third-party broker-dealer to send its
principal, agency, riskless principal).
trading interest to the ATS), the ATS
Item 2(a) would require the Covered
would be required to list that affiliated
ATS to name and describe each type of
asset manager under Item 2(a). However, affiliate that enters or directs the entry
if that affiliated asset manager submits
of trading interest into the ATS (e.g.,
trading interest to a third-party brokerbroker-dealers, another Covered ATS,
dealer, and that third-party brokerinvestment companies, hedge funds,
market makers, PTFs) and, for each of
534 See NMS Stock ATS Adopting Release, supra
those affiliates, provide the applicable
note 2, at 38818–19.
MPID and list the capacity of its trading
535 In Part II, Item 1(a), the Commission is
interest (e.g., principal, agency, riskless
proposing to delete examples of trading interest—
quotes, conditional orders, and indications of
principal). The disclosures in Items 1(a)
interest—as the proposed definition of trading
and 2(a) would help market participants
interest would encompass these examples.
understand both the types of broker536 For a further discussion about how a conflict
evaluation of potential conflicts of
interest.534
of interest related to trading by the broker-dealer
operator on its own ATS could be harmful to other
subscribers, see NMS Stock ATS Adopting Release,
supra note 2, at 38771, 38824–29.
PO 00000
Frm 00050
Fmt 4701
Sfmt 4702
537 As explained above, Form ATS–N will remove
references to ‘‘orders,’’ and its disclosures will
focus on ‘‘trading interest.’’
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
dealer operator business units and
affiliates that can trade in a Covered
ATS, and their trading activities.538
In addition to what is required under
current Form ATS–N, the Commission
proposes to add an additional disclosure
request to Part II, Items 1(a) and 2(a) of
Form ATS–N that would require a
Covered ATS to explain any
circumstance when the broker-dealer
operator or an affiliate, respectively,
would be a counterparty to an ATS
trade. Based on Commission experience,
the broker-dealer operator may act as a
counterparty to both sides of a trade to
maintain the anonymity of each
counterparty or to facilitate clearance
and settlement of the trade. To the
extent the broker-dealer operator or
affiliate of the broker-dealer operator of
a Covered ATS intermediates between
two counterparties, the ATS should
publicly disclose to its subscribers when
and how it does so and the capacity of
the broker-dealer operator or its
affiliates.539
Part II, Items 1(b) and 2(b) of Form
ATS–N would require a Covered ATS to
disclose whether the services that the
ATS offers and provides to the business
units or affiliates required to be
identified in Item 1(a) and 2(a),
respectively, are the same for all
subscribers and persons whose trading
interest is entered into the ATS by a
subscriber.540 This request would be in
538 Although the narrative responses to Items 1(a)
and 2(a) could typically be kept up-to-date via
updating amendments to Form ATS–N, the
Commission also notes that in most cases, if the
‘‘yes’’ or ‘‘no’’ response to Items 1(a) or 2(a) changes
(e.g., the Covered ATS changes its operations to
allow affiliates to trade whereas they could not do
so prior, or vice versa), the ATS would be required
to file a material amendment. See NMS Stock ATS
Adopting Release, supra note 2, at 38826.
539 Depending on how the Covered ATS operates,
it is possible that disclosures about the brokerdealer operator’s (or its affiliate’s) role as an
intermediary between two other counterparties
would be required disclosures elsewhere on the
Form ATS–N (e.g., Part III, Item 7 (Order Types and
Sizes; Trading Facilities), Part III, Item 21 (PostTrade Processing, Clearance, and Settlement)).
Accordingly, the Commission is proposing that this
information would be required to be publicly
disclosed in Part II. However, to decrease
redundancy in the form, the ATS could note in Part
II, Item 1(a) and/or 2(a) disclosures that the brokerdealer operator or its affiliates could be
counterparties to a trade, state the capacity in
which broker-dealer operator or its affiliate is a
counterparty to the trade, and provide a more
detailed responses to other requests for information
as required in the form.
540 The Commission is proposing to revise Part II,
Items 1(b) and 2(b) to specifically ask about
treatment of persons whose trading interest is
entered into the ATS by a subscriber or the brokerdealer operator. In the Commission’s experience,
ATS services could vary among not only
subscribers, but also non-subscriber participants to
the ATS. The Commission is therefore proposing to
broaden the scope of these questions to apply to
differing treatment among non-subscriber
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
the form of a ‘‘yes’’ or ‘‘no’’ question,
and if the ATS answers ‘‘no,’’ it would
be required to explain any differences in
response to the applicable Item
number(s) in Part III of Form ATS–N
and list the applicable Item number(s).
If there are differences that are not
applicable to Part III of Form ATS–N,
the ATS must explain those differences
in detail under Part II, Items 1 and 2.
Part II, Items 1(c) and 2(c) would
require a Covered ATS to disclose the
broker-dealer operator’s or any of its
affiliates’ role as a liquidity provider in
the ATS, if applicable. These Items
would require the ATS to disclose—in
the form of a ‘‘yes’’ or ‘‘no’’ response—
whether there are any formal or
informal arrangements with any of the
sources of trading interest of the brokerdealer operator or affiliates identified in
Item 1(a) and Item 2(a), respectively, to
provide trading interest to the ATS (e.g.,
undertaking to buy or sell continuously,
or to meet specified thresholds of
trading or quoting activity). If the ATS
answers ‘‘yes,’’ it must identify the
business unit(s) or affiliate(s) and
respond to the Item with information
about liquidity providers in the ATS.541
Based on the Commission staff’s
experience with Form ATS–N filed by
NMS Stock ATSs, highlighting whether
the broker-dealer operator or affiliate
acts as a liquidity provider on a Covered
ATS would help market participants
evaluate the potential for conflicts of
interest or information leakage on the
trading platform.
Finally, the Commission proposes to
relocate the Part II, Items 1(d) and 2(d)
disclosure requests to proposed Part III,
Item 16(c). Currently, these request an
NMS Stock ATS to disclose information
about sending orders and trading
interest to a trading center operated or
controlled by the broker-dealer operator
or any of its affiliates, respectively in
the form of a ‘‘yes’’ or ‘‘no’’ question.
The related narrative is currently
required to be provided in Part III, Item
16, which requires disclosures about
external routing from the NMS Stock
ATS. The Commission continues to
believe that this disclosure is important
when evaluating potential conflicts of
interest and how trading interest may be
handled in the ATS. The Commission
originally included subpart (d) in Part II,
Items 1 and 2 to highlight conflicts of
interest related to routing. The
Commission believes that it would be
more efficient for market participants
participants whose trading interest is entered into
the ATS by a subscriber or the broker-dealer
operator.
541 This request is contained in Part III, Item 12.
See infra Section V.D.5.l.
PO 00000
Frm 00051
Fmt 4701
Sfmt 4702
15545
and filers to consolidate this disclosure
with the responses to the request
soliciting information about the routing
or sending of trading interest from the
ATS. As such, the Commission is
proposing to delete Items 1(d) and 2(d)
from Part II, and relocate the disclosure
requirements therein to Part III, Item
16(c).
Request for Comment
85. What information about trading by
the broker-dealer operator and its
affiliates related to Government
Securities ATSs is important to market
participants? Are there any additional
relevant points of information about
NMS Stock ATSs that Form ATS–N
does not solicit and should be asked?
86. Are there potential conflicts of
interest for broker-dealer operators of
Government Securities ATSs or their
affiliates that may justify greater
operational transparency for
Government Securities ATSs than for
NMS Stock ATSs, or vice versa?
87. Should the Commission require
separate disclosures for different types
of trading by the broker-dealer operator
on the Covered ATS, such as trading by
the broker-dealer operator for the
purpose of correcting error trades
executed in the ATS, as compared to
other types of principal trading? If so,
what types of principal trading should
be addressed separately and why? What
disclosures should the Commission
require about principal trading and
why?
88. Should the Commission limit or
expand in any way the proposed
disclosure requirements to require
disclosure of arrangements regarding
access by the broker-dealer operator or
its affiliates to both other trading venues
and affiliates of those other trading
venues?
89. Should the Commission require
ATSs to provide information about
when the broker-dealer or affiliate of the
broker-dealer would be a counterparty
to an ATS trade? What type of
information about such arrangements
would be useful to market participants?
90. Form ATS–N currently requires
that an NMS Stock ATS name the
affiliate(s) of the broker-dealer operator
permitted to enter or direct the entry of
trading interest into the ATS. A
Government Securities ATS would also
be required to describe the type of
affiliates on Form ATS–N. Should the
Commission continue to require NMS
Stock ATSs, but not Government
Securities ATSs, to disclose the name(s)
of affiliate(s) in Form ATS–N?
91. Should the Commission require
Covered ATSs to disclose the percentage
of trading in the ATS attributable to
E:\FR\FM\18MRP2.SGM
18MRP2
15546
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
each or all of the broker-dealer
operator’s business units, affiliates or
both? Should Form ATS–N require a
Covered ATS to disclose specific trade
volume data for its trading with
business units of the broker-dealer
operator or its affiliates? If so, how
should that volume be measured (e.g.,
executed trades, dollar volume)?
92. Would the disclosure of
information about trading by the brokerdealer operator and its affiliates in the
Covered ATS be sufficient to address
potential conflicts of interest? If
disclosure alone is insufficient, are there
other measures the Commission could
take to mitigate potential conflicts of
interest regarding trading? Should the
Commission prohibit some or all trading
by the broker-dealer operator and its
affiliates in the ATS to address potential
conflicts of interest?
jspears on DSK121TN23PROD with PROPOSALS2
b. Item 3: Interaction of Trading Interest
With Broker-Dealer Operator; Affiliates
Proposed Part II, Item 3 of Form ATS–
N is designed to solicit information
about the interaction of trading interest
between unaffiliated subscribers to a
Covered ATS and trading interest of the
broker-dealer operator and its affiliates
in the ATS. As proposed, Part II, Item
3(a) of Form ATS–N would require a
Covered ATS to disclose whether a
subscriber can opt out of interacting
with trading interest of the broker-dealer
operator in the ATS, and Part II, Item
3(b) would require the ATS to disclose
whether a subscriber can opt out of
interacting with the trading interest of
an affiliate of the broker-dealer operator
in the ATS.542 Part II, Item 3(c) of Form
ATS–N would require the ATS to
disclose whether the requirements 543 of
the opt-out processes for the brokerdealer operator and affiliates required to
be identified in Items 3(a) and (b) are
the same for all subscribers. Proposed
542 For example, if a broker-dealer operator uses
algorithms to submit subscriber orders into the
Covered ATS, any steps that either the brokerdealer operator or the subscriber needs to take so
that the ATS prevents those orders from trading
with the broker-dealer operator or its affiliates
would be required disclosures under Items 3(a) and
3(b), respectively.
543 The Commission is proposing to replace the
phrase ‘‘terms and conditions’’ with
‘‘requirements.’’ In the Commission staff’s
experience reviewing Form ATS–N and discussing
the requirements of the form with NMS Stock ATSs,
the Commission has observed that some NMS Stock
ATSs have read ‘‘terms and conditions’’ to mean all
legal or contractual terms, rather than terms
relevant to the scope of the question (i.e., what is
required for a subscriber to opt out). Using the term
‘‘requirements’’ will clarify that the Item is
soliciting information specifically related to
requirements related to the opt-out process.
Substantively, the Commission does not believe
that the proposed change would change information
that is being solicited in this Item.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Part II, Item 3 would be important to
unaffiliated market participants trading
on an ATS because, given the potential
for informational advantages by the
broker-dealer operator or its affiliates,544
some unaffiliated subscribers may not
wish to interact with the order flow of
the broker-dealer operator or its
affiliates. This disclosure could also
help subscribers understand whether
and how they may avoid trading with
the broker-dealer operator and its
affiliates should they elect to use the
services of the Covered ATS.
Request for Comment
93. Should Form ATS–N request more
or less information about how a market
participant can limit its interaction on a
Covered ATS with the broker-dealer
operator or its affiliates? If commenters
believe Form ATS–N should request
more information, please provide
specific information that would be
useful along with an explanation of its
utility.
c. Item 4: Arrangements With Other
Trading Venues
Part II, Item 4 of Form ATS–N is
designed to disclose information about
formal or informal arrangements (e.g.,
mutual, reciprocal, or preferential
access arrangements) 545 between the
broker-dealer operator or an affiliate of
the broker-dealer operator and a trading
venue (e.g., ATS, broker-dealer,
exchange, OTC market maker, futures or
options market) to access the ATS
services (e.g., arrangements to effect
transactions or to submit, disseminate,
or display orders and trading interest in
the ATS).
Part II, Item 4 would require a
Covered ATS to disclose an arrangement
between the broker-dealer operator for
the ATS or affiliate of the broker-dealer
operator and a broker-dealer operator of
an unaffiliated ATS under which the
broker-dealer operator would send
trading interest to the unaffiliated ATS
for possible execution before sending it
to any other destination. Item 4 would
also require disclosure of the inverse
arrangement pursuant to which any
subscriber trading interest sent out of
the unaffiliated Covered ATS would be
sent first to the ATS before any other
trading venue. In addition, Item 4 would
require a summary of the terms and
544 See
supra Section IV.D.3.a.
NMS Stock ATS Adopting Release, supra
note 2, at 38831 nn.769–70 and accompanying text.
As the Commission discussed in the NMS Stock
ATS Adopting Release, the disclosures required by
Part II, Item 4 of revised Form ATS–N are not so
broad as to require the Covered ATS to list each
unaffiliated subscriber that accesses its system. See
id. at 38831.
545 See
PO 00000
Frm 00052
Fmt 4701
Sfmt 4702
conditions of the arrangement such as,
for example, whether the broker-dealer
operator of the Covered ATS is
providing monetary compensation or
some other brokerage service to the
unaffiliated ATS.546 If a broker-dealer
operator has an arrangement with
another trading venue operated by the
broker-dealer operator or an affiliate, or
an unaffiliated trading venue, market
participants are likely to consider
information about such arrangements
relevant to their evaluation of an ATS as
a potential trading venue and such an
arrangement may raise concerns about
conflicts of interest or information
leakage. The Commission is therefore
proposing disclosure of such
arrangements in Part II, Item 4 of Form
ATS–N.547
Request for Comment
94. What type of arrangements might
a broker-dealer operator of a Covered
ATS have with a trading venue for
government securities or repos? Please
explain and describe what information,
if any, market participants may wish to
know about such an arrangement.
d. Item 5: Other Products and Services
Part II, Item 5(a) is designed to
disclose whether the broker-dealer
operator offers any products or services
for the purpose of effecting transactions
or submitting, disseminating, or
displaying trading interest in the
Covered ATS (e.g., algorithmic trading
products that send orders to the ATS,
order management or order execution
systems, data feeds regarding orders and
trading interest in, or executions
occurring on, the ATS, order hedging or
aggregation functionality, post-trade
processing),548 and if applicable, to
546 In addition, in Part II, Item 4(b) of Form ATS–
N, the Commission is proposing to delete the phrase
‘‘if yes to Item 4(a).’’ This phrase was included in
Form ATS–N in error. The NMS Stock ATS would
be required to respond to Part II, Item 4(b)
regardless of its response to Part II, Item 4(a).
547 In the NMS Stock ATS Adopting Release, the
Commission provided examples of when potential
conflicts of interest and information leakage could
occur as a result of preferential routing
arrangements (e.g., an affiliate is contractually
obligated to route all unexecuted orders to ATS) or
routing arrangements with affiliates (e.g., all orders
routed by the NMS Stock ATS must first be routed
to an the affiliate(s)). Specifically, the former might
result in information leakage should the
arrangement provide that all orders not executed by
the affiliate are to be sent to the NMS Stock ATS
and the latter could provide incentive for the NMS
Stock ATS to route orders to an affiliate instead of
trying to execute the order in the ATS. These issues
could arise in the government securities markets, as
well, so those examples are also applicable to both
NMS Stock ATSs and Government Securities ATSs.
See id. at 38831 n.771.
548 In Part II, Item 5, the Commission is proposing
to add ‘‘order hedging or aggregation functionality’’
and ‘‘post-trade processing’’ as examples of
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
indicate whether the requirements of
use 549 for these services or products
required to be identified in Part II, Item
5(a) are the same for all subscribers,
persons whose trading interest is
entered into the ATS by a subscriber or
the broker-dealer operator, and the
broker-dealer operator.550
Customers of a broker-dealer operator
could be both subscribers to its ATS and
customers of the broker-dealer operator
and the broker-dealer operator may offer
its customers trading products and
services in addition to its ATS services.
In certain cases, the product or service
offered might be used by the customer
in conjunction with the customer’s use
of the ATS. Broker-dealer operators
may, directly or indirectly through an
affiliate, offer products or services for
the purpose of, for example, submitting
trading interest, or receiving
information about displayed interest, in
the ATS.551 The Commission is
products or services for the purpose of effecting
transactions or submitting, disseminating, or
displaying trading interest in a Covered ATS, and
which could be particularly relevant to Government
Securities ATSs. ‘‘Order hedging or aggregation
functionality’’ would include any aggregation
functionality that, for example, could be used by
subscribers to interface with the ATS to send or
receive orders and trading interest to and from other
markets, including U.S. Treasury Securities
markets, over-the-counter spot markets, or futures
markets. ‘‘Post-trade processing’’ would include any
functionality that could be used by subscribers in
connection with post-trade processing to manage
routing, enrichment, allocations, matching,
confirmation, affirmation, or notification of ATS
trades.
549 The Commission is proposing to replace the
phrase ‘‘terms and conditions’’ with the phrase
‘‘requirements’’ throughout this Item. See note 543
and accompanying text. The Commission is also
proposing to require the Covered ATS to disclose
any differences in treatment as they apply to
persons whose trading interest is entered into the
ATS by a subscriber or the broker-dealer operator.
In the Commission staff’s experience, broker-dealer
operators and their affiliates may, for example,
disclose products and services offered to customers
of subscribers. See proposed revisions to Part II,
Items 5(b) and 5(d).
550 For example, if a broker-dealer operator offers
subscribers alternative algorithms to handle orders,
including sending such orders to the Covered ATS,
and there is a difference in the latency in which
each of the alternatives transmits information, such
differences in latency would need to be disclosed
in Part II, Item 5 of revised Form ATS–N.
551 See NMS Stock ATS Proposing Release, supra
note 29, at 81048. See also NMS Stock ATS
Adopting Release, supra note 2, at 38832 n.779. For
example, order hedging functionalities could
encompass a product or service offered by the
broker-dealer operator to a customer that the
customer may use as a subscriber to the brokerdealer operator’s ATS to hedge exposures of trading
interest in or outside the ATS. A broker-dealer
operator that offers such a functionality for use with
the ATS would describe the requirements for a
subscriber to use the functionality in Part II, Item
5 and explain its use with regard to the ATS in Part
III of Form ATS–N. For example, if the order
hedging functionality affects order interaction in
the ATS, the ATS would explain the functionality
in proposed Part III, Item 7. If the order hedging
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
proposing to delete the term
‘‘Subscribers’’ from Items 5(a) and 5(c)
so that all products and services that the
broker-dealer operator or affiliate of the
broker-dealer operator offers for the
purpose of effecting transactions or
submitting, disseminating, or displaying
trading interest in the ATS, would be
required to be disclosed on Form ATS–
N, regardless of whether they are offered
to subscribers or non-subscribers (e.g.,
customers of ATS subscribers). For
example, a Government Securities ATS
would be required to disclose any
aggregation functionality that the
broker-dealer operator or its affiliate(s)
offers, which, for example, could be
used by subscribers to interface with the
ATS to send or receive trading interest
to and from other markets, including
U.S. Treasury Securities markets, overthe-counter spot markets, or futures
markets. The Commission believes that
participants would be interested in
understanding the use of an aggregation
functionality with the ATS and how it
can help achieve their trading strategies.
If the broker-dealer operator or its
affiliate offered a product for effecting
transactions or submitting,
disseminating, or displaying trading
interest in the Government Securities
ATS using related financial markets for
non-government securities (e.g., futures,
currencies, swaps, corporate bonds), the
ATS could summarize the requirements
for use of such a product in this Item
and explain the product’s use under
proposed Part III, Item 11.552
The Commission believes the
information required by Part II, Item 5
of revised Form ATS–N is important
because participants want to know the
products or services that the brokerdealer operator or its affiliates may offer
for the purpose of effecting transactions,
or submitting, disseminating, or
displaying trading interest in the ATS
because such products or services may
impact the participants’ access to, or
trading on, the ATS.553 In some cases,
if subscribers also use other products or
services that the broker-dealer operator
offers, they could receive more favorable
terms from the broker-dealer operator
with respect to their use of the ATS. For
example, if a participant purchases a
service offered by the broker-dealer
operator of a Covered ATS, the brokerdealer operator might also provide that
functionality involves futures and trading interest
in the ATS, the ATS would explain the related
procedures under proposed Part III, Item 11.
552 See infra Section IV.D.5.l.
553 Services for the purpose of effecting
transactions, or submitting, disseminating, or
displaying trading interest in the ATS that are
offered by a person other than the broker-dealer
operator would also be responsive to this Item.
PO 00000
Frm 00053
Fmt 4701
Sfmt 4702
15547
subscriber more favorable terms for its
use of the ATS than other participants
who do not purchase the service. Such
favorable terms could include fee
discounts or access to a faster
connection line to the ATS.
Additionally, a broker-dealer operator of
a Covered ATS may offer certain
products and services only to certain
participants or may offer products and
services on different terms to different
categories of participants. The
Commission believes that participants
would want to know, when assessing a
Covered ATS as a potential trading
venue, the range of services or products
that the broker-dealer operator or its
affiliates offers participants of the ATS,
and any differences in treatment among
participants, because such services or
products may impact the participants’
access to, or trading on, the ATS.
To the extent that a participant on a
Covered ATS is offered use of products
and services by the broker-dealer
operator or its affiliate for the purpose
of effecting transactions or submitting,
disseminating, or displaying trading
interest in the ATS, Part II, Item 5 of
Form ATS–N would require disclosures
about those products or services. For
example, if a broker-dealer operator
offers its customers an order
management system that can also be
used by participants to the ATS to
manage orders in the ATS (e.g., adjust
the pricing or size of trading interest in
relation to trading interest resting in or
outside the ATS, or modify order
instructions to execute or cancel at a
specified time or under certain market
conditions), the ATS would be required
to identify the order management
system, provide a summary of the
requirements for its use, and identify
the Part and Item number in Form ATS–
N where the order management system
is explained. In addition, any services
offered by the broker-dealer operator for
subscribers to mitigate risk, such as
limits on gross or net notional exposures
by a subscriber, identification of
duplicative orders in the ATS, or other
checks offered related to order entry or
authorizations to trade in the ATS,
would be identified in this Item and
explained further in proposed Part III,
Items 7(b) and 8(b), as applicable.
However, the requests in Part II, Item 5
would not encompass trading products
or services offered by the broker-dealer
operator to customers that are not for
the purpose of effecting transactions or
submitting, disseminating, or displaying
trading interest in the ATS.
To alleviate any concerns regarding
the potential disclosure of commercially
sensitive information in this disclosure
request, the proposed disclosure request
E:\FR\FM\18MRP2.SGM
18MRP2
15548
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
would require only a summary of the
requirements for the products and
services disclosed and an explanation of
how the product or service is used with
the ATS in the applicable Item number
in Part III of Form ATS–N. The
Commission believes that requiring only
a summary narrative would normally
not require the broker-dealer operator to
disclose commercially sensitive
information.
Request for Comment
95. What types of products and
services do broker-dealer operators of
Covered ATSs or affiliates of brokerdealer operators offer to subscribers and
how are such products and services
used in connection with the ATSs?
96. What information about the
products and services offered by brokerdealer operators would be helpful to
market participants?
97. Should the Commission expand
Part II, Item 5 of Form ATS–N to require
disclosure of products or services
offered by the broker-dealer operator or
its affiliates to subscribers, but not
necessarily offered in connection with
transacting on the Covered ATS?
98. Would the information required
by Part II, Item 5 require disclosure of
commercially sensitive information? If
so, how could the Commission revise
the information request to limit the
disclosure of commercially sensitive
information?
jspears on DSK121TN23PROD with PROPOSALS2
e. Item 6: Activities of Service Providers
Part II, Item 6(a) of Form ATS–N is
designed to provide disclosures relating
to any entity, other than the brokerdealer operator, that supports the
services or functionalities of the
Covered ATS.554 Information about the
roles and responsibilities of service
providers to the ATS is important
because it could inform market
participants about the potential for
information leakage on the ATS.555 The
Commission is not proposing that the
third-party service provider requests
554 As explained further below, the Commission
is relocating the disclosure request about shared
employees in Part II, Item 6(a) of current Form
ATS–N to Part II, Item 7(a) of revised Form ATS–
N. Accordingly, Part II, Item 6(a) of revised Form
ATS–N corresponds to Part II, Item 6(b) of current
Form ATS–N.
555 Legacy Government Securities ATSs that
operate pursuant to a Form ATS on file with the
Commission are currently subject to the disclosure
requirement of Exhibit E of Form ATS, which
requires ATSs to disclose the name of any entity
other than the ATS that will be involved in the
operation of the ATS, including the execution,
trading, clearing, and settling of transactions on
behalf of the ATS; and to provide a description of
the role and responsibilities of each entity. See Item
7 of Form ATS (describing the requirements for
Exhibit E of Form ATS). Proposed Part II, Item 6(b)
would expand upon this requirement.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
encompass purely administrative items,
such as human resources support, or
basic overhead items, such as phone
services and other utilities. As it is with
Part II, Item 6(b) in current Form ATS–
N, the information solicited in this
disclosure is meant to provide
information about the extent to which a
third party may be able to influence or
control the operations of the ATS
through involvement with its operations
(such as operating the ATS’s proprietary
data feeds sent to subscribers) and allow
the Commission to monitor the third
party’s role and operations in the
ATS.556 For example, any service
provider for clearance and settlement of
transactions in the ATS, consulting
relating to the trading systems or
functionality, regulatory compliance,
and recordkeeping for the ATS would
be responsive to this request.557
The Commission recognizes that an
ATS may engage an entity other than
the broker-dealer operator to perform an
operation or function of the ATS or a
subscriber may be directed to use an
entity to access a service of the ATS,
such as order entry, disseminating
market data, or display, for example. In
such instances, the ATS must ensure
that the entity performing the ATS
function complies with Regulation ATS
with respect to the ATS activities
performed. For example, with respect to
an ATS that is subject to the Fair Access
Rule, if participants are required to
enter orders in the ATS through an
order entry firm or to access displayed
orders from another entity, the ATS
must ensure that its written fair access
standards address these entities’
activities because of the affect these
entities’ activities can have on
participants’ ability to access the ATS
services.558 Likewise, to the extent an
entity, such as a service provider,
performs a function of the ATS, and as
a result has access to subscriber
confidential trading information, the
ATS’s written safeguards and
procedures to protect its subscribers’
556 See Bloomberg Letter at 8 (stating, in response
to the 2020 Proposal, that disclosure of outsourced
technology provider relationships is appropriate for
the Commission and FINRA to determine that the
regulated entity, the broker-dealer operator, is
monitoring its third-party service provider(s)).
557 If a summary of the role and responsibilities
of the service provider is disclosed in response to
Part III of Form ATS–N, the ATS need only list the
applicable Item number in response to this Item. If
there are services or functionalities that are not
applicable to Part III, the ATS would identify the
service provider, the services and functionalities,
and also provide a summary of the role and
responsibilities of the service provider in proposed
Part II, Item 6(a).
558 See Regulation ATS Adopting Release, supra
note 31, 63 FR 70873 n.252. See also infra Section
V.A.
PO 00000
Frm 00054
Fmt 4701
Sfmt 4702
confidential trading information would
also include the service provider’s
safeguards and procedures to protect the
ATS’s subscriber confidential trading
information that is accessible to the
service provider.559 In addition, as part
of the ATS’s oversight procedures, the
ATS must ensure that the service
provider, for example, follows the
service provider’s safeguards and
procedures to protect the ATS’s
subscriber confidential trading
information.
Disclosures about the activities of
service providers, for example, would
inform the Commission about the scope
of the ATS’s operations and therefore
the extent to which the ATS’s
Regulation ATS obligations would
apply to the service provider’s activities.
In addition, as discussed above, the
Commission will consider as part of its
review of the Form ATS–N whether the
entity filing Form ATS–N, or entities
involved in the operations of the ATS,
meets the definition of a Covered ATS,
including whether the Covered ATS
meets the criteria of Exchange Act Rule
3b–16.560 The information provided on
Form ATS–N about the role of service
providers with regard to the ATS’s
operations would help inform the
Commission’s review.
Furthermore, the requests under Part
II, Items 6(b) through (c) would require
disclosure about whether any service
providers or their affiliates use the
services of the ATS. If they do, the
Covered ATS would be required to
identify the service providers, the
service(s) used, and whether there is
any disparate treatment between those
service providers and other subscribers.
Thus, for example, a Covered ATS
would only be required to obtain and
disclose information about third-party
vendors and their affiliates that actively
use the services of the ATS; the ATS
should be aware of all parties that use
its services under its current
recordkeeping obligations. The
Commission believes that market
participants, when analyzing potential
conflicts of interest or information
leakage, would find it very useful to
understand whether potential
counterparties with whom they are
trading, and who also service the
operation of the ATS, have access to
different or unique ATS-related
services. Part II, Item 6(c) of Form ATS–
N would require the Covered ATS to
559 In such a case, a description of the written
safeguards and procedures to protect subscribers’
confidential trading information of the ATS and
service provider would be required to be disclosed
in Part II, Item 7 of Form ATS–N. See infra Section
IV.D.4.f.
560 See supra note 109.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
identify and explain any differences in
ATS services to a service provider and
all other subscribers and persons whose
trading interest is entered into the ATS
by a subscriber or the broker-dealer
operator.561 Additionally, depending on
the role and responsibilities of the
service provider, market participants
may wish to consider evaluating the
robustness of the ATS’s safeguards and
procedures to protect confidential
subscriber information.
This request for summary information
is designed to provide market
participants with a general
understanding of the types of
technology or hardware provided by the
service provider as part of its
responsibilities, and how that hardware
or technology is used by the ATS. The
purpose of this disclosure is to provide
information that subscribers can use to
better understand whether the service
provider might be able to access
subscriber confidential trading
information, so ATSs should draft their
disclosure with the goal of conveying
such information. Simply stating that a
third party provides technology or
hardware to the ATS would not be
responsive to the required summary of
the service provider’s role, but, on the
other hand, the ATS would not have to
provide information about the
manufacturer of its hardware
components.
jspears on DSK121TN23PROD with PROPOSALS2
Request for Comment
99. Are there any critical services or
functionalities (e.g., matching engine,
market data) that, if provided by a third
party, should be required to be
described in a higher level of detail than
the proposed ‘‘summary’’ level? If so,
which services and functionalities?
f. Item 7: Protection of Confidential
Trading Information
Part II, Item 7(a) of Form ATS–N is
designed to provide information about a
Covered ATS’s written safeguards and
written procedures to protect the
confidential trading information of
subscribers to the ATS, including, (1) a
summary of the roles and
responsibilities of any persons that have
access to confidential trading
information, the confidential trading
information that is accessible by them,
the basis for the access, and whether
any shared employees (defined below)
have access to confidential trading
561 The Commission is also proposing to require
the Covered ATS to disclose any differences in
services as they apply to persons whose trading
interest is entered into the ATS by a subscriber or
the broker-dealer operator (e.g., customers of
subscribers). See proposed revisions to Part II, Item
6(c).
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
information; (2) written standards
controlling employees of the ATS that
trade for employees’ accounts; and (3)
written oversight procedures to ensure
that the safeguards and procedures
described above are implemented and
followed.
The protection of confidential trading
information is an important component
of the regulation of ATSs and is
essential to ensuring the integrity of
ATSs as execution venues. The
Commission believes that disclosures
about any employee of the ATS’s
broker-dealer operator or employee of
its affiliate that provides services for
both the operations of the ATS and any
other business unit or any affiliate of the
broker-dealer operator (‘‘shared
employee’’) with access to subscriber
confidential trading information would
help market participants evaluate
circumstances when there is the
potential for information leakage. For
example, the Commission believes that
market participants would likely want
to know if an employee of the brokerdealer operator (or employee of an
affiliate of the broker-dealer operator)
that is responsible for the operations of
a system containing subscriber
confidential trading information from
the ATS is also responsible for
supporting, for instance, the principal
trading activity of the broker-dealer
operator, or another trading venue
operated by the broker-dealer, or a
trading venue that is an affiliate of the
broker-dealer operator. In addition, if
confidential trading information is not
protected, many of the advantages or
purposes for which a subscriber may
choose to send its trading interest to an
ATS (e.g., to trade anonymously and/or
to mitigate the impact of trading in large
positions) are eliminated. In cases
where the confidential trading
information of a subscriber is
impermissibly shared with the
personnel of the broker-dealer operator
or any of its affiliates, such an abuse is
also compounded by the conflicting
interests of the broker-dealer operator.
That is, in such a case, the broker-dealer
operator has invited subscribers to trade
on its ATS and may have abused that
relationship to provide itself or its
affiliates with a direct competitive
advantage over that subscriber.
Accordingly, the Commission believes
that disclosures informing market
participants about broker-dealer
operators’ written safeguards and
written procedures to protect
confidential trading information are
necessary so market participants can
independently evaluate the robustness
of the safeguards and procedures and
PO 00000
Frm 00055
Fmt 4701
Sfmt 4702
15549
decide for themselves whether they
wish to do business with a particular
Covered ATS.
Part II, Item 7(a) of revised Form
ATS–N contains, in part, the same
disclosure requests as Part II, Item 7(a)
of current Form ATS–N. The
Commission is proposing to amend Part
II, Item 7(a) of Form ATS–N by adding
the disclosure requests in Part II, Items
6(a) and 7(d) of current Form ATS–N.
Item 6(a) of current Form ATS–N
solicits information about ‘‘shared
employees.’’ Part II, Item 7(d) of current
Form ATS–N requires an ATS to
provide a summary of the roles and
responsibilities of any persons that have
access to confidential trading
information, the confidential trading
information that is accessible by them,
and the basis for the access.
The Commission is relocating and
consolidating these disclosure requests
based on its experience with Form
ATS–N filings by NMS Stock ATSs. In
the Commission staff’s experience, the
disclosures in Part II, Items 6(a), 7(a),
and 7(d) in current Form ATS–N solicit
similar information and thus, the
structure of Form ATS–N often resulted
in redundant disclosures within these
Items. For example, in responding to
Part II, Item 7(d) of current Form ATS–
N, the ATS initially needs to describe
what it considers to be confidential
trading information, such as whether
only pre-trade order information would
be considered confidential trading
information, or whether post-trade
information would also be treated as
confidential trading information, and for
what period of time. To explain the
basis for the access, the ATS currently
needs to explain why the person would
have access to the confidential trading
information in Part II, Item 7(d).
Similarly, Part II, Item 6(a) of current
Form ATS–N requires the ATS to
disclose whether and how shared
employees can access confidential
trading information. The Commission
believes that consolidating these
information requests into a single Item
request in Part II, Item 7(a) on Form
ATS–N would make the form easier to
use because the reader will be able to
find all the information previously
spread across three items in a single
item.
Part II, Items 7(b) and (c) of Form
ATS–N are designed to disclose
information about whether a subscriber
can consent and withdraw consent,
respectively, to the disclosure of its
confidential trading information to any
person (not including those employees
of the ATS who are operating the system
or responsible for its compliance with
applicable rules). Subscribers should be
E:\FR\FM\18MRP2.SGM
18MRP2
15550
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
able to give consent if they so choose to
share their confidential trading
information.562 Covered ATSs vary in
terms of the types of orders, indications
of interest (IOIs), or other forms of
trading interest that are confidential on
their systems and what information
about such trading interest may be
shared. For example, an ATS might
provide that no IOIs submitted by
subscribers will be considered
confidential, but may provide
subscribers with the option to restrict
the information in the IOI message to
just the symbol and side (i.e., buy or
sell). For this example, Part II, Items 7(b)
and 7(c) of Form ATS–N would require
the Covered ATS to describe the means
by which a subscriber could control
some of the information contained in
the IOI message by providing consent or
withdrawing such consent for the
sharing of its confidential trading
information.563 For example, a
subscriber can consent to its open
trading interest being displayed to
certain subscribers that the subscriber
believes are less likely to misuse or
exploit such information, or that have
open trading interest on the contra side
in the same symbol. If the Covered ATS
allows subscribers to consent in this
manner, the ATS would mark ‘‘yes’’ to
Part II, Item 7(b). Continuing the
example, if the subscriber can
subsequently withdraw its consent to
this display of its open trading interest,
the Covered ATS would mark ‘‘yes’’ to
Part II, Item 7(c).
jspears on DSK121TN23PROD with PROPOSALS2
Request for Comment—Part II
100. Should the Commission expand
the proposed disclosures in proposed
Part II, Item 7(a)(i) to other employees,
personnel, or independent contractors
of the broker-dealer operator? If so,
which employees, personnel, or
independent contractors should be
included and what information about
such persons should be solicited?
101. Should the Commission require
Covered ATSs to disclose the
information in Part II of Form ATS–N?
If so, what level of detail should be
disclosed?
102. Would Part II of Form ATS–N
capture the information that is most
relevant to understanding the Covered
ATS and its relationship with the
broker-dealer operator and the broker562 See Regulation ATS Adopting Release, supra
note 31, at 70879.
563 See id. The Commission believes that there
may be some Covered ATSs that might not offer any
means by which a subscriber could consent to the
dissemination of its confidential trading
information. A Covered ATS would be required to
disclose this fact pursuant to Item 7(a). See id. at
70891 n.437.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
dealer operator’s affiliates? Please
support your arguments.
103. Would the proposed disclosures
in Part II require broker-dealer operators
of Covered ATSs to reveal too much (or
not enough) information about their
structure and operations?
104. Is there other information about
the activities of the broker-dealer
operator and its affiliates that market
participants might find relevant or
useful in their assessment or use of the
Covered ATS? If so, describe such
information and explain whether or not
such information should be required to
be provided on Form ATS–N.
105. Should Covered ATSs not be
required to provide the proposed
disclosures in Part II on Form ATS–N
due to concerns regarding
confidentiality, business reasons, trade
secrets, burden, or any other concerns?
If so, what information and why?
106. Are there ways to obtain the
same information as would be required
from Covered ATSs by Part II other than
through disclosure on Form ATS–N? If
so, how else could this information be
obtained and would such alternative
means be preferable to the disclosures
in Part II?
107. Should Covered ATSs be
required to publicly disclose in their
entirety on Form ATS–N their written
safeguards and written procedures to
protect the confidential trading
information of subscribers? Should the
Commission require less information be
disclosed about the written safeguards
and procedures?
108. Would the information about
written safeguards and written
procedures to protect the confidential
trading information of subscribers
described in Form ATS–N be sufficient
for subscribers to independently
evaluate such safeguards and
procedures and thus evaluate the ATS
as a destination for their orders? Should
the Commission prohibit the disclosure
of confidential subscriber information in
some circumstances? If so, please
describe.
5. Part III: Manner of Operations
Part III of Form ATS–N is designed to
provide public disclosures to help
market participants understand, among
other things, how they may use a
Covered ATS to buy and sell securities
and find a counterparty to a trade. The
Commission is proposing amendments
to Part III that would apply to both NMS
Stock ATSs and Government Securities
ATSs. Government Securities ATSs
would be required to respond to Part III
of Form ATS–N in the same manner as
NMS Stock ATSs, and the below
description summarizes the types of
PO 00000
Frm 00056
Fmt 4701
Sfmt 4702
disclosures Form ATS–N would solicit
for both NMS Stock ATSs and
Government Securities ATSs.
As proposed, Form ATS–N would
include an instruction at the beginning
of Part III to require that the Covered
ATS identify and explain any
differences among and between
subscribers, persons whose trading
interest is entered into the ATS by a
subscriber or the broker-dealer operator,
the broker-dealer operator, and any
affiliates of the broker-dealer.564 Current
Form ATS–N is structured to include
separate questions throughout the Items
that require the ATS to identify and
explain any differences in the treatment
of subscribers and the broker-dealer
operator. Based on its experience
reviewing Form ATS–N filed by NMS
Stock ATSs, the Commission believes
that discussion of these differences is
integral to the responses to each of the
Items, and that requiring the discussion
to be included in the response to each
Item, rather than requiring separate,
potentially disjointed disclosures,
would improve the readability of the
disclosures. By requiring Covered ATSs
to disclose differences in treatment of
persons whose trading interest is
entered into the ATS by a subscriber or
the broker-dealer operator, which would
include, for example, sponsored access
clients of subscribers, and affiliates of
the broker-dealer operator, market
participants will be able to discern any
benefit or disadvantage they may
receive in comparison to a broader,
more comprehensive group of potential
users of the ATS.565 The disclosure
about differences in treatment of
subscribers, other persons whose
trading interest is entered into the ATS
by a subscriber or the broker-dealer
operator, the broker-dealer operator, and
the broker-dealer operator’s affiliates is
important to market participants and
would better allow them to decide
whether submitting trading interest to
the Covered ATS aligns with their
trading objectives. Accordingly, the
Commission is proposing to restructure
Part III to delete separate questions
regarding whether subscribers and the
564 For example, in Part III, Item 5, if a Covered
ATS designed its operations to allow only certain
types of subscribers to enter trading interest into the
ATS through direct means (e.g., Financial
Information eXchange (FIX) protocol) and other
types of subscribers to enter trading interest into the
ATS through indirect means (e.g., SOR or
algorithm), the ATS would describe these
differences in means of entry in Part III, Item 5(a).
565 See current Form ATS–N Part III, Items 2(c),
3(b), 4(b), 5(b), 5(d), 6(b), 6(d), 6(f), 7(b), 8(b), 8(d),
8(f), 9(b), 10(b), 10(d), 11(b), 11(d), 13(b), 13(e),
14(b), 15(c), 17(b), 18(c), 19(b), 21(b), 22(b), and
23(b). The Commission is proposing to delete these
Items for Form ATS–N and re-number Items
throughout Part III.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
broker-dealer operator are treated the
same, and instead, proposing to include
the instruction for the Covered ATS to
disclose any differences in treatment in
the applicable responses to Part III. To
be clear, this proposed change would
not relieve Covered ATSs from their
obligation to disclose any differences in
treatment that were required to be
disclosed in current Form ATS–N.
a. Item 1: Types of ATS Subscribers
jspears on DSK121TN23PROD with PROPOSALS2
Part III, Item 1 of Form ATS–N is
designed to provide information on the
type(s) of subscribers that can use the
Covered ATS services. The Item would
provide market participants with
information about the type of trading
interest in the Covered ATS based on
the types of subscribers that use it.
Covered ATSs may design their system
for trading by retail investors,
institutional investors, dealers, or any
other type of market participant.
The Commission is proposing to
revise the list of types of market
participants in Part III, Item 1 of Form
ATS–N that, in the Commission staff’s
experience, are commonly used for
Government Securities ATSs and NMS
Stock ATSs.566 The list would include:
Retail investors, issuers, asset managers,
brokers, dealers, investment companies,
hedge funds, market makers, PTFs,
insurance companies, pension funds,
corporations, and banks. The list is nonexhaustive and a Covered ATS would be
required to list any type of subscriber
that can use the ATS’s services.567 In
addition to disclosing its subscribers, a
Covered ATS may use Part III, Item 1 to
disclose any types of participants whose
trading interest may reach the ATS. For
example, for an ATS that only allows
brokers or dealers as subscribers, the
ATS could identify the types of
customers from which the brokers or
dealers send trading interest to the ATS.
566 In Part III, Item 1 of Form ATS–N, the
Commission is modifying the checkboxes listing
types of subscribers to add insurance companies,
pension funds, and corporations. The Commission
believes that adding these checkboxes will provide
more granular information on the types of
subscribers participating on an ATS in an easier-toread format. The Commission is also proposing to
remove the checkbox ‘‘NMS Stock ATS’’ under the
list of types of subscriber in Form ATS–N. A brokerdealer operator of an NMS Stock ATS seeking to
access another NMS Stock ATS would involve the
broker-dealer operator for the NMS Stock ATS
becoming a subscriber to the ATS, not the ATS that
the broker-dealer operates. In this scenario, an NMS
Stock ATS that accepts a broker-dealer operator for
another NMS Stock ATS would mark the checkbox
for broker and/or dealer in Part III, Item 1 on Form
ATS–N as appropriate.
567 See NMS Stock ATS Adopting Release, supra
note 2, at 38820–21 (discussing the definition of
‘‘subscriber’’ and the persons encompassed
thereunder).
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Request for Comment
109. Should Form ATS–N require a
Covered ATS to include information
about the types of subscribers to the
ATS? Based on Commission staff
experience, some ATSs only accept
broker-dealers as subscribers to the ATS
and various types of market participants
send trading interest into the ATS
through the broker-dealer subscriber.
Should the Commission require the
identification of the types of market
participants whose trading interest may
be sent to the ATS, whether directly or
indirectly, by a broker-dealer subscriber
to a Covered ATS? Would this
information be useful to understanding
the type of trading interest in the ATS?
110. Should the Commission add any
other categories of subscribers
commonly applicable to Government
Securities ATSs or NMS Stock ATSs, or
both, to Form ATS–N?
b. Item 2: Eligibility for ATS Services
Part III, Item 2 of Form ATS–N is
designed to provide market participants
with information about whether the
Covered ATS requires subscribers to be
registered broker-dealers or enter a
written agreement to use the ATS
services, and whether there are any
conditions that the ATS requires a
person to satisfy before accessing the
ATS services.568 This Item would
require disclosure of the conditions a
person must satisfy ‘‘before accessing
the ATS services’’ (emphasis added). On
the other hand, Part III, Item 3 of Form
ATS–N (discussed infra), would require
disclosures about any conditions that
would exclude a subscriber, in whole or
in part, from using the Covered ATS as
a result of subscriber behavior while
already actively participating in the
ATS.569
The disclosures required by Part III,
Item 2 would allow market participants
to understand the conditions that they
would need to satisfy to participate on
the Covered ATS. If the Covered ATS
indicates that it does have conditions
568 In Part III, Item 2(b), the Commission is
proposing to delete the word ‘‘other’’ and ask
whether there any conditions, rather than any
‘‘other’’ conditions, that the ATS requires a person
to satisfy before accessing the ATS services. The
Commission believes it would be accurate to use
the phrase ‘‘any conditions’’ rather than ‘‘any other
conditions’’ in circumstances where a Covered ATS
indicates that the ATS does not require subscribers
to be registered broker-dealers in Part III, Item 2(a).
569 For example, if a Covered ATS has a practice
of excluding subscribers that do not meet certain
percentage thresholds for submitting firm-up orders
in response to receiving an IOI, conditional order,
or RFQ sent to them by the ATS, then this practice
would be subject to disclosure under Part III, Item
3 of Form ATS–N (‘‘Exclusion from ATS Services’’)
and not Part III, Item 2 (‘‘Eligibility for ATS
Services’’).
PO 00000
Frm 00057
Fmt 4701
Sfmt 4702
15551
that a person must satisfy before
accessing the ATS services, the request
would require the ATS to list and
provide a ‘‘summary’’ of those
conditions. Some Covered ATSs may
only have the eligibility requirement
that a person be a client of the brokerdealer operator. In that case, any
eligibility requirements to become a
client of the broker-dealer operator
would be responsive to this Item. For
example, if a subscriber must be a
customer of the broker-dealer operator,
the Covered ATS would provide a
summary of conditions the subscriber,
as a customer, would need to satisfy
(e.g., know your customer) before its
trading interest can be entered into the
ATS. If the Covered ATS requires
subscribers to contract with or become
a member of a third party, for example,
for purposes of clearance and
settlement, such as, for Government
Securities ATSs, the Fixed Income
Clearing Corporation’s Government
Securities Division, such information
would be responsive.
Request for Comment
111. What eligibility requirements to
access a Covered ATS are important to
a potential subscriber or participant to
the ATS and why? Are there any
eligibility requirements that are
particularly relevant to Government
Securities ATSs (inclusive of
Communication Protocol Systems, as
proposed) or Communication Protocol
Systems that trade NMS stock that
should also be required to be disclosed
on Form ATS–N?
c. Item 3: Exclusion From ATS Services
Based on Commission staff’s
experience, ATSs often disclose rules
governing subscribers’ participation in
the ATS, and if a subscriber fails to
comply with these rules, the ATS may
limit or deny access to the ATS.570 Part
III, Item 3 of Form ATS–N would
require information about whether a
Covered ATS can exclude, in whole or
in part, any subscriber from the ATS
services, and if so, to list and provide a
summary of the conditions for
excluding (or limiting) a subscriber from
using the ATS. The disclosures are
designed to provide information about
when the Covered ATS can exclude, in
whole or in part, a subscriber from the
services of the ATSs and help
subscribers reasonably anticipate the
570 These limitations can result in some
subscribers having different levels of functionality
or more favorable terms of access than others. For
example, in the Commission staff’s experience,
some ATSs exclude subscribers that frequently fail
to respond with a firm-up order after receiving an
IOI or request for quote.
E:\FR\FM\18MRP2.SGM
18MRP2
15552
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
types of activities that may cause them
to be excluded (or limited) from using
the services of the ATS. The question,
which allows Covered ATSs to provide
a ‘‘summary’’ of conditions for
excluding (or limiting) a subscriber, is
designed to solicit information to alert
subscribers about the types of activities
that may cause them to be excluded (or
limited) from using the services of the
ATS while protecting sensitive
information to allow the ATS to
reasonably control the activities and
quality of flow on its platform and
prevent subscribers from using the
disclosures to potentially misuse or
game the system. To the extent that the
ATS monitors and surveils trading
activity on the ATS that could result in
excluding subscribers from ATS
services, to avoid duplicative
disclosures, the response to this Item
could reference the monitoring and
surveillance practices described in
response to Part III, Item 9.571
jspears on DSK121TN23PROD with PROPOSALS2
Request for Comment
112. Is there any subscriber behavior
for which Covered ATSs, particularly
Government Securities ATSs (inclusive
of Communication Protocol Systems, as
proposed) or Communication Protocol
Systems that trade NMS stock,
commonly exclude a subscriber in
whole or in part? What is that
behavior(s) and what form of exclusion
is commonly employed (e.g.,
disqualification from ATS, limitation of
services)?
d. Item 4: Hours of Operations and
Trading Outside of Regular Trading
Hours
Part III, Item 4 is intended to provide
market participants with information
about the days and hours of operation
of the Covered ATS, including the times
when trading interest can be entered in
the ATS, and ATS services available
outside of the ATS’s regular trading
hours. Part III, Item 4(a) would require
a Covered ATS to provide the hours
when it is operating, which would
include functions such as accepting
trading interest or allowing participants
to use communication protocols to
message other participants.572 The
disclosure required is not limited to
only those hours when the ATS matches
trading interest or allows participants to
submit trading interest.
The Commission is proposing to
revise Part III, Item 4 to include as Part
571 See
infra Section IV.D.5.i.
Commission is proposing to make minor
changes to this Item in Form ATS–N to replace
‘‘operation’’ with ‘‘operations’’ and to clarify that
‘‘regular trading hours’’ refers to the ATS’s regular
trading hours.
572 The
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
III, Item 4(b) a question about whether
the ATS services are available outside of
the ATS’s regular trading hours (e.g.,
after-hours trading) and with respect to
services available outside of the ATS’s
regular trading hours, whether there are
any differences between the services
during the ATS’s regular trading hours
and outside of the ATS’s regular hours.
Part III, Item 4(a) of current Form ATS–
N asks about hours of operations outside
of regular trading hours, and Part III,
Item 18 of current Form ATS–N asks
about whether the ATS conducts trading
outside of regular trading hours, and
whether there are any differences
between trading outside regular trading
hours and trading during regular trading
hours. The Commission is proposing to
streamline and combine the current
questions, and, recognizing that ATSs,
including Communication Protocol
Systems, may provide other services
beyond ‘‘conduct[ing] trading,’’ to ask
about ATS services available outside of
the ATS’s regular trading hours. The
Commission believes that it is important
for market participants and the
Commission to understand when a
Covered ATS operates, when trading
interest can be entered, including when
the ATS will accept trading interest
outside of its regular trading hours, and
whether any other ATS services are
available outside the ATS’s regular
hours of operations.
To the extent that there are
differences with respect to any services
the Covered ATS provides during and
outside of its regular trading hours, the
Covered ATS must describe those
differences. Similar to Item 17
(requesting differences between any
closing session(s) and regular trading
hours), a Covered ATS would be
required to disclose differences between
trading outside of its regular trading
hours and during regular trading hours
with respect to the relevant information
disclosed in Part III Items, including,
among others, order types and sizes, and
trading facilities (Item 7), use of nonfirm trading interest, and
communication protocols and
negotiation functionality (Item 8),
segmentation and notice (Item 13), and
display and visibility of trading interest
(Item 15). Many of the disclosures
discussed elsewhere in Form ATS–N
will relate to the ATS’s regular trading
hours so the ATS can simply discuss
any differences between trading during
its regular hours and trading outside its
regular trading hours in Part III, Item
4(c), if applicable.
e. Item 5: Means of Entry
Part III, Item 5 of Form ATS–N is
intended to disclose the means that can
PO 00000
Frm 00058
Fmt 4701
Sfmt 4702
be used to directly enter trading interest
into the Covered ATS and any other
means of entering trading interest into
the ATS (e.g., smart order router,
algorithm, order management system,
sales desk, direct market access, webenabled system, or aggregation
functionality). The Commission is
proposing to revise Part III, Item 5 of
Form ATS–N to include examples of
means of entry that it believes may be
relevant to Government Securities
ATSs, as well as Communication
Protocol Systems. These examples,
which are not exhaustive, would
include direct market access, webenabled systems, and aggregation
functionalities. Part III, Item 5 of Form
ATS–N would require the Covered ATS
to identify and explain means of
entering trading interest, including
whether the means are provided
through the broker-dealer operator itself,
through a third-party contracting with
the broker-dealer operator, or through
an affiliate of the broker-dealer
operator,573 and list and provide a
summary of the requirements 574 for
entering trading interest into the ATS
through these means.
Based on Commission staff
experience, trading interest may be
submitted into the Covered ATS both
directly and indirectly. A direct method
of sending trading interest to an ATS,
for example, may include the use of a
direct market access platform or FIX
protocol connection, which allows
subscribers to enter trading interest into
the ATS without an intermediary. An
example of an indirect method of
submitting trading interest to an ATS
could include the use of a smart order
573 In Part III, Item 5(b), the Commission is
proposing to make a minor revision to this Item and
change the word ‘‘indicate’’ to ‘‘including,’’ so the
Covered ATSs would identify and explain the
means for entering trading interest, ‘‘including’’
who provides the means, rather than identify and
explain the means for entering trading interest and
‘‘indicate’’ who provides the means. The
Commission believes identifying and explaining the
means for entering trading interest encompasses
describing who is providing the means of entry, and
for that reason, this revision would clarify what
information this Item is requesting. The
Commission is also proposing to add clarifying text
to Part III, Item 5(b) of Form ATS–N (renumbered
from Part III, Item 5(c) of current Form ATS–N) to
more clearly contrast such question from Part III,
Item 5(a). The question would read whether there
are ‘‘means of entering trading interest into the ATS
not otherwise disclosed in Part III, Item 5(a)’’ rather
than asking whether there are any ‘‘other means for
entering orders and trading interest into the NMS
Stock ATS.’’
574 Current Form ATS–N requires a summary of
the ‘‘terms and conditions’’ for entering orders or
trading interest into the ATS through these means.
The Commission is proposing to revise the question
to require a summary of the ‘‘requirements’’ for
entering trading interest in the ATS. See supra note
543 and accompanying text.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
router (‘‘SOR’’), algorithm or similar
functionality, website, graphical user
interface (‘‘GUI’’), aggregation interface,
or front-end system. The means of entry
into an ATS (e.g., direct or indirect)
could impact the speed with which a
subscriber’s trading interest is handled
and potentially executed and could
increase the risk of information leakage.
Today, the government securities
markets are not interconnected markets
like those for NMS stocks and therefore
SOR technology may not be applied in
the same manner by broker-dealer
operators of Government Securities
ATSs as it may for broker-dealer
operators of NMS Stock ATSs. The
Commission believes, however, that
similar functionality may be used to
send or receive trading interest to and
from a Government Securities ATS to
reduce latency or send trading interest
to markets with better prices for certain
government securities, and to the extent
it does, the ATS should be required to
provide information about that
functionality as required.
The Commission believes that the
disclosures regarding the direct or
indirect means of trading interest entry
would inform market participants about
the functionalities that their trading
interest pass through on their way to the
ATS and help them assess any potential
advantages that trading interest sent
through the broker-dealer operator may
have as opposed to other methods used
by other subscribers. A Covered ATS
would be required to identify the
functionality that directly connects to
the ATS (e.g., algorithm, GUI,
aggregation interface) and, if present,
any intermediate functionality that
trading interest passes through on its
way to the functionality that directly
connects to the ATS.575 Conversely, if
ATS trading interest submitted through
an algorithm is sent to another
intermediate functionality, and then
submitted to the ATS by that
functionality, such information would
need to be disclosed pursuant to this
Item.576
575 If an intermediate application or functionality
has access to information related to a subscriber’s
trading interest, the Covered ATS must take
appropriate measures to protect the confidentiality
of such information pursuant to Rule 301(b)(10) of
Regulation ATS. If the ATS arranges for an
intermediate application to be provided by another
party, the Covered ATS’s obligations under Rule
301(b)(10) would apply to the activities that that
party is performing for the ATS and the ATS’s
written safeguards and procedures should be
designed to protect subscriber confidential trading
information with regard to that party.
576 If a broker-dealer operator permits subscribers
to send trading interest to the ATS by excluding all
other trading venues from where such trading
interest could be sent, this procedure in effect
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
The proposed disclosure requirements
would only require the Covered ATS to
‘‘list and provide a summary of the
requirements for entering trading
interest into the ATS’’ through these
sources. Therefore, the Covered ATS
would not need to provide a detailed
description of the programming of the
indirect means for entering trading
interest that could put the ATS at a
competitive disadvantage with
competitors. However, if, for example,
an ATS ‘‘throttled’’ the number of
messages allowed for a given type of
connection, that information would be
responsive to this Item.
Although the Commission is
proposing to delete Part III, Items 5(b)
and 5(d) of current Form ATS–N, which
asks the Covered ATS to disclose
whether the protocols required to be
identified in Part III, Item 5 and the
requirements for any means of entry are
the same for all subscribers and the
broker-dealer operator, a Covered ATS
would be required to disclose such
differences in Part III, Item 5 pursuant
to the proposed instruction in Part III in
Form ATS–N.577 For example, a
Covered ATS would be required to
disclose any differences in the latency
of the alternative means for entering
trading interest into the ATS. The
Commission understands that there
might be different latencies associated
with each alternative. For instance, in
some cases, a direct connection to the
ATS may have reduced latencies as
compared to indirect means where
trading interest passes through an
intermediate functionality. A brokerdealer operator could also, for example,
configure the ATS to provide reduced
latencies for certain means of entry used
by itself or its affiliates.578
The Commission also believes that it
is important for subscribers to
understand if a means of entry is
provided by an affiliate, even if it does
not provide an advantage to a particular
entity.
Disclosures about a broker-dealer
operator’s use of its or an affiliate’s
direct or indirect functionality to enter
trading interest into the Covered ATS
are important to market participants to
allow them to assess the potential for
information leakage. The indirect means
of access (e.g., SOR or algorithm) may
obtain information about subscriber
trading interest that is sent to the ATS
(and may now be resting in the ATS)
and subscriber trading interest that is
allows a subscriber to direct an order to the ATS
and would be responsive to Part III, Item 5.
577 See supra note 564 and accompanying text.
578 Covered ATSs would not be required to
calculate and disclose precise latencies for each
means of entry for purposes of Form ATS–N.
PO 00000
Frm 00059
Fmt 4701
Sfmt 4702
15553
sent out of the ATS. The potential that
an indirect means of accessing the
Covered ATS could lead to leakage of
subscribers’ confidential trading
information necessitates disclosure of
certain information about the use of
such indirect means to send subscriber
trading interest in or out of the ATS. In
addition, there may be instances where
an ATS uses an intermediate
functionality or entity as the means to
bring together buyers and sellers or
provide established methods (such as
providing means to enter, display,
communicate, or execute trading
interest) and that intermediate
functionality or entity would be
considered part of the ATS for purposes
of Regulation ATS and Form ATS–N.579
For example, if the broker-dealer
operator arranges for trading interest to
be entered into the ATS by another
party, the activities of that party with
respect to the ATS would be subject to
the disclosure requirements of Form
ATS–N. Likewise, if an ATS is subject
to the Fair Access Rule under
Regulation ATS and its participants
must use an entity other than the
broker-dealer operator to enter or
receive information about trading
interest in the ATS, the ATS must
establish reasonable written standards
governing the granting, denial, or
limitation of access to ensure that those
participants are not treated in an unfair
and unreasonably discriminatory
manner by the entity.580
Request for Comment
113. Are there any means of entering
trading interest into the Covered ATS
where more or should be required to
explain their operation? Are there any
aspects of those means of entry that are
particularly important?
f. Item 6: Connectivity and Co-Location
Part III, Item 6(a) of Form ATS–N
would request information about
whether the Covered ATS offers colocation and related services, and if so,
would require a summary of the
requirements for use of such services,
including the speed and connection
(e.g., fiber, copper) options offered. Part
579 See NMS Stock ATS Adopting Release, supra
note 2, at 38832 and 38844. Depending on the
activities of the persons involved with the market
place, a group of persons can together provide,
constitute, or maintain a market place or facilities
for bringing together purchasers and sellers of
securities and together meet the definition of
exchange. In such a case, the group of persons
would have the regulatory responsibility for the
exchange.
580 See Regulation ATS Adopting Release, supra
note 31, at 70873. See infra Section V.A.3.a.
E:\FR\FM\18MRP2.SGM
18MRP2
15554
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
III, Item 6(b) of Form ATS–N 581 would
require a Covered ATS to indicate
whether it provides any other means
besides co-location and related services
described in the Item 6(a) to increase the
speed of communication with the ATS,
and if so, to explain the means and
provide a summary of the requirements
for its use. Part III, Item 6(c) would
require the Covered ATS to indicate
whether it offers any means to reduce
the speed of communication with the
ATS and if so, to provide a summary of
the requirements for its use.582
Latency is an important feature of
trading in certain government securities
and NMS stocks, and market
participants are interested in
understanding the functionalities
employed by Covered ATSs to influence
it.583 The Item would require a
summary of the requirements where a
trading venue employs mechanisms to
increase the latency or the length of
time for trading interest or other
information to travel from a user to the
system. Users of co-location services can
experience faster or slower connection
speeds to a Covered ATS depending on
factors such as the distance of the
customer servers from the matching
engine, or the use or non-use of
‘‘coiling’’ to its matching engine to
equalize connection speeds among
subscribers, among others. Such
differences in connection speed or
latency would be required to be
disclosed under Part III, Item 6. If, for
example, the ATS offers means that
would allow certain subscribers a
competitive advantage, then the ATS
581 The Commission is proposing to re-number
Part III, Item 6(c) of current Form ATS–N to Item
6(b) and Part III, Item 6(e) of current Form ATS–
N to Part III, Item 6(c).
582 To clarify that the Commission is soliciting
information about any requirements the ATS
imposes on subscribers or persons that submit
trading interest to use co-location, related services,
and other means to increase or reduce the speed of
communication with the ATS, rather than the legal
or contractual terms of such services, the
Commission is proposing to replace the current
requirement for a summary of the ‘‘terms and
conditions’’ with ‘‘requirements for use’’ for such
services in Part III, Items 6(a), 6(b), and 6(c). See
supra note 543.
583 See October 15 Staff Report, supra note 188,
at 36–37; Treasury Request for Information, supra
note 193, at 3928. See also Letter from Dan Cleaves,
Chief Executive Officer, BrokerTec Americas, and
Jerald Irving, President, ICAP Securities USA LLC,
to David R. Pearl, Office of the Executive Secretary,
Treasury Department, dated April 22, 2016
(‘‘BrokerTec/ICAP Letter’’), at 3–4, available at
https://www.treasurydirect.gov/instit/statreg/
gsareg/ICAPTreasuryRFILetter.pdf; Letter from C.
Thomas Richardson, Managing Director, Head of
Electronic Trading Service, Wells Fargo Securities,
and Cronin McTigue, Managing Director, Head of
Liquid Products, Wells Fargo Securities, to Treasury
Department, dated April 21, 2016, at 6–7, available
at https://www.treasurydirect.gov/instit/statreg/
gsareg/RFIcommentWellsFargo.pdf.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
should disclose such means on the
Form ATS–N. The Commission believes
that the information disclosed in Item 6
would help market participants
understand their connectivity options to
the ATS and expedite the order entry
process for subscribers.
Request for Comment
114. Are there any aspects of the
means for increasing or reducing the
speed of communication with Covered
ATSs that the Commission should
specifically require under this Item?
g. Item 7: Order Types and Sizes;
Trading Facilities
Part III, Item 7 of Form ATS–N is
designed to disclose whether the
Covered ATS provides trading facilities
or sets rules for bringing together orders
of buyers and sellers (e.g., crossing
system, auction market, limit order
matching book, click-to-trade
functionality). The request is intended
to capture Covered ATSs that offer the
use of firm trading interest and a trading
facility or rules for buyers and sellers to
interact and agree upon the terms of a
trade. The Commission believes that
systems that typically offer the use of
orders and trading facilities and systems
that offer the use of non-firm trading
interest and communication protocols
operate distinctively. Systems that offer
the use of orders and trading facilities
typically match orders of buyers and
sellers pursuant to pre-determined rules
programmed into an algorithm, while
systems that offer the use of trading
interest and communication protocols
allow buyers and sellers to interact
directly to find a counterparty and
negotiate a trade. To facilitate market
participants’ understanding of these
systems and their unique aspects, the
Commission is proposing that Covered
ATSs disclose information about the use
of orders and trading facilities or rules
in Part III, Item 7 and disclose the use
of trading interest and communication
protocols in Part III, Item 8. These
questions would apply to both NMS
Stock ATSs and Government Securities
ATSs. If a Covered ATS provides both
a trading facility and communication
protocol (e.g., provides both a limit
order book and RFQ protocol), the
Covered ATS would respond
affirmatively to and explain the
protocols separately under Items 7 and
8. To the extent the trading facility and
Communication Protocol Systems
interact in any way, the Covered ATS
would explain that interaction in
response to each question.
A Covered ATS that answers
affirmatively to Part III, Item 7 of revised
Form ATS–N would be required to
PO 00000
Frm 00060
Fmt 4701
Sfmt 4702
explain the trading facilities and rules
for bringing together the orders of
buyers and sellers in the ATS. In this
response, the ATS would be expected to
disclose the information responsive to
Part III, Items 7 (Order Types and
Attributes), 8 (Order Sizes), and 11
(Trading Services, Facilities, and Rules)
of current Form ATS–N. Based on
Commission staff experience reviewing
Form ATS–N filings, and particularly
disclosures related to order types, order
size, and the ATSs’ rules, procedures,
and facilities to bring buyers and sellers
together, ATS are linked and
intertwined. Allowing the Covered ATS
to provide a narrative of these topics
together in Part III, Item 7 of Form ATS–
N would provide for more streamlined
disclosures for market participants to
understand and reduce redundancy.
This proposed change would result in
clearer, more readable narrative
disclosures, and potentially reduce the
burden to Covered ATSs of drafting
repetitive disclosures in multiple
responses in the form.
Part III, Item 7 of Form ATS–N would
require that ATSs provide a description
of each order type offered by the
Covered ATS, and provide a list of items
that the ATS should include in its
description. To provide transparency to
market participants, the Item would
require a complete and detailed
description of the order types available
on the Covered ATS, their
characteristics, operations, and how
they are handled.584 All market
participants should have full
information about the operations of
order types available on a Covered ATS
to comprehensively understand how
their orders will be handled and
executed in the ATS. Order types are a
primary means by which users of a
Covered ATS communicate their
instructions to trade on an ATS. Given
the importance, diversity, and
complexity of order types, the
Commission is proposing to require
Covered ATSs to disclose the
information called for by Part III, Item
7 on Form ATS–N.
Market participants should have
sufficient information about all aspects
of the operations of order types
584 In the instruction to Part III, Item 7 of Form
ATS–N, the Commission is proposing to make
certain changes and clarify the examples provided
in this Item regarding order types. Particularly, the
Commission proposes to clarify the example
provided regarding ‘‘how price conditions affect the
rank and price at which it can be executed’’ by
replacing ‘‘it’’ with ‘‘the order type.’’ In addition,
the Commission is proposing to add ‘‘store orders’’
as an example of order types designed not to
remove liquidity. The Commission recognizes that
‘‘store orders’’ may be more relevant to Government
Securities ATSs than to NMS Stock ATSs.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
available on a Covered ATS to
understand how to use order types to
achieve their trading objectives, as well
as to understand how order types used
by other market participants could affect
their trading interest. A detailed
description of order type characteristics
would assist subscribers in better
understanding how their orders would
interact with other trading interest in
the ATS. It also would allow market
participants to see what order types
could be used by other market
participants, which could affect the
probability, timing, and quality of their
own executions. For example, if the
time priority of a pegged order changes
in response to changes in the reference
price, that would affect the likelihood of
execution for such an order. The
Commission is also proposing to require
that Covered ATSs disclose any order
size requirements (e.g., minimum or
maximum size, odd-lot, mixed-lot,
trading increments) and related
handling procedures (e.g., handling of
residual trading interest) in Part III, Item
7 of Form ATS–N. This incorporates the
requirements of Part III, Item 8 of
current Form ATS–N, with
modifications.585 This information
would inform subscribers about the
permissible size of orders and trading
interest that a subscriber could enter in
the ATS. For example, if a Covered ATS
has minimum or maximum order sizes,
or a minimum increment size
requirement for order modifications,
those requirements and related handling
procedures would be responsive to the
Item. The Commission is also proposing
to add the example of how residual or
unexecuted orders are handled to the
types of related handling procedures
that a Covered ATS would be required
to include in Part III, Item 7. Brokerdealer operators employ market access
and risk management controls and
procedures that prevent the entry of
erroneous orders and orders that are
above a subscriber’s predetermined
threshold. If order size requirements are
imposed on subscribers as part of a risk
management procedure, an explanation
of those procedures as they relate to the
ATS would be responsive to this Item.
An explanation of how a Covered ATS’s
requirements and conditions related to
the size of trading interest differ among
subscribers and persons would also
585 As discussed above, to streamline the format
of responses, the Commission is proposing to
consolidate current Form ATS–N Part III, Items 8(a)
through (f) in Part III, Item 7 of revised Form ATS–
N. The Commission believes that the information
requested is the same, and the information requests
covered by these sub-items (odd-lot orders and
mixed-lot orders) would be covered in Part III, Item
7 of revised Form ATS–N.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
provide a market participant with
information regarding how its trading
interest would be handled in relation to
other market participants.
Covered ATSs may offer the use of
various types of trading facilities to
bring together the orders of buyers and
sellers and for such orders to interact.
These types of systems would be
disclosed in Part III, Item 7 of Form
ATS–N. For example, many Covered
ATSs bring together multiple buyers
and sellers using limit order matching
systems. Other Covered ATSs offer the
use of crossing mechanisms that allow
participants to enter unpriced orders to
buy and sell securities, with the ATS’s
system crossing orders at specified
times at a price derived from another
market.586 Some Covered ATSs offer the
use an auction mechanism that matches
multiple buyers and sellers by first
pausing execution in a certain security
for a set amount of time, during which
the ATS’s system seeks out and/or
concentrates liquidity for the auction;
after the trading pause, orders will
execute at either a single auction price
or according to the priority rules for the
auction’s execution. Certain Covered
ATSs may use a voice system to bring
together orders as well, or a
combination of voice and electronic
systems. Part III, Item 7, would require
Covered ATSs to provide disclosure of
how these facilities operate.
In addition, Part III, Item 7 would
require a Covered ATS to disclose its
rules and procedures under which
orders interact and buyers and sellers
agree upon the terms of a trade.587 Form
ATS–N sets forth a non-exhaustive list
of such rules and procedures, which
includes order interaction, priority,588
pricing methodologies, allocation,
matching, and execution of orders and
other procedures for trading, such as
price improvement functionality, price
protection mechanisms, short sales,
functionality to adjust or hedge orders,
locked-crossed markets, the handling of
execution errors, the time-stamping of
messages and executions, and any
conditions or processes for terminating
a counterparty match.589
586 See Regulation ATS Adopting Release, supra
note 31, at 70849 n.37.
587 The Commission is proposing to add examples
of functionalities used in the government securities
market for which a Government Securities ATS
would be required to explain the ATS’s rules and
procedures, if applicable.
588 The Commission is making a non-substantive
change to Part III, Item 7 of Form ATS–N to state
that a Covered ATS would be required to disclose
the order type’s priority ‘‘in relation to’’ (rather than
‘‘vis-a`-vis’’) other orders on the book due to changes
in the NBBO or other reference price.
589 This non-exhaustive list is the same as what
is in current Form ATS–N, Part III, Item 11.
PO 00000
Frm 00061
Fmt 4701
Sfmt 4702
15555
The Commission is also proposing
that a Covered ATS disclose pricing
methodologies used for each type of
security traded by the ATS under Part
III, Item 7.590 For example, orders may
be priced using spreads off a benchmark
price, or spreads between two different
maturities of a security. A Covered ATS
may also restrict the allowable deviation
from a benchmark price, or allow for
indicative pricing of certain securities. If
a transaction has more than one leg, the
ATS may price both legs according to a
price derived from one of the securities
traded. In response to this request, a
Covered ATS would be required to
describe the ATS’s procedures for
determining all pricing methodologies
and to the extent the pricing
methodologies differ among subscribers
and the broker-dealer operator, the ATS
must disclose those differences.
In addition, Item 7 would require
Covered ATSs to disclose how orders
may interact with non-firm trading
interest or separate trading
functionalities within the ATS or
offered by the broker-dealer operator.
Item 7 would also require Covered ATSs
to disclose the various procedures under
which orders interact and match. Some
Covered ATSs may offer price-time
priority to determine how to match
orders (potentially with various
exceptions), while others may offer
midpoint-only matching with time
priority. Some Covered ATSs might also
take into account other factors to
determine priority. For example, a
Covered ATS may assign either a lower
or higher priority to an order entered by
a subscriber in a certain class (e.g.,
orders of principal traders or retail
investors) or sent from a particular
source (e.g., orders sent by an algorithm
or similar functionality) when compared
to an equally priced order entered by a
different subscriber or via a different
source. Also, if applicable, the Item
would require an explanation of which
party to a trade would receive any price
improvement depending on the priority,
order type, and prices of the matched
orders and the percentage of price
improvement the party would receive. A
broker-dealer operator could also act as
the counterparty for each side of a
transaction that matches on its ATS.
Pursuant to the proposed instruction
at the beginning of Part III, Covered
ATSs would be required to disclose any
differences in treatment among
subscribers, the broker-dealer, and other
participants in the ATS as they relate to
590 Part III, Item 7 would require Government
Securities ATSs and, to the extent applicable, NMS
Stock ATSs, to describe any functionality to adjust
or hedge orders.
E:\FR\FM\18MRP2.SGM
18MRP2
15556
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
the means and facilities for bringing
together the orders of buyers and sellers.
Request for Comment
115. What are the most prevalent
order types on Government Securities
ATSs? Are there more important means
than order types for subscribers to
communicate the handling of their
trading interest on Government
Securities ATSs? Does Form ATS–N
capture all of the means for subscribers
of Government Securities ATSs to
communicate the handling of their
orders? Are there any aspects of order
types on Government Securities ATSs
that should be specifically addressed in
the Item? If yes, please explain.
116. Are there any operations or
procedures, either of an ATS or a
broker-dealer operator, which could
limit the entry, or size of, a subscriber’s
orders submitted to the ATS? If so,
please describe these operations or
procedures and explain why they are
important to subscribers.
117. Are there any specific means or
facilities used to bring together multiple
buyers and sellers on Covered ATSs that
should be specifically included as an
example in this Item? Are there any
rules and procedures that govern trading
of government securities and repos that
should be specifically included as
examples in this Item?
jspears on DSK121TN23PROD with PROPOSALS2
h. Item 8: Use of Non-Firm Trading
Interest; Communication Protocols and
Negotiation Functionality
As discussed above, the proposed
definition of ‘‘exchange’’ would include
systems that make available the use of
non-firm trading interest and
communication protocols to bring
together buyers and sellers of securities.
Form ATS–N currently includes
questions about NMS Stock ATSs’ use
of conditional order functionality and
indications of interest,591 which can be
forms of communication protocols.
Current Form ATS–N, however, does
not contain comprehensive disclosure
requests about systems that solely offer
the use of non-firm trading interest and
communication protocols because, as
discussed above, such systems typically
do not fall within the criteria of current
Exchange Act Rule 3b–16(a) and,
therefore, do not operate pursuant to the
ATS exemption. The Commission is
proposing to revise Part III, Item 8 to
591 Part III, Item 9 of current Form ATS–N asks
about conditional orders and indications of interest.
Part III, Item 8 of current Form ATS–N asks about
order sizes. The Commission is proposing to
incorporate the requirements of Part III, Item 8 into
Part III, Items 7 and 8. In addition, the Commission
is proposing to incorporate the requirements in Part
III, Item 9 of current Form ATS–N in Part III, Item
8 of revised Form ATS–N.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
request information about the
operations of these systems and the
requests would be applicable to both
NMS Stock ATSs and Government
Securities ATSs. With respect to
conditional orders and indications of
interest, Part III, Item 8 of revised Form
ATS–N incorporates and expands on the
current disclosure requirements of Part
III, Item 9 (Conditional Orders and
Indications of Interest) and Part III,
Items 7 (Order Types) and 8 (Order
Sizes) of current Form ATS–N as they
relate to conditional orders and
indications of interest in the ATS.
Proposed Part III, Item 8 of revised
Form ATS–N would require Covered
ATSs to disclose whether they make
available communication protocols for
buyers and sellers to communicate nonfirm trading interest, solicit interest to
buy or sell a security, discover prices,
find a counterparty, or negotiate a trade.
Such systems could offer, for example,
RFQ or workup protocols, stream axes,
or conditional order functionalities.592
If the Covered ATS provides
communication protocols and
negotiation functionalities, it would be
required to identify and explain the
protocols and functionalities in the
response to Part III, Item 8. The
Commission believes that identifying
and explaining these functionalities
would provide transparency regarding
how buyers and sellers can interact with
each other on the system. This would
require the Covered ATS to provide a
narrative description of how
participants in the ATS send and
receive messages, how such messages
interact, and the rules, procedures, and
protocols governing the use of non-firm
trading interest in the Covered ATS. To
facilitate this disclosure, the
Commission is proposing to include in
Form ATS–N a description of the types
of information that should be explained
in this Item. The Commission
recognizes, however, that each system
operates differently and may offer
unique protocols, and has designed Part
III, Item 8 to allow ATSs the flexibility
to provide a narrative response that will
help market participants understand the
protocols governing their systems.
First, the Covered ATS would be
required to explain the use of messages
in the ATS. Messaging is a primary tool
by which Communication Protocol
Systems bring together buyers and
sellers. Use of messaging is critical to
how buyers and sellers can use the
system to find one another and negotiate
a transaction. The Commission believes
that ATSs offer diverse types of
messaging that facilitate communication
592 See
PO 00000
supra Section II.B.2.
Frm 00062
Fmt 4701
Sfmt 4702
and negotiation, including non-firm
trading interest that subscribers expose
to other subscribers, communications
that subscribers send to other
subscribers to negotiate transactions,
messages that subscribers use to
communicate to the ATS how they want
their trading interest to be handled, as
well as messages the ATS sends to
subscribers to communicate the
presence of trading interest. The
Commission believes that this
information will help market
participants understand how they can
use messages in the ATS to interact with
potential counterparties and to
communicate how they want their
trading interest to be handled by the
ATS.
The Commission is proposing to
provide a non-exhaustive list of what
this explanation would include, as
applicable to the Covered ATS’s
protocols and functionalities. The
Covered ATS would be required to
describe and explain each type of
message the ATS permits participants to
send and receive and the types of
persons that can send and receive each
type of messages (e.g., the ATS, types of
subscribers, specific subscribers,
customers of subscribers, trading
venues). The ATS would also be
required to disclose the information
contained in messages (e.g., symbol,
price, direction (i.e., buy or sell), or size
minimums) and any other information
that a participant may choose to include
in a message. If terms in messages can
vary based on potential recipients (e.g.,
different subscribers may receive
varying priced messages for the same
security), the Covered ATS would be
required to disclose that.
The Commission is proposing that the
Covered ATS disclose whether messages
are attributed to their sender or
anonymous, and whether a subscriber
may elect to disclose its identity to other
participants, and if so, what is disclosed
and how, when, and to whom. The
Commission understands that some
Communication Protocol Systems allow
participants to negotiate trades on an
attributed basis so that certain
counterparties may know the identity of
other counterparties pre-trade. In some
cases, subscribers on the ATS have
established relationships and may
choose to share their identity with a preselected list of potential counterparties
or potential counterparties that meet
certain criteria. Even while the
subscriber discloses its identity to
others, the identity of potential
counterparties may be either known or
anonymous. The Covered ATS would be
required to describe when, and under
what conditions, the subscriber or the
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
ATS discloses subscribers’ identities
and how and when messages are
transmitted (e.g., order management
system, router, or FIX).
The Covered ATS would be required
to describe the processes to respond to
a message and any parameters around
such responses. In the Commission’s
experience, on negotiation systems, a
subscriber or the Covered ATS makes
known the existence of trading interest
or an interest in negotiation, and
potential counterparties have the
opportunity to respond. For example, a
Covered ATS would be required to
explain how the sender of a message
would ‘‘firm-up’’ a conditional or other
non-firm message to execute a trade.
The ATS would also be required to
describe the processes to respond to a
request to negotiate, and for subscribers
who initiate an RFQ to respond to any
responses. In addition, if the ATS
permits the initiating party or
respondents a final opportunity prior to
execution to accept or reject the price
after the negotiating parties agree to a
trading price (i.e., a ‘‘last look’’), the
ATS must describe such processes.
Part III, Item 8 would require the
Covered ATS to describe any time
parameters that the ATS sets or permits
subscribers to set regarding sending and
receiving messages. This would include
time-in-force restrictions that a
subscriber may place on trading interest
in a message (e.g., fill-or-kill, day, goodtil-cancel). This would also include time
parameters for updating prices or
responding to trading interest or
requests for negotiation applicable
during any negotiation process. In the
case of an RFQ, subscribers may provide
a specific price with a ‘‘wire time’’
during which such price is actionable.
Any parameters around such wire times
would be required to be disclosed by the
Covered ATS. Additionally, if the
Covered ATS requires that a subscriber
firm-up its conditional orders within,
for example, three seconds of receiving
a response, the Covered ATS would be
required to state so. Any time
parameters within which an initiator of
a message would have to respond to
responses to its messages would also be
disclosed under Part III, Item 8.
The Covered ATS would also be
required to provide information
regarding the contra-party trading
interest made available or known on the
system, including whether a subscriber
may elect whether to display only part
of its trading interest. The instruction in
Part III, Item 8 would state that, if
trading interest is made known on the
system, the ATS would be required to
describe it in Part III, Item 15. Part III,
Item 8 of Form ATS–N would also
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
require a description of the
circumstances under which messages
may be modified, replaced, canceled,
rejected, or removed from the Covered
ATS. The Covered ATS would also be
required to describe any restrictions or
conditions under which the message
might result in the match of two
counterparties, require a response, or
result in an execution in the Covered
ATS (e.g., interaction, matching,
selection, automatic execution) and any
price conditions (e.g., how price
conditions affect the rank and price at
which the message can result in an
execution).
The Covered ATS would also be
required to describe the limits or
requirements for multiple messages sent
at the same time. For example, if the
Covered ATS prohibits a subscriber
from entering non-firm trading interest
to buy and sell the same bond or
security at the same time, entering the
same price for a buy and sell order in
the same bond (i.e., a locked market), or
entering a lower-priced sell order than
the buy order (i.e., inverted market), it
should disclose these. In addition, the
ATS would be required to state whether
a message containing trading interest is
eligible to be sent to destinations
outside the Covered ATS, and if so,
describe it in Part III, Item 16. The
Covered ATS would also be required to
disclose information about the
availability of message types across all
forms of connectivity to the ATS. To the
extent there are differences in the
availability of message types across
forms of connectivity, the ATS would
need to describe those differences.
A Covered ATS would also be
required to disclose, with respect to
non-firm trading interest, any
requirements relating to the size of
trading interest (e.g., minimum or
maximum size, odd-lot, mixed-lot,
trading increments, message controls or
throttling). This would include the
requirements of Part III, Item 8 of
current Form ATS–N, and also include
examples of limitations, such as
message controls or throttling, that the
Commission understands a negotiation
system, for example, may use to limit
the number of messages sent by a
subscriber. The Covered ATS would
also be required to disclose any related
handling procedures, such as, for
example, the handling of residual
trading interest after an execution on the
ATS (e.g., whether it is canceled or
remains in the system).
In addition, in its response to Part III,
Item 8, the Covered ATS would also be
required to disclose in its response the
procedures governing communication
protocols. These requirements are
PO 00000
Frm 00063
Fmt 4701
Sfmt 4702
15557
currently incorporated in Part III, Item
11 of current Form ATS–N. Requiring
information about such procedures
would provide transparency into how
buyers and sellers may interact, and
how non-firm trading interest may
interact with other trading interest in
the ATS. The Commission is proposing
to require disclosure of how Covered
ATSs prioritize and permit their
subscribers to prioritize trading interest,
to provide information that market
participants can use to choose an
appropriate venue at which they can
interact with other subscribers or send
trading interest. As applicable, the
Covered ATS would be required to
provide in Part III, Item 8, a description
of priority applied to a message upon
entry and any subsequent change to
priority (if applicable, whether and
when the message can receive a new
time stamp, the message’s priority in
relation to other messages in the
Covered ATS due to a change to any
reference price, and any instance in
which a message could lose execution
priority to a later arriving message at the
same price); whether the Covered ATS
permits or provides for subscribers to
vary pricing based on the identity of
other subscribers (e.g., preferred pricing
feeds or tiered pricing); and whether
subscribers can select counterparties
based on their identity or other factors.
If a Covered ATS allows subscribers
complete discretion to, for example,
select which counterparty to interact
with when the prices such
counterparties offer are the same, the
Covered ATS would be required to
disclose that.
In addition, Part III, Item 8 would
require a Covered ATS to disclose its
rules and procedures under which
buyers and sellers interact and agree
upon the terms of a trade. Based on
Commission staff experience, ATSs
disclose various methods, rules, and
conditions under which subscribers
may interact using trading interest.
Form ATS–N would provide a nonexhaustive list of such rules and
procedures, which includes those for
participant interaction, pricing
methodologies, allocation, matching,
and execution. This question is
designed to provide transparency to
those diverse methods, rules, and
conditions so that market participants
better understand how the ATS will
handle non-firm trading interest and
how subscribers may interact with
others in the ATS. If the Covered ATS
auto-executes non-firm trading interest,
the ATS would also be required to
disclose the functionality or protocols
governing such auto-execution. The
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
15558
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Covered ATS would be required to
disclose, for example, how the ATS or
a subscriber can designate trading
interest as automatically executable.
Any limitations that subscribers may
impose on auto-execution would be
responsive to such request.
The Covered ATS would also be
required to discuss in Part III, Item 8
how non-firm trading interest may
interact with orders or separate trading
functionalities in the ATS or
functionality offered by the brokerdealer operator. For example, if an IOI
can interact with a firm order on the
Covered ATS’s order book, it should
disclose this and any policies and
procedures for such interaction. To the
extent that the Covered ATS has
disclosed this in Part III, Item 7 in its
discussion of how firm orders can
interact with non-firm trading interest,
the ATS should describe how the nonfirm trading interest may interact with
firm trading interest and may crossreference the disclosure in Part III, Item
7.
In the Commission’s experience,
ATSs have adopted other trading
procedures governing interaction and
execution. The Commission is
proposing to include examples of such
procedures governing communication
protocols that would be required to be
disclosed. This would include
functionality or protocols that permit
the selection of displayed non-firm
trading interest to trade against. In the
Commission’s experience, negotiation
systems may allow subscribers to
choose the trading interest they interact
with; any procedures governing such
selection should be disclosed in Part III,
Item 8. In addition, the Commission
believes that market participants would
benefit from transparency regarding
procedures that could re-price trading
interest or prevent it from interacting
with other trading interest under certain
conditions. Accordingly, the Form
ATS–N would provide a non-exhaustive
list of procedures that includes price
improvement, price protection
mechanisms, procedures related to short
sales, functionality to adjust or hedge
trading interest, locked-crossed markets,
the handling of execution errors,
platform and trade controls (e.g., fat
finger checks, whether the ATS can
employ a global kill switch), the timestamping of trading interest messages
and executions, and any conditions or
processes for terminating a counterparty
match.
In addition, the Covered ATS would
be required to disclose what information
is available to subscribers from the ATS
about interaction history, counterparty
matching, or executions (e.g., pre- and
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
post-trade data, best execution analysis,
transaction cost analysis), when such
information is made available, the
source(s) of such information, and the
process for subscribers to access this
information. The Commission believes
that requiring such information would
allow market participants to better
assess the information that Covered
ATSs provide, including allowing them
to analyze or evaluate their
performance, resolve potential disputes,
and/or understand how their trading
interest has historically interacted and
been treated in the ATS, among other
things.
Request for Comment
118. Are there any aspects of how
Covered ATSs permit non-firm trading
interest to be sent and/or received that
are not covered by this Item? Are there
any aspects of how subscribers interact
with each other on Covered ATSs by
using non-firm trading interest that are
not covered by this Item? What
information about non-firm trading
interest and the process for transmitting
non-firm trading interest would be
useful to market participants?
i. Item 9: Monitoring and Surveillance
of the ATS Market
The Commission is proposing that
Part III, Item 9(a) of Form ATS–N
require a Covered ATS to disclose
information about the activities the ATS
undertakes to supervise the trading
activity that occurs on or through the
ATS (e.g., supervisory systems and
procedures to detect, deter, or limit
potentially disruptive, manipulative, or
non-bona fide quoting and trading
activities that occur on or through its
system and to ensure that they are
reasonably designed to achieve
compliance with applicable SRO rules
and the Federal securities laws) and to
provide a summary of any supervision
activities that occur on or through the
ATS, the sources of data the ATS uses
to supervise trading activity (e.g.,
internal or external sources), and the
activities that the ATS intends to detect,
deter, or limit.
As a registered broker-dealer, an ATS
must comply with the filing and
conduct obligations associated with
being a registered broker-dealer,
including becoming a member of an
SRO, such as FINRA, and compliance
with SRO rules.593 Accordingly, ATSs
must comply with SRO rules which,
593 Section 15(b)(8) of the Exchange Act requires
a broker or dealer to become a member of a
registered national securities association, unless it
effects transactions in securities solely on an
exchange of which it is a member. 15 U.S.C.
78o(b)(8).
PO 00000
Frm 00064
Fmt 4701
Sfmt 4702
among other things, require each
member to maintain a reasonably
designed supervisory system.594 For
example, FINRA states it expects an
ATS’s supervisory system to be
reasonably designed to identify ‘‘red
flags,’’ including potentially
manipulative or non-bona fide trading
that occurs on or through its systems,
and that ATSs must regularly assess and
evaluate their supervisory systems and
procedures to ensure that they are
reasonably defined to achieve
compliance with applicable FINRA
rules and the Federal securities laws.595
The Commission believes that the
information disclosed in response to
this request would help market
participants understand the scope of
supervision activities that an ATS
performs to mitigate potentially
manipulative and non-bona fide trading
that occurs on or through its system.
This information could also help
regulators, including the Commission
and FINRA, to assess the extent to
which an ATS’s supervision procedures
are designed to facilitate investor
protection over activities occurring in
the ATS and comply with the applicable
rules, including the Exchange Act and
FINRA rules.
The Commission is proposing Part III,
Item 9(b) of Form ATS–N to request
disclosures about whether the ATS
monitors for certain types of trading
behaviors or activities that may be
detrimental to the ATS market place or
trading (e.g., anti-gaming technology)
and, if so, to provide a summary of the
ATS’s monitoring activities and the
trading behaviors and explain the
594 See Regulatory Notice 18–25, ATS
Supervision Obligations, August 13, 2018, available
at https://www.finra.org/sites/default/files/
Regulatory-Notice-18-25.pdf (‘‘FINRA Regulatory
Notice’’) at 3. In addition, FINRA Rule 3310
requires FINRA members to, among other things:
Establish and maintain a system to supervise the
activities of each associated person that is
reasonably designed to achieve compliance with
applicable securities laws, regulations, and FINRA
rules; establish, maintain, and enforce written
procedures to supervise the types of business in
which it engages and the activities of associated
persons that are reasonably designed to achieve
compliance with applicable securities laws,
regulations, and FINRA rules; conduct a review, at
least annually of the businesses in which it engages
reasonably designed to assist the member in
detecting and preventing violations of, and
achieving compliance with, applicable securities
laws, regulations, and FINRA rules and retain a
written record of the date upon which each review
and inspection is conducted; and include in its
supervisory procedures a process for the review of
securities transactions that are reasonably designed
to identify trades that may violate the provisions of
the Exchange Act, the rules thereunder, or FINRA
rules prohibiting insider trading and manipulative
and deceptive devices that are effected for certain
accounts. See FINRA Rule 3310.
595 See FINRA Regulatory Notice, supra note 594,
at 3.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
activities that the ATS intends to detect,
deter, or limit. In the NMS Stock ATS
Adopting Release, the Commission
described that, in response to the
proposal of Form ATS–N, commenters
requested that information about the
monitoring activities the ATS performs
be included in Form ATS–N.596 One
commenter suggested that disclosure of
certain additional trading services
should be required, specifically whether
the ATS employs technology designed
to detect and deter price manipulation
and other disruptive trading practices
(i.e., anti-gaming technology), and, if so,
the ATSs should include a description
of this technology in the form.597 This
commenter stated that existence of such
technology can increase market
confidence, particularly for market
participants that transact in large
volumes, such as funds, because it
shows that a trading venue is committed
to providing a fair and competitive
market.598 This commenter further
stated that funds currently have no
mechanism to receive standardized
information regarding anti-gaming
technology or to compare anti-gaming
technology across different ATSs.599
Another commenter stated that antigaming technology and other subscriberrelated safeguards are among the core
attributes of ATSs that are of particular
importance to buy-side institutions.600
The Commission, however, declined
to adopt a request related to anti-gaming
technology and subscriber-related
safeguards at that time because such
descriptions made in a publicly
available document could serve to
undermine those safeguards by
disclosing information that makes
evading those safeguards easier.601
However, the Commission is now
proposing this requirement because it
believes that market participants would
want to know how the ATS may
monitor for certain trading behaviors or
activities that may be detrimental to the
ATS market place or to the participants
that use the ATS’s services. In addition,
the information would help market
596 See NMS Stock ATS Adopting Release, supra
note 2, at 38850.
597 See Letter from David W. Blass, General
Counsel, Investment Company Institute, dated
February 25, 2016, at 9–10.
598 See id.
599 See id.
600 See Letter from Phillip S. Gillespie, Executive
Vice President, General Counsel, State Street Global
Advisors, dated February 26, 2016 at 2–3. See also
Memorandum from the Office of Commissioner
Kara Stein regarding a July 26, 2016 meeting with
representatives of Morgan Stanley (including in a
presentation that whether an ATS has anti-gaming
controls is among the frequently asked questions by
clients).
601 See NMS Stock ATS Adopting Release, supra
note 2, 83 FR 38850.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
participants determine which ATSs
provide better market quality that the
market participants would be more
inclined to effect transactions on. In the
Commission staff’s experience
reviewing Forms ATS–N filed by NMS
Stock ATSs, some NMS Stock ATSs
have described information about their
surveillance procedures and other
safeguards, which allow market
participants to understand their
practices, while avoiding the level of
detail that would help enable market
participants to evade them.
Accordingly, the Commission believes
that the requests for information
proposed would not serve to undermine
the ATS’s surveillance and monitoring
activities because the Commission is
requesting summary level information,
which would strike the right balance in
requiring these important disclosures
and avoiding the risk that market
participants could use the disclosures
on Form ATS–N to evade such tools and
controls.
Request for Comment
119. Would requiring summary
disclosure regarding the Covered ATS’s
anti-gaming technology and similar
safeguards benefit market participants?
What other information regarding
monitoring and surveillance of activity
in the ATS would be beneficial? Does
the proposed summary disclosure strike
the right balance in providing disclosure
and avoiding the risk that market
participants could use the disclosures to
evade the ATS’s tools and controls?
j. Item 10: Opening and Reopening
Part III, Item 10 of Form ATS–N is
designed to provide information about
the use of any special processes and
procedures related to matching trading
interest at the opening, or to set a single
opening or reopening price to, for
example, maximize liquidity and
accurately reflect market conditions at
the opening or reopening of trading. The
Commission believes that this
disclosure requirement is important
because market participants would
likely want to know about any special
opening or reopening processes,
including which types of trading
interest can participate in the opening
or reopening processes or whether there
are any protocols at the open for buyers
and sellers to send messages and
negotiate a trade. To capture processes
related to sending, receiving, and
viewing trading interest for
communication protocols and
negotiation systems, the Commission is
proposing to specify in Part III, Item 10
that the ATS should disclose when and
how trading interest may be sent,
PO 00000
Frm 00065
Fmt 4701
Sfmt 4702
15559
received, and viewed at opening, how
unexecuted trading interest is handled
at the time the ATS begins its regular
trading hours or following a stoppage of
trading in a security during its regular
trading hours, and whether there are
any protocols at the open for buyers and
sellers to send messages and negotiate a
trade.
Based on Commission staff experience
with Form ATS–N filings, the
Commission is proposing to amend
Form ATS–N to incorporate the
requirements of Part III, Item 10(c) of
current Form ATS–N with the
requirements of Part III, Item 10(a). In its
experience, the Commission observed
significant overlap in the responses to
Part III, Item 10(a), which asks about
how the ATS opens or re-opens after
stoppage, and Part III, Item 10(c), which
asks how unexecuted trading interest is
handled at the start of regular trading
hours or following a stoppage, as the
treatment of unexecuted trading interest
is an integral part of an ATS’s opening
and re-opening procedures. Because of
this overlap, some NMS Stock ATSs
repeat the disclosures in both current
Form ATS–N Part III, Items 10(a) and
(c). To streamline the disclosure and
reduce redundancy, the Commission is
proposing to specify in Part III, Item
10(a) of revised Form ATS–N that the
Covered ATS describe how unexecuted
trading interest is handled at the time
the ATS begins its regular trading hours
or following a stoppage of trading in a
security during its regular trading hours,
and to delete the separate disclosure
requirements of Part III, Item 10(c) of
current Form ATS–N.
Information about when the Covered
ATS will price and prioritize trading
interest during the opening or reopening
of the ATS would provide market
participants with the information they
need to plan and execute their trading
strategies during these periods. The Item
would also, for example, require
disclosure of any processes or
procedures to match trading interest to
set a single opening or reopening price
to maximize liquidity and accurately
reflect market conditions at the opening
or reopening of trading. For trading
interest allowed to be submitted before
an ATS opens for trading, the Item 10(b)
would require an explanation of what
priority rules would apply to that
trading interest.602 The Commission
believes most participants consider
important the procedures for the pricing
and priority of trading interest, and the
602 The Commission is renumbering Part III, Item
10(e) of current Form ATS–N as Part III, Item 10(b)
in revised Form ATS–N. The Commission also
proposes to clarify in Item 10 that ‘‘regular trading
hours’’ refer to the ATS’s regular trading hours.
E:\FR\FM\18MRP2.SGM
18MRP2
15560
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
types of trading interest allowed
because these rules and procedures can
directly impact their execution price.
The disclosures are also designed to
provide information to subscribers
about when they may use the systems to
send or receive messages or view
trading interest at the open or reopen,
and the status of any messages or orders
that may be pending before the ATS
opens or reopens.
jspears on DSK121TN23PROD with PROPOSALS2
Request for Comment
120. Do Government Securities ATSs
have any special opening and reopening
processes and procedures around
Treasury auctions? If so, do commenters
believe there any aspects of the opening
and reopening processes for Treasury
auctions that should be specifically
addressed in this Item?
k. Item 11: Interaction With Related
Markets
Proposed Part III, Item 11 of Form
ATS–N is designed to provide
information about any functionality,
procedure or protocol used to facilitate
trading or communication on, or source
pricing for, the Covered ATS that is
offered by the broker-dealer operator or
its affiliates 603 using markets for
financial instruments related to the
securities it trades (‘‘Related Markets’’).
In the 2020 Proposal, the Commission
proposed to add a similar question to
Form ATS–G; the Commission is now
proposing to add this question to Form
ATS–N and to make it applicable to
both Government Securities ATSs and
NMS Stock ATSs. Markets for financial
instruments related to government
securities could include those nongovernment securities markets that trade
futures, currencies, fixed income, and
swaps, for example. Markets for
financial instruments related to NMS
stocks could include, for example, nonNMS stock markets that trade futures,
options, and swaps. If applicable, the
Covered ATS would: (1) Identify the
functionality, procedures, protocols,
and source of pricing and the Related
Market; (2) state whether the
functionality, procedures, protocols,
and source of pricing is provided or
operated by the broker-dealer operator
or its affiliate, and whether the Related
Market is provided or operated by the
broker-dealer operator or its affiliate; (3)
explain the use of the functionality,
procedures, protocols, and source of
603 Among other things, services to facilitate
trading or source pricing for the Government
Securities ATS using non-government securities
markets that are offered by a third-party by
arrangement with the broker-dealer operator or
affiliates would also be required to be disclosed
under this Item.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
pricing with regard to the Related
Market and the ATS, including how and
when the functionality, procedures,
protocols, and source of pricing can be
used, by whom, and with what markets.
The functionalities, procedures, or
protocols required to be disclosed
would include, for example, offering
order types to facilitate transactions in
the ATS and the Related Market,
procedures to allow subscribers to
perform multi-leg transactions involving
another market and the ATS, or a
protocol to allow a subscriber to
communicate with other persons to
negotiate a trade including, for example,
a government security and nongovernment security. A Covered ATS
could offer, for example, Exchange-forPhysical (‘‘EFP’’) transactions that can
involve markets in addition to the ATS.
An EFP transaction where ATS
subscribers agree to exchange a financial
product, such as a futures contract on a
government security, for the underlying
related government security or NMS
stock, would be responsive to this Item.
The Commission believes that it would
be important to participants to
understand functionality, procedures,
and protocols made available to them,
as they can impact their experience in
the ATS.604
Information about how the ATS uses
market data from a Related Market,
through an aggregator or otherwise, to
provide the services it offers would also
be required by the form.605 Among other
things, for example, the ATS would
need to disclose in response to this Item
its use of such market data to display,
price, prioritize, execute, and remove
trading interest in the ATS.606 As part
of this explanation, the ATS would
specify, if applicable, when the ATS
may change sources of market data to
provide its services. In response to
proposed Part III, Item 11 of Form ATS–
N, the ATS would explain how, for
example, market data from a Related
Market is received by the ATS,
compiled, and delivered to the matching
engine. For example, among other
possible arrangements, the ATS could
604 To the extent that a Government Securities
ATS offers a functionality, procedure, or protocol
using a market for government securities (e.g.,
trading venue for U.S. Treasury Securities or
options) or an NMS Stock ATS offers a
functionality, procedure, or protocol using a market
for NMS stocks, the Covered ATS would disclose
information about that functionality, procedure, or
protocol in Part III, Item 11 of Form ATS–N.
605 If a Covered ATS uses market data from
another market that trades government securities,
that information would be disclosed under Part III,
Item 22 of revised Form ATS–N.
606 Disclosure of any market data used by the
Covered ATS, including market data for options
and repos on government securities, would be
required under Part III, Item 22 of Form ATS–N.
PO 00000
Frm 00066
Fmt 4701
Sfmt 4702
explain that market data from a Related
Market is received and assembled by the
broker-dealer operator, and
subsequently delivered to the matching
engine, or that market data is sent
directly to the matching engine, which
normalizes the data for its use. The ATS
would disclose, for example, whether it
uses market data from the futures
market to price and execute EFP
transactions and describe how it uses
that market data under this Item.
A broker-dealer operator’s activities in
financial instruments related to the
securities that the ATS trades or
offerings of a Related Market, such as a
futures exchange, along with its
operation of an ATS, raise the potential
for information leakage of a subscriber’s
confidential trading information, or the
broker-dealer operator could provide
certain advantages to subscribers that
use a Related Market that it operates. As
such, Item 11 would require information
about whether the functionality,
protocols, procedures, and source of
pricing on the Covered ATS or the
Related Markets are provided or
operated by the broker-dealer operator
or its affiliates.
Request for Comment
121. What are commenters’ views on
the relationship between markets for
government securities and Related
Markets and between markets for NMS
stocks and Related Markets and how
investors may use these markets
together with a Covered ATS to achieve
their trading objectives?
122. What aspects of government
securities markets or NMS stock markets
and Related Markets, such as the futures
markets, do market participants use for
trading on a Covered ATS? What
information about those markets might
be useful to a subscriber and why?
l. Item 12: Liquidity Providers
Part III, Item 12 of Form ATS–N is
designed to disclose information about
arrangements with liquidity providers.
Like national securities exchanges,607
ATSs might engage firms to provide
liquidity on both sides of the market.
The Commission has observed that the
overwhelming majority of registered
national securities exchanges have
structured programs for market makers,
which generally set forth both
obligations (e.g., continuous quoting at
or within the NBBO) and often, some
benefits (e.g., fee rebates). Similarly, a
Covered ATS may want to ensure that
there is sufficient contra-side liquidity
607 See, e.g., NYSE Guide Rule 104 (Dealings and
Responsibilities of DMMs), Nasdaq Rules Equity 2,
Section 5 (Market Maker Obligations).
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
available in the ATS in a particular
security to incentivize market
participants to send trading interest in
that security to the ATS. To do this, the
ATS may engage certain market
participants to quote in a security or
trade against orders in the Covered ATS,
performing similar functions to a market
maker on a national securities
exchange.608
To the extent that a Covered ATS and
a participant have entered into an
arrangement under which that
participant undertakes obligations to
display, enter, or trade against trading
interest on the Covered ATS, the
Commission believes that market
participants should know both the terms
and conditions of such an arrangement
and the identity of the liquidityprovider ATS participant. Form ATS–N
currently requires an ATS to disclose
the terms and conditions of an
arrangement with a liquidity provider
and the names of any liquidity
providers that are either business units
of the broker-dealer operator or affiliates
of the broker-dealer operator.609 When it
adopted Form ATS–N, the Commission
explained that it was requiring
disclosure regarding liquidity providers
because it believed that market
participants would want to know the
identity of such liquidity providers to
help evaluate potential conflicts of
interest or information leakage on the
trading platform.610 The Commission
now believes that the names of all
liquidity providers should be disclosed
to evaluate potential conflicts of interest
and the potential for information
leakage. Specifically, if a participant is
obligated to provide contra-side
liquidity and, for example, derives a
particular benefit in exchange for
undertaking such an obligation, the
Commission believes that other users of
the ATS should know who that liquidity
provider is, how it is expected to trade
in the ATS, and the benefit that it is
receiving. This disclosure would be
similar to Exhibit M of Form 1, which
requires national securities exchanges to
publicly disclose, among other things,
the identity of all market makers and
liquidity providers. The Commission
believes it appropriate to require a
similar level of disclosure for Covered
ATSs with regard to the identity of
608 These liquidity providers may quote in a
particular security in the ATS during trading hours
and may receive a benefit for performing this
function, such as discounts on fees, rebates, or the
opportunity to execute with a particular type of
segmented order flow.
609 See Part II, Items 1(c) and 2(c) of Form ATS–
N.
610 See NMS Stock ATS Adopting Release, supra
note 2, at 38829.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
market makers and liquidity providers,
given the sizable market share of such
entities in their respective sectors.
Additionally, the Commission
believes that information about liquidity
providers would be useful to ATS
participants who, for example, may
want their orders to only interact with
agency orders (and not with those of a
liquidity provider), or, conversely, may
themselves want to become liquidity
providers on the Covered ATS. Such
arrangement could take many forms,
and the function of the liquidity
provider on an ATS could depend on
the structure and trading protocols of
the ATS. This Item could cover, for
example, arrangements or agreements
between the broker-dealer operator and
another party to quote or trade on the
Covered ATS. The Item does not cover
agreements with a subscriber that has no
obligation to buy or sell securities in the
ATS. Furthermore, to obtain disclosures
about activity on Communication
Protocol Systems, the Commission is
proposing to revise Part III, Item 12 of
Form ATS–N, which asks about whether
there are arrangements to ‘‘provide’’
orders and trading interest, and, instead,
to ask about arrangements to ‘‘display,
enter, or trade against’’ trading interest.
Accordingly, the Commission is
proposing that Part III, Item 12 require
a Covered ATS to disclose any formal or
informal arrangements with any
person 611 or the broker-dealer operator
to display, enter, or trade against trading
interest in the ATS (e.g., undertaking to
buy or sell continuously or to meet
specified thresholds of trading or
quoting activity). This will be in the
form of a ‘‘yes’’ or ‘‘no’’ question, and
if the ATS answers yes, it must both
identify the liquidity provider(s) and
describe the arrangement(s), including
the terms and conditions.
Request for Comment
123. Are there any arrangements
between Covered ATSs and persons to
provide trading interest to the Covered
ATS that may not be required by this
Item but should be? If any, what is the
nature of those arrangements, and why
611 The Commission is proposing to change the
current requirement to disclose arrangements with
any ‘‘Subscriber’’ to display, enter, or trade against
trading interest in the Covered ATS to require
disclosure of any such arrangements with any
‘‘persons.’’ In the Commission’s experience,
arrangements to display, enter, or trade against
trading interest in a Covered ATS may include
arrangements with subscribers, non-subscriber
participants who submit orders through a
subscriber or the broker-dealer operator, and
persons controlling subscribers or participants to
the ATS. The Commission is therefore proposing to
revise the rule text by using the term ‘‘person’’ to
capture arrangements with non-subscribers that
could impact order flow on the ATS.
PO 00000
Frm 00067
Fmt 4701
Sfmt 4702
15561
are they important to disclose publicly
on Form ATS–N?
124. Should Covered ATSs be
required to identify liquidity providers
on Form ATS–N? Please explain why or
why not, including any advantages or
disadvantages resulting from this
disclosure.
m. Item 13: Segmentation; Notice
Part III, Item 13(a) of Form ATS–N is
designed to disclose information about
how trading interest in the Covered ATS
is segmented into categories,
classifications, tiers, or levels. The
Covered ATS would be required to
explain the segmentation procedures,
including how and what trading interest
is segmented. The Commission is
proposing to add in Item 13(a) of Form
ATS–N a requirement to explain where
the identification of segmented trading
interest is applied (e.g., when ATS
trading interest is received by the
broker-dealer operator or entered into
the ATS). From the Commission’s
experience, systems may segment
trading interest when trading interest
enters through the broker-dealer (from
the SOR or similar functionality), or
when the trading interest is entered into
the ATS. The Commission believes
subscribers would want to understand
where their trading interest is
segmented so they can assess who is
making the decisions about how their
trading interest will be categorized
when entered into the ATS and the level
of protections their confidential trading
information will receive. The Covered
ATS would also be required to identify
and describe any categories,
classifications, tiers, or levels and the
types of trading interest that are
included in each and provide a
summary of the parameters for each
segmented category and length of time
each segmented category is in effect.
The Commission is proposing to add to
Item 13(a) that the parameters for each
segmented category would include
when such category is determined,
reviewed, and can be changed. Item
13(a) also requires disclosure of any
procedures for overriding a
determination of segmented category
and would require how segmentation
can affect trading interest interaction.
This Item is designed to provide
market participants with an
understanding of the categories of
trading interest or types of participants
with which they may interact. In
addition, the information provided
would allow them to both assess the
consistency of a segmented group and
determine whether the manner in which
the trading interest is segmented
comports with their views of how
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
15562
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
certain trading interest should be
categorized. Disclosure of the
procedures and parameters used to
segment categories would allow a
participant to determine whether its
view of what constitutes certain trading
interest it wants to seek or avoid is
classified in the same way by the
Covered ATS. For example, a subscriber
may find it useful to understand the
standards a Covered ATS uses to
categorize high frequency trading firms
so that it can compare the criteria used
by the ATS with its view of what
constitutes a high frequency trading
firm, and thus be able to successfully
trade against or avoid such trading
interest. Similarly, information
regarding the procedures applicable to
trading among segmented categories
would allow market participants to
evaluate whether they can successfully
trade against or avoid the segments of
trading interest. In response to the
question regarding segmentation on
previously-proposed Form ATS–G in
the 2020 Proposal, one commenter
stated that, as the fixed income market
structure continues to develop, types of
segmentation options may occur in
Government Securities ATSs and
should be disclosed.612
Some Covered ATSs segment trading
interest entered in the ATS according to
various categories for purposes of
trading interest interaction. For
example, a Covered ATS could elect to
segment trading interest by type of
participant (e.g., buy-side or sell-side
firms, PTFs, agency-only firms, firms
above or below certain assets under
management thresholds). When
segmenting trading interest in the ATS,
a Covered ATS might look to the
underlying source of the trading interest
such as the trading interest of retail
customers. Some Covered ATSs segment
by the nature of the trading activity,
which could include segmenting by
patterns of behavior, time horizons of
traders, or the passivity or
aggressiveness of trading strategies.
Covered ATSs might use some
combination of these criteria or other
criteria altogether. The ATS might use
these segmented categories to design its
trading interest interaction rules,
allowing only trading interest from
certain categories to interact with each
other.
The Commission recognizes the
concern that describing the precise
criteria used by the ATS to segment
trading interest could result in gaming
of those criteria by subscribers and thus
reduce the effectiveness of segmentation
as a control. On the other hand, market
612 See
Bloomberg Letter at 8.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
participants are interested in
understanding how their trading interest
is categorized in the ATS and the types
of market participants that would
interact with its trading interest. The
Commission believes that Part III, Item
13 of Form ATS–N appropriately
balances these competing interests by
soliciting a summary of the parameters
for each segmented category. By
requiring Covered ATSs to provide a
summary of these parameters on Form
ATS–N, rather than a detailed analysis
of the parameters and how they are
calculated, this Item is designed to
avoid responses that could allow the
gaming or manipulation of segmentation
criteria.
Based on the Commission’s
experience, systems that offer RFQs or
BWIC protocols that bring buyers and
sellers together to negotiate may apply
filtering technology to allow
participants to more easily search for
securities with particular characteristics
that comport with the participants’
needs or exclude securities that do not
meet the participants’ needs. They may
also offer counterparty filtering that
prevents transactions between certain
participants (i.e., potential
counterparties) by prohibiting views of
either party’s inventory by the other
party. Such systems may also
implement permissioning procedures
for subscribers to be able to view trading
interest of certain other subscribers. The
Commission believes that market
participants would benefit from
understanding how a Covered ATS
controls the counterparty interest that
they, and their potential counterparties,
can view and interact with, and
accordingly, the Commission is
proposing to add new Part III, Item
13(b), which would ask if the ATS, in
the absence of subscriber direction, can
prevent a participant or its potential
counterparties from viewing or
interacting with certain trading interest
(e.g., permissioning, filtering, or
blocking).613 An ATS that has such
controls would be required to explain
the processes, including what a
subscriber or counterparty is prevented
from viewing or interacting with and
where this determination is made (i.e.,
when trading interest is received at the
broker-dealer operator or the ATS); how
613 The Commission is proposing to specify that
this question relates to process implemented ‘‘in the
absence of subscriber direction.’’ The Commission
is drawing a distinction from the filtering or
blocking that a subscriber can do in the ATS, which
would be disclosed in Part III, Item 14 (CounterParty Selection). If the ATS, on its own, and in the
absence of subscriber directions, filters certain
subscribers from viewing the existence of certain
trading interest, that would be responsive to Part III,
Item 13 of Form ATS–N.
PO 00000
Frm 00068
Fmt 4701
Sfmt 4702
and when the ATS prevents a subscriber
or its potential counterparty from
viewing or interacting with certain
trading interest; any categories,
classifications, tiers, or levels, and the
types of trading interest that the ATS
uses to determine how subscribers can
view or interact with other trading
interest; a summary of the parameters
for such processes and the length of
time any such parameter is in effect; any
procedures for overriding a
determination of any category,
classification, tier, or level that the ATS
uses to designate how subscriber trading
interest can interact; how such
processes can affect trading interest
interaction; and how a subscriber can
view filtered messages and any
permissioning process and criteria for a
subscriber to send, receive, or interact
with a message.
The Commission believes that market
participants will benefit from
transparency regarding protocols that
Covered ATSs use to limit in any way
the trading interest that certain
subscribers can view or interact with
based on the identity of the
counterparty. The Commission
recognizes that RFQs and similar
systems may establish protocols to block
or filter participants from viewing or
interacting with the trading interest of
certain potential counterparties. The
Commission is thus proposing to clarify
in Part III, Item 13 of Form ATS–N that
the scope of the question would extend
to ATS protocols involving the ATS
filtering or blocking trading interest.
Part III, Item 13(c) would address
whether the ATS identifies trading
interest entered by a customer of a
broker-dealer as customer trading
interest. Disclosing the origin of
customer trading interest of a brokerdealer could be a form of segmentation
because it can facilitate users restricting
their trading to only certain types of
market participants and it can
contribute to information leakage and
adverse selection of trading interest of
institutional investors, who generally
trade passively. Accordingly, Part III,
Item 13(c) would require a Covered ATS
to disclose if it identifies trading interest
entered by a customer of a broker-dealer
in the ATS as customer trading interest.
In addition, in Part III, Item 13(d) of
Form ATS–N, the ATS would be
required to state whether it discloses to
any person the designated segmented or
otherwise designated category,
classification, tier, or level of trading
interest and, if so, provide a summary
of the content of the disclosure, when
and how the disclosure is
communicated, who receives it, and
whether and how such designation can
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
be contested. This requirement is
substantially similar to the current
requirement of Part III, Item 13(d) of
Form ATS–N, but the Commission is
proposing to amend this request to add
designations other than segmentation,
such as permissioning, filtering, and
blocking, that would be responsive
under proposed Part III, Item 13(b) of
Form ATS–N. This would provide
information to market participants about
the notice that the ATS provides
subscribers about the segmented
category to which they are assigned, and
also, if applicable, who can obtain
information about the segmented
categories of other subscribers.
jspears on DSK121TN23PROD with PROPOSALS2
Request for Comment
125. What information about the
segmentation of trading interest by a
Covered ATS or any other practices or
procedures that allow a Covered ATS to
control which counterparties view each
other’s trading interest or are able to
interact would be important to persons
that use the services of the ATS?
n. Item 14: Counter-Party Selection
Part III, Item 14(a) of Form ATS–N is
designed to provide information about
whether trading interest can be
designated to interact or not interact
with certain trading interest in the ATS
by an ATS participant. The Commission
is proposing to make minor
modifications to this question including
new examples of the types of
designations that a subscriber can make
to control both interactions with and
matching against trading interest or a
participant in the ATS. These examples
would include designations to interact
with or execute against a specific
subscriber’s trading interest or prevent
the trading interest of a subscriber from
interacting with or executing against the
trading interest of that subscriber. If the
ATS has such counterparty selection
available, it would be required to
explain the counterparty selection
procedures, including how
counterparties can be selected and
whether the designation affects the
trading rules (e.g., order interaction or
priority) or communication protocols of
the ATS.614 To analyze whether the
ATS is an appropriate venue to
accomplish their trading objectives,
market participants have an interest in
knowing whether—and how—they may
designate their trading interest to
interact or avoid interacting with
specific trading interest or persons in
614 The Commission is proposing minor changes
to Form ATS–N, Part III, Item 14, which references
how the designation affects the ‘‘interaction and
priority of trading interest in the ATS’’ to be more
inclusive of communication protocols.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
the ATS. Part III, Item 14 is designed to
require disclosure of such information.
For instance, the disclosures proposed
under this Item would allow a
participant in the Covered ATS to know
whether it can interact with certain
categories of trading interest in the ATS
or can designate trading interest
submitted to the ATS to interact only
with trading interest of certain other
types of ATS participants. The ATS
might allow subscribers to choose from
categories of trading interest or
categories of participants that the
broker-dealer operator segments in the
ATS. For example, buy-side or
institutional subscribers might seek to
trade only against other buy-side or
institutional trading interest, or might
seek to avoid trading against PTFs or
high frequency trading firms. Also, it
would also be responsive to this Item for
a Covered ATS to state whether a
subscriber can restrict interacting with
its own trading interest, whether such
restrictions are by default or only upon
subscriber request, and any applicable
limitations on such restrictions. This
Item would require description of any
procedures allowing a subscriber to
limit its counterparty on an order-byorder basis or a participant-byparticipant basis, how it would go about
doing so, and how such selection would
affect the interaction and priority of
trading interest. For example, an ATS
would include in its response to this
Item whether a designation to interact
with a specific category of counterparty
trading interest or participants can be
made by the subscriber (i.e., by marking
its trading interest) or whether the
designation must be implemented by
the broker-dealer, on the subscriber’s
behalf. If the broker-dealer implements
the counterparty designation, the ATS
would also include when such
designation would go into effect (e.g., on
same trading day as the subscriber’s
selection or on a date thereafter).
The Commission is also proposing to
amend Form ATS–N to add a
requirement that the ATS disclose in
Part III, Item 14(b) whether a subscriber
can designate trading interest that the
subscriber or potential counterparties
can view (e.g., filtering, blocking,
permissioning). The ATS would be
required to explain any such processes,
including how and when a subscriber
can (or cannot) designate which trading
interest it or a potential counterparty
can view, any categories, classifications,
or levels, and the types of trading
interest that subscribers are able to
designate, a summary of the parameters
for such processes and the length of
time any such parameter is in effect, and
how such processes can affect how
PO 00000
Frm 00069
Fmt 4701
Sfmt 4702
15563
trading interest interacts in the ATS.
The Commission believes this type of
functionality may be particularly
relevant to communication protocols
and negotiation systems that may fall
within the criteria of Rule 3b–16(a), as
proposed to be amended. From
Commission staff’s experience, ATSs
may disclose counterparty filters that
could, for example, allow a subscriber to
prohibit itself from viewing a potential
counterparty’s inventory or to prohibit a
potential counterparty from viewing its
inventory. Under proposed Part III, Item
14(b), an ATS would include in its
response if, for example, participants in
the ATS can choose not to view trading
interest from certain identified potential
counterparties or certain types of
counterparties, such as those that have
failed to respond to RFQs in a given
amount of time. Similarly, if a
participant can block certain potential
counterparties from viewing its trading
interest, such functionality would be
required to be disclosed in this Item as
well. Market participants should be
aware of how participants on the
platform can choose not to interact with
certain trading interest. If, however, the
ATS (and not the participant) makes
these designations and restricts the
interactions of potential counterparties,
such designations and restrictions
would be required to be disclosed under
Part III, Item 13.615
Request for Comment
126. Should Form ATS–N request
more or less information about how
trading interest can be designated to
interact or not interact with certain
trading interest in the Covered ATS?
Are there important forms of
counterparty selection that the
Commission should address?
o. Item 15: Display and Visibility of
Trading Interest
The Commission is proposing to
restructure Part III, Item 15 so market
participants can more readily
understand information regarding
trading interest that the Covered ATS
displays to the subscribers, the public,
and any person, including the brokerdealer operator, and what information
regarding trading interest a subscriber of
the ATS can display through the ATS.
Although, as discussed below, the
Commission proposes to require
Covered ATSs to divide the responses to
Part III, Item 15(b) of current Form
ATS–N into Items 15(a), (b), and (c) in
revised Form ATS–N, the Commission
believes that these questions would
solicit substantially similar information
615 See
E:\FR\FM\18MRP2.SGM
supra Section IV.D.5.m.
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
15564
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
that is required by current Item 15(b) of
Form ATS–N, in addition to information
that is relevant to communication
protocols and the use of non-firm
trading interest.
Part III, Item 15(a) of Form ATS–N
would require a Covered ATS to
disclose whether the ATS displays
trading interest to subscribers or the
public (e.g., whether the ATS
disseminates orders through market data
feeds or a website or sends invitations
or requests to subscribers about
potential counterparties to trade with).
If the ATS displays trading interest to
subscribers or the public, the ATS
would be required to explain what
information the ATS displays (e.g.,
security, price, size, direction, the
identity of the sender, rating
information based on the sender’s past
performance in the ATS), how and
when such information is displayed, to
whom such information is displayed
(e.g., subscribers, public, types of
market participant), and how long the
displayed information is available. In
addition, the ATS would also be
required to indicate whether a
subscriber can opt-out of the display of
its trading interest, and if so, the process
for subscribers to do so. This Item
would also require the ATS to describe
differences in latencies with which the
ATS displays subscribers’ trading
interest due to a functionality of the
ATS. For example, if a Covered ATS
transmits and displays its proprietary
data feed to certain subscribers faster
than to other subscribers as a result of
the alternative means offered by the
ATS to connect, such information
would be responsive to this Item. In
addition, this Item would require an
ATS that offers work-ups to match
trading interest to disclose the
information that is displayed to all
subscribers or certain subscribers in
public or private phases of the work-up,
as well as what characteristics of the
trading interest are displayed.
The ATS could display subscriber
trading interest in a number of ways.
For instance, when an ATS sends
electronic messages outside of the ATS
that expose the presence of trading
interest in the ATS, it is displaying or
making known trading interest in the
ATS. In Part III, Item 15(a), a Covered
ATS would be required to disclose the
circumstances under which the ATS
sends these messages, the types of
market participants that received them,
and the information contained in the
messages, including the exact content of
the information, such as symbol, price,
size, attribution, or any other
information made known. An ATS may
also offer a direct data feed from the
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
ATS that contains real-time order
information.616 Some ATSs have
arrangements, whether formal or
informal (oral or written), with third
parties to display the ATS’s trading
interest outside of the ATS, such as IOIs
from the subscribers being displayed on
vendor systems or arrangements with
third parties to transmit IOIs between
subscribers. A Covered ATS would be
required to include this type of
information in its response to this Item.
Part III, Item 15(b) of Form ATS–N
would require a Covered ATS to
disclose whether a subscriber can use
the ATS to display or make known
trading interest to any person (e.g.,
stream quotes to the subscribers or the
public or send a request for quote, IOI,
conditional order, or invitation to
negotiate to a subscriber or the brokerdealer operator). If yes, the ATS would
explain what information the subscriber
can display through the ATS (e.g.,
security, price, size, direction, the
identity of the sender), procedures for
subscribers to display such information,
how and when such information is
displayed, to whom such information is
displayed (e.g., subscribers, public,
types of market participant), and how
long the displayed information is
available. In addition, Communication
Protocol Systems may offer
functionalities or protocols to allow
their subscribers, who otherwise do not
have the ability to display their trading
interest, to use the functionalities or
protocols to display trading interest
information. Part III, Item 15(b) would
differ from Part III, Item 15(a) in that
Item 15(b) would ask what information
subscribers can display or make known
about their trading interest through the
ATS whereas Part III, Item 15(a) would
ask what information regarding trading
interest the ATS displays. For example,
an ATS that receives orders and
disseminates top-of-book information to
subscribers would be required to
disclose this in Item 15(a), while an
RFQ system that allows participants to
select when, how, and to whom to
display their trading interest to solicit
counterparty trading interest would be
required to disclose this in Item 15(b).
The Commission is proposing the
disclosure requirements of Item 15(b)
because it believes that ATS
616 In the case of a Covered ATS offering a direct
data feed with information about trading interest in
the ATS, the ATS would be required to disclose
under Part III, Item 15 what information the data
feed provides about the trading interest, the
associated timing in receiving the feed (e.g., realtime, delayed), how a subscriber would receive the
feed (e.g., connectivity), and if all subscribers are
treated the same in receiving the feed, including
whether all subscribers are eligible to receive it and
any differences in latency receiving the feed.
PO 00000
Frm 00070
Fmt 4701
Sfmt 4702
participants would want to know
whether a particular ATS would
provide them with any protocol or
functionality that would enable them to
stream quotes to other subscribers or the
public or send a request or invitation to
negotiate to another subscriber or the
broker-dealer operator. The disclosures
regarding whether subscribers can
display or make known their trading
interest and the types of information
that the subscribers can display would
help market participants understand the
extent to which potential information
leakage may occur on the ATS.
Part III, Item 15(c) of Form ATS–N
would require a Covered ATS to
disclose whether any trading interest
bound for the ATS is made known to
any person—not including employees of
the ATS who are operating the system.
Many market participants are sensitive
to precisely how and when the ATS
displays or otherwise makes known
their trading interest both inside and
outside the ATS as such information
could result in other market participants
trading ahead of their positions, and
thus possibly causing inferior execution
prices for the participants whose trading
interest is displayed or otherwise made
known. These participants could use
these disclosures to evaluate whether
sending trading interest to a particular
ATS would achieve their trading
strategies. In particular, subscribers that
use the services of Covered ATSs,
including customers of the broker-dealer
operator, have limited information
about the extent to which their trading
interest sent to the ATS could be
displayed outside the ATS.
For example, trading interest directed
to the ATS could pass through the
broker-dealer operator’s non-ATS
systems or functionalities such as an
algorithm or a SOR, before entering the
ATS. Such non-ATS systems and
functionalities could be used to support
the broker-dealer operator’s other
business units, including any trading
venues.617 It would be responsive to this
Item to identify the recipient of
displayed information by identifying the
functionality of the broker-dealer
operator (e.g., SOR, algorithm, trading
desk), third party, or the type of market
participant 618 that receives the
displayed information. If, for instance,
the ATS displays orders to the brokerdealer operator’s SOR or trading desk,
the ATS would indicate ‘‘yes’’ to this
617 The broker-dealer operator typically controls
the logic contained in these systems or functionality
that determines where trading interest that the
broker-dealer operator receives will be handled or
sent.
618 See Part III, Item 1 of Form ATS–N (providing
examples of types of market participants).
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
question. If the answer is ‘‘yes’’ to either
of these questions, the ATS would be
required to explain what information is
displayed (e.g., security, price, size,
direction, the identity of the sender),
how and when such information is
displayed, to whom such information is
displayed (e.g., algorithm, SOR, trading
desk, third party), and how long the
displayed information is available. If,
for instance, trading interest bound for
the ATS passes through the brokerdealer operator’s common gateway or
algorithm, the ATS would need to
disclose these functionalities as the
trading interest was displayed to a
functionality of the broker-dealer
operator that would likely be outside
the ATS. If trading interest resting in the
ATS is displayed to one or more of the
broker-dealer operator business units,
the ATS would need to identify the
business units of the broker-dealer
operator by type of market participant
(e.g., institutional investors, PTFs,
market makers, affiliates, trading desks
at the broker-dealer operator, market
data vendors, clearing entities, and
potential subscribers, among others).
This Item is designed to ensure that the
ATS discloses any display of trading
interest bound to the ATS or residing in
the ATS not otherwise captured in Part
III, Items 15(a) and (b). Consistent with
the discussion above, the Commission
believes that market participants should
have a full understanding of how and
when their trading interest becomes
known to any person, particularly when
the information is made known to the
broker-dealer operator’s non-ATSsystems and functionalities. The
Commission further believes that
information required under this Item
would help market participants assess
the potential for information leakage of
subscribers’ confidential trading
information to the broker-dealer
operator’s non-ATS systems and
functionalities.
The proposed Item would not require
information about employees of the ATS
in non-trading related roles, such as
technical, quality assurance,
compliance, or accounting roles, among
others, that support the ATS’s
operations and to whom trading interest
are made known in the performance of
their duties.619
619 Covered
ATSs, as proposed, would be subject
to the requirements of Rule 301(b)(10) and would
be required to establish adequate safeguards and
procedures to protect subscribers’ confidential
trading information, which must include: Limiting
access to the confidential trading information of
subscribers to those employees of the ATS who are
operating the system or responsible for its
compliance with these or any other applicable
rules; and implementing standards controlling
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Part III, Item 15(d) of Form ATS–N
would require the ATS to indicate
whether it is an Electronic
Communication Network (‘‘ECN’’) as
defined in Rule 600(a)(31) of Regulation
ATS.620 NMS Stock ATSs that are also
ECNs may differ in how and where
trading interest are displayed. NMS
Stock ATSs that indicate ‘‘yes’’ to this
Item would also be required to provide
information in response to Part III, Items
15(a), (b), or (c) to inform market
participants how ECNs display trading
interest.
Request for Comment
127. What information involving NMS
stocks, government securities, and repos
do ATSs or Communication Protocol
Systems display? Are there levels of
displayed information that a system
may offer to market participants? If so,
what are the levels and are there any
specific requirements for a market
participant to access that information?
For instance, do ATSs or
Communication Protocol Systems have
different mechanisms or functionalities
for displaying trading interest
depending on the subscriber? What
functionalities does the system use to
display information in government
securities and repos? Please explain the
purpose and operation of any such
functionality.
128. For ATSs or Communication
Protocol Systems that display trading
interest both on the system and outside
the system, what is the process for
market participants to submit trading
interest to interact with the trading
interest that is displayed outside the
system?
129. Are there any aspects of display
of trading interest on Government
Securities ATSs that should be
specifically addressed in the Item? Are
there any aspects of display that are
unique to Communication Protocol
Systems?
p. Item 16: Routing
Part III, Item 16 is designed to provide
information about whether trading
interest in the ATS can be routed or sent
to a destination outside the ATS. As
proposed, Part III, Item 16 would apply
to both NMS Stock ATSs and
Government Securities ATSs. In the
employees of the ATS trading for their own
accounts. See 17 CFR 242.301(b)(10).
620 Part III, Item 15(d) of revised Form ATS–N
(which is currently included in Part III, Item 15(a)
of current Form ATS–N) would be applicable only
to NMS Stock ATSs because Rule 600(a)(31) only
applies to systems that trade NMS stocks. A
Government Securities ATS would select ‘‘no’’ in
response to this question. The Commission is also
correcting a typo referencing Rule 600(a)(23) and
replacing the reference with Rule 600(a)(31).
PO 00000
Frm 00071
Fmt 4701
Sfmt 4702
15565
Commission’s experience, routing of
government securities among trading
venues is not as prevalent as in the
market for NMS stocks. To the extent it
is inapplicable, a Government Securities
ATS would check ‘‘no’’ on Form ATS–
N. However, Government Securities
ATSs may have mechanisms to send
trading interest outside the ATS.
Accordingly, the Commission is
proposing to require Covered ATSs to
disclose whether they route or
otherwise ‘‘send’’ trading interest
outside of the ATS. If the Covered ATS
permits trading interest to be routed or
sent to a destination outside of the ATS,
the ATS would be required to indicate
whether affirmative instructions from a
subscriber must be obtained before its
trading interest can be routed or sent
from the ATS, and provide a description
of the affirmative instruction and
explain how the affirmative instruction
is obtained. If the ATS is not required
to obtain an affirmative instruction to
route or send trading interest, the ATS
would be required to explain when
trading interest can be routed or sent
from the ATS (e.g., at the discretion of
the broker-dealer operator). The
Commission believes that such
disclosures provide ATS participants
with the ability to gauge how their
trading interest would be handled by
the ATS. Subscribers might, for
example, have concerns about the
leakage of confidential trading
information when their orders are
routed to other trading venues. The
Commission believes the disclosures in
Part III, Item 16 would provide relevant
information for ATS participants to
evaluate the potential for leakage of
their confidential trading information.
The Commission is also proposing to
relocate Part II, Items 1(d) and 2(d) of
current Form ATS–N to Part III, Item
16(c) of revised Form ATS–N.621
Specifically, proposed Item 16(c) of
revised Form ATS–N would request
whether trading interest in the ATS can
be routed or sent to a destination
operated or controlled by the brokerdealer operator or an affiliate of the
broker-dealer. If yes, the ATS would be
required to identify the destination and
when and how trading interest is routed
or sent from the ATS to the destination.
The Commission believes that such
information would help market
participants evaluate whether the
Covered ATS sending trading interest to
a trading venue operated or controlled
621 As discussed above, the Commission believes
it would be more efficient for market participants
and filers to consolidate the current disclosure in
Part II, Items 1(d) and 2(d) to proposed Part III, Item
16(c). See supra Section IV.D.4.a.
E:\FR\FM\18MRP2.SGM
18MRP2
15566
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
by the broker-dealer operator or its
affiliates poses a conflict of interest and
is consistent with its trading objectives.
Request for Comment
130. Do Government Securities ATSs
(inclusive of Communication Protocol
Systems, as proposed) and
Communication Protocol Systems that
trade NMS stocks send trading interest
to destinations away from the system? If
so, how and under what circumstances?
Are there any aspects about how trading
interest is sent away from a Covered
ATS that should be addressed by Form
ATS–N? Have the mechanisms for
routing to a destination outside an NMS
Stock ATS changed in any way since
the adoption of Form ATS–N for NMS
Stock ATSs? If so, do commenters
believe that the Commission should
require Covered ATSs to provide
additional information in Part III, Item
16 to reflect such change?
jspears on DSK121TN23PROD with PROPOSALS2
q. Item 17: Closing
Part III, Item 17 of Form ATS–N is
designed to provide information about
differences between how trading
interest is treated on the ATS during the
ATS’s closing session(s) 622 and during
regular trading hours established by the
ATS. The Item is designed to provide
market participants with information
about processes the Covered ATS uses
to transition to the next trading day,
including whether the ATS offers any
particular order types during a closing
session(s) or has different procedures for
closing trading for a particular trading
session and transitioning trading to the
next trading day. The vast majority of
requests in Part III of revised Form
ATS–N relate to trading during the
Covered ATS’s regular trading hours.
Therefore, when discussing differences
between trading during the Covered
ATS’s closing session(s) and during
regular trading hours set by the ATS, the
Covered ATS would be required to
discuss differences as compared to
relevant information disclosed in Part III
Items, including, among others, order
types and sizes and trading facilities
(Item 7), use of non-firm trading interest
and communication protocols and
negotiation functionality (Item 8),
segmentation and notice (Item 13), and
display and visibility of trading interest
(Item 15). The Commission believes this
information would be important for
market participants to understand the
closing procedures around a particular
622 The Commission is proposing to revise Item
17 of Form ATS–N to clarify that the question
relates to the ATS’s closing session(s), and that
‘‘regular trading hours’’ refers to the ATS’s regular
trading hours.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
trading session, if any, to carry out their
trading objectives.623
r. Item 18: Fees
Part III, Item 18 of Form ATS–N 624
would require a Covered ATS to provide
information on any fees or charges for
use of the ATS’s services, including any
fees or charges for use of the ATS’s
services that are bundled with the
subscriber’s use of non-ATS services or
products offered by the broker-dealer
operator or its affiliates, and any rebate
or discount of fees or charges. The
Commission believes that disclosures
regarding fees on Form ATS–N are
necessary and important, and should
not be voluntary for Covered ATSs. Fee
disclosures on Form ATS–N are
designed to allow all market
participants to analyze the fee structures
across Covered ATSs in an expedited
manner and decide which ATS offers
them the best pricing according to the
characteristics of their order flow, the
type of participant they are (if relevant),
or any other aspects of an ATS’s fee
structure that serves to provide
incentives or disincentives for specific
market participants or trading
behaviors. Requiring disclosures of ATS
fees is warranted as, in the
Commission’s experience, fees can be a
primary factor for market participants in
deciding where to send their trading
interest.
Part III, Item 18 would request that
Covered ATSs include in their
descriptions the types of fees, the
structure of the fees, variables that
impact the fees, and differentiation
among types of subscribers, and
whether the fee is incorporated into the
price displayed for a security, and the
Commission would provide examples of
responsive information in a
parenthetical in the text of each
subpart.625 The Item also would require
623 The Item would, for example, require
disclosure of any procedures to match trading
interest to set a single closing price to maximize
liquidity and accurately reflect market conditions at
the close of trading in the ATS.
624 As discussed above, the Commission is
proposing to delete current Part III, Item 18 of Form
ATS–N (Trading Outside of Regular Trading Hours)
to combine such disclosure requests with Part III,
Item 4 (Hours of Operations). As a result of this
deletion, the Commission is proposing to re-number
Part III, Items 19 through 26 of current Form ATS–
N. The discussion herein refers to the Items as
proposed to be re-numbered.
625 The Commission is including non-exhaustive
lists of examples of responsive information in
parentheticals in the text of the Item. For instance,
for the description of the structure of the fees, the
Commission is providing as examples fixed,
volume-based, and transaction-based fee structures.
For the description of variables that impact the fees,
the Commission is providing as examples: The
types of securities traded, block orders, and the
form of connectivity to the ATS. For the description
PO 00000
Frm 00072
Fmt 4701
Sfmt 4702
a range for each type of fee (e.g.,
subscription, connectivity, and market
data) charged on the Covered ATS.
The Commission is proposing to add
the term ‘‘market data’’ to the examples
listed in Part III, Item 18 of the types of
fees that a Covered ATS must disclose.
For example, if a Covered ATS
distributed a market data feed and
charged a fee for it, the ATS would be
required to provide the information
responsive to Item 18 regarding that fee.
The Commission believes this example
may be relevant to Government
Securities ATSs, which are primarily lit
venues that offer market data to
subscribers. While most NMS Stock
ATSs do not disseminate market data, a
description of an NMS Stock ATS’s
market data fees is currently required by
the Item, which requires disclosure of
‘‘any’’ fee or charge for use of the ATS
services. Adding the example could
assist Covered ATSs in responding
comprehensively to the Item.
The Commission recognizes that the
fee structures of Covered ATSs can vary
and that not all Covered ATSs apply set
tiers or categories of fees for subscribers;
however, the Commission believes that
a market participant should have
sufficient information to understand the
fees for using the services of the
Covered ATS. Recognizing the various
fees that can be charged by Covered
ATSs, the Commission is specifying in
the fee request the types of information
that a Covered ATS must provide in
response to the Commission’s proposed
request to describe its fees (e.g., the
structure of the fees, variables that
impact each fee, differentiation among
types of subscribers, and the range of
fees). With regard to the variables that
impact the fees set, ATSs would be
required to be specific and delineate
how a given variable would likely
impact the fee level (e.g., higher or
lower). In addition, the Commission is
proposing to add a new requirement not
included in current Form ATS–N that
the Covered ATS must disclose whether
the fee is incorporated into the price
displayed for a security (e.g., markups,
markdowns). For example, the price
displayed by the security may be higher
(or lower) than the market price, and the
broker-dealer would be compensated by
the difference between the displayed
price and the market price. The
Commission believes that, in particular,
such fees or charges may be relevant to
communication protocols that would be
of the differentiation among types of subscribers for
the fee, the Commission is providing as examples
the types of subscribers: Broker-dealers,
institutional investors, and retail investors.
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
included under the proposed definition
of ‘‘exchange.’’
These disclosures are designed to
provide market participants with more
insight regarding the fees charged so
that they can better understand how fees
may apply to them and assess how such
fees may impact their trading strategies.
Although the fees charged for Covered
ATS services may be individually
negotiated between the broker-dealer
operator and the subscriber, the
disclosures about the type of fees
charged by the Covered ATS are
designed to help market participants
discern how the ATS’s fees are
organized and compare that information
across Covered ATSs, which could
reduce the search costs of market
participants in deciding where to send
their trading interest. The Commission
believes that Covered ATSs should be
required to disclose differences in the
treatment among ‘‘types of subscribers’’
(e.g., broker-dealers, institutional
investors, retail). This information
would allow subscribers to observe
whether a Covered ATS is offering
preferential treatment for certain types
of subscribers with respect to fees.
Part III, Item 18(a) would cover
charges to subscribers for their ‘‘use of
the ATS services’’ 626 and would not
request information on fees charged for
non-ATS services by a third party not in
contract with the broker-dealer
operator.627 Part III, Item 18(b) would
require a description of any bundled
fees, including a summary of the
bundled services and products offered
by the broker-dealer operator or its
affiliates, the structure of the fee,
variables that impact the fee (including,
for example, whether the particular
broker-dealer services selected would
impact the fee), differentiation among
types of subscribers, and range of fees.
Part III, Item 18(b) is designed to allow
market participants to better evaluate
fees for bundled services and products
that include access to the Covered ATS.
Covered ATSs would be required to
provide information, including the
relevant services and products offered
by the broker-dealer operator and its
affiliates for each bundled fee offered,
that will provide context to market
participants with which to assess how
626 The
Covered ATS services generally include
those services used for the purpose of effecting
transactions in securities, or for submitting,
disseminating, or displaying trading interest in the
ATS. See 17 CFR 242.300(b).
627 See NMS Stock ATS Adopting Release, supra
note 2, at 38858 (discussing what fees should be
categorized as for use of the ATS’s services).
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
bundled fees could apply to them as
subscribers.628
The disclosure requests under Part III,
Item 18 would contain a stand-alone
Item—Item 18(c)—which requests
information about rebates and discounts
of fees that are identified in subparts (a)
and (b) of Item 18. Item 18(c) would
require information about rebates and
discounts that is similar to information
required for fees (e.g., type of rebate or
discount, structure of the rebate or
discount, variables that impact the
rebate or discount, differentiation
among types of subscribers, and range of
rebate or discount).
Request for Comment
131. What fees should the
Commission require a Covered ATS
subject to the Fair Access Rule to
disclose on Form ATS–N? Are there any
fees disclosures that are unique to NMS
Stock ATSs or Government Securities
ATSs and, if so, what information about
those fees should be disclosed on Form
ATS–N?
132. What disclosures about bundled
fees would be relevant and useful to
potential and current subscribers to the
ATS?
133. What fees should the
Commission require a Communication
Protocol System that operates as a
Covered ATS to disclose on Form
ATS–N?
s. Item 19: Suspension of Trading
Part III, Item 19 of Form ATS–N
would require a Covered ATS to provide
information about any procedures for
suspending or stopping trading in the
ATS, including the suspension of
trading in an NMS stock, U.S. Treasury
Security, or an Agency Security.629 This
Item is designed to, for example, inform
market participants of whether, among
other things, a Covered ATS will
continue to accept trading interest after
a suspension or stoppage occurs,
whether the ATS cancels, holds, or
executes trading interest that was
resting in the ATS before the suspension
or stoppage was initiated, and what type
of notice the ATS provides to
subscribers regarding a suspension or
stoppage. Examples of system
disruptions would include, but are not
limited to, internal software problems
that prevent the Covered ATS’s system
628 See
NMS Stock ATS Adopting Release, supra
note 2, at 38858 (discussing responses to current
Item 19(b) (proposed Item 18(b)) depending on
whether there is an explicit fee for the ATS as part
of any bundled services).
629 The Commission is proposing to revise Form
ATS–N, Part III, Item 19 of revised Form ATS–N
(numbered as Item 20 in current Form ATS–N) to
reference trading in U.S. Treasury Securities and
Agency Securities.
PO 00000
Frm 00073
Fmt 4701
Sfmt 4702
15567
from opening or continuing trading,630 a
significant increase in volume that
exceeds the ability of the trading system
of the ATS to process incoming trading
interest,631 and the failure of the trading
system of the ATS to receive external
pricing information that is used in the
system’s pricing methodology.
Information regarding a Covered ATS’s
procedures about how trading interest
might be handled by the ATS during a
suspension or stoppage of trading would
be useful to market participants because
an ATS’s procedures might require the
cancelation of existing trading interest
or preclude the acceptance or execution
of trading interest during a suspension,
both of which would impact a
subscriber’s trading interest or its ability
to trade in the ATS. This information
would better inform a subscriber’s
trading decisions at the time of such an
event and thus help that subscriber
accomplish its trading objectives. If a
Covered ATS establishes different
procedures for suspending or stopping
trading in the ATS depending on
whether the source of the disruption is
internal or external, a description of
both procedures would be responsive to
this request. In addition, this Item
would require disclosure of procedures
whereby a Covered ATS suspends
trading in NMS stocks, U.S. Treasury
Securities, or Agency Securities so that
it does not cross the volume thresholds,
as proposed herein, that may subject the
ATS to certain Federal securities laws,
including the order display and
execution access rule (Rule 301(b)(3)),
Fair Access Rule, or Regulation SCI.
Information regarding the procedures
for how a Covered ATS would handle
trading interest during a suspension of
trading or system disruption or
malfunction would help the
Commission better monitor the
securities markets.
Request for Comment
134. Should Form ATS–N request
information about any procedures for
suspending or stopping trading that is
particularly relevant to Government
Securities ATSs (inclusive of
Communication Protocol Systems, as
proposed) or Communication Protocol
Systems that trade NMS stock?
t. Item 20: Trade Reporting
Part III, Item 20 of Form ATS–N
would require a Covered ATS to provide
information on any procedures and
material arrangements for reporting
630 See Regulation SCI Adopting Release, supra
note 3, at 72254–55 n.28.
631 See id. at 72255 n.29.
E:\FR\FM\18MRP2.SGM
18MRP2
15568
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
transactions in the ATS.632 For
Government Securities ATSs, FINRA
member firms are required to report
transactions in U.S. Treasury Securities
and Agency Securities to TRACE.633
Part III, Item 20 would require a
Covered ATS to disclose its trade
reporting procedures for reporting
transactions in the ATS to an SRO or
any alternative trade reporting
destinations, if applicable. For example,
it would be responsive to Item 20 for a
Covered ATS to disclose whether the
ATS has a specific procedure for
reporting transactions to the SRO at
different times based on, for example, a
subscriber’s use of a particular order
type, or the type of subscriber involved
in the transaction. Covered ATSs would
also be required to disclose ‘‘material’’
arrangements for reporting transactions
in the ATS. The Commission recognizes
that there could be arrangements
relevant to trade reporting, such as the
specific software used to report, that
play a minor role in the ATS’s trade
reporting and need not be disclosed. On
the other hand, if a Covered ATS uses
another party to report transactions
occurring in the ATS or has a backup
facility that it uses for trade reporting,
that information is likely to be
responsive as a material arrangement.
Requiring reporting only of material
arrangements would limit potential
burdens on Covered ATSs while
providing market participants with
sufficient information to understand
how their trade information will be
reported. Also, the proposed disclosure
of the trade reporting procedures would
allow the Commission to more easily
review the compliance of the Covered
ATS with its applicable trade reporting
obligations as a registered broker-dealer
as proposed herein.
jspears on DSK121TN23PROD with PROPOSALS2
u. Item 21: Post-Trade Processing,
Clearance, and Settlement
Part III, Item 21 is designed to provide
information on any procedures and
material arrangements undertaken as a
result of the contractual agreements
between the broker-dealer operator for
the Covered ATS 634 and the ATS’s
participants to manage the post-trade
processing, clearance, and/or settlement
632 This question is substantially the same as Part
III, Item 21 of current Form ATS–N.
633 See supra notes 228–229 and accompanying
text.
634 The contractual obligations of the ATS are
ultimately those of the broker-dealer operator.
Because an ATS must register as a broker-dealer,
the broker-dealer operator controls the ATS and is
legally responsible for all operational aspects of the
ATS and for ensuring that the ATS complies with
applicable Federal securities laws and the rules and
regulations thereunder. See NMS Stock ATS
Adopting Release, supra note 2, at 38819.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
of transactions on the Covered ATS. The
Commission is proposing revisions to
Part III, Item 21 that would request
information about post-trade processing,
which covers the steps taken after
execution to prepare a trade for
clearance and/or settlement. These steps
include, but are not limited to, routing
trade information to relevant parties;
enrichment of trade details with
supplemental information (such as
counterparty account information)
required to effect settlement; performing
allocations whereby a block trade is
broken down into various client
accounts; comparing the terms of a trade
submitted by each counterparty
(performing matching) to reconcile the
terms so as to generate an affirmed
confirm; performing sequential
affirmation and confirmation processes;
or sending notifications to interested
parties, such as custodians. These types
of activities can be performed both
manually (with trading desk, middle
office, or back office personnel
completing the steps) or through
automated activity processes (which
seek to achieve the goal of straightthrough processing whereby trade
information passes through the
necessary steps to effect settlement in an
automated manner).
The proposed revisions to Part III,
Item 21 provide some specific examples
of the types of procedures and material
arrangements that should be described
by a Covered ATS under this Item, such
as whether the broker-dealer operator,
or an affiliate of the broker-dealer
operator becomes a counterparty;
submits trades to a registered clearing
agency; requires subscribers to have
arrangements with a clearing firm, or
terminates trades. These examples are
intended to be illustrative and not the
only types of material arrangements that
may exist. From Commission staff’s
experience reviewing Form ATS–N, the
Commission understands that brokerdealer operators have different
arrangements and contractual
obligations that are important to
understanding the clearance and
settlement of transactions in the ATS.
A Covered ATS would also be
required to describe any user
requirements for such procedures and
material arrangements, including the
type and extent of connectivity (e.g.,
FIX), and whether the connectivity is to
an order management system (OMS),
execution management system (EMS),
end-of-month expirations (EOMS),
clearinghouse/custodian, or other
system.
The integrity of the trading markets
depends on the prompt and accurate
post-trade processing, clearance, and/or
PO 00000
Frm 00074
Fmt 4701
Sfmt 4702
settlement of securities transactions. For
example, counterparties to a trade face
counterparty credit risk, regardless of
whether they choose to clear and settle
bilaterally or through a central
counterparty, and therefore knowledge
of any specific arrangements that are
required by an ATS as part of the
clearing process promotes market
integrity.635 The Covered ATS’s
procedures or material arrangements
that address post-trade processing,
clearance, and/or settlement are critical
to ensuring that a buyer receives
securities and a seller receives proceeds
in accordance with the agreed-upon
terms of the trade by settlement date.
The disclosures required by this Item
are intended to cover each of the steps
in the post-trade process from the time
of execution (including whether the
broker-dealer operator or an affiliate of
the broker-dealer operator is a
counterparty to a transaction and
whether the obligations of a
counterparty are ever assigned or
novated), through trade matching or
affirmation/confirmation, and then
through clearing procedures (including
whether the Covered ATS requires its
participants to be a member of a
registered clearing agency, whether
participants have any particular clearing
obligations, and whether transactions
are—wholly or partially—submitted to a
registered clearing agency or cleared
bilaterally using clearing banks or
clearing agents), until settlement of the
transaction (including whether
counterparties make use of custodians,
settlement banks, or a registered
clearing agency). If the Covered ATS has
adopted post-trade processing, clearing,
and/or settlement processes or imposes
any obligations on its participants in the
event of a disruption (for example, a
failure to deliver securities, a liquidity
shortfall, or a counterparty default), this
proposed Item should include a
discussion of these processes and any
resulting participant obligations.
The Item requires the disclosure of
‘‘material’’ arrangements to manage the
post-trade processing, clearance, and/or
settlement of transactions on the
Covered ATS. For example, an
arrangement under which another party
would have a role in clearance or
settlement may constitute a material
635 See Treasury Market Practices Group (TMPG),
White Paper on Clearing and Settlement in the
Secondary Market for U.S. Treasury Securities (July
12, 2018), available at https://www.newyorkfed.org/
medialibrary/Microsites/tmpg/files/CS-DraftPaper071218.pdf. ‘‘The TMPG found that many market
participants do not understand the role of the
[interdealer brokers] platform in terms of who their
counterparty credit risk was to and the roles of
various market participants in settlement and
clearing.’’ Id. at 27.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
arrangement that could trigger the
disclosure requirement under Part III,
Item 21. Limiting the explanation
required to material arrangements
would reduce the burden on Covered
ATSs while at the same time still
allowing market participants to
understand and more easily compare
such arrangements required across
Covered ATSs.
Proposed Part III, Item 21 is also
designed to help market participants
understand the measures the Covered
ATS takes to manage post-trade
processing, clearance, and/or settlement
of transactions. Market participants
should know and be able to understand
any requirements a Covered ATS places
on its subscribers, or other persons
whose trading interest is sent to the
ATS, to receive certain post-trade
processing, clearance, and/or settlement
services. The Commission believes
market participants would likely find
the disclosures required by this Item to
be useful in understanding the measures
undertaken by a Covered ATS to
manage post-trade processing,
clearance, and/or settlement of
subscriber orders in the ATS and allow
them to more easily compare these
arrangements across Covered ATSs as
part of deciding where to send their
trading interest. The Commission
believes that these disclosures would
assist the Commission in better
understanding the post-trade
processing, clearance, and/or settlement
procedures of Covered ATSs and risks
and trends in the market as part of its
overall review of market structure.
jspears on DSK121TN23PROD with PROPOSALS2
Request for Comment
135. What aspects of the procedures
and material arrangements undertaken
to manage the post-trade processing,
clearance, and/or settlement of
transactions on Covered ATSs are
important for ATSs to disclose on Form
ATS–N for the benefit of market
participants?
v. Item 22: Market Data
Part III, Item 22 636 of Form ATS–N is
designed to solicit information about the
sources of market data used by the
Covered ATS and how the ATS uses
that market data from these sources to
provide the services that it offers. As the
Commission is proposing to apply Form
ATS–N to Government Securities ATSs,
the Commission is proposing to add to
Part III, Item 22 to include ‘‘feeds from
trading venues’’ in the examples of
sources of market data, which may be
applicable to Government Securities
636 This
Item is currently numbered as Part III,
Item 23 of current Form ATS–N.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
ATSs. Specifically, market participants
would likely find it useful to know the
source and specific purpose for which
the market data is used by the Covered
ATS, as the market data received by the
ATS might affect the price at which
trading interest is prioritized and
executed, including trading interest that
is pegged to an outside reference price.
An NMS Stock ATS, for example, would
be required to provide the names of
national securities exchanges from
which the ATS receives direct market
data feeds, either from a vendor or
directly from the exchange, in addition
to the specific types of market data
received from each source. In addition,
a Covered ATS would be required to
provide information about how the ATS
uses market data to provide the services
it offers. To avoid duplicative
disclosure, market data reflecting
options traded on government securities
that is used by the ATS could be
discussed in response to proposed Part
III, Item 11. The Commission is
proposing to include determining the
best bid or offer (BBO) as an example of
how the ATS uses market data, which
could be applicable to Government
Securities ATSs. Among other things,
Part III, Item 22 requires the disclosure
of the use of market data to display,
price, prioritize, execute, and remove
trading interest. As part of this
explanation, the Covered ATS would be
required to specify, if applicable, when
the ATS may change sources of market
data to provide its services. A Covered
ATS would also be required to explain
how market data is received by the ATS,
compiled, and delivered to the matching
engine. For example, among other
possible arrangements, a Covered ATS
could explain in response to the Item
that market data is received and
assembled by the broker-dealer operator,
and subsequently delivered to the
matching engine, or that market data is
sent directly to the matching engine,
which normalizes the data for its use.
Request for Comment
136. What are the sources of market
data in NMS stocks, government
securities, and repos that are available
to market participants as well as to
Covered ATSs and how do market
participants and ATSs use this
information? What disclosures about an
ATS’s use of market data would be
important to market participants?
w. Item 23: Order Display and
Execution Access
Part III, Item 23 is designed to provide
information about whether an NMS
Stock ATS is required to comply with
PO 00000
Frm 00075
Fmt 4701
Sfmt 4702
15569
Rule 301(b)(3)(ii) of Regulation ATS.637
The Commission is not proposing to
make changes to this Item, other than
specifying that this Item would be
applicable to NMS Stock ATSs, as the
order display and execution access
provisions under Rule 301(b)(3) only
apply to an ATS’s NMS stock
activities.638
x. Item 24: Fair Access
Part III, Item 24 of Form ATS–N
would provide a mechanism under
which a Covered ATS would notify
market participants whether it has
triggered the proposed fair access
threshold and, if so, whether the ATS is
subject to the Fair Access Rule. As
described above, the Commission is
proposing to require Government
Securities ATSs to comply with the Fair
Access Rule if they meet the applicable
thresholds.639 As a result, Part III, Item
24 would be applicable to both NMS
Stock ATSs and Government Securities
ATSs that meet the applicable
thresholds. Pursuant to proposed Rule
301(b)(5)(ii), a Covered ATS would
aggregate the trading volume for a
security or category of securities for
ATSs that are operated by a common
broker-dealer, or ATSs that are operated
by affiliated broker-dealers for the
purpose of calculating the volume
thresholds.640 In connection with
proposed Rule 301(b)(5)(ii), the
Commission is proposing to require the
Covered ATS to indicate in Part III, Item
24(a) through (c) if the ATS crossed the
volume thresholds ‘‘whether by itself or
aggregated pursuant to Rule
301(b)(5)(ii).’’
If a Covered ATS crosses the fair
access thresholds, proposed Rule
301(b)(5)(iii)(A) 641 requires the ATS to
establish and apply reasonable written
standards for granting, limiting, and
denying access to the services of the
ATS.642 If subject to the Fair Access
Rule, the Covered ATS would be
required to describe the reasonable
written standards for granting, limiting,
and denying access to the services of the
ATS pursuant to Rule 301(b)(5)(iii) of
637 Part III, Item 23 of revised Form ATS–N
(currently numbered as Part III, Item 24 of current
Form ATS–N) would be required only for NMS
Stock ATSs, as the associated rule is inapplicable
to government securities. See also NMS Stock ATS
Adopting Release, supra note 2, at Section V.D.24.
638 17 CFR 242.301(b)(3).
639 See supra Section III.D.
640 The Commission is proposing changes to the
Fair Access Rule, which are discussed in detail
below. See infra Section V.A.2.
641 See infra Sections V.A.3 through V.A.4.
642 See 17 CFR 242.301(b)(5)(iii)(A). The
Commission is proposing that any change in a
Covered ATS’s response to Item 24 would be filed
as a contingent amendment. See supra note 440 and
accompanying text.
E:\FR\FM\18MRP2.SGM
18MRP2
15570
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Regulation ATS (as proposed to be
applied herein).643 A description of the
Covered ATS’s reasonable written
standards in response to Part III, Item 24
should be clear and comprehensive and
should explain, among other things, the
objective and quantitative criteria upon
which the ATS’s reasonable written
standards are based, any differences in
access to the services of the ATS by
applicant and current participants, and
why the standards including any
differences in access to the services of
the ATS) are fair and not unreasonably
discriminatory. To the extent another
person performs a function of the ATS,
the ATS would be required to provide
reasonable written standards for
granting, limiting, or denying access to
the services performed by such person.
In addition, an NMS Stock ATS must
provide the ticker symbol for each NMS
stock for which the NMS Stock ATS has
exceeded the fair access threshold
during each of the last 6 calendar
months.
The Commission believes that the
proposed disclosures would facilitate its
oversight of Covered ATSs and their
compliance with Rule 301(b)(5) as
proposed herein. In addition, the
proposed disclosures would allow
market participants to assess whether
fair access is, in fact, being applied by
a Covered ATS that meets the fair access
threshold, in part by making publicly
available a description of the ATS’s
written standards for granting access.
Request for Comment
137. Is there other information that
market participants might find
important or useful regarding the
reasonable written standards for
granting, denying, and limiting access to
the services of a Covered ATS that is
subject to the Fair Access Rule? If so,
describe such information and explain
whether, and if so, why, such
information should be required to be
provided on Form ATS–N.
y. Item 25: Aggregate Platform-Wide
Data; Trading Statistics
jspears on DSK121TN23PROD with PROPOSALS2
Part III, Item 25 of Form ATS–N 644 is
designed to make public aggregate,
platform-wide statistics that a Covered
ATS already otherwise collects and
publishes, or provides to one or more
subscribers to the ATS. The purpose of
643 The Commission is proposing revisions to Part
III, Item 24 (currently numbered as Part III, Item 25)
to conform to the proposed rule text of the Fair
Access Rule, including rule re-numbering,
describing the required written standards as
‘‘reasonable,’’ and to reference standards limiting
and denying access to the services of the ATS.
644 This Item is currently numbered as Part III,
Item 26 of current Form ATS–N.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Item 25 is to place subscribers on a level
playing field with regard to aggregate,
platform-wide statistics about the
Covered ATS that the ATS makes
available.
As explained above, the Commission
is proposing to amend Form ATS–N to
solicit information about the use of nonfirm trading interest in the ATS, which
relates to the proposed changes to
Exchange Act Rule 3b–16.645 Consistent
with those proposed revisions, the
Commission also proposes to change the
request for information on Part III, Item
25 to require statistics beyond solely
platform-wide order flow and execution
statistics. Specifically, the Commission
proposes that Part III, Item 25 require a
Covered ATS to disclose all aggregate,
platform-wide statistics that it publishes
or provides to one or more subscribers.
Such statistics would include the order
flow and execution data that is currently
solicited in Form ATS–N. In addition,
the proposed disclosure request would
require a Covered ATS to disclose
statistics related to use of non-firm
trading interest. On an RFQ system,
such statistics might include the
percentage or total number of timed-out
inquiries (i.e., when a participant
receives no prices or other responses
after posting an inquiry). With the use
of a conditional order protocol, such
statistics could include market
participants’ firm-up rates (e.g., the ATS
sends a firm-up request to participants
after their conditional orders are
matched).
While the Commission proposes to
expand the scope of information that
this Item would solicit, the proposed
disclosure request does not require a
Covered ATS to create, maintain, or
publish any specific type of statistic. As
is the case with the current requirement,
this disclosure request only requires a
Covered ATS to publicly disclose any
statistics within the scope of the
question that it already discloses to one
or more subscribers. If a Covered ATS
compiles a particular statistic without
distributing it (i.e., only uses it
internally), it would not be required to
provide that statistic on Form ATS–N.
Finally, as with current Part III, Item 26
(proposed to be renumbered to Item 25),
the proposed disclosure request does
not require a Covered ATS to provide on
Form ATS–N any data that is otherwise
required by Rule 605 of Regulation
NMS.646 A Covered ATS may choose to
create and publish or provide to one or
more subscribers or persons aggregate,
platform-wide statistics for different
reasons. To the extent that a Covered
645 See
646 See
PO 00000
supra Section II.C.
17 CFR 242.605.
Frm 00076
Fmt 4701
Sfmt 4702
ATS has made a determination to create
and publish or provide to subscribers
certain aggregate platform-wide data,
the Commission believes that others
may also find such information useful
when evaluating the ATS as a possible
venue for their trading interest.
As with the current disclosure
request, the proposed disclosure request
would not require a Covered ATS to
amend its Form ATS–N every time it
receives a subscriber data request. To
comply with the proposed requirements
under Part III, Item 25, Form ATS–N
only requires a Covered ATS to update
its disclosures for Part III, Item 25 on a
quarterly basis.647 For instance, if a
participant were to request updated or
new aggregate platform-wide statistics
in January, the Covered ATS would not
be required to immediately file an
updating amendment containing these
statistics after complying with the
participant’s request. Rather, the ATS
would need to file an updating
amendment within 30 days following
the end of March. That updating
amendment must contain the most
recently distributed version of these
statistics, as well as the most recently
distributed version of all other aggregate
platform-wide data that was provided
during that quarter. The Commission
notes that communications associated
with the responsive statistics are not
required to be publicly filed. In the prior
example, for instance, if the statistics
provided in the quarterly amendment
are the ones provided in January (i.e.,
those are the latest version of those
aggregate platform-wide statistics the
ATS distributed), the ATS would not
(and should not) also attach to Form
ATS–N the participant’s email
requesting the statistics.
Furthermore, Part III, Item 25 of Form
ATS–N would only require a Covered
ATS to publicly disclose aggregate
platform-wide data. As such, a Covered
ATS would not be required to disclose
individualized or custom reports
containing data relating to that
participant’s specific usage of the ATS.
For example, an individual participant’s
trade reports, order and execution
quality statistics, and other statistics
647 If, for example, a Covered ATS publishes or
provides a particular statistic on a daily basis, the
ATS would include in Exhibit 4 of Form ATS–N the
statistic that was published or provided to one or
more subscribers on the last trading day of the
calendar quarter (e.g., the statistic published or
provided on June 30th or last trading day prior to
June 30th). If a Covered ATS publishes or provides
a particular statistic weekly, the ATS would be
required to include in Exhibit 4 of Form ATS–N the
statistic that was published or provided to one or
more subscribers at the end of the week prior to the
end of the calendar quarter (e.g., the statistic
published for the last full week of June).
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
specific to a participant’s trading in the
ATS would not be covered by the
disclosure request in Part III, Item 25. A
Covered ATS would need to
independently evaluate any statistics
that it compiles and distributes to
determine whether they are responsive
to this disclosure request.
Part III, Item 25 would require the
Covered ATS to attach both the
responsive statistics and its explanation
of the categories or metrics of the
statistics and the criteria or
methodology used to calculate those
statistics as Exhibits 4 and 5,
respectively. Also, in lieu of filing
Exhibits 4 and 5, the Covered ATS
could certify that the information
requested under Exhibits 4 and 5 is
available at the website provided in Part
I, Item 6 of the form and is accurate as
of the date of the filing. The
Commission is proposing to add to the
instruction that if the ATS selects the
checkbox, the ATS will maintain its
website in accordance with the rules for
amending Form ATS–N pursuant to
Rule 304(a)(2)(i) to reflect any changes
to such information. This would require
an ATS checking the box to update its
website as if it were Form ATS–N, and
therefore, to update the information, as
appropriate pursuant to the
Commission’s rules for amending Form
ATS–N.
jspears on DSK121TN23PROD with PROPOSALS2
Request for Comment
138. Does Part III of Form ATS–N
capture the information that is most
relevant to understanding the operations
of the Government Securities ATS and
the use of non-firm trading interest on
Communication Protocol Systems? Are
there any Items that commenters believe
are unnecessary? If so, why?
139. Should the Commission expand
what Covered ATSs must disclose on
Form ATS–N? Is there other information
that market participants might find
relevant or useful regarding the
operations of Covered ATSs that should
be publicly disclosed? If so, describe
such information and explain whether,
and if so, why, such information should
be required to be provided under Form
ATS–N.
140. Is there any information related
to repos that Form ATS–N should
require?
141. Is there any information related
to options on government securities that
Form ATS–N should require?
142. Is there any information that
would be required by Part III of Form
ATS–N that a Covered ATS should not
be required to disclose due to concerns
regarding confidentiality, business
reasons, trade secrets, commercially
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
sensitive information, burden, or any
other concerns?
143. Should the Commission adopt a
more limited or expansive definition of
‘‘affiliate’’ for purposes of Part III? 648
144. Would the disclosures under Part
III of Form ATS–N help market
participants better evaluate trading
opportunities and decide where to send
trading interest to reach their trading
objectives?
145. Would the proposed disclosures
in Part III of Form ATS–N require a
Government Securities ATS to reveal
too much (or not enough) information
about its structure and operations?
146. Are there ways to obtain the
same information as would be required
from Government Securities ATSs by
Part III of Form ATS–N other than
through disclosure on Form ATS–N? If
so, how else could this information be
obtained?
147. Could the proposed requirement
to disclose the information that would
be required by Part III of Form ATS–N
impact innovation in Government
Securities ATSs?
148. Are there any aggregate platformwide statistics of the Covered ATS that
should not be required to be disclosed
under Item 25?
149. Has Form ATS–N allowed
market participants to better evaluate
trading venues? If so, how? How do
commenters believe the manner in
which NMS Stock ATSs currently
disclose information on Form ATS–N
could be improved? Is the level of detail
required appropriate? Are there any
aspects of Form ATS–N on which the
Commission should provide further
guidance?
6. Part IV: Contact Information,
Signature Block, and Consent to Service
Part IV of Form ATS–N would require
a Covered ATS to provide certain basic
information about the point of contact
for the ATS, such as the point of
contact’s name, title, telephone number,
and email address. Part IV would also
require the Covered ATS to consent to
service of any civil action brought by, or
any notice of any proceeding before, the
Commission or an SRO in connection
with the ATS’s activities. The
Commission is proposing that Form
ATS–N would be filed electronically
and require an electronic signature.649
648 See
supra note 533 for the definition of
affiliate under Form ATS–N.
649 To avoid confusion, the Commission is
proposing to delete language in the signature block
in Part IV of Form ATS–N that refers to the
signatory as ‘‘duly sworn.’’ The Commission notes
that unlike Form ATS, Form ATS–N filings, which
are submitted to EDGAR, are not required to be
notarized; instead, they are subject to the rules
PO 00000
Frm 00077
Fmt 4701
Sfmt 4702
15571
The signatory to each Form ATS–N
filing would be required to represent
that the information and statements
contained on the submitted Form ATS–
N, including exhibits, schedules,
attached documents, and any other
information filed, are current, true, and
complete. Given that market
participants would use information
disclosed on Form ATS–N to evaluate
potential venues, and that the
Commission intends to use the
information to monitor developments of
Covered ATSs, it is important that Form
ATS–N contain disclosures that are
current, true, and complete, and
therefore the Commission is proposing
to require that the signatory to Form
ATS–N make such an attestation.
V. Proposed Amendments to Form ATS,
Form ATS–R, and Other Conditions to
Regulation ATS
A. Proposed Amendments to the Fair
Access Rule for all ATSs
In addition to the amendments to the
Fair Access Rule for Government
Securities ATSs,650 the Commission is
proposing several amendments to the
Fair Access Rule that would apply to all
ATSs that are subject to the rule. The
proposed amendments are discussed
below.
1. Rule Text Clarifications
The Commission is re-proposing to
amend the Fair Access Rule, as well as
the Capacity, Integrity, and Security
Rule under Rule 301(b)(6), to specify the
use of volume to calculate the relevant
thresholds under the rule. For purposes
of determining whether an ATS crossed
the average daily volume thresholds for
compliance with the Fair Access Rule,
Rule 301(b)(5)(i) does not specify
whether the ATS’s transaction volume
in an NMS stock or an equity security
that is not an NMS stock and for which
transactions are reported to an SRO is
calculated using the dollar or the share
volume.651 In the Regulation ATS
Adopting Release, when discussing the
Fair Access Rule, the Commission stated
that for these two types of securities, the
test should be based on the share
volume.652 Similarly, Rules 301(b)(5)(i)
and (b)(6)(i) do not specify whether, for
purposes of determining compliance
with the Fair Access Rule and the
governing electronic signatures set forth in Rule 302
of Regulation S–T. See 17 CFR 232.302.
650 See supra Section III.B.4.
651 17 CFR 242.301(b)(5)(i)(A)–(B).
652 See Regulation ATS Adopting Release, supra
note 31, at 70873 (‘‘Accordingly, if an [ATS]
accounted for twenty percent or more of the share
volume in any equity security, it must comply with
the fair access requirements in granting access to
trading in that security.’’) (emphasis added).
E:\FR\FM\18MRP2.SGM
18MRP2
15572
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
Capacity, Integrity, and Security Rule,
the volume for municipal securities or
corporate debt securities is calculated
based on the dollar or the share
volume.653 In the Regulation ATS
Adopting Release, the Commission
intended the test applicable to debt
securities to be based on the dollar
volume.654 To mitigate any potential
confusion, the Commission is adding
these terms to Rules 301(b)(5)(i) and
(b)(6)(i) to align the rule text with the
Regulation ATS Adopting Release.655
The Commission is also re-proposing
to amend Rules 301(b)(5)(i)(C) and (D) to
clarify that the average daily dollar
volume in municipal securities is
provided by the SRO to which such
transactions are reported and average
daily dollar volume in corporate debt
securities is provided by the SRO to
which such transactions are reported.656
When Regulation ATS was adopted,
transaction reporting plans for
municipal securities and corporate debt
securities were being developed.657
Today, transactions in municipal
securities are reported to the MSRB and
transactions in corporate debt securities
are reported to FINRA. These two SROs
provide the information that can be
used by ATSs to determine whether the
ATS is subject to the Fair Access Rule
for these two categories of securities.658
This amendment will add clarity to the
rule given the established transaction
reporting regimes for municipal
securities and corporate debt securities.
653 17 CFR 242.301(b)(5)(i)(C)–(D); 17 CFR
242.301(b)(6)(i)(A)–(B).
654 See Regulation ATS Adopting Release, supra
note 31, at 70873, 70875 (requiring compliance with
the Fair Access Rule and the Capacity, Integrity,
and Security Rule if an ATS accounted for more
than 20 percent of the total ‘‘share volume’’ in a
security with respect to equity securities, and for
more than 20 percent of the ‘‘volume’’ in a security
with respect to debt securities). While Form ATS–
R requires an ATS to report total volume in terms
of both units and dollars for equity securities, it
requires an ATS to report the total settlement value
only in dollar terms for municipal securities and
corporate debt securities. See id. at 70878.
655 See proposed Rule 301(b)(5)(i)(A)–(D);
proposed Rule 301(b)(6)(i)(A)–(B).
656 To the extent transactions are reported to
multiple SROs, the volume of transactions reported
to such SROs would be combined for the purpose
of calculating whether the transactions meet the
threshold.
657 See Regulation ATS Adopting Release, supra
note 31, at 70873.
658 See MSRB Rule G–14; FINRA Rule 6730.
Electronic Municipal Market Access (‘‘EMMA’’),
which is a service operated by the MSRB, and
FINRA disseminate information on transactions in
municipal securities and corporate debt securities,
respectively. See EMMA Information Facility,
available at https://www.msrb.org/Rules-andInterpretations/MSRB-Rules/Facilities/EMMAFacility.aspx; FINRA Rule 6750.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
2. Aggregation of Volume Threshold for
Affiliated ATSs
The Commission is also proposing to
amend the Rule 301(b)(5)(ii) of the Fair
Access Rule to aggregate the trading
volume for a security or category of
securities for ATSs that are operated by
a common broker-dealer, or ATSs that
are operated by affiliated broker-dealers,
solely for the purpose of calculating the
average transaction volume under Rule
301(b)(5)(i)(A) through (F).659 Today,
there are single entities that may be the
registered broker-dealer operator for
different types of ATSs that trade
different categories of securities (e.g.,
NMS Stock ATS and non-NMS Stock
ATS), and there are broker-dealers that
may operate multiple ATSs that trade
the same type of securities with
different matching protocols (e.g., limit
order book for one and volumeweighted-average-price for the other).
Likewise, there are entities that control
multiple subsidiary broker-dealers, each
of which operates one or more ATS or
Communication Protocol System that
trade the same or different categories of
securities.660 In these instances, each
659 For Rule 301(b)(5)(ii), the Commission would
refer to the definition of affiliate used for purposes
of Form ATS–N. See NMS Stock ATS Adopting
Release, supra note 2, at 38818–19. Affiliate was
defined to mean ‘‘with respect to a specified Person,
any Person that, directly or indirectly, controls, is
under common control with, or is controlled by, the
specified Person.’’ Id. The Commission is proposing
to include the definition of affiliate in proposed
Rule 300(c). The currently defined term ‘‘affiliate of
a subscriber’’ in Rule 300(c) is not currently used
in Regulation ATS, and the Commission is therefore
replacing such term with the definition of
‘‘affiliate.’’ The proposed amended definition of
‘‘affiliate’’ would help ATSs determine whether to
aggregate the trading volume of ATSs operated by
affiliated broker-dealer operators. The proposed
definition of ‘‘affiliate’’ is identical to the definition
of affiliate in Form ATS–N Explanation of Terms.
Like the definition of ‘‘affiliate of a subscriber’’
under current Rule 300(c), the proposed definition
of ‘‘affiliate’’ would include a specified person that,
directly or indirectly, controls, is under common
control with, or is controlled by, the specified
person, and therefore would include employees of
the specified person.
660 The term ‘‘control’’ is defined in Rule 300(f)
of Regulation ATS to mean: The power, directly or
indirectly, to direct the management or policies of
the broker-dealer of an alternative trading system,
whether through ownership of securities, by
contract, or otherwise. A person is presumed to
control the broker-dealer of an alternative trading
system if that person: Is a director, general partner,
or officer exercising executive responsibility (or
having similar status or performing similar
functions); directly or indirectly has the right to
vote 25 percent or more of a class of voting
securities or has the power to sell or direct the sale
of 25 percent or more of a class of voting securities
of the broker-dealer of the alternative trading
system; or in the case of a partnership, has
contributed, or has the right to receive upon
dissolution, 25 percent or more of the capital of the
broker-dealer of the alternative trading system. 17
CFR 242.300(f). See also NMS Stock ATS Adopting
Release, supra note 2, at 38818–19 (discussing
definition of control).
PO 00000
Frm 00078
Fmt 4701
Sfmt 4702
ATS with a common broker-dealer
operator—and each of the affiliated
Communication Protocol Systems that
would be subject to Regulation ATS
under this proposal—must comply with
Regulation ATS.661
In response to the 2020 Proposal, one
commenter stated that because each
ATS is unique, it believed that for
purposes of determining whether an
ATS should be subject to the Fair
Access Rule, volume should be
determined at an individual ATS level
and not aggregated across commonly
controlled ATSs.662 The commenter
stated that a broker-dealer may choose
to operate separate ATSs based on
separate business units within the
broker-dealer, different technology
backbones, or different types of
functionality, such as anonymous or
fully disclosed order books or auctionbased offerings.663
The Commission is concerned,
however, that despite differences that
may exist between ATSs that are
operated by a common broker-dealer or
ATSs operated by affiliated brokerdealers, there is a potential for a brokerdealer operator or controlling entity for
more than one broker-dealer to structure
its business to avoid triggering the fair
access thresholds, and thereby
circumvent the Fair Access Rule. It
could do this by establishing multiple
ATSs under one broker-dealer, or
establishing multiple broker-dealers that
each operate an ATS, to trade the same
security or category of securities. The
Fair Access Rule is designed to ensure
that market participants have reasonable
access to ATS market places that
capture a significant percentage of
national trading volume for a security or
type of security. When a single entity
operates multiple market places, that
entity ultimately controls which market
participants have access to trading
across those market places.
When an organization, such as a
broker-dealer, for example, provides an
exchange market place for the same
security or category of security but
chooses to divide the market place into
component parts by filing multiple
Forms ATS or Forms ATS–N rather than
filing a single form encompassing all the
component market places, that
organization is still the exchange
providing a market place to bring
together buyers and sellers of securities
661 See Rule 3a1–1(a)(2) (providing that an
organization, association, or group of persons shall
be exempt from the definition of ‘‘exchange’’ if it
is in compliance with Regulation ATS) and Rule
301(a) (providing that an ATS shall comply with
the requirements of Rule 301(b)).
662 See ICE Bonds Letter I at 6.
663 See id.
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
and ultimately controls access to the
entire security or category of securities
that it makes available for trading across
its multiple ATSs. In the Commission’s
experience, ATSs under common
operation of a broker-dealer generally
are designed to function as
complementary products of a single
business of the broker-dealer as opposed
to separate market places competing
against each other for order flow in the
same security or types of securities. In
the Commission’s experience, it is
typical for a broker-dealer that operates
multiple ATSs for the same security or
category of securities to use, for
example, the same operations,
technology, and administrative
personnel for purposes of its ATSs’
trading operations. Furthermore, a
single entity controlling multiple ATSs
often applies similar standards for
granting access across all of its ATSs
that trade the same security or category
of security and applies the same market
data, clearance, settlement, and trade
reporting processes, and procedures for
protecting subscriber confidential
trading information. Even in the case of
a single parent company, for example,
which controls several affiliated brokerdealers that each operate an ATS for the
same category of security, access to each
ATS is obtained from the broker-dealer
operator, and each broker-dealer
operator is subject to the direction of the
parent company. Ultimately, those ATSs
serve the business interests of, and are
under common control by, the parent
company.
Aggregating trading volume among
ATS market places and Communication
Protocol Systems that would be subject
to Regulation ATS under this
proposal—either operated by a common
broker-dealer or by affiliated brokerdealers—would help further the vital
policy goal of ensuring that no single
entity is able to restrict fair access to a
security or type of security. As a result
of this proposed change, if, for example,
a broker-dealer operated two NMS Stock
ATSs that each accounted for three
percent of the average daily volume in
an NMS stock during at least four of the
preceding six calendar months, both
NMS Stock ATSs would be subject to
the Fair Access Rule for that security
because their aggregated volume
exceeds the five percent threshold of
Rule 301(b)(5)(i)(A).664 If, instead, one
664 Also, if one of the ATSs operated by the
common broker-dealer operator accounted for five
percent of the average daily volume in an NMS
stock for three months and the other ATS accounted
for five percent of the average daily volume in the
same NMS stock for the subsequent three months,
then both ATSs would be subject to the Fair Access
Rule for that NMS stock because aggregated they
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
of the ATSs had six percent of the
average daily volume for an NMS stock
and the other ATS had one percent,
both NMS Stock ATSs would be subject
to the Fair Access Rule as a result of
their common broker-dealer operator
and aggregated volume. In another
example, if two broker-dealers that are
subsidiaries of the same parent
company each operate an ATS for
corporate bonds and each ATS accounts
for three percent of the average daily
volume of corporate bonds traded in the
United States during at least four of the
preceding six calendar months, then
both ATSs would be subject to the Fair
Access Rule. This result would be
because the ATSs are operated by
affiliated broker-dealers and their
aggregate volume exceeds the volume
threshold of Rule 301(b)(5)(i)(C).
3. Reasonable Written Standards
The Commission is proposing to
amend the requirements related to
reasonable written standards.665 The
Commission is proposing Rule
301(b)(5)(iii)(A) to provide that the ATS
‘‘establish and apply reasonable written
standards for granting, limiting, and
denying access to the services of the
alternative trading system.’’ As
discussed in more detail below, the
Commission is proposing to add the
word ‘‘reasonable’’ before ‘‘written
standards’’ to incorporate the concept
that is part of current Rule
301(b)(5)(ii)(B) (‘‘not unreasonably
prohibit or limit’’) and used in the
Regulation ATS Adopting Release.666
The Commission is also adding in the
rule text, for the removal of any doubt,
that the ATS must ‘‘apply’’ the
reasonable written standards as
established. For example, if an ATS
establishes a written standard that states
subscribers’ trading interest will not be
displayed to anyone, but the ATS in
practice displays trading interest to a
subscriber, then the ATS would not be
applying its established written
standards. Establishing the written
standard is not sufficient if the ATS is
not following or applying them.
Also incorporated into proposed Rule
301(b)(5)(iii)(A), and taken from current
would have crossed the volume threshold for more
than four of the preceding six calendar months.
665 These requirements are currently in Rule
301(b)(5)(ii), which the Commission is proposing to
re-number as Rule 301(b)(5)(iii).
666 See Regulation ATS Adopting Release, supra
note 31, at 70872. The Commission believes that the
addition of ‘‘reasonable’’ is consistent with its
intent as expressed in the Regulation ATS Adopting
Release. Specifically, in discussing the Fair Access
Rule, the Commission stated that ‘‘fair treatment
. . . is particularly important’’ when ATSs reach
significant volume in a security, and the rule would
serve to prohibit ‘‘unreasonably’’ discriminatory
denials of access.
PO 00000
Frm 00079
Fmt 4701
Sfmt 4702
15573
Rule 301(b)(5)(ii)(B), is that the written
standards apply to access of ‘‘the
services of the alternative trading
system.’’ This addition to the rule text
serves to emphasize that the Fair Access
Rule applies not only to the initial grant
or denial of access to an applicant of the
ATS, but also to the services of the ATS
that are offered to current participants.
ATS services, including, among others,
the provision of market data, order entry
functionalities, priority rules,
segmentation procedures, negotiation
features, communication protocols,
counterparty selection, and order types
offered, would all be subject to the
provisions of the Fair Access Rule. The
Commission is also incorporating from
current Rule 301(b)(5)(ii)(B) that the Fair
Access Rule applies when limiting and
denying access to the ATS services, not
solely granting access.667 The
application of the Fair Access Rule to
limitations and denials of access would
help ensure that market participants
receive the full benefits of participation
in an ATS subject to the Fair Access
Rule unless a limitation or denial of
access can be reasonably justified.
As indicated above, the Commission
is making explicit in the text of Rule
301(b)(5) that the written standards
required under the Fair Access Rule
must be reasonable. An ATS subject to
the Fair Access Rule is not required to
treat all participants the same in all
instances; however, the Fair Access
Rule has always required that an ATS
subject to the rule provide reasonable
access to ATS services.668 The
Commission is revising the rule text to
make it clear that the written standards
must be reasonable. For an ATS’s
written standards to be reasonable, the
standards must be fair and not
unreasonably discriminatory. Some
ATSs, for example, might offer different
services, or levels of a service, to one
subscriber or among different classes of
subscribers. An ATS subject to the Fair
Access Rule could not provide services
to one class of participants and not to
other classes of participants unless the
ATS established standards with a
reasonable basis for treating the
participant classes differently. For
example, as stated in the Regulation
ATS Adopting Release, an ATS may
establish a standard that requires all
participants be registered broker-dealers
and that ATS may deny access to the
ATS to any applicant that is not a
667 Rule 301(b)(5)(ii)(B) states that the ATS shall
not ‘‘unreasonably prohibit or limit’’ (emphasis
added) any person with respect to the services of
the ATS.
668 See supra notes 666–667.
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
15574
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
registered broker-dealer.669 As part of its
reasonable analysis, an ATS subject to
the Fair Access Rule must explain why
the standard for admitting registered
broker-dealers rather than nonregistered broker-dealers is fair and not
unreasonably discriminatory.670 Fees
can be a manner of limiting or denying
services. In another example, an ATS
that charges certain fees to one class of
participants but different fees to another
class of participants for the same service
could not, if it were subject to the Fair
Access Rule, discriminate in this
manner unless it adopted reasonable
written standards and applied them in
a fair and non-discriminatory manner.
Also, to apply the standards fairly and
non-discriminatorily, the ATS’s
activities (or the activities of persons
performing a function of the ATS) must
be carried out in accordance with the
established written standards of the
ATS.
When assessing the reasonableness of
standards under the Fair Access Rule,
the Commission may consider
principles applied in the national
securities exchange context to guide its
analysis of whether an ATS’s written
standards are fair and not unreasonably
discriminatory. Under Section 6(b)(5) of
the Exchange Act, for example, a
national securities exchange must show
that its rules are not designed to permit
unfair discrimination between
customers, issuers, brokers or dealers.671
Sections 6(b)(2) and 6(c) of the
Exchange Act require national securities
exchanges to consider the public
interest in administering their markets
and to establish rules designed to admit
members fairly.672 National securities
exchanges and ATSs are regulated
pursuant to separate statutory and rule
provisions of the Federal securities laws
and there are different benefits and
burdens associated with each entity;
however, as the Commission stated in
the Regulation ATS Adopting Release,
fair access requirements are based on
the principle that qualified market
participants should have fair access to
the U.S. securities markets, and such
markets would include ATSs subject to
the Fair Access Rule.673
The justification provided for why
each written standard is fair and not
unreasonably discriminatory is an
important aspect of an ATS’s
compliance with the Fair Access Rule as
proposed to be amended. The same
669 See Regulation ATS Adopting Release, supra
note 31, at 70874.
670 See proposed Rule 301(b)(5)(iii)(A)(4).
671 15 U.S.C. 78f(b)(5).
672 15 U.S.C. 78f(b)(2) and (c).
673 See Regulation ATS Adopting Release, supra
note 31, at 70874.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
limitation or restriction on different
ATSs may be unfair on one ATS and not
another depending on the design of the
ATS and its rationale for such a
limitation. One commenter suggested
that fair access is not applicable to fixed
income platforms where each
participant has discretion over which
other participants they want to trade
with.674 Under these circumstances
where ATS participants can select their
potential counterparties, the
Commission would view an ATS that
implements the participant’s choices as
having adopted those as ATS standards.
As a result, the ATS subject to the Fair
Access Rule would need to establish
reasonable written standards that,
among other things, justify why the
differences in access between the
selected and not-selected counterparties
are fair and non-discriminatory and thus
reasonable. For example, if subscribers
selected their counterparties based on
the condition of the counterparty’s
balance sheet (e.g., totals for assets and
liabilities), and the ATS implemented
those selections, then the ATS would
need to include a justification in its
written standards for why implementing
those selections is fair and not
unreasonably discriminatory.675 In cases
where the Commission staff reviews an
ATS’s fair access standards, whether in
the description provided under Item 24
of revised Form ATS–N for NMS Stock
ATSs and Government Securities ATSs
(as proposed) or during an examination,
the Commission staff would review
whether a given justification for the
standard is, for example, unreasonably
discriminatory, or is pretextual and, in
fact, designed to thwart the goal of
providing fair access to qualified market
participants.676
Even if an ATS’s written standard is
equally applicable to all participants,
674 See
MarketAxess Letter at 10.
practice, the ATS participant making a
selection of its potential counterparties would need
to provide the ATS with its justification for
selecting those counterparties, and the ATS would
need to evaluate whether the stated justification
comports with the Fair Access Rule, and if so,
incorporate it into the ATS’s established written
standards.
676 Rule 301(b)(5)(ii)(D) requires ATSs to report to
the Commission information on Form ATS–R
regarding grants, limitations, and denial of access
to an ATS subject to the Fair Access Rule.
Specifically, Form ATS–R, Exhibit C requires the
ATS to list of all persons granted, denied, or limited
access to the ATS during the period covered by the
report, designating for each person whether they
were granted, denied, or limited access; the date the
ATS took such action; the effective date of such
action; and the nature of any denial on limitation
of access. The Commission stated in the Regulation
ATS Adopting Release that the Commission
intended to enforce the Fair Access Rule by
reviewing Form ATS–R reports and investigating
any possible violations of the rules. See Regulation
ATS Adopting Release, supra note 31, at 70874.
675 In
PO 00000
Frm 00080
Fmt 4701
Sfmt 4702
the ATS must nevertheless ensure the
standard itself is not unfair or
unreasonably discriminatory or applied
in an unfair or unreasonably
discriminatory manner. If an ATS
included in its written standards that it
reserves the right to accept or deny
applicants to the ATS at its sole
discretion, such standard may apply
equally to all applicants, but it would
not be reasonable as it would contradict
the rule’s goal of promoting fair access
to the securities markets. In another
example, if an ATS adopts a written
standard that it would only accept
participants with ‘‘industry-leading
reputations,’’ such written standard,
depending on the justification, is
unlikely to be considered reasonable
because of its subjectivity and potential
substantial limiting effect on market
participants’ access to the ATS. As
stated in the Regulation ATS Adopting
Release, if an ATS applied its standards
so as to discriminate among similarlysituated participants, such actions
would be inconsistent with reasonable
written standards because the ATS
would not be acting impartially. One
example of this would be an ATS that
provides liquidity providers that met
certain volume thresholds with trading
privileges, yet does not provide those
privileges equally to every qualifying
liquidity provider. Another example
would be a Communication Protocol
System that establishes a standard to
track all participants’ ‘‘firm up’’ rates in
response to requests for quotes but
subsequently denies or limits access to
only certain subscribers that exceed the
firm-up threshold and not to other
participants who likewise exceeded the
firm-up threshold.
The Commission is also proposing
Rule 301(b)(5)(iii)(A)(1) through (5) to
provide minimum requirements for the
reasonable written standards that must
be established, and applied, by an ATS
that is subject to the Fair Access Rule.
These minimum requirements for what
the written standards must include do
not alter the substantive requirement
that the written standards be reasonable.
Rather, they explain in more granular
detail what is required to be sufficient
written standards to facilitate
compliance. First, the Commission is
proposing Rule 301(b)(5)(iii)(A)(1) to
require that an ATS’s reasonable written
standards provide the dates that each
written standard is adopted, effective,
and, if applicable, modified. This
proposed requirement is designed to
assist Commission examination staff in
their evaluation of the application of an
ATS’s written standards as well as help
the staff understand the written fair
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
access standards that were in place at a
given time.
Second, the Commission is proposing
Rule 301(b)(5)(iii)(A)(2) to require an
ATS’s reasonable written standards set
forth any objective and quantitative
criteria upon which each standard is
based.677 Objective or quantitative
standards can help demonstrate an
ATS’s compliance with the Fair Access
Rule by limiting an ATS’s discretion
and its ability to act arbitrarily with
respect to an applicant to the ATS or
current participant. Nevertheless, an
ATS’s objective or quantitative
standards must still be fair and not
unreasonably discriminatory. An ATS
could not, for example, establish,
without reasonable justification, a
quantitative standard at such a high
level that it unfairly results in only a
limited group of ATS participants that
can meet it. If an ATS, for example, sets
its required firm up rate on conditional
orders at 95 percent, compliance with
the Fair Access Rule would depend on
whether that standard was fair and
whether it unreasonably discriminated
against those subscribers that did not
attain a 95 percent firm up rate.678
In the case of an ATS that segments
the order flow of its participants into
certain categories based on quantitative
metrics, such as reversion rates,679 the
ATS’s standards generally should
include, among other things, the metrics
and factors used to determine the
segmented categories and, as explained
further below, how the metrics and
factors are fair and not unreasonably
discriminatory, and thus are reasonable.
The presence of the objective and
quantitative thresholds limits the ATS’s
discretion in differentiating among
participants (in this example, by setting
677 See Regulation ATS Adopting Release, supra
note 31, at 70874 (providing minimum capital or
credit requirements for subscribers as an example
of objective standards).
678 In assessing whether such a standard is
reasonable, the Commission could consider, among
other things, the quantitative criteria upon which
the standard is based, the justification by the ATS
for why the standard is fair and not unreasonably
discriminatory, the differences in, and impact on,
access to services from the application of the
standard, and other information provided through
discussions with the ATS.
679 In the Commission’s experience, a common
method for ATSs to segment order flow is to
measure a security’s change in price within a
certain (usually short) time period after an
execution and, based on that figure or reversion
rate, assign a score to one or both of the parties to
the transaction. If a security’s price moves
substantially after an execution, then that
subscriber’s (or subscribers’) score may cause it to
be segmented into a class of subscribers that is
considered riskier to trade against and other
subscribers may select to not trade against that
subscriber. Subscribers are assigned scores based on
their reversion rates and segmented into classes or
categories accordingly.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
segmented categories for order
interaction and thus denying certain
participants the ability to interact with
other participants on the ATS). The
quantitative threshold still must be
reasonable; an objective or quantitative
standard would not by itself be
sufficient to comply with fair access. In
cases where an ATS has a written
standard for access that is not based on
objective or quantitative criteria, the
ATS must still justify why the standard
is reasonable, and more specifically,
how such standard is fair and not
unreasonably discriminatory.
Third, the Commission is proposing
Rule 301(b)(5)(iii)(A)(3) to require that
an ATS’s reasonable written standards
identify any differences in access to the
services of the ATS by applicants and
current participants. The purpose of this
provision is to highlight each instance
where an ATS treats participants
differently under the established written
standards. Under the Fair Access Rule,
ATSs may provide different services to
different subscribers, or may vary how
services are offered among ATS
participants; however, the ATS must
have a reasonable basis for doing so. An
ATS might, for example, segment
participant order flow into specific
categories (i.e., based upon the type of
market participant generating the order
flow) to determine order interaction. As
a result, some subscribers can only
interact with certain subscribers and not
others. In such a case, the ATS would
be required to, among other things,
identify the segmentation categories and
criteria used to set the categories. If, for
example, an ATS grants certain trading
privileges, such as being able to view
certain trading interest, to a person
classified as a liquidity provider, the
ATS would be required to describe any
such differences in treatment for the
liquidity provider. The identification of
differences in treatment required would
also include those applicable to
applicants to the ATS. For example, if
an ATS had different minimum capital
and credit requirements for applicants
to the ATS, the ATS would need to
identify the differences in its written
standards. As described above,
differences in access must be reasonable
and the ATS would be required to
justify how such differences in access
are fair and not unreasonably
discriminatory pursuant to proposed
Rule 301(b)(5)(iii)(A)(4).
Fourth, the Commission is proposing
Rule 301(b)(5)(iii)(A)(4) to require that
an ATS’s reasonable written standards
justify why each standard, including
any differences in access to the services
of the ATS, is fair and not unreasonably
discriminatory. While the Fair Access
PO 00000
Frm 00081
Fmt 4701
Sfmt 4702
15575
Rule does not require that the ATS treat
all market participants equally, the Fair
Access Rule requires an ATS to have a
reasonable basis for not treating market
participants equally. Accordingly, an
ATS would be required to justify in
writing why its standards are fair and
not unreasonably discriminatory.680
Requiring an ATS to justify its fair
access standards in writing would
facilitate Commission staff review of
those standards, whether by reviewing
the standards in the description
provided under Item 24 of revised Form
ATS–N for NMS Stock ATSs and
Government Securities ATSs (as
proposed) or during an examination of
an ATS. Above, the Commission sets
forth an example of an ATS establishing
different minimum capital and credit
requirements for applicants to the ATS.
In addition to identifying that difference
in its written standards, the ATS would
also be required to justify why the
difference is fair and not unreasonably
discriminatory. The ATS could, for
instance, explain: (1) Objective or
quantitative criteria used to determine
which minimum applies to which
applicants and why the ATS chose the
objective and qualitative criteria that it
did, which would also meet the
requirements of paragraph
(b)(5)(iii)(A)(2) outlined above; and (2)
why those objective or quantitative
criteria are fair and not unreasonably
discriminatory as applied to the ATS. If
there are no objective criteria, the ATS
must explain why it is fair and not
unreasonably discriminatory to have
and apply the capital and credit
requirements among applicants to the
ATS.
Finally, the Commission is proposing
Rule 301(b)(5)(iii)(A)(5) to require an
ATS’s reasonable written standards
address any standard for granting,
limiting, or denying access to the
services of the ATS performed by
persons other than the broker-dealer
operator. From the Commission’s
experience, persons other than the
broker-dealer operator may perform all
or some functions of the ATS. In other
cases, the broker-dealer operator, or
affiliate of the broker-dealer operator,
may direct the ATS participants to use
the services of a person other than the
broker-dealer operator. In both such
cases, the activities of those persons can
affect participants’ access to the ATS,
680 As the Commission is proposing to relocate
these requirements under the requirements for an
ATS’s written standards under Rule
301(b)(5)(iii)(A), the Commission is proposing to
delete the rule text under current Rule
301(b)(5)(ii)(B) and renumber current paragraphs
(b)(5)(ii)(B) and (C) to paragraphs (b)(5)(ii)(C) and
(D), respectively.
E:\FR\FM\18MRP2.SGM
18MRP2
15576
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
and therefore, the ATS must ensure,
through its written fair access standards,
that those persons have established
reasonable written standards for
granting, denying, and limiting access to
the ATS and are applying those
standards in a fair and nondiscriminatory manner.
For example, an ATS that arranges for
an entity to provide order entry services
to the ATS would be required to ensure
that the order entry provider has
reasonable standards for ATS
participants to access the order entry
services, and thus the ATS. The ATS
would be required to address in its
reasonable written standards how the
provider ensures that its standards are
reasonable because the activities of the
provider can impact the ability of
participants to access the ATS. In
addition, if the ATS broker-dealer
operator, or affiliate of the broker-dealer
operator, directs participants to use the
services of another entity in connection
with the ATS, that ATS would be
responsible to ensure that such entity
establishes reasonable standards for
access. For example, if the broker-dealer
operator, or affiliate of the broker-dealer
operator, directs participants to use the
services of a certain clearing broker, the
ATS would be required to ensure that
the clearing broker has reasonable
written standards and to include in the
ATS’s written standards the clearing
broker’s written standards for granting,
denying, or limiting access to its
clearing services as they relate to the
ATS. The Commission is concerned that
an ATS may attempt to use an affiliate
or third party to perform ATS activities
or functions while avoiding the
application of Regulation ATS to those
activities or functions.681 Requiring an
ATS subject to the Fair Access Rule to
address in its written standards the
activities or functions performed by
persons in conjunction with the ATS
other than the broker-dealer operator
would help ensure fair access to the
ATS by investors.
4. Recordkeeping Requirements
The Commission is also proposing
changes to the ATS recordkeeping
requirements under Rule
301(b)(5)(iii)(B), as proposed to be
amended.682 The Commission is
proposing to replace the reference to
records relating to grants of access to
‘‘subscribers’’ with references to
‘‘participants.’’ In the Commission’s
experience, ATSs can grant access to
681 See Regulation ATS Adopting Release, supra
note 31, at 70873, n.252.
682 This is currently in paragraph (b)(5)(iii)(C), but
would be renumbered to paragraph (b)(5)(iii)(B)
under the proposed changes.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
customers of subscribers who may not
themselves be subscribers to the ATS.
This proposed change would clarify that
records related to such participants
would need to be made and kept under
the rule. In addition, the Commission is
proposing to add to the rule text that the
ATS must make and keep records
related to denials or limitations of
access and reasons for each applicant
‘‘and participant.’’ By adding
‘‘participant,’’ the Commission will
reflect that it requires an ATS subject to
the rules to keep records of when it
limits access to existing participants
(not only ‘‘applicants’’) to the ATS
system. This is a technical change, as
the current rule requires the ATS to
make and keep all records related to
limitations of access and reasons for
such limitations, which would apply to
both existing participants, as well as
applicants upon entry to the ATS.
The Commission is also proposing to
add language to Rule 301(b)(5)(iii)(B)(1)
and (2) to reference that grants of access
and denials of limits of access and
reasons for limitation and denying
access to the services of the ATS would
be under the standards provided in
proposed Rule 301(b)(5)(iii)(A).
Referencing the standards in Rule
301(b)(5)(iii)(A) would clarify that
grants, limitations, and denials of ATS
services would be under the standards
of the rule, as proposed to be revised.
The Commission is also proposing to
amend Rule 303(a)(1)(iii) of Regulation
ATS to require an ATS subject to the
Fair Access Rule, for a period of not less
than three years, the first two years in
an easily accessible place, to preserve at
least one copy, including each version,
of such ATS’s written standards for
access to trading, all documents relevant
to the ATS decision to grant, deny, or
limit access to any person, and all other
documents made or received by the ATS
in complying with the Fair Access
Rule.683 This change would modify the
current rule to specify that the standards
are ‘‘written’’ and that the ATS must
maintain ‘‘each version’’ of the written
standards required under Rule 301(b)(5),
which is consistent with the previous
Commission guidance.684
683 The Commission is also proposing to specify
in Rule 303(a)(1)(iv) and (v) that an ATS must
maintain ‘‘each version’’ of copies of records made
in the course of complying with Rule 301(b)(6) and
copies of the written safeguards and written
procedures to protect subscribers’ confidential
trading information and written oversight
procedures created in the course of complying with
Rule 301(b)(10).
684 See Regulation ATS Adopting Release, supra
note 31, at n.251 (stating that the Commission
expects an ATS to maintain a record of its standards
at each point in time, and that if the ATS amends
or modifies its access standards, the records kept
PO 00000
Frm 00082
Fmt 4701
Sfmt 4702
5. Removal of the Exclusion for Passive
Systems From the Fair Access Rule
The Commission is re-proposing to
remove an exclusion from compliance
with the Fair Access Rule under Rule
301(b)(5) and the Capacity, Integrity,
and Security Rule under Rule 301(b)(6)
that is applicable to ATSs that trade
equities.685 An ATS is excluded from
complying with the requirements of the
Fair Access Rule and the Capacity,
Integrity, and Security Rule if the ATS:
(i) matches customer orders for a
security with other customer orders; (ii)
such customers’ orders are not
displayed to any person, other than
employees of the ATS; and (iii) such
orders are executed at a price for such
security disseminated by an effective
transaction reporting plan, or derived
from such prices.686 In adopting the
exclusion, the Commission stated that
ATSs of this nature, the so-called
‘‘passive systems,’’ did not contribute
significantly to price discovery;
however, the Commission also stated
that they had the potential to and
frequently do affect the markets from
which their prices are derived, and thus,
the Commission would continue to
monitor these systems and reconsider
whether the requirements should apply
if concerns arise in the future.687
In the Regulation ATS Adopting
Release, the Commission explained that
fair treatment by ATSs of subscribers is
particularly important when an ATS
captures a large percentage of trading
volume in a security because investors
lack access to viable alternatives to
trading in the ATS.688 Since the
adoption of Regulation ATS, passive
systems (as the term is used in the
Regulation ATS Adopting Release) for
NMS stocks have garnered a significant
percentage of trading volume in
securities and have come to play an
important role in matching buyers and
sellers of securities.689 Eliminating the
should reflect historic standards, as well as current
standards).
685 When adopting the exclusion, the Commission
contemplated that it would apply only to ATSs that
trade equity securities, as one of the elements of the
exclusion requires that the prices in the ATS be
based on the SIP. The third prong of each exception
states that if an ATS meets the requirement, among
others, to execute customer orders ‘‘at a price for
such security disseminated by an effective
transaction reporting plan, or derived from such
prices,’’ the ATS would not be subject to the Fair
Access Rule or Capacity, Integrity, and Security
Rule, as applicable. 17 CFR 242.301(b)(5)(iii)(C); 17
CFR 242.301(b)(6)(iii)(C).
686 17 CFR 242.301(b)(5)(iii); 17 CFR
242.301(b)(6)(iii).
687 Regulation ATS Adopting Release, supra note
31, at 70853.
688 Id. at 70872.
689 See NMS Stock ATS Adopting Release, supra
note 2, at 38770–71.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
Rule 301(b)(5)(iii) exclusion would
ensure that the Fair Access Rule is
applied as intended and help ensure fair
treatment of applicants and current
subscribers by any type of ATS that
captures a large percentage of trading in
a security or type of security.
The Commission is also re-proposing
to amend Rule 301(b)(6) to remove the
exclusion from compliance with the
Capacity, Integrity, and Security Rule
under Rule 301(b)(6)(iii).690 As part of
Regulation SCI, Rule 301(b)(6) of
Regulation ATS was amended to no
longer apply to ATSs that trade equities
because Regulation SCI superseded and
replaced the requirements of the
Capacity, Integrity, and Security Rule
with regard to ATSs that trade NMS
stocks and non-NMS stocks.691
Request for Comment
150. Should the Commission change
the five percent fair access threshold for
NMS stocks, equity securities that are
not NMS stocks, corporate bonds, or
municipal securities? If so, should the
threshold be changed higher or lower
than the existing five-percent threshold
under Rule 301(b)(5)(i)? National
securities exchanges are required to
have rules designed to prevent unfair
discrimination 692 and admit members
fairly.693 Because ATSs are operating
pursuant to an exemption from
exchange registration, should the
Commission eliminate the volume
threshold(s) for the Fair Access Rule
and thus, require all ATSs to provide
fair access to their participants
regardless of trading volume? If yes,
should the Commission eliminate the
volume thresholds for all categories of
securities subject to the Fair Access
Rule or only specific categories?
151. Should the Commission change
the look-back period for applying the
fair access thresholds from four out of
the preceding six months to something
different? For example, should an ATS
be subject to fair access if its average
daily trading volume in a subject
security is five percent over the prior
quarter or the prior month? Should the
Commission change to the look-back
period for all categories of securities
subject to the Fair Access Rule, or just
specific categories?
152. Should the Commission allow or
require ATSs to use sources of market
data other than published data provided
by the SRO to which trades are
reported? If yes, which data sources?
690 17
CFR 242.301(b)(6)(iii).
Regulation SCI Adopting Release, supra
note 3, at 72252, 72267.
692 15 U.S.C. 78f(b)(5).
693 See 15 U.S.C. 78f(b)(2) and (c); 15 U.S.C. 78o–
3(b)(8).
691 See
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
153. Should the Commission change
the Fair Access Rule for it to apply
categorically to NMS stocks rather than
on a security-by-security basis? For
example, should the Commission
change the fair access threshold for
equity securities so that an ATS would
only be subject to the requirements of
the Fair Access Rule if its average daily
trading volume is five percent across all
NMS stocks? Should the Commission
change the Fair Access Rule to provide
fair access in all NMS stocks if it
surpasses the fair access threshold in a
single NMS stock?
154. Should the Commission change
the Fair Access Rule so that it applies
categorically, rather than on a securityby-security basis, to equity securities
that are not NMS stocks? For example,
should the Commission change the fair
access threshold for equity securities so
that an ATS would only be subject to
the requirements of the Fair Access Rule
if its average daily trading volume is
five percent across all equity securities
that are not NMS stocks? Additionally,
or alternatively, should the Commission
change the Fair Access Rule to require
an ATS to provide fair access in all
NMS stocks if it surpasses the fair
access threshold in a single NMS stock?
155. Should the Commission adopt
rules to amend the Rule 301(b)(5)(ii) of
the Fair Access Rule to aggregate the
trading volume for a security or category
of securities for ATSs that are operated
by a common broker-dealer, or ATSs
that are operated by affiliated brokerdealers, solely for the purpose of
calculating the average transaction
volume under Rule 301(b)(5)(i)(A)
through (F)?
156. Under Regulation ATS, an ATS
would be subject to Rule 301(b)(3)
(Order Display and Execution Rule) and
Rule 301(b)(6) (Capacity, Integrity and
Security Rule) if the ATS exceeded
certain volume thresholds within a
given period of time under the rules.
Should the Commission amend the
Order Display and Execution Rule and
the Capacity, Integrity, and Security
Rule to aggregate the trading volume for
a security or category of securities for
ATSs that are operated by a common
broker-dealer, or ATSs that are operated
by affiliated broker-dealers, for the
purpose of calculating the average
transaction volume under those rules?
157. Instead of aggregating trading
volume across multiple ATSs operated
by a common broker-dealer, should the
Commission amend Regulation ATS to
require a broker-dealer to operate only
one ATS for a category of security? If no,
why is it important for one brokerdealer to be able to offer multiple ATS
PO 00000
Frm 00083
Fmt 4701
Sfmt 4702
15577
market places for the trading of the same
category of security?
158. Should the Commission adopt
the same standard of reasonableness
that is applied to national securities
exchanges for purposes of the Fair
Access Rule? If not, what standard of
reasonableness should apply to ATSs
that are subject to the Fair Access Rule?
159. Should the Commission adopt
requirements in addition to the
reasonable written standards proposed
in Rule 301(b)(5)(iii)(A)(1) through (4)?
Should any of those standards be
amended?
160. Should the Commission
eliminate the exclusion from
compliance with the Fair Access Rule
under Rule 301(b)(5)(iii) and with the
Capacity, Integrity, and Security Rule
under Rule 301(b)(6)(iii)?
161. Should the Commission adopt
the changes to the recordkeeping
provisions of the Fair Access Rule? Are
there any additional records that an
ATS should be required to keep?
B. Electronic Filing of and Other
Changes to Form ATS and Form ATS–
R
The Commission is re-proposing
revisions to Rule 301(b)(2), Form ATS,
and Form ATS–R to modernize Form
ATS and Form ATS–R and to provide
that they are filed electronically. In
addition, the Commission is proposing
to require ATSs to provide certain
additional information on Form ATS–R,
including volume reporting for
transactions in repurchase and reverse
repurchase agreements on the ATS.
ATSs are required to file the
information required by Form ATS–
R 694 pursuant to Rule 301(b)(9) within
30 calendar days after the end of each
calendar quarter in which the ATS has
operated.695
First, the Commission is re-proposing
an amendment to Rule 301(b)(2)(vi),
which currently states that ‘‘[e]very
notice or amendment filed pursuant to
this paragraph (b)(2) shall constitute a
‘report’’’ within the meaning of
applicable provisions of the Exchange
Act. The Commission proposes to add a
reference to Rule 301(b)(9) to state that
Form ATS–R, as is the case with Form
ATS, constitutes a report within the
meaning of applicable provisions of the
Exchange Act.696
694 See
Form ATS–R. See also supra notes 144–
147.
695 See 17 CFR 242.301(b)(9)(i). An ATS must also
file Form ATS–R more frequently upon request of
the Commission. See Form ATS–R Instructions.
696 This amendment would be consistent with
Rule 301(b)(2)(vii), which states that ‘‘[a]ll reports
filed pursuant to this paragraph (b)(2) and
E:\FR\FM\18MRP2.SGM
Continued
18MRP2
15578
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
Next, the Commission is re-proposing
to require that all Forms ATS and ATS–
R are filed with the Commission
electronically. As proposed, following
the effective date of the proposed rule,
all Form ATS filers would be required
to file an amendment on Form ATS in
the electronic format proposed herein
that would also include all new
information required by revised Form
ATS. Currently, ATSs are required to
submit paper submissions of Forms ATS
and ATS–R to the Commission.697 The
Commission proposes to amend Rule
301(b)(2)(vii) to require that an ATS
must file a Form ATS or a Form ATS–
R in accordance with the instructions
therein. The Commission is proposing
to revise the instructions to Form ATS
and Form ATS–R to require that they be
submitted electronically via EDGAR.698
The Commission is also proposing to
require in Rule 301(b)(2)(vii) that
reports provided for in Rule 301(b)(2)
and (9) shall be filed on Form ATS and
Form ATS–R, as applicable, and include
all information as prescribed in Form
ATS or Form ATS–R, as applicable, and
the instructions thereto.699 In addition,
the Commission is proposing to require
that any Form ATS or Form ATS–R
shall be executed at, or prior to, the time
Form ATS or Form ATS–R is filed and
shall be retained by the ATS in
accordance with Rule 303 of Regulation
ATS and Rule 302 of Regulation S–T,
paragraph (b)(9)’’ of Rule 301 are, as proposed,
accorded confidential treatment subject to
applicable law. See 17 CFR 242.301(b)(2)(vii). The
instructions to Form ATS and Form ATS–R require
an ATS to submit one original and two copies of
Form ATS and Form ATS–R to the Commission.
See Form ATS and Form ATS–R Instructions. In
addition, Rule 301(b)(2)(vii) requires that an ATS
file copies of its Form ATS filings with the
examining authority of the SRO with which it is
registered (e.g., FINRA) at the same time it files
with the Commission, and upon request, the ATS
must provide its SRO’s surveillance personnel with
duplicate Form ATS–R filings. See 17 CFR
242.301(b)(2)(vii).
697 Rule 301(b)(2)(vii) of Regulation ATS specifies
that reports on Form ATS shall be considered filed
upon receipt by the Division of Trading and
Markets, at the Commission’s principal office in
Washington, DC See 17 CFR 242.301(b)(2)(vii).
698 See infra note 701 and accompanying text.
699 Accordingly, the Commission is proposing to
delete the provisions of Rule 301(b)(2)(vii) related
to paper submission. Specifically, the Commission
is proposing to delete the sentence that the reports
shall be considered filed ‘‘upon receipt by the
Division of Trading and Markets, at the
Commission’s principal office in Washington, DC’’
Additionally, although the Commission would
continue to require that duplicates of filings on
Form ATS be provided to the SRO that is the
examining authority for each ATS, and that
duplicates of the Form ATS–R be made available to
the surveillance personnel of such SRO upon
request, the Commission proposes to eliminate the
reference to ‘‘originals’’ in Rule 301(b)(2)(vii)
because paper reports will no longer be furnished
to the Commission and there will therefore be no
‘‘original’’ version of the reports.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
and the instructions in Form ATS or
Form ATS–R, as applicable.700 Among
other benefits, the electronic filing of
Forms ATS and ATS–R would increase
efficiencies and decrease filing costs for
ATSs (i.e., ATSs would no longer be
required to print and mail paper filings)
and for Commission staff when
undertaking a review of these forms.
Form ATS–N is required to be filed in
EDGAR. EDGAR is currently configured
to support the Commission’s receipt and
review of filings under Regulation ATS,
and requiring electronic Form ATS and
Form ATS–R filings to be submitted via
EDGAR would be the most efficient way
to facilitate their electronic filing.
To facilitate electronic filing, the
Commission is proposing to amend the
text of General Instructions A.4 of
Forms ATS and ATS–R to require that
all filings be submitted via EDGAR and
prepared, formatted, and submitted in
accordance with Regulation S–T and the
EDGAR Filer Manual.701 The
Commission also proposes to amend
Forms ATS and ATS–R General
Instruction A.5 to state that a filing that
is defective may be rejected and not be
accepted by the EDGAR system and that
any filing so rejected shall be deemed
not filed. This is consistent with the
requirements of Regulation S–T, which
provides the rules for EDGAR
submissions.702 The Commission also
notes that the instructions for current
Form ATS contain similar language,703
but the current instructions for Form
700 The Commission notes that the proposed
provisions would conform to similar provisions of
Rule 304, which provide for the electronic filing of
Form ATS–N. See 17 CFR 242.304(c).
701 The Commission proposes to eliminate the
language in the Form ATS instructions and Form
ATS–R instructions requesting that an ATS type all
information because an ATS would not otherwise
have the option to handwrite any responses. The
instructions for both forms would be amended to
eliminate the option to use a ‘‘reproduction’’ of the
forms. The Commission also believes it is
redundant to state that the Form ATS or Form ATS–
R must be the ‘‘current version’’ as the ATS is
required to attest that the form is ‘‘current.’’ The
Commission also proposes to delete the
requirement to attach an execution page with
original manual signatures for Form ATS because,
as discussed above, Form ATS and Form ATS–R
would be signed electronically and thus there
would be no need for an execution page. The
Commission also proposes to delete the instruction
that the name of the alternative trading system, CRD
number, SEC file number, and report period dates
be listed on each page, as this requirement will be
unnecessary because the Form ATS or Form ATS–
R will be submitted as a single submission. Because
Form ATS and Form ATS–R would be submitted
via EDGAR, the Commission is also proposing to
delete references to submitting the ‘‘original’’ and
‘‘copies’’ of the form to the Commission at the
Commission’s mailing address.
702 17 CFR part 232. This is also consistent with
the requirements for Form ATS–N.
703 The Form ATS Instructions state that ‘‘Form
ATS shall not be considered filed, unless it
complies with applicable requirements.’’
PO 00000
Frm 00084
Fmt 4701
Sfmt 4702
ATS–R do not contain such language.
The Commission believes that it would
be appropriate to reject a filing as
defective if it does not comply with the
technical requirements of the form, for
example, if a Form ATS or Form ATS–
R is missing exhibits, or if the ATS does
not provide a response to a Form ATS
request or does not comply with the
electronic filing requirements. The
Commission is also proposing to amend
General Instruction A.6
(‘‘Recordkeeping’’) of both forms to
reflect that records must be retained in
accordance with the EDGAR Filer
Manual and Rule 303 of Regulation ATS
and to conform to the recordkeeping
instructions on Form ATS–N, as
revised.704 Instruction A.8 would also
be revised to reflect updated Paperwork
Reduction Act estimates, and, to
conform to changes the Commission is
proposing in Rule 301(b)(2)(vii),705 to
state that types of securities traded
provided on Form ATS and Form ATS–
R will not be afforded confidential
treatment. The Commission is also
proposing to add new Instruction A.8 to
Form ATS to require that, for
amendments, the filer attach an Exhibit
C marked to indicate additions to or
deletions from the disclosures in Items
1 through 6 of Form ATS. This
document would help enable the
Commission to identify any changes to
the form more easily. Most ATSs
currently provide such a marked
document to the Commission on a
voluntary basis. The Commission is also
proposing to amend the instructions to
Form ATS to state that Newly
Designated ATSs are required to file a
Form ATS no later than the date 30
calendar days after the effective date of
any final rule, if adopted.706
In addition, the Commission is reproposing to amend Form ATS to
require an ATS filing an amendment on
Form ATS to identify whether the Form
ATS filing is a material amendment
under Rule 301(b)(2)(ii), a periodic
amendment under Rule 301(b)(2)(iii), or
a correcting amendment under Rule
301(b)(2)(iv).707 An ATS currently
identifies an amendment to current
Form ATS by marking the ‘‘Amendment
to Initial Operation Report’’ box on
Form ATS, and Form ATS currently
does not ask the ATS to specify whether
the amendment to Form ATS is a
material, periodic, or correcting
704 Rule 303 of Regulation ATS provides the
record preservation requirements for ATSs. See 17
CFR 242.303.
705 See infra Section V.C.
706 See supra note 180 and accompanying text.
707 See Rule 301(b)(2)(ii)–(iv).
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
amendment.708 Requiring an ATS to
specify the type of amendment would
better enable the Commission to
determine whether an ATS is in
compliance with Regulation ATS. The
Commission also proposes requiring an
ATS that is filing a cessation of
operations report to provide the date
that the ATS ceased to operate, which
is not currently required on Form ATS.
The Commission believes that having
information about the date that the ATS
ceased to operate would enable the
Commission to determine more readily
whether an ATS is, or was, in
compliance with Regulation ATS.709
The Commission is also re-proposing
to amend Form ATS and Form ATS–R
to change the solicitation of information
relating to the name of the broker-dealer
operator and the registration and contact
information of the broker-dealer
operator. Because many broker-dealer
operators of ATSs engage in brokerage
and/or dealing activities in addition to
operating an ATS, and some brokerdealers operate multiple ATSs, the
name of the broker-dealer operator of an
ATS often differs from the commercial
name under which the ATS conducts
business. To identify the broker-dealer
operator of an ATS and to assist the
Commission in collecting and
organizing its filings and assessing
whether the ATS has met its
requirement to register as a brokerdealer, Forms ATS and ATS–R would
require the ATS to indicate the full
name of the broker-dealer operator of
the ATS, as it is stated on Form BD, in
Item 1 of Form ATS and Form ATS–R.
To further facilitate compliance with the
requirements of Regulation ATS, as
proposed, Form ATS and Form ATS–R
would require the ATS to indicate
whether the filer is a broker-dealer
registered with the Commission and
whether the broker-dealer operator has
been authorized by a national securities
association to operate an ATS. Such
requirements would conform to the
proposed requirements of Form ATS–
N.710 The Commission is proposing to
conform Item 1 of Form ATS and Form
ATS–R 711 to the requirements of Form
708 The Commission is also proposing to add cites
to the relevant rule text next to the check boxes on
Form ATS identifying whether the ATS is filing an
Initial Operation Report (‘‘IOR’’), amendment to
IOR, or a cessation of operations report.
709 See Rule 301(b)(2)(v) (requiring an ATS to
promptly file a cessation of operations report on
Form ATS in accordance with the instructions
therein upon ceasing to operate as an ATS).
710 See supra Section IV.D.3.
711 Form ATS and Form ATS–R currently ask for
the ATS’s main street address, mailing address,
business telephone number and facsimile number,
and the contact information for the ATS’s contact
person. The Commission is proposing to move the
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
ATS–N, which is currently filed
electronically. In addition, the
Commission is proposing to add to Item
1 of Form ATS and Form ATS–R a
requirement that the ATS provide the
broker-dealer operator’s LEI, if the
broker-dealer operator has an LEI,712
and the MPID of the broker-dealer
operator.713 These requests would help
the Commission in identifying and
corresponding with ATSs and would
conform to the identifying information
on Form ATS–N, as proposed to be
revised.714 To determine whether the
compliance transition rules applicable
to Newly Designated ATSs apply, the
Commission is also proposing to require
the ATS to indicate if it is a Newly
Designated ATS in Item 2.
In addition, to facilitate the electronic
filing of Form ATS, the Commission is
proposing to revise Form ATS to
provide that the narrative disclosures be
included in a single document, rather
than multiple exhibits.715 The ATS
information requests for the name and title and
telephone number of the contact employee to the
signature block on the form, and to request an email
address for such person and not require the
facsimile number. The proposed signature block
would ask for the primary street address and
mailing address of the ATS. The current
certifications required in Form ATS and Form
ATS–R, including that the information filed is
current, true, and complete, would remain
unchanged. However, the Commission is proposing
to delete the provision allowing for service of any
civil action pursuant to confirmed telegram and
instead, permit service of any civil action via email.
The signature block on Form ATS and Form ATS–
R would conform to the signature block in Form
ATS–N, as proposed. See supra Section IV.D.6.
712 See supra note 506.
713 See supra Section IV.D.3 (proposing requiring
the ATS to disclose the MPID of its broker-dealer
operator).
714 The Commission proposes to replace in Item
1 of Form ATS and Form ATS–R the requests for
the ATS’s main street address, mailing address, and
business telephone number and facsimile number
with a requirement that the ATS provide the
primary, and if any, secondary physical street
address of the ATS’s matching system, as well as
a URL address for its website if it has a website.
Knowing the location of the matching system
address and secondary matching system address
could be useful to the Commission in the event of,
for instance, a natural disaster that could impact
market participants’ ability to trade in the ATS and
potential latency that could be experienced due to
the location of the secondary site of the ATS. The
Commission is also requesting the full name of the
national securities association of the broker-dealer
operator, the effective date of the broker-dealer
operator’s membership with the national securities
association, and MPID of the ATS. In addition,
because any current or former names of the ATS
would be searchable on EDGAR and there will be
multiple identifiers included on the form, including
MPID, the Commission is proposing to delete the
requirement that the ATS indicate if it is changing
its name and list its former name.
715 In response to the 2020 Proposal, one
commenter stated that current Form ATS Exhibit F,
which requires the ATS to provide certain specified
information about its operations and procedures,
should be amended to follow the same structure as
current Form ATS Exhibit G, which requires a
PO 00000
Frm 00085
Fmt 4701
Sfmt 4702
15579
would be required to provide the
information currently required in
Exhibits A, B, C, E, F (other than a copy
of the ATS’s subscriber manual and any
other materials provided to subscribers),
G, H, and I in a single document.
Because the subscriber manual may be
lengthy, it would be more efficient for
the ATS to provide a copy of its
subscriber manual and any other
materials provided to subscribers,
which are currently required to be
included in Exhibit F, as a separate, new
Exhibit A. In addition, the Commission
is proposing new Exhibit B, which
would include a copy of the
constitution, articles of incorporation or
association, with all amendments, and
of the existing by-laws or corresponding
rules or instruments, whatever the
name, of the alternative trading system.
Today, an ATS may, in lieu of attaching
such documents, indicate that the ATS
makes such information publicly
available on a continuous basis on an
internet site controlled by the ATS and
indicate the website of the ATS.
Because the Commission is requiring
the ATS to provide its website in Part
I,716 the Commission is proposing to
include a checkbox for the ATS to select
if, in lieu of filing, the ATS certifies that
the information requested under the
exhibit is available at the website above
and is maintained on a continuous basis
and is accurate as of the date of the
filing.
The Commission is also re-proposing
to amend Form ATS–R to make it easier
for the Commission staff to identify if
the ATS has met its reporting
obligations. First, the Commission is
proposing to require an ATS to specify
whether it is filing a quarterly report
amendment under Rule 301(b)(9)(i) or a
report for an ATS that has ceased to
operate under Rule 301(b)(9)(ii) and, if
the latter, to indicate the date the ATS
ceased to operate. Requiring an ATS to
indicate its type of Form ATS–R filing
would enable the Commission to more
effectively review Form ATS–R
submissions and determine whether an
ATS is in compliance with Regulation
ATS. The Commission is also proposing
‘‘brief description’’ of the ATS’s procedures for
reviewing system capacity, security, and
contingency planning procedures to provide ATS
operators with latitude in the manner in which they
provide information to the Commission. See ICE
Bonds Letter I at 6–7. The Commission is not
proposing a change to the structure of Exhibit F of
Form ATS to conform to the structure of Exhibit G.
The structures of Exhibits F and G are not
dissimilar in that they both require an ATS to
provide a description of ATS policies and
procedures and that the information solicited by
Exhibit F is important for the Commission to
understand and oversee ATSs.
716 See supra note 714.
E:\FR\FM\18MRP2.SGM
18MRP2
15580
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
to amend Form ATS–R to ask whether
the ATS was subject to the fair access
obligations under § 242.301(b)(5) during
any portion of the period covered by the
report by adding a corresponding box
for the ATS to check ‘‘yes’’ or ‘‘no.’’
Currently, Form ATS–R requires an ATS
that is subject to the Fair Access Rule to
report a list of all persons for whom
access to the ATS was granted, denied,
or limited during the period covered by
the Form ATS–R.717 Asking the ATS to
indicate whether the ATS was subject to
the Fair Access Rule during any portion
of the period covered by the report
would facilitate the Commission’s
review of Form ATS–R submissions.
The Commission is also proposing
changes to the Form ATS–R categories
of securities to modernize them and add
more specificity with regard to all
categories of securities. Form ATS–R
currently requires ATSs to indicate the
total dollar volume of government
securities transactions in the period
covered by the report. The Commission
is proposing to require that ATSs
specify the total dollar volume of
transactions in ‘‘U.S. Treasury
Securities’’ and ‘‘Agency Securities’’
under the heading ‘‘Government
securities.’’ 718 As currently, ATSs
would also be required to indicate the
total dollar volume in government
securities overall. This change would
help the Commission facilitate
compliance with the thresholds for the
Fair Access Rule and Regulation SCI,
which the Commission is proposing
would be based on trading volume in
U.S. Treasury Securities and Agency
Securities.719 To avoid double-reporting
of transactions in after-hours trading
(reported under Item 6), the
Commission is proposing to specify that
Item 4 pertains to transactions ‘‘other
than those for after-hours trading.’’ In
addition, the Commission is proposing
to amend Form ATS–R to update the
descriptions of certain categories of
securities for which volume is required
to be reported on Form ATS–R by an
ATS. Specifically, the Commission is
proposing to delete the categories of
securities, ‘‘Nasdaq National Market
Securities’’ and ‘‘Nasdaq SmallCap
Market Securities,’’ reported in Items 4
and 6 of Form ATS–R.720 The proposal
717 See Form ATS–R and Form ATS–R
Instructions, No. 8.
718 The Commission is proposing to add to the
Form ATS–R instructions the definitions of U.S.
Treasury Security and Agency Security, which
would conform to the definitions the Commission
is proposing in Rule 300(o) and (p), respectively.
719 See supra Sections III.B.4 and III.C.
720 Currently, any equity securities traded on the
Nasdaq Global Market are required to be reported
under ‘‘Nasdaq National Market Securities,’’ and
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
to require ATSs to file Form ATS–R
electronically via EDGAR would allow
the Commission staff to easily ascertain
on which national securities exchanges
the equity securities the ATS traded
during the applicable period, as
disclosed in Exhibit B, are traded.
Therefore, it would no longer be
necessary to separate out the total
volume of securities traded on the
Nasdaq markets from the total volume of
securities traded on other national
securities exchanges. The proposal
would require ATSs to report the total
volume previously reported under the
‘‘Nasdaq National Market Securities’’
and ‘‘Nasdaq SmallCap Market
Securities’’ categories under ‘‘Listed
Equity Securities.’’
The Commission is proposing to
require ATSs to break down the volume
for corporate debt securities, currently
reported in Item 4J, by U.S. and nonU.S. corporate debt securities. Non-U.S.
corporate debt securities would include
debt securities issued by a foreign issuer
(excluding a foreign government) in
emerging markets as well as nonemerging markets. In addition, the
Commission is adding new Item 4L to
require ATSs to report total dollar
volume for foreign sovereign debt
securities, which currently are required
to be reported under other debt
securities in Item 4N. Foreign sovereign
debt securities would be defined in
Instruction B of Form ATS–R as any
security other than an equity security, as
defined in § 240.3a11–1, issued or
guaranteed by a foreign government, as
defined in § 240.3b–4.721 Creating
subcategories of corporate debt
securities and a reporting requirement
for foreign sovereign debt securities
would improve the quality of data that
the Commission already gathers through
Form ATS–R. In addition, the proposed
reporting requirements would help the
Commission further understand the
amount of trading that occurs on the
any equity securities traded on the Nasdaq Capital
Market are required to be reported under ‘‘Nasdaq
SmallCap Market Securities.’’ ‘‘Listed Equity
Securities’’ include all other equity securities listed
on any other markets or national securities
exchanges, including the Nasdaq Global Select
Market. Any rights and warrants are required to be
reported under the ‘‘Rights and Warrants’’ category
even if they are listed on a national securities
exchange. As proposed, Items 4B, 4C, 6B, and 6C
would be deleted, and therefore, Items 4D through
4N and Item 6D would be re-numbered.
721 ‘‘Debt Securities’’ is defined as ‘‘any security
other than an equity security, as defined in
§ 240.3a11–1’’ in Form ATS–R. See Instruction B of
Form ATS–R. Section 240.3b–4 (Rule 3b–4(a) under
the Exchange Act) defines ‘‘foreign government’’ as
the government of any foreign country or of any
political subdivision of a foreign country. See 17
CFR 240.3b–4.
PO 00000
Frm 00086
Fmt 4701
Sfmt 4702
ATSs for corporate bonds and foreign
sovereign debt securities markets.
The Commission is also proposing to
add new Items 4N and 4O to Form
ATS–R, which would require ATSs to
disclose the total unit and dollar volume
of transactions in repurchase
agreements and reverse repurchase
agreements. Specifically, the
Commission is proposing to require
ATSs to disclose the total unit 722 and
dollar volume of repurchase and reverse
repurchase transactions broken down by
(1) whether the transaction is overnight
or term; 723 (2) whether the transaction
is triparty 724 or bilateral; 725 and (3) the
type of securities used to finance the
collateral—i.e., NMS stocks, U.S.
Treasury Securities, Federal Agency
Securities, Agency Mortgage-Backed
Securities, municipal securities, U.S.
and non-U.S. corporate debt securities,
asset-backed securities, foreign
sovereign debt securities, and other
securities.726 If an ATS traded
repurchase or reverse repurchase
agreements collateralized with other
securities, the ATS would list the other
types of securities in proposed Item 4N
or 4O. In the Commission’s experience,
some ATSs that trade repurchase or
reverse repurchase agreements, which
are currently required to be disclosed as
debt securities on Item 4N of Form
ATS–R, currently provide in Item 5B of
722 For repurchase or reverse repurchase
agreements collateralized with a basket or group of
securities, ‘‘total unit volume of transactions’’
would mean the number of units within each basket
or group rather than the number of baskets or
groups.
723 Overnight repo trades end in one business
day, whereas term repos mature on a specific future
business day that is more than one business day.
See, e.g., Office of Financial Research, U.S. Repo
Market Data Release Methodology for Tri-party
Repo, available at https://
www.financialresearch.gov/data/files/2021-04Methodology-TPR.pdf; Office of Financial Research,
U.S. Repo Market Data Release Methodology for
DVP Cleared Repo, available at https://
www.financialresearch.gov/data/files/2021-04Methodology-DVP.pdf.
724 See supra note 521. Triparty repurchase and
reverse repurchase transactions would include
triparty trades between members that participate in
the Fixed Income Clearing Corporation’s (‘‘FICC’’)
General Collateral Financing (GCF) Repo Service.
On the other hand, repurchase and reverse
repurchase transactions in the FICC’s Delivery vs.
Payment (‘‘DVP’’) Repo Service would be reported
under the bilateral category.
725 See supra note 522.
726 As a result, ATSs would report the total unit
and dollar volume of transactions for each of 80
categories of repos: 2 types of agreements
(repurchase or reverse repurchase) × 2 transaction
types (overnight or term) × 2 party types (bilateral
or triparty) × 10 collateral types (NMS stocks, U.S.
Treasury Securities, Federal Agency Securities,
Agency Mortgage-Backed Securities, municipal
securities, U.S. corporate debt securities, non-U.S.
corporate debt securities, asset-backed securities,
foreign sovereign debt securities, or other
securities).
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Form ATS–R on a voluntary basis a
breakdown of nominal trade value of
each of these types of securities. Adding
new Items 4N and 4O to Form ATS–R
to require that ATSs provide the total
unit and dollar volume of transactions
in repurchase and reverse repurchase
agreements would require all ATSs that
trade repurchase or reverse repurchase
agreements to take a consistent
approach in providing this information.
The Commission understands that
certain transaction information about
repurchase and reverse repurchase
agreements is publicly available.727
However, individual ATSs are not
currently required to provide the
Commission with information breaking
down the types of transactions in
repurchase and reverse repurchase
agreements. In addition, transactions in
repurchase and reverse repurchase
agreements are not generally required to
be reported to an SRO, and the absence
of information about the trading of
repurchase and reverse repurchase
agreements that occur on ATSs impedes
the Commission’s oversight of these
markets. The proposed reporting
requirement would enhance the
Commission’s oversight of ATSs that
trade repurchase and reverse repurchase
agreements.
Finally, the Commission is proposing
to add new Item 5C, which would
require an ATS to list the types of listed
options reported in Item 4F of Form
ATS–R. Item 4F of Form ATS–R
currently requires ATSs to disclose the
total unit volume and dollar volume of
transactions in listed options. Under
new Item 5C, an ATS might indicate, for
example, that it trades equity options
and options on government securities.
This would provide the Commission
with more specific information about
the types of options that each ATS
trades.
In addition, because the Commission
is proposing to change the definition of
‘‘exchange’’ to include systems that use
trading interest, the Commission is
proposing to revise Form ATS to require
information related to the entry of
‘‘trading interest.’’ Communication
Protocol Systems that transact in
securities other than NMS stocks or
government securities or repos will be
required to file Form ATS if they choose
to comply with Regulation ATS and the
resulting disclosures will help the
Commission oversee these systems. In
addition, the Commission is proposing
to include in Form ATS the definition
of ‘‘trading interest’’ identical to that
proposed in Rule 3b–16(e) and Rule
300(q).728 The Commission is also
proposing to change the definition of
‘‘subscriber’’ to conform to the changes
the Commission is proposing in Rule
300(b).729 Form ATS Item 3.g (current
Exhibit F.a) requests that the ATS
provide information about ‘‘the manner
of operations of the alternative trading
system.’’ 730 An ATS that either operates
a Communication Protocol System, or
an order-driven system, would be
required to provide information about
the manner of operations on Form ATS
that is akin to information provided in
response to in Part III of Form ATS–N
(e.g., display, connectivity,
segmentation, market data, counterparty
selection).731 For example, ATSs that
use orders generally should provide
information about order types and sizes,
and the trading facilities and rules for
bringing together the orders of buyers
and sellers on the ATS. ATSs that use
non-firm trading interest generally
should provide information about the
communication protocols and
functionalities of the ATS, including the
use of messages, requirements related to
the size of trading interest, and
procedures governing the
communication protocols.
Request for Comment
162. Would the proposed changes to
Form ATS and Form ATS–R enhance
the Commission’s oversight of ATSs? Do
commenters disagree with any of the
proposed modifications? If so, what
alternatives should the Commission
implement?
163. Form ATS–R requires an ATS to
quarterly report volume of transactions
for certain securities, all subscribers that
were participants in the ATS, and
securities that were traded in the ATS.
Should the Commission adopt
amendments to Form ATS–R to add,
change, or modify any of the requests
for information on Form ATS–R? Are
the current categories of securities and
728 See
supra note 98 and accompanying text.
id.
730 See Item 4.g of Form ATS, as proposed to be
revised.
731 See NMS Stock ATS Adopting Release, supra
note 2, at 38869 (describing that many of the
disclosure items on Form ATS–N are also required
by respondents in whole or in part on current Form
ATS). See also NMS Stock ATS Proposing Release,
supra note 29, at 81099–102 (describing that some
of the disclosures of Form ATS–N that the
Commission was proposing were already required
under Form ATS).
jspears on DSK121TN23PROD with PROPOSALS2
729 See
727 For instance, the Treasury Department’s Office
of Financial Research (‘‘OFR’’) collects data on
repurchase agreements cleared by triparty clearing
banks and major central counterparties, such as the
FICC, and publishes aggregate statistics on these
transactions broken out by three venues—which are
the triparty market, FICC’s DVP Service, and FICC’s
GCP Repo Service—collateral, tenor, volume, and
rates. See OFR, U.S. Repo Market Data Release,
available at https://www.financialresearch.gov/
data/us-repo-data/.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00087
Fmt 4701
Sfmt 4702
15581
the proposed categories of securities for
reporting transaction volume to the
Commission appropriate?
164. Should Form ATS–R require
ATSs to disclose total unit volume in
government securities, U.S. Treasury
Securities, and/or Agency Securities?
165. Proposed Items 4N and 4O of
Form ATS–R would require ATSs to
report unit and dollar volume of
transactions in repurchase and reverse
repurchase agreements broken down by,
among other categories, whether the
transaction is triparty or bilateral. Do
commenters believe that categorizing
repurchase and reverse repurchase
agreements into these two segments
would yield useful information to the
Commission? Do commenters believe
that the Commission should require
ATSs to separately report volumes for
repurchase and reverse repurchase
agreements in the FICC’s GCF Repo
Service and FICC’s DVP Service rather
than include them under volumes for
triparty and bilateral, respectively? Are
there any types of securities, not
otherwise covered in proposed Items 4N
and 4O, that are used as collateral in
repurchase and reverse repurchase
agreements?
166. Proposed Items 4N and 4O of
Form ATS–R would require ATSs to
report transaction volumes of
repurchase and reverse repurchase
agreements in total unit and dollar
volume. Do commenters believe that
ATSs should be required to provide the
unit volume as well as the dollar
volume?
167. Are there characteristics unique
to repurchase or reverse repurchase
agreements collateralized with a basket
or group of securities that would make
reporting those repurchase or reverse
repurchase agreements in both unit and
dollar volume in Form ATS–R unduly
burdensome or inappropriate for ATSs?
For such basket repos, the Commission
is proposing to define ‘‘total unit
volume of transactions’’ as the number
of units within each basket or group
rather than the number of baskets or
groups. Do commenters believe ‘‘unit’’
should be defined differently for basket
repos?
168. Proposed Item 4J of Form ATS–
R would require ATSs to report dollar
volume of transactions in U.S. and nonU.S. corporate debt securities. Do
commenters believe that the two
subcategories would yield useful
information to the Commission? NonU.S. corporate debt securities would
include debt securities issued by a
foreign issuer in emerging markets as
well as non-emerging markets. Do
commenters believe that the
Commission should require ATSs to
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
15582
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
further break down the volume for nonU.S. corporate debt securities by type of
market—emerging and non-emerging? If
so, how should ‘‘emerging markets’’ be
defined for the purpose of reporting on
Form ATS–R? Do commenters believe
‘‘emerging markets’’ should be defined
by country or region?
169. Do commenters believe that the
Commission should require ATSs to
report total dollar volume of foreign
sovereign debt securities on Form ATS–
R, as proposed? Should the proposed
definition of sovereign debt securities be
modified in any way?
170. Instruction A.1 of Form ATS–R
requires ATSs to file Form ATS–R
within 30 days after the end of each
calendar quarter, or more frequently
upon the request of the Commission. Do
commenters believe that the
Commission should request information
from ATSs on Form ATS–R on a more
frequent basis (e.g., monthly)? Do
commenters believe that such request
would be unduly burdensome for ATSs?
171. Form ATS requires an ATS to
report information to the Commission
about the ATS, including but not
limited to, types of subscribers and
differential access to services, types of
securities traded, counsel, governance
documents, service providers, manner
of operations, including entry of trading
interest, order execution procedures,
clearance and settlement procedures,
and trade reporting, procedures for
reviewing system capacity, security, and
contingency planning, procedures to
safeguard subscriber funds and
securities, and direct owners. Should
the Commission adopt amendments to
Form ATS to add, change, or modify
any of the requests for information on
Form ATS? The proposed changes to
Rule 3b–16 would require
Communication Protocol Systems that
trade securities other than NMS stocks
or government securities or repos to file
Form ATS. Are there any changes that
the Commission should make to Form
ATS that would be relevant to
Communication Protocol Systems? If so,
please identify the request and explain
how it should be amended.
172. Should the Commission amend
Form ATS to require disclosures similar
to disclosures required on Part II of
Form ATS–N, which requests
information about ATS-related activities
of the broker-dealer operator and its
affiliates?
173. Should the Commission amend
Form ATS to include questions similar
to those in Part III of Form ATS–N,
which requests information about the
manner of the ATS’s operations?
174. Are there any specific items on
Form ATS–N, currently or as proposed
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
to be revised, that the Commission
should incorporate into Form ATS?
175. Should the Commission amend
Rule 301(b)(2) and Form ATS to provide
that Form ATS is publicly
disseminated? If so, should any of the
information on Form ATS be kept
confidential?
C. Amendment to Rule 301(b)(2)(vii)
Rule 301(b)(2)(vii) provides that all
reports filed pursuant to Rules 301(b)(2)
and (9) are ‘‘deemed confidential.’’ 732
As a result, the Commission does not
make Form ATS and Form ATS–R
disclosures available to the public,
including the types of securities that the
ATS trades or intends to trade.733
Currently, the Commission makes
public on a monthly basis on the
Commission website information about
ATSs that have a Form ATS on file with
the Commission, which includes the
name of the ATS, any name(s) under
which business is conducted, and the
location of each ATS. The list also
identifies each ATS that filed a
cessation of operations report in the
prior month. While the Commission
does not approve Form ATS filings, the
list is designed to inform the public
about ATSs that have noticed their
operations with the Commission.
The Commission is re-proposing to
amend Rule 301(b)(2) to clarify that
being ‘‘deemed confidential’’ means
receiving confidential treatment under a
relevant Commission regulation subject
to applicable law 734 and to eliminate
confidential treatment for information
about the type(s) of securities that the
ATS trades as disclosed in the Exhibit
B, subpart (a) of Form ATS and Exhibit
B of Form ATS–R. The Commission
does not believe that ATSs will be
harmed by these disclosures because a
vast majority of ATSs currently
publicize the types of securities in
which they transact, for example, on the
website for the ATS or the website of
the ATS broker-dealer operator. The
Commission publishes on its website a
list of ATSs that have an active Form
ATS on file with the Commission;
however, information about types of
securities traded is not provided on that
list and the Commission frequently
732 See
17 CFR 242.301(b)(2)(vii).
Commission notes, however, that Form
ATS and Form ATS–R are available to the
examination staff of state securities authorities and
SROs. See Instruction A.7 of Form ATS and Form
ATS–R. See also 17 CFR 242.301(b)(2)(vii)
(requiring duplicate of filings on Form ATS be
provided to the surveillance personnel designated
by the SRO that is the examining authority for each
ATS, and that duplicates of the Form ATS–R be
made available to the surveillance personnel of
such SRO upon request).
734 See, e.g., 17 CFR 200.83, 240.24b–2.
733 The
PO 00000
Frm 00088
Fmt 4701
Sfmt 4702
receives requests from the public and
regulators for more detail in the
Commission’s publication about the
types of securities traded by ATSs.
Disclosing this information could help
the public understand a fundamental
aspect of an ATS. To allow for this
narrow exception, the Commission is
proposing to amend Rule 301(b)(2)(vii)
of Regulation ATS to state that the
content of reports filed under Rule
301(b)(2) and (9) ‘‘(except for types of
securities traded provided on Form ATS
and Form ATS–R) will be accorded
confidential treatment subject to
applicable law.’’
Request for Comment
176. Should the Commission amend
Rule 301(b)(2)(vii) to make Form ATS,
Form ATS–R, or both public? Should
the Commission amend Rule
301(b)(2)(vii) to make any other
disclosures provided on Form ATS or
Form ATS–R public?
177. Should the Commission
eliminate confidential treatment for
information about the type(s) of
securities that the ATS trades as
disclosed on Form ATS and Form ATS–
R?
VI. General Request for Comment
The Commission is requesting
comments from all members of the
public. The Commission particularly
requests comment from the point of
view of persons who operate ATSs that
would meet the proposed definition of
Government Securities ATS, subscribers
to those systems, and investors. The
Commission seeks comment on all
aspects of the proposed rule
amendments and proposed form,
particularly the specific questions posed
above. Commenters are requested to
provide empirical data in support of any
arguments or analyses. With respect to
any comments, the Commission notes
that they are of the greatest assistance to
its rulemaking initiative if accompanied
by supporting data and analysis of the
issues addressed in those comments and
by alternatives to the Commission’s
proposals where appropriate.
VII. Paperwork Reduction Act
Certain provisions of the proposed
rule amendments contain ‘‘collection of
information’’ requirements within the
meaning of the Paperwork Reduction
Act of 1995 (‘‘PRA’’).735 The
Commission is submitting these
collections of information to the Office
of Management and Budget (‘‘OMB’’) for
review in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11. An agency
735 44
E:\FR\FM\18MRP2.SGM
U.S.C. 3501 et seq.
18MRP2
15583
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
may not conduct or sponsor, and a
person is not required to respond to, a
collection of information unless the
agency displays a currently valid
control number. The Commission is
proposing to alter seven existing
collections of information and apply
such collections of information to new
OMB
control No.
Rule
Rule title
Rule 301 of Regulation ATS .....................
Rule 302 of Regulation ATS .....................
Regulation ATS Rule 301 Amendments ......................................................................
Rule 302 (17 CFR 242.302) Recordkeeping Requirements for Alternative Trading
Systems.
Rule 303 (17 CFR 242.303) Record Preservation Requirements for Alternative
Trading Systems.
Regulation ATS Rule 304 and Form ATS–N ...............................................................
Form BD and Rule 15b1–1 Application for Registration as a Broker-Dealer .............
3235–0763
3235–0012
Form ID ........................................................................................................................
3235–0328
Regulation SCI and Form SCI .....................................................................................
3235–0703
Rule 303 of Regulation ATS .....................
Rule 304 of Regulation ATS .....................
17 CFR 240.15b1–1 (Rule 15b1–1 under
the Exchange Act).
17 CFR 232.10(b) (Rule 10(b) of Regulation S–T).
Rules 1001 through 1007 of Regulation
SCI.
A. Summary of Collection of
Information
The proposed amendments create
burdens under the PRA by (1) adding
new categories of respondents to the
seven existing collections of information
noted above and (2) modifying the
requirements of two of those collections,
as noted below. The proposed
amendments do not create any new
Rule
Burden description
Rule 301 of Regulation ATS
and Forms ATS and
ATS–R.
Rule 301(b)(2) ...................
Revised Burden: File initial operations
report using the proposed modernized
Form ATS.
Comply with fair access standards recordkeeping and fair access notice requirements for certain securities, including, as proposed, U.S. Treasury
Securities and Agency Securities.
Rule 301(b)(6) ...................
Rule 301(b)(9) ...................
Comply with ATS-specific systems capacity, integrity and security recordkeeping and systems outages notice
requirements.
Revised Burden: File quarterly reports
using the proposed modernized Form
ATS–R.
Rule 301(b)(10) .................
Comply with written safeguards and procedures requirement.
Rule 302 of Regulation ATS
Rule 302 ............................
Comply with ATS recordkeeping requirements (required by Rule 301(b)(8)).
Rule 303 of Regulation ATS
Rule 303 ............................
Rule 304 of Regulation ATS
and Form ATS–N.
Rule 304 ............................
Comply with ATS record preservation requirements (required by Rule
301(b)(8)).
Revised Burden: File initial Form ATS–N
(required by Rule 301(b)(2)(viii)), as
proposed to be revised.
Rule 15b1–1 and Form BD
Rule 15b1–1 ......................
Register as a broker-dealer using Form
BD (required by Rule 301(b)(1)).
Form ID ................................
Rule 101 of Regulation S–
T.
Apply for EDGAR access using Form ID
736 See infra Section VII.C for a description of the
categories of respondents.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Frm 00089
Fmt 4701
Sfmt 4702
3235–0505
Respondent categories
Certain Communication Protocol Systems.
All Other Form ATS Filers.
Certain Communication Protocol Systems.
Certain Legacy Government Securities
ATSs.
Certain NMS Stock ATSs.
Certain Other ATS Filers.
Certain Communication Protocol Systems.
All Communication Protocol Systems.
All Legacy Government Securities ATSs.
All NMS Stock ATSs.
All Other Form ATS Filers.
All Communication Protocol Systems.
All Currently Exempted Government Securities ATSs.
All Communication Protocol Systems.
All Currently Exempted Government Securities ATSs.
All Communication Protocol Systems.
All Currently Exempted Government Securities ATSs.
Certain Communication Protocol Systems.
All Legacy Government Securities ATSs.
All NMS Stock ATSs.
Certain Communication Protocol Systems.
Certain Currently Exempted Government
Securities ATSs.
Certain Communication Protocol Systems.
Certain Currently Exempted Government
Securities ATSs.
737 Unless otherwise described, none of the
existing information collections are being revised
with new requirements.
PO 00000
3235–0509
3235–0510
collections of information. The
collections of information and
applicable categories of new
respondents736 are summarized in the
following table: 737
Collection of information
Rule 301(b)(5) ...................
jspears on DSK121TN23PROD with PROPOSALS2
categories of respondents. The titles of
such existing collections of information
are:
E:\FR\FM\18MRP2.SGM
18MRP2
15584
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Collection of information
Rule
Burden description
Regulation SCI ....................
Rules 1001–1007 of Regulation SCI.
Comply with Regulation SCI ...................
jspears on DSK121TN23PROD with PROPOSALS2
B. Proposed Use of Information
The existing information collections
affected by the proposed amendments
are used as described below:
1. Rule 301 of Regulation ATS and
Forms ATS and ATS–R
Rule 301 of Regulation ATS sets forth
the conditions that an ATS must comply
with to be exempt pursuant to Exchange
Act Rule 3a1–1(a)(2). Rule 301 requires
an ATS to register as a broker-dealer.
Rule 301 further requires all ATSs that
wish to comply with Regulation ATS to
file an initial operation report on Form
ATS. The initial operation report
requires information regarding
operation of the system including the
manner of operation, how subscribers
access the trading system, and the types
of securities traded. ATSs are also
required to notice changes in their
operations by filing amendments to
Form ATS to the Commission.
In addition, Regulation ATS requires
ATSs to provide quarterly transaction
reports on Form ATS–R. ATSs are also
required to file cessation of operations
reports on Form ATS. The gathering of
such information permits the
Commission to oversee the operation of
such systems and track the growth of
their role in the securities markets.
The Commission is proposing
revisions to Rule 301(b)(2), Form ATS,
and Form ATS–R to modernize Form
ATS and Form ATS–R and to provide
that they are filed electronically. The
Commission believes that, among other
benefits, the electronic filing of Forms
ATS and ATS–R would increase
efficiencies and decrease filing costs for
ATSs.
ATSs with significant volume are
required to comply with requirements
for fair access pursuant to Rule 301(b)(5)
of Regulation ATS. As proposed, such
ATSs would be required to establish
and apply reasonable written standards
for granting, limiting, and denying
access to the services of the ATS and
make and keep records of all grants of
access including, for all subscribers, the
reasons for granting such access, and all
denials or limitations of access, and the
reasons for each applicant for denying
or limiting access.738 The Commission
is proposing to apply the Fair Access
Rule to the trading of U.S. Treasury
738 See
supra Section V.A.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Securities and Agency Securities. The
Commission believes that, today, the
principles undergirding the Fair Access
Rule are equally relevant to a
Government Securities ATS and
amending the Fair Access Rule to
include the trading of U.S. Treasury
Securities and Agency Securities would
help ensure the fair treatment of
potential and current subscribers to
ATSs that consist of a large percentage
of trading volume in these two types of
securities.
ATSs with significant volume are also
required to comply with requirements
for systems capacity, integrity and
security pursuant to Rule 301(b)(6),
which, together with the requirements
under Rule 302, requires ATSs to
preserve any records made in the
process of complying with the systems
capacity, integrity, and security
requirements. In addition, such ATSs
are required to notify Commission staff
of material systems outages and
significant systems changes.
The Commission uses the information
provided pursuant to Rule 301 to
comprehensively monitor the growth
and development of ATSs to confirm
that investors effecting trades through
the systems are adequately protected,
and that the systems do not impede the
maintenance of fair and orderly
securities markets or otherwise operate
in a manner that is inconsistent with the
Federal securities laws. In particular,
the information collected and reported
to the Commission by ATSs enables the
Commission to evaluate the operation of
ATSs with regard to national market
system goals, and monitor the
competitive effects of these systems to
ascertain whether the regulatory
framework remains appropriate to the
operation of such systems.
Without the information provided on
Forms ATS and ATS–R, the
Commission would not have readily
available information on a regular basis
in a format that would allow it to
determine whether such systems have
adequate safeguards. Further, in the
absence of Rule 301, the Commission
would not regularly obtain uniform
trading data to identify areas where
surveillance by SROs may be more
appropriately tailored to the detection of
fraudulent, deceptive and manipulative
practices that may be peculiar to an
automated trading environment.
PO 00000
Frm 00090
Fmt 4701
Sfmt 4702
Respondent categories
Certain Communication Protocol Systems.
Certain Legacy Government Securities
ATSs.
2. Rule 302 of Regulation ATS
Rule 302, as proposed to be
amended,739 would require ATSs to
make a record of subscribers to the ATS,
daily summaries of trading in the ATS
and time-sequenced records of trading
interest information in the ATS.
Regulators (including the Commission
and SROs) use the information
contained in the records required to be
preserved by Rule 302 to ensure that
ATSs are in compliance with Regulation
ATS as well as other applicable rules
and regulations. Without the data
required by Rule 302, regulators would
be limited in their ability to comply
with their statutory obligations, provide
for the protection of investors, and
promote the maintenance of fair and
orderly markets.
3. Rule 303 of Regulation ATS
Rule 303 describes the record
preservation requirements for ATSs.
Rule 303 also describes how such
records must be maintained, what
entities may perform this function, and
how long records must be preserved.
The information contained in the
records required to be preserved by Rule
303 is used by regulators (including the
Commission and the SROs) to ensure
that ATSs are in compliance with
Regulation ATS as well as other
applicable rules and regulations.
Without the data required by Rule 303,
regulators would be limited in their
ability to comply with their statutory
obligations, provide for the protection of
investors, and promote the maintenance
of fair and orderly markets.
4. Rule 304 of Regulation ATS and Form
ATS–N
Rule 304 provides conditions for NMS
Stock ATSs seeking to rely on the
exemption from the definition of
‘‘exchange’’ provided by Rule 3a1–1(a)
of the Exchange Act, including to file a
Form ATS–N, and for that Form ATS–
N to become effective. Form ATS–N
requires NMS Stock ATSs to provide
information about their manner of
operations, the broker-dealer operator,
and the ATS-related activities of the
broker-dealer operator and its affiliates
to comply with the conditions provided
under Rule 304. Form ATS–N promotes
739 See
supra notes 165–166 and accompanying
text.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
more efficient and effective market
operations by providing more
transparency to market participants
about the operations of NMS Stock
ATSs and the potential conflicts of
interest of the controlling broker-dealer
operator and its affiliates, and helps
brokers meet their best execution
obligations to their customers.
Operational transparency rules,
including Form ATS–N, are designed to
increase competition among trading
centers in regard to order routing and
execution quality.
As discussed above, the Commission
is re-proposing to amend Rule 304(a) to
require that a Covered ATS, which
would include a Government Securities
ATS, must comply with Rules 300
through 304 of Regulation ATS, as
applicable, to be exempt pursuant to
Rule 3a1–1(a)(2). As proposed, all
Government Securities ATSs would be
required to comply with Rule 304, as
proposed to be amended, to file Form
ATS–N, as revised.740
The Commission is proposing to
revise Form ATS–N to include
information it previously proposed on
Form ATS–G, including a question
requiring information about interaction
with related markets, which would be
required to be responded to by both
Government Securities ATSs and NMS
Stock ATSs.741 The Commission is also
proposing to reorganize certain
questions on Form ATS–N and to
require disclosure about any
surveillance and monitoring that is
conducted with respect to the ATS.742
The Commission believes that the
proposed revisions to Form ATS–N will
continue to allow for better comparisons
between ATSs, and applying Form
ATS–N to Government Securities ATSs
will help enable market participants to
compare Government Securities ATSs.
The Commission is also proposing
certain amendments to Form ATS–N
that would apply globally to Form ATS–
N unless otherwise noted.743 The
Commission believes that Form ATS–
N’s public disclosures would provide
important information to market
participants that would help them better
understand these operational facets of
Government Securities ATSs and select
the best trading venue based on their
needs.
5. Rule 15b1–1 and Form BD
The Commission uses the information
disclosed by applicants in Form BD: (1)
To determine whether the applicant
meets the standards for registration set
forth in the provisions of the Exchange
Act; (2) to develop a central information
resource where members of the public
may obtain relevant, up-to-date
information about broker-dealers,
municipal securities dealers, and
government securities broker-dealers,
and where the Commission, other
regulators, and SROs may obtain
information for investigatory purposes
in connection with securities litigation;
and (3) to develop statistical
information about broker-dealers,
municipal securities dealers, and
government securities broker-dealers.
Without the information disclosed in
Form BD, the Commission could not
effectively implement policy objectives
of the Exchange Act with respect to its
investor protection function.
6. Form ID
The information provided on Form ID
allows the Commission staff to review
applications for EDGAR access and, if
the application is approved, assign
identification numbers (if the applicant
does not already have an identification
number) and access codes to applicants
15585
to permit filing on EDGAR. Form ID is
essential to EDGAR security.
7. Regulation SCI
Regulation SCI requires certain key
market participants to, among other
things: (1) Have comprehensive policies
and procedures in place to help ensure
the robustness and resiliency of their
technological systems, and also that
their technological systems operate in
compliance with the Federal securities
laws and with their own rules; and (2)
provide certain notices and reports to
the Commission to improve
Commission oversight of securities
market infrastructure.
C. Respondents
The categories of respondents for
which the proposed amendments create
a burden under the PRA are described
below.
1. Legacy Government Securities ATSs
As discussed above, the Commission
is re-proposing amendments to
Regulation ATS that would require a
Currently Exempted Government
Securities ATS that seeks to operate
pursuant to the exemption from the
definition of an ‘‘exchange’’ under
Exchange Act Rule 3a1–1(a)(2), and thus
not be required to be registered as a
national securities exchange, to comply
with Regulation ATS as proposed 744
and that Current Government Securities
ATSs will have to comply with the
enhanced requirements for Government
Securities ATSs.745 The Commission
estimates the total number of Currently
Exempted Government Securities ATSs
to be 7 746 and Current Government
Securities ATSs to be 17,747 and some
or all of this number will be subject to
the following collections of information
as estimated below:
Collection of information
Rule
Number of respondents
Description
Rule 301 of Regulation ATS
and Forms ATS and
ATS–R.
Rule 301(b)(5) ...................
7 .........................................
The Commission estimates that certain Legacy Government Securities ATSs would satisfy the conditions for the proposed application of the Fair Access
Rule to Government Securities ATS and be subject
to the related recordkeeping and notice provisions.
740 See
supra Section IV.A.
supra Section IV.D.1.
742 See supra Section IV.D.5.
743 See supra Section IV.D.
744 See supra Section III.B.2.
745 See supra Section IV.A.
746 The Commission estimates that there are 7
Currently Exempted Government Securities ATSs
that would be newly subject to the requirements of
the exemption under Rule 3a1–1(a)(2) and will be
required to comply with the applicable sections of
Regulation ATS, as amended. The Commission
741 See
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00091
Fmt 4701
Sfmt 4702
estimates that 5 such ATSs limit their trading
activity to government securities and the other 2
ATSs limit their trading activity to repos.
747 As of September 30, 2021, 17 Government
Securities ATSs currently operate pursuant to a
Form ATS currently on file with the Commission.
E:\FR\FM\18MRP2.SGM
18MRP2
15586
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Collection of information
Rule
Number of respondents
Description
Rule 301(b)(9) ...................
24 .......................................
Rule 301(b)(10) .................
7 .........................................
Rule 302 of Regulation ATS
Rule 302 ............................
7 .........................................
Rule 303 of Regulation ATS
Rule 303 ............................
7 .........................................
Rule 304 of Regulation ATS
and Form ATS–N.
Rule 304 ............................
24 .......................................
Rule 15b1–1 and Form BD
Rule 15b1–1 ......................
1 .........................................
Form ID ................................
Rule 101 of Regulation S–
T.
1 .........................................
Regulation SCI ....................
Rules 1001–1007 of Regulation SCI.
1 Legacy Government Securities ATS that is an
existing SCI entity and 1
that is a new SCI entity.
The Commission estimates that all Legacy Government Securities ATSs will have to comply with the
requirement to file quarterly reports on the proposed
modernized Form ATS–R. The proposal would impose the full currently-authorized baseline burden of
filing on Currently Exempted Government Securities
ATSs, for which the requirement is new. For Current
Government Securities ATSs, the proposal would
only impose the marginal new burden of filing using
the modernized version of the form.
The Commission estimates that all Currently Exempted Government Securities ATSs will have to comply
with the requirement to have written safeguards and
written procedures to protect subscribers’ confidential trading information.
The Commission estimates that all Currently Exempted Government Securities ATSs will have to comply
with the recordkeeping requirements for ATSs.
The Commission estimates that all Currently Exempted Government Securities ATSs will have to comply
with the record preservation requirements for ATSs.
The Commission estimates that all Legacy Government Securities ATSs will have to comply with the
requirement to file initial Form ATS–N, as proposed
to be revised.
The Commission estimates that certain Currently Exempted Government Securities ATSs currently operated by a bank and not registered as a broker-dealer will have to register using Form BD.
The Commission estimates that the same subset of
Currently Exempted Government Securities ATSs
that are not currently registered as a broker-dealer
will also have to file Form ID to apply for EDGAR
access.
The Commission estimates that certain Legacy Government Securities ATSs would meet the specified
volume threshold to meet the proposed amended
definition of ‘‘SCI alternative trading system’’ and be
subject to the requirements of Regulation SCI.
jspears on DSK121TN23PROD with PROPOSALS2
2. Communication Protocol Systems
As discussed above, the Commission
is proposing to amend Exchange Act
Rule 3b–16(a) to cause Communication
Protocol Systems to fall within the
definition of ‘‘exchange’’ and believes
that such Communication Protocol
Systems would likely choose to register
as a broker dealer and be regulated
under the Regulation ATS exemption
than register as a national securities
exchange because of the lighter
regulatory requirements imposed on
ATSs, as compared to registered
Number of
respondents
Collection of information
Rule
Rule 301 of Regulation ATS
and Forms ATS and ATS–R.
Rule 301(b)(2) .........................
748 See
supra Section II.D.
of the below estimates could change
based on how the Communication Protocol Systems
structure their operations if subject to Regulation
ATS. For example, the Commission is basing some
of the below estimates on the assumption that
operators of Communication Protocol Systems that
are affiliated with existing broker-dealers would
structure their operations so that the existing
broker-dealer would operate the ATS to avoid the
749 Some
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
14
Description
The Commission estimates that certain Communication Protocol Systems, which trade securities other than NMS
stocks or government securities or repos, would be required to file the proposed modernized Form ATS.
costs of new broker-dealer registration. In addition,
the Commission estimates that 2 Communication
Protocol Systems that trade municipal securities or
corporate debt securities would meet the volume
thresholds to satisfy the conditions for complying
with ATS-specific systems capacity, integrity and
security recordkeeping as well as systems outages
requirements. This number is based on aggregate
data reported by broker-dealers and could vary
PO 00000
exchanges.748 The Commission
estimates the total number of
Communication Protocol Systems to be
22,749 and some or all of this total
number will be subject to the following
collections of information as estimated
below:750
Frm 00092
Fmt 4701
Sfmt 4702
based on how these systems structure their
businesses.
750 The estimated respondents for the Rule 304/
Form ATS–N collection of information is based on
the assumption that systems that operate multiple
market places that are affiliated with a new or
existing broker-dealer will all be operated by such
broker-dealer, and that such systems will not
register multiple broker-dealers to operate multiple
affiliated ATSs.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Collection of information
Description
Rule 301(b)(5) .........................
8
Rule 301(b)(6) .........................
2
Rule 301(b)(9) .........................
22
Rule 301(b)(10) .......................
22
Rule 302 of Regulation ATS ...
Rule 302 .................................
22
Rule 303 of Regulation ATS ...
Rule 303 .................................
22
Rule 304 of Regulation ATS
and Form ATS–N.
Rule 304 .................................
8
Rule 15b1–1 and Form BD .....
Rule 15b1–1 ...........................
6
Form ID ...................................
Rule 101 of Regulation S–T ...
6
Regulation SCI ........................
Rules 1001–1007 of Regulation SCI.
2
3. NMS Stock ATSs
As discussed above, the Commission
is proposing to revise Form ATS–N to
include information it previously
proposed on Form ATS–G, including
adding questions requiring information
jspears on DSK121TN23PROD with PROPOSALS2
Number of
respondents
Rule
Rule 301 of Regulation ATS
and Forms ATS and ATS–R.
Rule 301(b)(9) .........................
supra Section IV.D.1.
id. and Section IV.D.4–5. In addition, for
purposes of calculating whether an ATS meets the
Fair Access Rule volume thresholds, the
Commission is proposing to aggregate trading
volume among certain affiliated ATSs. See supra
Section V.A. At this time, the Commission
estimates that no NMS Stock ATSs would be
752 See
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
34
Description
The Commission estimates that all NMS Stock ATSs will
have to prospectively comply with the requirement to file
quarterly reports on the proposed modernized Form ATS–
R.
subject to the Fair Access Rule as a result of the
proposed changes to aggregate affiliated ATS
trading volume, and that the proposed change
would therefore impose no additional burden. Also
see infra note 1085.
753 As of September 30, 2021, there are 34 NMS
Stock ATSs that have filed an effective Form ATS–
N with the Commission. For the purpose of this
PO 00000
questions on Form ATS–N.752 The
Commission estimates the total number
of NMS Stock ATSs to be 34 753 and that
all will be subject to the following
collections of information as estimated
below:
Number of
respondents
Rule
751 See
The Commission estimates that certain Communication Protocol Systems would meet the volume thresholds in government securities, NMS stocks, corporate debt securities,
municipal securities, equity securities that are not NMS
stocks and for which transactions are reported to an SRO
and be subject to the Fair Access Rule and the related
recordkeeping and notice provisions.
The Commission estimates that certain Communication Protocol Systems that trade municipal securities or corporate
debt securities and meet certain volume requirements
would satisfy the conditions for complying with ATS-specific systems capacity, integrity and security recordkeeping
as well as systems outages requirements.
The Commission estimates that all Communication Protocol
Systems will have to comply with the requirement to file
quarterly reports on the proposed modernized Form ATS–
R.
The Commission estimates that all Communication Protocol
Systems will have to comply with the requirement to have
written safeguards and written procedures to protect subscribers’ confidential trading information.
The Commission estimates that all Communication Protocol
Systems will have to comply with the recordkeeping requirements for ATSs.
The Commission estimates that all Communication Protocol
Systems will have to comply with the record preservation
requirements for ATSs.
The Commission estimates that certain Communication Protocol Systems that trade NMS stocks or government securities or repos would be required to file Form ATS–N, as
proposed to be revised.
The Commission estimates that certain Communication Protocol Systems are not currently registered as or affiliated
with a broker-dealer and will have to register using Form
BD.
The Commission estimates that the same subset of Communication Protocol Systems that are not currently registered
as or affiliated with a broker-dealer will also have to file
Form ID to apply for EDGAR access.
The Commission estimates that certain Communication Protocol Systems that trade government securities, NMS
stocks, or equity securities other than NMS stocks reported
to an SRO would meet the specified volume threshold to
meet the proposed amended definition of ‘‘SCI alternative
trading system’’ and be subject to the requirements of
Regulation SCI.
about interaction with related markets,
surveillance and monitoring on the
ATS, and liquidity providers, which
would be required to be responded to by
both Government Securities ATSs and
NMS Stock ATSs.751 The Commission is
also proposing to reorganize certain
Collection of information
Frm 00093
Fmt 4701
15587
Sfmt 4702
PRA analysis, NMS Stock ATSs include only those
that operate today. The burden on Communication
Protocol Systems that the Commission estimates
will trade NMS stocks are included in the
discussion of that category of respondent. See
supra, Section VII.C.2; infra, Section VII.D.3.
E:\FR\FM\18MRP2.SGM
18MRP2
15588
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Collection of information
Rule 304 of Regulation ATS
and Form ATS–N.
Rule 304 .................................
34
Description
The Commission estimates that all NMS Stock ATSs will be
required to re-file their current electronic Form ATS–N disclosure using Form ATS–N, as proposed to be revised.
Securities ATSs and will continue to
have an obligation to file Form ATS
after the effective date of any final rule.
These filers will incur burdens to
comply with the proposed revisions to
Forms ATS and ATS–R discussed
4. Other Form ATS Filers
There is set of respondents (‘‘Other
Form ATS Filers’’) that are currently
required to file Form ATS and are
neither NMS Stock ATSs nor
exclusively 754 Legacy Government
above.755 The Commission estimates the
total number of Other Form ATS Filers
to be 59 756 and that these respondents
will be subject to the following
collections of information as estimated
below:
Number of
respondents
Collection of information
Rule
Rule 301 of Regulation ATS
and Forms ATS and ATS–R.
Rule 301(b)(2) .........................
59
Rule 301(b)(9) .........................
59
Description
The Commission estimates that all Other Form ATS Filers
will be required to re-file their current paper Form ATS disclosure using the proposed modernized Form ATS.
The Commission estimates that all Other Form ATS Filers
will have to comply prospectively with the requirement to
file quarterly reports on the proposed modernized Form
ATS–R.
As discussed above, the Commission
is proposing to amend Exchange Act
Rule 3b–16(a), which would cause
Communication Protocol Systems to fall
within the definition of ‘‘exchange’’ and
believes that such Communication
Protocol Systems would likely choose to
register as a broker dealer and be
regulated under the Regulation ATS
exemption.757 Certain Communication
Protocol Systems that trade securities
other than NMS stocks or government
securities would be subject to
requirements under Rule 301(b)(2),
including to file an IOR and
amendments thereto using the proposed
modernized and electronic 758 Form
ATS.
Other Form ATS Filers—current Form
ATS filers that are not required to file
Form ATS–N after the effective date of
any final rule—would incur a burden to
comply with the requirements to file
Form ATS using the proposed
modernized form. To comply with the
requirements of revised Form ATS, such
respondents would be required to re-file
their most recently-filed Form ATS IOR
or Amendment to IOR using the
proposed modernized Form ATS. The
Commission estimates an initial burden
of 20.5 hours 759 and an annual burden
of 5 hours 760 per respondent for
complying with Rule 301(b)(2) and the
following total initial and annual
burdens:
754 Government Securities ATSs that also have
trading activities other than in government
securities or repos will be required to separately
report that activity on Form ATS after the effective
date of any final rule.
755 See supra Section V.B. In addition, for
purposes of calculating whether an ATS meets the
Fair Access Rule volume thresholds, the
Commission is proposing to aggregate trading
volume among certain affiliated ATSs. See supra
Section V.A. At this time, the Commission
estimates that no Other Form ATS Filers would be
subject to the Fair Access Rule as a result of the
proposed changes to aggregate affiliated ATS
trading volume, and that the proposed change
would therefore impose no additional burden. As
discussed above, the Commission is also reproposing to remove an exclusion from compliance
with the Fair Access Rule under Rule 301(b)(5) and
the Capacity, Integrity, and Security Rule under
Rule 301(b)(6) that is applicable to ATSs that trade
equities and also re-proposing revisions to Rule
301(b)(2), Form ATS, and Form ATS–R to
modernize Form ATS and Form ATS–R and to
provide that they are filed electronically. See id.
The Commission does not expect, however, that any
ATSs will be newly subject to the Fair Access Rule
or the Capacity, Integrity, and Security Rule as a
result of removing the exclusion. Also see infra note
1085.
756 As of September 30, 2021, there are 61 ATSs
that file Form ATS. Two of these trade only
government securities or repos and, as proposed,
would only be required to file a Form ATS–N and
amendments to Form ATS–N after the effective date
of any final rule. Accordingly, the Commission
estimates that 59 ATSs will continue to file Form
ATS amendments.
757 See supra Section II.D.
758 The Commission believes that the proposed
electronic submission of Forms ATS and ATS–R
would impose no additional burden on existing
filers under Regulation ATS such as Other Form
ATS Filers. These respondents would already have
been required to register as broker-dealers pursuant
to Rule 301(b)(1), and registered broker-dealers have
been assigned a CIK number and do not need to
submit a Form ID to access EDGAR. A broker-dealer
that has never used EDGAR to make electronic
submissions may use its assigned CIK number to
receive access codes that will allow that brokerdealer operator to submit Form ATS–N filings on
EDGAR without needing to apply for a Form ID, so
the proposed changes would not impose a burden
under the existing Rule 15b1–1 and Form BD or
Form ID collections of information on this category
of respondents.
759 The Commission’s currently approved
baseline burden for the average initial compliance
burden for each Form ATS IOR is 20 hours
(Attorney at 13 hours + Compliance Clerk at 7
hours). See Extension Without Change of a
Currently Approved Collection: Regulation ATS
Rule 301 Amendments; ICR Reference No. 202101–
3235–011; OMB Control No. 3235–0509 (June 9,
2018), available at https://www.reginfo.gov/public/
do/PRAViewDocument?ref_nbr=202101-3235-011
(‘‘Rule 301 PRA Supporting Statement’’). The
Commission is proposing amendments to Part I of
Form ATS, which would add an additional burden
of 0.5 hours per filing using the modernized form
(Compliance Clerk at 0.5 hours), and therefore the
average compliance burden for each Form ATS
filing would be 20.5 hours. See supra Section V.B
and infra Section VII.E (discussing proposed
changes).
760 The Commission’s currently approved
baseline burden for the average ongoing compliance
burden for each amendment to a Form ATS IOR is
4 hours ((Attorney at 1.5 hours + Compliance Clerk
at 0.5 hours) × 2 IOR amendments a year). See Rule
301 PRA Supporting Statement, supra note 759.
The Commission is proposing amendments to Part
I of Form ATS, including a requirement applicable
to an ATS filing an IOR amendment to attach as
Exhibit 3 a marked document to indicate changes
to ‘‘yes’’ or ‘‘no’’ answers and additions or deletions
from any Item in Part I, Part II, and Part III, which
would add an additional annual burden of 1 hour
per ATS using the modernized form (Compliance
Clerk at 0.5 hours × 2 IOR amendments a year).
Therefore the average compliance burden for each
Form ATS filing would be 5 hours. See supra
Section V.B and infra Section VII.E (discussing
proposed changes).
D. Total PRA Burdens
1. Burden of Rule 301 of Regulation
ATS and Forms ATS and ATS–R
a. Rule 301(b)(2) Burden on
Communication Protocol Systems and
Other Form ATS Filers
jspears on DSK121TN23PROD with PROPOSALS2
Number of
respondents
Rule
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00094
Fmt 4701
Sfmt 4702
E:\FR\FM\18MRP2.SGM
18MRP2
15589
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Number of
respondents
Burden type
Respondent type
Initial ....................................
Annual
Initial ....................................
Annual
Communication Protocol Systems ....................................
14
Other Form ATS Filers ......................................................
59
b. Rule 301(b)(5) Burden on
Communication Protocol Systems and
Legacy Government Securities ATSs
As discussed above, the Commission
is proposing to apply the Fair Access
Rule to the trading of U.S. Treasury
Securities and Agency Securities.
Certain Communication Protocol
Systems and Legacy Government
Securities ATS that trade U.S. Treasury
Securities and Agency Securities and
meet the relevant thresholds would be
newly subject to the requirements of
Rule 301(b)(5) of Regulation ATS.761 In
addition, for purposes of calculating
whether an ATS meets the Fair Access
Rule volume thresholds, the
Commission is proposing to aggregate
trading volume among certain affiliated
ATSs, which will impose a burden on
Communication Protocol Systems .......................................................................................
Legacy Government Securities ATSs .................................................................................
c. Rule 301(b)(6) Burden on
Communication Protocol Systems
As discussed above, the Commission
is proposing to amend Exchange Act
Rule 3b–16(a) to cause Communication
Protocol Systems to fall within the
definition of ‘‘exchange’’ and believes
that such Communication Protocol
Annual burden
per respondent
(hours)
8
7
Systems would likely choose to register
as a broker dealer and be regulated
under the Regulation ATS exemption.
Certain Communication Protocol
Systems that trade municipal and
corporate debt securities and meet the
relevant thresholds would be newly
subject to the systems capacity,
integrity, and security recordkeeping
287
70
1,209.5
295
Total annual
burden
(number of
respondents ×
annual burden
per respondent)
(hours)
37
37
296
259
and systems outages notice
requirements of Rule 301(b)(6) of
Regulation ATS. There is no initial
burden associated with the currently
approved collection of information for
this requirement.765 The Commission
estimates an annual compliance burden
of 11 hours per respondent 766 and the
following total annual burden:
Respondent type
Number of
respondents
Annual burden
per respondent
(hours)
Total annual burden
(number of respondents
× annual burden per
respondent)
(hours)
Communication Protocol Systems .............................................................................
2
11.25
22.5
d. Rule 301(b)(9) Burden on All
Respondents
All respondent categories—
Communication Protocol Systems,
jspears on DSK121TN23PROD with PROPOSALS2
20.5
5
20.5
5
certain NMS Stock ATSs and Other
Form ATS Filers that trade securities
subject to the Fair Access Rule.762 There
is no initial burden associated with the
currently approved collection of
information for this requirement.763 The
Commission estimates an annual
compliance burden of 37 hours per
respondent 764 and the following total
annual burdens:
Number of
respondents
Respondent type
Total burden
(number of
respondents ×
burden per
respondent)
(hours)
Burden per
respondent
(hours)
761 See
supra Section II.D.2.
proposed Rule 301(b)(5)(ii). See supra
Section V.A.
763 See Rule 301 PRA Supporting Statement,
supra note 759.
764 The Commission’s currently approved
baseline for the average compliance burden per
respondent is 37 hours = 10 hours for Fair Access
Standards recordkeeping (Attorney at 5 hours × 2
762 See
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Legacy Government Securities ATSs,
NMS Stock ATSs, and Other Form ATS
Filers—are subject to the requirements
of Rule 301(b)(9) and would incur a
burden to file quarterly transaction
reports using the proposed modernized
and electronic 767 Form ATS–R.
responses a year) + 27 hours for Fair Access notices
(Attorney at 1 hour × 27 responses a year). See Rule
301 PRA Supporting Statement, supra note 759.
765 See Rule 301 PRA Supporting Statement,
supra note 759.
766 The Commission’s currently approved
baseline for the average compliance burden per
respondent is 11.25 hours = 10 hours for systems
capacity, integrity and security recordkeeping
(Attorney at 10 hours) + 1.25 hours for systems
outages notice (Attorney at .25 hours × 5 systems
outages a year). See Rule 301 PRA Supporting
Statement, supra note 759.
767 As discussed above, the Commission believes
that the proposed electronic submission of Form
ATS–R would impose no additional burden on
current Forms ATS and ATS–N filers. See supra
note 758.
PO 00000
Frm 00095
Fmt 4701
Sfmt 4702
E:\FR\FM\18MRP2.SGM
18MRP2
15590
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Presently, neither Currently Exempted
Government Securities ATSs—the
subset of Legacy Government Securities
ATSs not operating pursuant to a Form
ATS on file with Commission as of the
effective date of any final rule—nor
Communication Protocol Systems—are
required to file quarterly transaction
information on Form ATS–R, but the
proposed amendments will newly
impose on all respondents in these
categories the currently-approved
Number of
respondents
Respondent type
Communication Protocol Systems .............................................................................
Currently Exempted Government Securities ATSs ...................................................
Current Government Securities ATSs .......................................................................
NMS Stock ATSs .......................................................................................................
Other Form ATS Filers ..............................................................................................
jspears on DSK121TN23PROD with PROPOSALS2
e. Rule 301(b)(10) Burden on
Communication Protocol Systems and
Currently Exempted Government
Securities ATSs
Rule 301(b)(10) requires ATSs to
establish adequate written safeguards
and written procedures to protect
subscribers’ confidential trading
new increased burden of filing on the
modernized version of Form ATS–R.
There is no initial burden associated
with the currently approved collection
of information for this requirement.769
The Commission estimates an annual
compliance burden of 19 hours per new
Form ATS–R respondent 770 and 3 hours
per existing Form ATS–R
respondent; 771 and the following total
annual burdens:
baseline burden of filing Form ATS–R
and the additional burden of filing using
the proposed modernized form.768
Current Government Securities
ATSs—the subset of Legacy Government
Securities ATSs operating pursuant to a
Form ATS on file with Commission as
of the effective date of any final rule—
as well as NMS Stock ATSs and Other
Form ATS Filers already incur a burden
to file Form ATS–R, so the proposed
rules would only impose upon them the
Annual burden
per respondent
(hours)
Total annual burden
(number of respondents
× annual burden per
respondent)
(hours)
19
19
3
3
3
418
133
51
102
177
22
7
17
34
59
information. Neither Currently
Exempted Government Securities ATSs
nor Communication Protocol Systems
are presently subject to any of the
requirements of Rule 301(b), but the
current proposal will newly impose on
all respondents in these categories the
currently-approved baseline burden of
complying with Rule 301(b)(10) after the
effective date of any final rule.772 The
Commission estimates an initial burden
of 8 hours 773 and an annual burden of
4 hours 774 per respondent for
complying with Rule 301(b)(10) and the
following total initial and annual
burdens:
Total burden
(number of respondents
× burden per
respondent)
(hours)
Burden per
respondent
(hours)
Number of
respondents
Burden type
Respondent type
Initial ..................................
Annual
Initial ..................................
Annual
Communication Protocol Systems ...............................
22
Currently Exempted Government Securities ATSs .....
7
8
4
8
4
176
88
56
28
2. Burden of Rules 302 and 303 of
Regulation ATS on Communication
Protocol Systems and Currently
Exempted Government Securities ATSs
Rule 301(b)(8) of Regulation ATS
requires ATSs to comply with the
recordkeeping requirements of Rule 302
and the record preservation
requirements of Rule 303.
768 The Commission’s currently approved
baseline for the average compliance burden for each
Form ATS–R filing is 4 hours (Attorney at 3 hours
+ Compliance Clerk at 1). See Rule 301 PRA
Supporting Statement, supra note 759. The
Commission is proposing amendments to Form
ATS–R, which would add an additional burden of
0.75 hours per filing (Compliance Manager at 0.25
hours + Compliance Clerk at 0.5), and therefore the
average compliance burden for each Form ATS–R
filing would be 4.75 hours. See supra Section V.B
and infra Section VII.E (discussing proposed
changes to Form ATS–R applicable to all ATSs).
769 See Rule 301 PRA Supporting Statement,
supra note 759.
770 The annual burden per Currently Exempted
Government Securities ATS or Communication
Protocol System would be 4.75 hours × 4 quarterly
filings annually = 19 burden hours.
771 The annual burden per existing Form ATS–R
respondent would be 0.75 hours × 4 quarterly
filings annually = 3 burden hours.
772 The proposal would not impose a new burden
on Current Government Securities ATSs, NMS
Stock ATSs, and Other Form ATS Filers, as these
categories of respondents would already be required
to comply with Rule 301(b)(10) before the effective
date of any final rule.
773 The Commission’s currently approved
baseline for the average initial compliance burden
is 8 hours (Attorney at 7 hours + Compliance Clerk
at 1 hour). See Rule 301 PRA Supporting Statement,
supra note 759.
774 The Commission’s currently approved
baseline for the average ongoing compliance burden
is 4 hours (Attorney at 2 hours + Compliance Clerk
at 2 hours). See Rule 301 PRA Supporting
Statement, supra note 759.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00096
Fmt 4701
Sfmt 4702
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
The proposal would newly impose the
currently-approved baseline burden of
complying with these rules on
Communication Protocol Systems and
Rule
Rule
Rule
Rule
Rule
302 ...........................
303
302 ...........................
303
Communication Protocol Systems ..............................
22
Currently Exempted Government Securities ATSs ....
7
As discussed above, the Commission
is proposing to amend Exchange Act
Rule 3b–16(a) to cause Communication
Protocol Systems to fall within the
definition of ‘‘exchange’’ and believes
that such Communication Protocol
Systems would likely choose to register
as a broker dealer and be regulated
under the Regulation ATS
exemption.778 Under the proposal,
Government Securities ATSs (inclusive
of Communication Protocol Systems)
would be subject to the proposed
jspears on DSK121TN23PROD with PROPOSALS2
302 776 and 15 hours to comply with
Rule 303; 777 and the following total
annual burdens:
Number of
respondents
Respondent type
3. Burden of Rule 304 of Regulation
ATS and Form ATS–N on
Communication Protocol Systems,
Legacy Government Securities ATSs,
and NMS Stock ATSs
775 The proposal would not impose a new burden
on Current Government Securities ATSs, NMS
Stock ATSs, and Other Form ATS Filers, as these
categories of respondents would already be required
to comply with Rules 302 and 303 before the
effective date of any final rule.
776 The Commission’s currently approved
baseline for the average compliance burden is 45
hours (Compliance Clerk at 45 hours). See
Extension Without Change of a Currently Approved
Collection: Rule 302 (17 CFR 242.302)
Recordkeeping Requirements for Alternative
Trading Systems; ICR Reference No. 201906–3235–
011; OMB Control No. 3235–0510 (October 24,
2019), available at https://www.reginfo.gov/public/
do/PRAViewDocument?ref_nbr=201906-3235-011.
There is no initial burden associated with this rule.
777 The Commission’s currently approved
baseline for the average compliance burden is 15
hours (Compliance Clerk at 15 hours). See
Extension Without Change of a Currently Approved
Collection: Rule 303 (17 CFR 242.303) Record
Preservation Requirements for Alternative Trading
Systems; ICR Reference No. 202101–3235–010;
OMB Control No. 3235–0505 (June 25, 2021),
available at https://www.reginfo.gov/public/do/
PRAViewDocument?ref_nbr=202101-3235-010.
There is no initial burden associated with this rule.
778 See supra Section II.D.
779 See supra Section III.
780 See supra Section IV.
VerDate Sep<11>2014
Currently Exempted Government
Securities ATS.775 The Commission
estimates an annual burden of 45 hours
per respondent to comply with Rule
20:33 Mar 17, 2022
Jkt 256001
15591
Annual burden
per respondent
(hours)
Total annual burden
(number of respondents
× annual burden per
respondent)
(hours)
45
15
45
15
990
330
315
105
changes to Regulation ATS related to
Government Securities ATSs.779 Those
respondents, as well as Communication
Protocol Systems that trade NMS
Stocks, will be newly required to file
Form ATS–N as revised,780 pursuant to
Rule 304. In addition, existing NMS
Stock ATSs that do not also trade in
government securities will, after the
effective date of any final rule, be
required to re-file their most recent
Form ATS–N or Form ATS–N
amendment using the revised Form
ATS–N. The Commission estimates the
initial burden for new filers of Form
ATS–N, as revised—Currently
Exempted Government Securities ATSs
and Communication Protocol Systems
that trade government securities or NMS
Stocks—to be 136.4 hours.781 The
Commission estimates the initial burden
for Current Government Securities
ATSs, which currently file on Form
ATS, to file on Form ATS–N, as revised,
to be 116.4 hours.782 The Commission
estimates the initial burden for existing
NMS Stock ATSs that do not also trade
government securities, which currently
file on Form ATS–N, to be 8 hours.783
The Commission estimates that the
annual burden for each new Form ATS–
N respondent to file amendments to
Form ATS–N is 47 hours.784 The total
estimated initial and annual 785 burdens
for each respondent type are as follows:
781 The Commission’s currently approved
baseline burden for the average initial compliance
burden for each initial Form ATS–N is 130.4 hours
(currently approved baseline burden to complete an
initial Form ATS at 20 hours: Attorney at 13 hours
and Compliance Clerk at 7 hours; see Rule 301 PRA
Supporting Statement, supra note 759) + (Part I at
0.5 hour) + (Part II at an average of 29 hours) + (Part
III at an average of 78.75 hours) + (Access to EDGAR
at 0.15 hours) + (Posting link to published Form
ATS–N on ATS website at 2 hours) = 130.4 burden
hours. See Extension Without Change of a Currently
Approved Collection: Regulation ATS Rule 304 and
Form ATS–N; ICR Reference No. 202109–3235–014;
OMB Control No. 3235–0763 (January 3, 2022),
available at https://www.reginfo.gov/public/do/PRA
ViewICR?ref_nbr=202109-3235-014 (‘‘Rule 304 PRA
Supporting Statement’’). The aggregate totals by
professional, including the baseline, are estimated
to be approximately 54.6 hours for an Attorney, 0.5
hours for a Chief Compliance Manager, 34.55 hours
for a Compliance Manager, 32.25 hours for a Senior
Systems Analyst, 1 hour for a Senior Marketing
Manager, and 7.5 hours for a Compliance Clerk. The
Commission estimates that the proposed
amendments to Form ATS–N would add an
additional burden of 6 hours per filing (Attorney at
2.5 hours, Compliance Manager at 1.5 hours, Senior
Systems Analyst at 1.5 hours, and Compliance
Clerk at 0.5 hours), and therefore the average
compliance burden for each new Form ATS–N filer
would be 136.4 hours. See supra Section V.B and
infra Section VII.E (discussing proposed changes).
782 The Commission estimates that existing Form
ATS filers will not incur the portion of the
currently approved baseline burden to file an initial
Form ATS–N that is attributable to completing an
initial Form ATS, estimated at 20 hours. See Rule
304 PRA Supporting Statement, supra note 781.
Thus, the total initial burden for these respondents
will be 116.4 hours (130.4 hours baseline burden to
file an Initial Form ATS–N¥20 hours + 6 hours per
filing to complete the proposed revised items of
Form ATS–N). See id.
783 The Commission estimates the proposal would
impose upon current Form ATS–N filers a one-time
burden of 8 hours: The marginal burden of 6 hours
to respond to the revised items in the form (see
supra note 781) + 2 hours for a Compliance Clerk
to reorganize their current Form ATS disclosures to
respond to revised Form ATS–N.
784 The currently approved baseline burden for
filing amendments to Form ATS–N is 47 hours
((Attorney at 5.5 hours + Compliance Manager at 2
hours + Compliance Clerk at 1.9 hours) × 5
amendments a year). See Rule 304 PRA Supporting
Statement, supra note 781.
785 The currently approved baseline annual
burden for Rule 304 contemplates NMS Stock ATSs
filing amendments to Form ATS–N, and this
proposal does not add to that burden.
PO 00000
Frm 00097
Fmt 4701
Sfmt 4702
E:\FR\FM\18MRP2.SGM
18MRP2
15592
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Burden type
Respondent type
Initial ..................................
Annual
Initial ..................................
Annual
Initial ..................................
Annual
Initial ..................................
Communication Protocol Systems ...............................
8
Currently Exempted Government Securities ATSs .....
7
Current Government Securities ATSs .........................
17
NMS Stock ATSs .........................................................
34
4. Burden of Rule 15b1–1 and Form BD
on Communication Protocol Systems
and Currently Exempted Government
Securities ATSs
Rule 301(b)(1) of Regulation ATS
requires ATSs to register as a brokerdealer under section 15 of the Act. The
proposal would newly impose the
currently-approved baseline burden of
complying with the Rule 15b1–1 and
Form BD collection of information on
certain Communication Protocol
Systems and Currently Exempted
Government Securities ATSs that are
Burden per
respondent
(hours)
Number of
respondents
Respondent type
Initial ..................................
Annual
Initial ..................................
Annual
Communication Protocol Systems ...............................
6
Currently Exempted Government Securities ATSs .....
1
The same subset of Communication
Protocol Systems and Currently
Exempted Government Securities ATSs
that are not already registered as brokerdealers discussed above would also
newly incur the currently-approved
baseline burden of the Form ID
collection of information necessary to
Communication Protocol Systems .............................................................................
Currently Exempted Government Securities ATSs ...................................................
As discussed above, the Commission
is re-proposing to amend Regulation SCI
to expand the definition of ‘‘SCI
alternative trading system’’ to include
786 The proposal would not impose a new burden
on Current Government Securities ATSs, NMS
Stock ATSs, and Other Form ATS Filers, as these
categories of respondents are already subject to the
requirement of Regulation ATS, and specifically
Rule 301(b)(1) to register as a broker-dealer. The
Commission also estimates that a subset of
Communication Protocol Systems and Currently
Exempted Government Securities ATSs would
already be registered as broker-dealers.
787 The Commission’s currently approved
baseline burden for the average initial compliance
burden for each Form BD is 2.75 hours (Compliance
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
1,091
376
955
329
1,979
799
272
2.75
.95
2.75
.95
Total burden
(number of respondents
× burden per
respondent, rounded to
nearest 0.5 hours)
16.5
5.5
3
1
apply for EDGAR access.789 The
Commission estimates an initial burden
of 0.15 hours 790 and no annual burden
per respondent for completing Form ID,
and the following total burdens:
Number of
respondents
Respondent type
6. Burden of Regulation SCI on
Communication Protocol Systems and
Legacy Government Securities ATSs
136.4
47
136.4
47
116.4
47
8
Total burden
(number of respondents
× burden per
respondent, rounded to
nearest 0.5 hours)
not already registered as brokerdealers.786 The Commission estimates
an initial burden of 2.75 hours 787 and
an annual burden of 1 hour 788 per
respondent for completing Form BD and
the following total initial and annual
burdens:
Burden type
5. Burden of Form ID on
Communication Protocol Systems and
Currently Exempted Government
Securities ATSs
jspears on DSK121TN23PROD with PROPOSALS2
Burden per
respondent
(hours)
Number of
respondents
Initial burden
per respondent
(hours)
Total initial burden
(number of respondents
× initial burden per
respondent, rounded to
nearest 0.5 hours)
0.15
0.15
1
0
6
1
Government Securities ATSs that meet
a specified volume threshold, which
would, in turn, fall within the definition
of ‘‘SCI entity’’ and, as a result, be
subject to the requirements of
Regulation SCI.791 As proposed, (1)
Communication Protocol Systems that
transact in U.S. Treasuries, Agency
Securities, NMS stocks, or equity
securities other than NMS stocks
reported to an SRO and (2) Legacy
Government Securities ATSs could
become newly subject to the
requirements of Regulation SCI if they
Manager at 2.75 hours). See Extension Without
Change of a Currently Approved Collection: Form
BD and Rule 15b1–1. Application for registration as
a broker-dealer; ICR Reference No. 201905–3235–
016; OMB Control No. 3235–0012 (August 7, 2019),
available at https://www.reginfo.gov/public/do/
PRAViewDocument?ref_nbr=201905-3235-016.
(‘‘Form BD PRA Supporting Statement’’).
788 The Commission’s currently approved
baseline burden for the average ongoing compliance
burden for each respondent amending Form BD is
.95 hours (Compliance Manager at 0.33 hours × 2.87
amendments per year). See Form BD PRA
Supporting Statement, supra note 787.
789 As discussed above, respondents burdened
under the PRA by this proposal that are already
registered as broker-dealers would not incur this
burden. See supra note 786.
790 See Revision of a Currently Approved
Collection: Form ID—EDGAR Password; ICR
Reference No. 202104–3235–022; OMB Control No.
3235–0328 (April 29, 2021), available at https://
www.reginfo.gov/public/do/
PRAViewDocument?ref_nbr=202104-3235-022.
791 See supra Section III.C.
PO 00000
Frm 00098
Fmt 4701
Sfmt 4702
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
satisfy the thresholds set forth in the
proposed amended definition of ‘‘SCI
alternative trading system.’’ 792
The Commission estimates 2
Communication Protocol Systems will
initially satisfy the conditions and
thresholds set forth in the proposed
amended definition of ‘‘SCI alternative
trading system’’ that are not existing SCI
entities or affiliated with SCI entities
and will incur a higher initial burden to
comply. With respect to Legacy
Government Securities ATSs, the
Commission estimates that 1 respondent
will qualify as an SCI alternative trading
system that is currently an SCI entity or
is affiliated with an SCI entity and will
incur a lower initial burden to comply
with Regulation SCI, and 1 respondent
will qualify as an SCI alternative trading
systems that is not an existing SCI entity
or affiliated with an SCI entity and will
Burden type
Burden description/respondent type
Initial ..................................
Annual
Initial ..................................
Annual
Initial ..................................
Annual
Compliance with Regulation SCI (Legacy Government Securities ATSs that are existing SCI entities).
Compliance with Regulation SCI (Legacy Government Securities ATSs that are new SCI entities).
Compliance with Regulation SCI (Communication
Protocol Systems that are new SCI entities).
1
2
792 The proposal would not impose a new burden
on (1) Communications Protocol Systems that
transact in categories of securities that are not
within the definition of ‘‘SCI alternative trading
system,’’ (2) NMS Stock ATSs, which are already
subject to the requirements of Regulation SCI
(unless they are Communication Protocol Systems
that meet the Regulation SCI thresholds in NMS
stocks), and (3) Other Form ATS Filers, which, as
defined in this proposal, do not transact in the
categories of securities within the definition of ‘‘SCI
alternative trading system.’’
793 The Commission’s currently approved
baseline burden for the average initial compliance
burden for an existing SCI entity that is not an SRO
or a plan processor is 1,017.15 hours. See Extension
Without Change of a Currently Approved
Collection: Regulation SCI and Form SCI; ICR
Reference No. 201807–3235–001; OMB Control No.
3235–0703 (September 26, 2018) available at
https://www.reginfo.gov/public/do/
PRAViewDocument?ref_nbr=201807-3235-001
(‘‘2018 SCI PRA Supporting Statement’’).
794 The Commission’s currently approved
baseline burden for the average initial compliance
burden for an existing SCI entity that is not an SRO
or a plan processor is 2,034.3 hours. See 2018 SCI
PRA Supporting Statement supra note 793.
795 The Commission’s currently approved
baseline burden for the average ongoing compliance
burden for an SCI entity that is not an SRO or a
plan processor is 2,458.6 hours. See 2018 SCI PRA
Supporting Statement supra note 793.
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00099
Fmt 4701
Sfmt 4702
Burden per
respondent
(hours)
1
should direct them to the Office of
Management and Budget, Attention:
Desk Officer for the Securities and
Exchange Commission, Office of
Information and Regulatory Affairs,
Washington, DC 20503, and should also
send a copy of their comments to
Vanessa Countryman, Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090, with reference to File
Number S7–02–22. Requests for
materials submitted to OMB by the
Commission with regard to this
collection of information should be in
writing, with reference to File Number
S7–02–22 and be submitted to the
Securities and Exchange Commission,
Office of FOIA/PA Services, 100 F Street
NE, Washington, DC 20549–2736. As
OMB is required to make a decision
concerning the collection of information
between 30 and 60 days after
publication, a comment to OMB is best
assured of having its full effect if OMB
receives it within 30 days of
publication.
VerDate Sep<11>2014
incur the higher initial burden to
comply.
The Commission estimates an initial
compliance burden for existing SCI
entities of 1,017.15 hours,793 an initial
compliance burden for new SCI entities
of 2,034.3 hours,794 an annual
compliance burden for all qualifying
SCI entities of 2,458.65 hours,795 and
the following total initial and annual
burdens:
Number of
respondents
E. Request for Comments
Pursuant to 44 U.S.C. 3506(c)(2)(B),
the Commission solicits comments to:
178. Evaluate whether the proposed
collection of information is necessary
for the proper performance of the
Commission’s functions, including
whether the information shall have
practical utility;
179. Evaluate the accuracy of the
Commission’s estimates of the burden of
the proposed collection of information;
180. Determine whether there are
ways to enhance the quality, utility, and
clarity of the information to be
collected;
181. Evaluate whether there are ways
to minimize the burden of collection of
information on those who are to
respond, including through the use of
automated collection techniques or
other forms of information technology;
and
182. Evaluate whether the proposed
amendments would have any effects on
any other collection of information not
previously identified in this section.
Persons submitting comments on the
collection of information requirements
15593
Total burden
(number of respondents
× burden per
respondent, rounded to
nearest 0.5 hours)
1,017.15
2,458.65
2,034.3
2,458.65
2,034.3
2,458.65
1,017
2,458.5
2,034.5
2,458.5
4,068.5
4,917.5
VIII. Economic Analysis
A. Introduction
We are mindful of the economic
effects that may result from the
proposed amendments, including the
benefits, costs, and the effects on
efficiency, competition, and capital
formation.796 This section analyzes the
expected economic effects of the
proposed rules relative to the current
baseline, which consists of the current
market and regulatory framework in
existence today.
A significant number of buyers and
sellers for securities are brought together
through Communication Protocol
Systems, Government Securities ATSs,
ATSs trading other securities asset
classes, and registered exchanges, but
this activity is subject to different
regulations according to the type of
venue and asset class. By amending
Exchange Act Rule 3b–16 to include
Communication Protocol Systems
within the definition of exchange and
ending the exemption for Government
Securities ATSs, the proposed
amendments would functionally apply
796 Exchange Act Section 3(f) requires the
Commission, when it is engaged in rulemaking
pursuant to the Exchange Act and is required to
consider or determine whether an action is
necessary or appropriate in the public interest, to
consider, in addition to the protection of investors,
whether the action will promote efficiency,
competition, and capital formation. See 15 U.S.C.
78c(f). In addition, Exchange Act Section 23(a)(2)
requires the Commission, when making rules
pursuant to the Exchange Act, to consider among
other matters the impact that any such rule would
have on competition and not to adopt any rule that
would impose a burden on competition that is not
necessary or appropriate in furtherance of the
purposes of the Exchange Act. See 15 U.S.C.
78w(a)(2).
E:\FR\FM\18MRP2.SGM
18MRP2
15594
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Regulation ATS to an additional number
of entities not currently regulated by it.
This would have a number of benefits,
including enhanced regulatory oversight
and protection for investors, a reduction
in trading costs and improvement in
execution quality, and enhancement of
price discovery and liquidity.
The proposed amendments would
also have costs for those entities subject
to new requirements, including
compliance costs associated with filing
forms such as Form ATS–N or Form
ATS, protecting confidential
information, keeping certain records,
and complying with the Fair Access
Rule and/or Regulation SCI.
B. Baseline
1. Current State of Communication
Protocol Systems
Communication Protocol Systems
bring together buyers and sellers of
securities through the use of non-firm
trading interest and by providing
structured methods for communication.
Three common types of protocols, RFQ,
stream axes, and conditional order
protocols, along with their potential
advantages and disadvantages for
participants, are described in following
subsections.797 Subsequent sections
discuss details of Communication
Protocol Systems that are particular to
different asset classes.798
jspears on DSK121TN23PROD with PROPOSALS2
a. Request-for-Quote Protocol
As described in Section II.B.2, an RFQ
protocol system typically allows market
participants to obtain quotes for a
particular security by simultaneously
sending messages to one or more
potential respondents. The initiating
participant is typically required to
provide information related to the
request in a message, which may
include the name of the initiating
participant, CUSIP, side, and size.
Participants that observe the initiating
participant’s request have the option to
respond to the request with a price
quote. These respondents are typically
dealers in the relevant asset class, and
are often, though not always, preselected. The initiating participant can
then select among the respondents by
either accepting one of multiple
responses or rejecting all responses,
usually within a ‘‘good for’’ time period.
After the initiating participant and a
respondent agree on the terms of the
797 See infra Tables VIII.5 and VIII.6 for a
breakdown of the market share of different
protocols, including ATS protocols, in the markets
for government securities and corporate debt.
798 See infra Sections VIII.B.2.b, VIII.B.3.b,
VIII.B.4.b, VIII.B.5.d, VIII.B.6.b, and VIII.B.7.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
trade, the trade will then proceed to
post-trade processing.
Initiating participants have an
incentive to invite multiple respondents
to an RFQ, because receiving more
quotes increases price competition and
thus may improve execution quality.799
The Commission understands that it is
common for an RFQ to include at least
three participants.
The number of respondents that are
invited to participate in the RFQ is
generally less than the total number of
dealers available through the system.800
There may be several reasons for this.
First, the Commission understands that
the system itself may limit the total
number of respondents that can be
selected for a single RFQ, typically to
five counterparties. This limitation may
encourage dealers to respond to RFQs,
since it reduces the number of other
dealers they would compete with in any
give request session.
A second reason stems from the
initiating participant’s possible
incentive to limit the degree of
information leakage. If the trade the
initiating participant is seeking to
complete with the help of the RFQ is
not completely filled in that one
session, and other participants know
this, quotes the initiating participant
receives elsewhere may be affected,
including in subsequent RFQ sessions.
A third reason is that respondents and
initiators both have an incentive to limit
price impact because of the expense it
will add to the offsetting trade that must
follow. Specifically, a dealer who takes
a position to fill a customer order
through an RFQ will often subsequently
offset that position in the interdealer
market. If a large number of dealers are
invited to participate in an RFQ, this
would lead to widespread knowledge
that the dealer with the winning bid
will now try to offset that position,
which could impact the prices available
to that dealer in the interdealer market.
Because RFQs give the initiating
participant the opportunity to mitigate
the information leakage described
above, they may give the initiating
participant more control over its
information than a limit order book
(‘‘LOB’’).801
799 See MarketAxess Letter at 3, stating that
variations of the RFQ protocol can allow clients to
simultaneously request liquidity on an anonymous
basis from over 1,000 platform participants, and
that connecting to more counterparties improves
trading outcomes and lowers transaction costs for
liquidity providers and takers.
800 See supra Section V.A.3, discussing the
applicability of fair access to platforms where each
participant has discretion over which other
participants they want to trade.
801 This reduction in information leakage may be
offset by the fact that on disclosed RFQs, the
PO 00000
Frm 00100
Fmt 4701
Sfmt 4702
Once the initiator receives responses
from the counterparties, the initiator can
select a quote with which to trade. On
some RFQ platforms, it is at this point
that both sides become committed to the
trade. However, there are other RFQ
platforms which allow the respondent
an opportunity to confirm the trade.
Additionally, after the RFQ session has
ended, the system may inform other
respondents to the RFQ of the price of
the second best quote. This allows them
to get information as to what other
respondents are quoting in the market,
while limiting information leakage
regarding the details of the actual trade
that took place.
Anonymous RFQ sessions may reduce
information leakage more than a
disclosed RFQ, because the identity of
the initiating participant might
otherwise reveal something about the
initiating participant’s willingness to
pay.802 However, this means
respondents are not able to price quotes
on the basis of an ongoing relationship
with the counterparty.
RFQ systems have disadvantages for
the initiating participants, when
compared with LOBs. For liquid
securities, trading on an RFQ system
results in less price competition among
respondents when compared with an
LOB, if the number of respondents are
limited. Compared to an LOB,
respondents cannot see what quotes
they would have to beat to win the
auction, and may not have to compete
with as many respondents to provide a
quote.
Also, the Commission understands
that there may be less straight-through
processing when trading is conducted
via an RFQ protocol system, as opposed
to on an exchange. Furthermore,
depending on the type of asset being
traded, there may not be centralized
means of clearing and settlement
available. For these reasons, the
Commission understands that one
reason why disclosed RFQs are used is
so that RFQ initiating participants can
choose dealers with whom the initiator
has an established relationship.803
Then, after an RFQ session has ended,
all necessary processing for the trade is
completed through this relationship, in
the same way that a transaction might
initiator’s identity is revealed to participants in the
session, which may be an especially sensitive bit of
information to reveal.
802 The use of anonymous RFQ is not uniform
across asset classes. The Commission preliminarily
believes that anonymous RFQ is uncommon in the
market for U.S. Treasury Securities.
803 See, e.g., MarketAxess Letter at 5, stating that
the majority of RFQ trades are completed on a
name-disclosed basis with no central clearing party.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
be processed via bilateral voice
trading.804
In order to facilitate processing of the
trade while maintaining the anonymity
of the counterparties, the operator of the
anonymous RFQ, which is typically a
broker-dealer, may act as a counterparty
to each side of the trade. Also, the
Commission understands that
anonymous RFQs are often received by
all liquidity providers participating on
the platform, instead of a pre-selected
few. The Commission understands that
providing an intermediary broker to act
as a counterparty to each side of a trade
on the system may also function as a
convenience to RFQ participants
generally, by allowing the system to
help facilitate more straight-through
processing.
As described in Section II.B.2, RFQ
Lists, also referred to as BWIC or
OWIC,805 are a variation of the RFQ
protocol in which quotes are solicited
for multiple securities simultaneously.
Market participants use RFQ Lists to
complete trades in a number of different
securities at the same time. Bringing all
liquidity providers together into a
single, multi-security RFQ may be a
more efficient way of trading multiple
securities at once than initiating a
separate RFQ session for each security,
especially if it is important to complete
the trades close together in time.
However, the use of the joint session
may reveal more about the trading
intentions of the initiator to its
counterparties than using separate RFQ
sessions, where information leakage is
more limited, as respondents may be
less aware of the complete position the
initiator is seeking to take.
b. Stream Axes
As defined in Section II.B.2, ‘‘stream
axes’’ are systems that electronically
display continuous trading interest (firm
or non-firm) in a security or type of
security to participants on the systems.
The Commission understands a typical
stream axe to operate as follows: Dealers
submit an indication or indications of
interest (‘‘axe’’ or ‘‘axes’’), which may
include price quotes and sizes for
buying and selling securities. Axes are
streamed to participants, updating
continuously as dealers adjust prices
and inventory offerings. A market
participant may choose an axe with
which to trade at the broadcasted price
and size. In some cases, the axes are
streamed on a non-anonymous basis,
which permits the prices to be
customized to the recipient on the basis
804 Bilateral voice trading refers to telephone
calls, chat messages, etc.
805 See supra note 58.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
of the relationship between the recipient
and the dealer.
Stream axes differ from RFQs in that
the dealer streaming the axes receives
less information about the
counterparty’s trading intentions before
the trade is agreed to. Stream axes are
similar to an LOB in this way. This lack
of information may end up reflected in
the prices the dealer chooses to stream,
as well as the type of dealer who
chooses to participate in stream axes.
Therefore, the decision to use an RFQ or
stream axe may depend on the trading
intentions of the participant. The stream
axes protocol gives the participant
receiving the stream the free option to
trade at whatever price is being
streamed at the moment, without
revealing anything about its trading
intentions beyond its identity. On the
other hand, this may be less conducive
to trading in certain sizes, and may not
result in the same price as an RFQ.
c. Conditional Order Protocol
Section II.B.2 defines conditional
orders as trading interest that may not
be executable until after a user takes
subsequent action, for example, sending
a firm-up invitation message to other
participants. Conditional order
protocols often allow the matched
parties to modify the attributes of the
non-firm trading interest before
accepting the firm-up invitation. If both
matching parties accept the firm-up
invite, the parties would agree upon the
terms of the trade and an execution
would occur.
Unlike LOBs, conditional order
protocols allow participants to
ultimately decline a transaction after
receiving a response to their quote. This
may be particularly useful for large size
orders or for illiquid securities, for
which search costs may be particularly
high. For example, participants can
place conditional orders on various
systems in search of liquidity, and use
the fact that the orders are non-firm to
avoid the risk of double-execution by
declining some responses if they receive
more than one. However, the ability for
the matched counterparty to also
decline to transact implies that the risk
of non-execution on conditional order
protocols is likely higher than that of
LOBs.
2. Current State of Government
Securities Market
The market for U.S. Government
securities is large both in terms of the
outstanding debt and daily trading
volume. According to the Treasury
Department, as of the end of 2020, the
total amount outstanding of marketable
Treasury Securities was approximately
PO 00000
Frm 00101
Fmt 4701
Sfmt 4702
15595
$21 trillion.806 The Financial Accounts
of the United States Z.1 released by the
Federal Reserve Board shows that the
amount outstanding of Agency- and
GSE-Backed Securities is about $10.1
trillion, as of the end of 2020.807
According to data published by SIFMA,
in September 2021, the average daily
trading volume in government securities
was about $850.1 billion, or roughly 95
percent of all fixed income trading
volume in the U.S.808 This includes
$582.1 billion average daily trading in
U.S. Treasury Securities, $265.7 billion
in Agency MBSs, and $2.4 billion in
other Agency Securities.
a. ATSs in the Market for U.S.
Government Securities
i. Operations and Market Share of
Government Securities ATSs
The variety of market participants
trading on Government Securities ATSs
has increased since their inception.
While Government Securities ATSs in
the market for U.S. Treasury Securities
historically only allowed bank and nonbank dealers 809 to trade, beginning in
2003, firms that were neither banks nor
dealers, such as hedge funds, insurance
companies, and PTFs, gained
permission from the ATSs to trade
directly on Government Securities
ATSs.810 The Commission estimates
that there are currently 17 ATSs trading
in government securities (either
Treasury or Agency securities, or both)
that have a Form ATS on file.811
806 See Monthly Statement of the Public Debt of
the United States, dated December 31, 2020,
available at https://www.treasurydirect.gov/govt/
reports/pd/mspd/2020/opds122020.pdf.
807 See Financial Accounts of the United States
Z.1 at 177, available at https://
www.federalreserve.gov/releases/z1/20210311/
z1.pdf.
808 See SIFMA Fixed Income Trading Volume,
available at https://www.sifma.org/resources/
research/us-fixed-income-securities-statistics/. The
stated figures include Treasury Securities, Agency
MBS, and Federal Agency Securities.
809 Absent an exception or an exemption, Section
15(a)(1) of the Exchange Act makes it unlawful for
a ‘‘dealer’’ to effect any transactions in, or to induce
or attempt to induce the purchase or sale of, any
security unless registered with the Commission in
accordance with Section 15(b) of the Exchange Act.
Similarly, Section 15C of the Exchange Act makes
it unlawful for a ‘‘government securities dealer’’
(other than a registered broker-dealer or financial
institution) to induce or attempt to induce the
purchase or sale of any government security unless
such government securities dealer is registered in
accordance with Section 15C(a)(2).
810 See Letter from Jim Greco, CEO, Direct Match,
to David R. Pearl, Office of the Executive Secretary,
U.S. Department of the Treasury, dated April 22,
2016, (‘‘Direct Match Letter’’) at 5, available at
https://www.treasurydirect.gov/instit/statreg/
gsareg/RFIcommentletterDirectMatch.pdf at 6–7.
811 See supra Section VII.C.1. The Commission
estimates that some of these ATSs only support
Treasuries trading to facilitate hedging in
E:\FR\FM\18MRP2.SGM
Continued
18MRP2
15596
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Additionally, the Commission estimates
that 7 Currently Exempted Government
Securities ATSs are not currently
required to register as a national
securities exchange or comply with
Regulation ATS.812
Currently, Government Securities
ATSs account for a significant
including the liquidity needed to
efficiently fill customer orders outside
the current ATSs. The Commission
understands that this means some
portion of dealer transactions on
Government Securities ATSs are
associated with the dealers’ activity in
filling customer orders.
percentage of all Treasury trading
activity reported to TRACE.813 As
shown in Table VIII.1, ATSs accounted
for approximately 32 percent of U.S.
Treasury Securities trading volume in
the first half of 2021. Dealer participants
on current ATSs use them as a source
of liquidity in government securities,
TABLE VIII.1—ATS MARKET SHARE ANALYSIS
Treasury
securities
Num. of Current Gov. Sec. ATSs ................................................................................................
Num. of Currently Exempted Gov. Sec. ATSs ............................................................................
Num. of Grouped-Affiliated ATSs ................................................................................................
Total volume share of Current Gov. Sec. ATSs .........................................................................
Total volume share of Currently Exempted Gov. Sec. ATSs .....................................................
Total volume share of Grouped-Affiliated ATSs Companies ......................................................
Agency
securities
Number of
unique
platforms
13
5
18
24.5%
9.6%
34.1%
7
1
7
11.6%
0.7%
12.3%
15
5
........................
........................
........................
........................
1
0
2
15.2%
........................
15.2%
1
0
1
11.6%
........................
........................
2
0
........................
........................
........................
........................
2
0
4
21.3%
........................
23.7%
1
0
1
11.6%
........................
........................
2
0
........................
........................
........................
........................
2
0
4
21.3%
........................
23.7%
1
0
1
11.6%
........................
........................
2
0
........................
........................
........................
........................
2
2
8
21.3%
7.9%
32.0%
1
0
1
11.6%
........................
........................
2
2
........................
........................
........................
........................
Above 10% Market Share
Num. of Current Gov. Sec. ATSs ................................................................................................
Num. of Currently Exempted Gov. Sec. ATSs ............................................................................
Num. of Grouped-Affiliated ATSs ................................................................................................
Total volume share of Current Gov. Sec. ATSs .........................................................................
Total volume share of Currently Exempted Gov. Sec. ATSs .....................................................
Total volume share of Grouped-Affiliated ATSs ..........................................................................
Above 5% Market Share
Num. of Current Gov. Sec. ATSs ................................................................................................
Num. of Currently Exempted Gov. Sec. ATSs ............................................................................
Num. of Grouped-Affiliated ATSs ................................................................................................
Total volume share of Current Gov. Sec. ATSs .........................................................................
Total volume share of Currently Exempted Gov. Sec. ATSs .....................................................
Total volume share of Grouped-Affiliated ATSs ..........................................................................
Above 4% Market Share
Num. of Current Gov. Sec. ATSs ................................................................................................
Num. of Currently Exempted Gov. Sec. ATSs ............................................................................
Num. of Grouped-Affiliated ATSs ................................................................................................
Total volume share of Current Gov. Sec. ATSs .........................................................................
Total volume share of Currently Exempted Gov. Sec. ATSs .....................................................
Total volume share of Grouped-Affiliated ATSs ..........................................................................
Above 3% Market Share
jspears on DSK121TN23PROD with PROPOSALS2
Num. of Current Gov. Sec. ATSs ................................................................................................
Num. of Currently Exempted Gov. Sec. ATSs ............................................................................
Num. of Grouped-Affiliated ATSs ................................................................................................
Total volume share of Current Gov. Sec. ATSs .........................................................................
Total volume share of Currently Exempted Gov. Sec. ATSs .....................................................
Total volume share of Grouped-Affiliated ATSs ..........................................................................
conjunction with corporate bonds transactions, but
typically are not used for outright Treasuries
trading. See also ICE Bonds Letter I at 3, stating that
this offering of Government Securities ATSs gives
participants the convenience of electronically
trading in instruments with correlated trading
activities in a centralized location.
812 As discussed in Section I, a Currently
Exempted Government Securities ATS is defined as
an ATS that limits its securities activities to
government securities or repos and registers as a
broker-dealer or is a bank. Currently Exempted
Government Securities ATSs transact exclusively in
government securities or repos, and are not required
to file a Form ATS.
813 TRACE aggregation and analysis methods
follow those used by Treasury market regulators
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
and FINRA, including adjustments for multiple
trade reports for a single transaction and counting
only one trade report for an ATS or inter-dealer
broker (IDB). Commission staff uses the regulatory
version of TRACE in its analysis.
A ‘‘Give-Up’’ ID is reported when a principal to
a transaction delegates another participant to report
a trade on its behalf. When a ‘‘Give-Up’’ ID is
reported, the corresponding reporting or contraparty is replaced with the ‘‘Give-Up’’ ID. This
ensures that trades are attributed to the principals
to each transaction. System control numbers are
used to link corrected, canceled, and reversed trade
messages with original new trade messages. In these
cases, only corrected trades are kept and all
cancellation and reversal messages and their
corresponding new trade messages are removed.
PO 00000
Frm 00102
Fmt 4701
Sfmt 4702
Special care must be taken when counting market
volume. When a FINRA registered broker directly
purchases from another FINRA member, two trade
messages are created. If those FINRA registered
brokers transact through an IDB, four trade
messages are created, two for the IDB and one for
each member. In both cases, the volume from only
one report is needed. To ensure that double
counting of transactions does not occur, only the
following trade messages are summed to calculate
market volume: Sales to non-IDB members, sales to
identified customers, such as banks, hedge funds,
asset managers, and PTFs, and purchases from and
sales to customers and affiliates. Any trade in
which the contra-party is an IDB is excluded. Thus,
in the case of trades involving IDBs, only the IDBs’
sale message is added to overall volume.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
15597
TABLE VIII.1—ATS MARKET SHARE ANALYSIS—Continued
Agency
securities
Number of
unique
platforms
1
0
1
11.6%
........................
........................
3
2
........................
........................
........................
........................
Treasury
securities
Above 2% Market Share
Num. of Current Gov. Sec. ATSs ................................................................................................
Num. of Currently Exempted Gov. Sec. ATSs ............................................................................
Num. of Grouped-Affiliated ATSs ................................................................................................
Total volume share of Current Gov. Sec. ATSs .........................................................................
Total volume share of Currently Exempted Gov. Sec. ATSs .....................................................
Total volume share of Grouped-Affiliated ATSs ..........................................................................
3
2
8
23.7%
7.9%
32.0%
Each panel reports the volume share (%) for Government Securities ATSs and the number of Government Securities ATSs above the specified
market share level. Grouped-Affiliated ATSs refer to ATSs operated by a common broker-dealer or affiliated broker-dealer and for which their
volume would be aggregated under the proposed changes to the Fair Access Rule. Treasury Securities include nominal bonds, TIPS and
STRIPS. Agency Securities include Agency Debentures, Agency Collateralized Mortgage Obligations, and Agency Pass-Through Mortgage
Backed Securities.a Trading volume is measured in dollar volume in par value. Data is based on the regulatory version of TRACE for U.S.
Treasury Securities and TRACE for Agency Securities from April 1, 2021 to September 30, 2021.b c
a Agency Pass-through Mortgage Backed Securities include those traded in specified pool transactions and those to be announced. ‘‘Agency
Debenture’’ is equivalent to ‘‘Federal Agency Security,’’ as used in Part I, Item 8(b) of Form ATS–N. ‘‘Agency Mortgage Backed Securities’’ as
used in Part I, Item 8(b) of Form ATS–N include both ‘‘Agency Collateralized Mortgage Obligations’’ and ‘‘Agency Pass-Through Mortgage
Backed Securities.’’
b The analysis based on TRACE is necessarily limited to transactions reported to TRACE, which may not be all transactions in government securities. Transactions that take place on non-FINRA member ATSs or between two non-FINRA members are not reported to TRACE.
c Trades reported to TRACE may include trades conducted on a Communication Protocol System if one participant in the trade is a FINRA
member. The volume reported in this table is categorized given this limitation.
Government Securities ATSs have
evolved such that they operate with a
level of technology use and speed of
trading that is similar to that observed
on NMS Stock ATSs, particularly in the
secondary electronic cash market for onthe-run U.S. Treasury Securities.814
Some Government Securities ATSs
operate as anonymous LOB systems and
offer features such as low latency
connectivity, direct market data feeds,
co-location services, and a variety of
order types. In addition to facilitating
low latency trading, the Commission
understands that the data feeds
provided by Government Securities ATS
serve as a source for real-time prices in
the market for government securities.815
In providing such information to market
participants about Treasury prices in
particular, these feeds may serve as a
source for real-time risk-free rate
benchmarks, which help price other
financial instruments.
PTFs have a significant presence on
Government Securities ATSs.816 Table
VIII.2 shows that, during April to
September of 2021, PTFs accounted for
approximately 25.4 percent of total onthe-run U.S. Treasury Securities ATS
trading volume. There were 41 PTFs
operating on ATSs that trade U.S.
Treasury Securities as of August 2021.
The Commission understands that PTFs
trading on the electronic market for U.S.
Treasury Securities often employ
automated, algorithmic trading
strategies that rely on speed and allow
the PTFs to quickly execute trades, or
cancel or modify quotes in response to
perceived market events.817 The
Commission understands that PTFs
contribute liquidity to the trading
environment on Government Securities
ATSs.818
TABLE VIII.2—ON-THE-RUN U.S. TREASURY SECURITIES TRADING VOLUME
Number of
venues
Volume
Volume share
(%)
On-the-Run U.S. Treasury Securities Trading Volume
jspears on DSK121TN23PROD with PROPOSALS2
ATSs ............................................................................................................................................
Customer trades ...................................................................................................................
Dealer trades ........................................................................................................................
PTF trades ............................................................................................................................
Non-ATS Interdealer Brokers ......................................................................................................
Customer trades ...................................................................................................................
Dealer trades ........................................................................................................................
PTF trades ............................................................................................................................
Bilateral dealer-to-dealer trades ..................................................................................................
Bilateral dealer-to-customer trades .............................................................................................
Bilateral dealer-to-PTF trades .....................................................................................................
814 See October 15 Staff Report, supra note 188,
at 35–36, discussing increased electronic trading in
the market for Treasuries. See also Bloomberg Letter
at 5, stating that liquid on-the-run government
securities are mostly traded on central limit order
books and Bloomberg Letter at 21, stating that ATSs
are a significant source of liquidity for on-the-run
U.S. Treasury Securities.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
815 See Letter from Dan Cleaves, Chief Executive
Officer, BrokerTec Americas, and Jerald Irving,
President, ICAP Securities USA LLC, to David R.
Pearl, Office of the Executive Secretary, Treasury
Department, dated April 22, 2016 at 7, available at
https://www.treasurydirect.gov/instit/statreg/
gsareg/ICAPTreasuryRFILetter.pdf.
PO 00000
Frm 00103
Fmt 4701
Sfmt 4702
18
11
18
11
24
19
23
9
352
333
97
816 See
812,480
52,754
344,781
414,945
118,067
77,334
40,252
481
92,051
604,823
7,250
49.7
3.2
21.1
25.4
7.2
4.7
2.5
0.0 a
5.6
37.0
0.4
supra Section III.A.
October 15 Staff Report at 32, 35–36, 39.
818 One market participant stated that this
liquidity provision may fill a gap that was left after
the introduction of post-2008 financial crisis
regulations and their subsequent effects on dealers.
See Direct Match Letter at 7.
817 See
E:\FR\FM\18MRP2.SGM
18MRP2
15598
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
TABLE VIII.2—ON-THE-RUN U.S. TREASURY SECURITIES TRADING VOLUME—Continued
Number of
venues
Total ...............................................................................................................................
Volume
........................
1,634,671
Volume share
(%)
100.0
ATSs,b
This table reports trading volume and volume share for
Non-ATS interdealer brokers, bilateral dealer-to-dealer transactions, bilateral
dealer-to-customer, and bilateral dealer-to-PTF transactions for on-the-run U.S. Treasury Securities. On-the-run U.S. Treasury Securities are
the most recently issued nominal coupon securities. Nominal coupon securities pay a fixed semi-annual coupon and are currently issued at
original maturities of 2, 3, 5, 7, 10, 20, and 30 years. Treasury Bills and Floating Rate Notes are excluded. Volume is the average weekly dollar volume in par value (in millions of dollars) over the 6-month period, from April 1, 2021, to September 30, 2021.c Number of Venues is the
number of different trading venues in each category and the number of distinct MPIDs for bilateral transactions.d Market Share (%) is the
measure of the dollar volume as a percent of total dollar volume.e The volumes of ATSs and non-ATS interdealer brokers are broken out by
Customer trades, Dealer trades, and PTF trades within each group.f Data is based on the regulatory version of TRACE for U.S. Treasury Securities from April 1, 2021, to September 30, 2021. Bilateral trades are a catchall classification that may include trades conducted via bilateral
negotiation, as well as trades conducted electronically via platforms not registered with FINRA as an ATS. Bilateral trades may include trades
conducted on Communication Protocol Systems.
a The
percentage to the nearest non-zero is 0.02%.
See supra notes b and c in Table VIII.1.
c FINRA reports volume as par volume, where par volume is the volume measured by the face value of the bond, in dollars. See relevant
weekly volume files, available at https://www.finra.org/filing-reporting/trace/data/trace-treasury-aggregates.
d Dealers are counted using the number of distinct MPIDs.
e Total dollar volume (in par value) is calculated as the sum of dollar volume for ATSs, non-ATS interdealer brokers, bilateral dealer-to-dealer
transactions, and bilateral dealer-to-customer transactions.
f We identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE for U.S. Treasury Securities.
The regulatory version of TRACE for U.S. Treasury Securities includes an identifier for customer and interdealer trades. Furthermore, we use
MPID for non-FINRA member subscriber counterparties in the regulatory version of TRACE for U.S. Treasury Securities to identify PTF trades on
ATSs.
b
Table VIII.1 also shows that trading in
the Treasury Securities market is
concentrated on a few large ATSs.819
The largest ATS by Treasury dollar
volume has 15.2 percent of the total
Treasury Securities market reported to
TRACE. Two Government Securities
ATSs have dollar volumes that are over
five percent of the total TRACE volume
figure, and four have dollar volumes
over three percent.
Table VIII.2 shows that the majority of
trading in on-the-run government
securities reported to TRACE goes
through Government Securities ATSs.
Specifically, Government Securities
ATSs accounted for nearly 50 percent of
total dollar volume.
When on-the-run securities transition
to off-the-run status, their trading
activity shifts away from Government
Securities ATSs, and towards other
transaction methods, including
Communication Protocol Systems.820
This is reflected in Table VIII.3, which
shows that Government Securities ATSs
account for approximately 21 percent of
the total dollar volume of off-the-run
Treasury trading reported to TRACE.821
Table VIII.3 also shows that, while
dealers remain a significant contributor
to ATS trading in Treasury Securities in
the off-the-run market, PTFs make up a
smaller percentage of volume than they
do in the on-the-run market.
TABLE VIII.3—OFF-THE-RUN U.S. TREASURY SECURITIES TRADING VOLUME
Number of
venues
Volume
Volume share
(%)
jspears on DSK121TN23PROD with PROPOSALS2
Off-the-Run U.S. Treasury Securities Trading Volume
ATSs ............................................................................................................................................
Customer trades ...................................................................................................................
Dealer trades ........................................................................................................................
PTF trades ............................................................................................................................
Non-ATS Interdealer Brokers ......................................................................................................
Customer trades ...................................................................................................................
Dealer trades ........................................................................................................................
PTF trades ............................................................................................................................
Bilateral dealer-to-dealer trades ..................................................................................................
Bilateral dealer-to-customer trades .............................................................................................
Bilateral dealer-to-PTF trades .....................................................................................................
17
10
17
11
22
18
21
12
509
333
114
110,945
13,304
83,668
13,973
43,604
15,092
28,451
61
47,912
437,665
1,415
21.7
2.1
13.0
2.2
6.8
2.4
4.4
0.0 a
7.5
68.2
0.2
Total ...............................................................................................................................
........................
641,540
100.0
819 All ATSs identified in this table are
determined by the regulatory version of TRACE.
TRACE data contains an identifier for trades
occurring on ATSs, identifying the MPID of the
ATS.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
820 One commenter referenced that market
participants trading in less liquid off-the-run
securities are better able to find liquidity in nonATS trading methods. See Bloomberg Letter at 5
and 21–22.
PO 00000
Frm 00104
Fmt 4701
Sfmt 4702
821 See
E:\FR\FM\18MRP2.SGM
supra note 193.
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
15599
TABLE VIII.3—OFF-THE-RUN U.S. TREASURY SECURITIES TRADING VOLUME—Continued
Number of
venues
Volume
Volume share
(%)
This table reports trading volume and volume share for ATSs,b non-ATS interdealer brokers, bilateral dealer-to-dealer transactions, bilateral
dealer-to-customer, and bilateral dealer-to-PTF transactions for off-the-run U.S. Treasury Securities. Off-the-run or ‘‘seasoned’’ U.S. Treasury
Securities include TIPS, STRIPS, and nominal coupon securities issues that preceded the current on-the-run nominal coupon securities.
Number of Venues is the number of different trading venues in each category and the number of distinct MPIDs for bilateral transactions. Volume is the average weekly dollar volume in par value (in millions of dollars) over the 6-month period, from April 1, 2021, to September 30,
2021. Market Share (%) is the measure of the dollar volume as a percent of the total dollar volume. The volumes of ATSs and non-ATS interdealer brokers are broken out by Customer trades, Dealer trades, and PTF trades within each group.c Data is based on the regulatory
version of TRACE for U.S. Treasury Securities from April 1, 2021, to September 30, 2021. Bilateral trades are a catchall classification that
may include trades conducted via bilateral negotiation, as well as trades conducted electronically via platforms not registered with FINRA as
an ATS. Bilateral trades may include trades conducted on Communication Protocol Systems.
a The
percentage to the nearest non-zero is 0.009%.
supra notes b and c of Table VIII.1.
identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE for U.S. Treasury Securities.
The regulatory version of TRACE for U.S. Treasury Securities includes an identifier for customer and interdealer trades. Furthermore, we use
MPID for non-FINRA member subscriber counterparties in the regulatory version of TRACE for U.S. Treasury Securities to identify PTF trades on
ATSs.
b See
c We
Government Securities ATSs also play
a significant role in the market for
Agency Securities, accounting for
approximately 12 percent of the total
dollar volume reported to TRACE. Like
in the Treasury market, dealers play a
significant role in trading on ATSs for
Agency Securities.822
It is the Commission’s understanding
that PTFs play only a small role in the
market for Agency Securities. The
Commission invites comment on the
role of PTFs in trading Agency
Securities. The Commission also
requests comment on the providers of
liquidity in the market for Agency
Securities.
TABLE VIII.4—AGENCY SECURITIES TRADING VOLUME
Number of
venues
Volume
Volume share
(%)
Agency Securities Trading Volume
ATSs ............................................................................................................................................
Customer trades ...................................................................................................................
Dealer trades ........................................................................................................................
PTF trades ............................................................................................................................
Non-ATS Interdealer Brokers ......................................................................................................
Customer trades ...................................................................................................................
Dealer trades ........................................................................................................................
PTF trades ............................................................................................................................
Bilateral dealer-to-dealer trades ..................................................................................................
Bilateral dealer-to-customer trades .............................................................................................
Bilateral dealer-to-PTF trades .....................................................................................................
8
7
7
3
13
9
13
5
470
470
84
31,940
6,767
25,173
1
7,935
1,096
6,838
0
12,170
206,777
3
12.3
2.6
9.7
a 0.0
3.0
0.4
2.6
b 0.0
4.7
79.9
c 0.0
Total ......................................................................................................................................
........................
264,916
100.0
ATSs,d
This table reports trading volume and volume share for
non-ATS interdealer brokers, bilateral dealer-to-dealer transactions, and bilateral
dealer-to-customer transactions for U.S. Agency Securities. Agency Securities include Agency Debentures, Agency Collateralized Mortgage
Obligations, and Agency Pass-Through Mortgage Backed Securities. Number of Venues is the number of different trading venues in each
category and the number of MPIDs for bilateral transactions. Volume is the average daily dollar volume in par value (in millions of dollars)
over the 6-month period, from April 1, 2021, to September 30, 2021. Market Share (%) is the measure of the dollar volume as a percent of
the total dollar volume. The volume of ATSs and non-ATS interdealer brokers are broken out by Customer trades and Dealer trades within
each group.e Data is based on the regulatory version of TRACE for Agency Securities from April 1, 2021, to September 30, 2021. Bilateral
trades are a catchall classification that may include trades conducted via bilateral negotiation, as well as trades conducted electronically via
platforms not registered with FINRA as an ATS. Bilateral trades may include trades conducted on Communication Protocol Systems.
a The
percentage to the nearest non-zero is 0.0003%.
percentage to the nearest non-zero is 0.00007%.
percentage to the nearest non-zero is 0.001%.
d See supra notes b and c of Table VIII.1.
e We identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE for Agency Securities. The
regulatory version of TRACE for Agency Securities includes an identifier for customer and interdealer trades.
b The
jspears on DSK121TN23PROD with PROPOSALS2
c The
822 Agency Securities are those issued by U.S.
Government sponsored enterprises (‘‘GSEs’’) such
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
as Federal Home Loan Banks (‘‘FHLBs’’), the
Federal National Mortgage Association (‘‘Fannie
PO 00000
Frm 00105
Fmt 4701
Sfmt 4702
Mae’’), and the Federal Home Loan Mortgage
Corporation (‘‘Freddie Mac’’).
E:\FR\FM\18MRP2.SGM
18MRP2
15600
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
ii. Regulatory Environment for
Government Securities ATSs
The regulatory environment for
Government Securities ATSs varies
according to whether the ATS is a
Current Government Securities ATS or
a Currently Exempted Government
Securities ATS, and whether the ATS is
operated by a registered broker-dealer.
Differences in reporting requirements
can lead to an uneven competitive
landscape for Government Securities
ATSs and leave room for regulatory
arbitrage.823 In addition, current
regulation for Government Securities
ATSs does not require public disclosure
about operations, fair access, or robust
systems.
Much of the difference in regulatory
treatment among Government Securities
ATSs comes from the fact that Current
Government Securities ATSs must
comply with Regulation ATS, while
Currently Exempted Government
Securities ATSs do not. For example,
Currently Exempted Government
Securities ATSs are not required to file
Form ATS with the Commission, while
ATSs that trade U.S. Government
securities as well as non-government
securities, such as corporate or
municipal securities, must have filed
Form ATS as a confidential filing with
the Commission when they began
operations, and will incur the cost to do
so again if there is a material change in
operations.824
Current Government Securities ATSs
are also required to confidentially report
their transaction dollar volume in
government securities to the
Commission on a quarterly basis via
Form ATS–R within 30 days after the
end of each calendar quarter. Currently
Exempted Government Securities ATSs
are not subject to this requirement.
Unlike Current Government Securities
ATSs, Currently Exempted Government
Securities ATSs are not required to
establish written safeguards and written
procedures to protect subscribers’
confidential trading information.825 To
the extent that a Currently Exempted
Government Securities ATS does not
have these procedures, or has them but
the procedures are not adequate,826 a
823 One commenter stated that the lack of a
consistent regulatory framework for entities that
undertake similar activities leads to opportunities
for arbitrage and may result in market
fragmentation, which in turn may cause reduced
market liquidity. See Tradeweb Letter at 9.
824 The Commission may use this information in
monitoring, examinations and enforcement.
825 These requirements come from Rule 301(b)(10)
of Regulation ATS. Current Government Securities
ATSs are currently subject to these rules. See supra
Section II.D.2.
826 Currently Exempted Government Securities
ATSs are not required to file their written
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
subscriber’s confidential trading
information might be at risk of
unauthorized disclosure or subject to
potential misuse.
Current Government Securities ATSs
must also comply with certain
additional requirements, such as
recordkeeping requirements pursuant to
Rule 301(b)(8). These include
requirements to make and keep certain
records for an audit trail of trading
activity, such as time-sequenced order
information, as well as information
about current subscribers and
summaries of trading activity. The
requirement to keep such records may
impose compliance costs on Current
Government Securities ATSs to which
Currently Exempted Government
Securities ATSs are not subjected. To
the extent that Currently Exempted
Government Securities ATSs do not
voluntarily maintain records similar to
those required by Rule 301(b)(8),
detection and investigation of potential
market irregularities may be inhibited.
A further disparity exists in the case
of the estimated one bank-operated
Currently Exempted Government
Securities ATS. All other Currently
Exempted Government Securities ATSs
and all Current Government Securities
ATSs are registered broker-dealers that
incur the costs of registering with the
Commission as well as the costs of SRO
membership, and face operational
regulatory reporting requirements.827 In
contrast, the estimated one bankoperated Currently Exempted
Government Securities ATS is not
required to register as a broker-dealer
with the Commission and thus, does not
have to file Form BD with the
Commission or be subject to FINRA
rules.
The estimated one bank-operated
Currently Exempted Government
Securities ATS does not report
government securities transactions to
TRACE. All transactions in government
securities that include at least one
FINRA member are required to be
reported to TRACE within 15 minutes of
safeguards and written procedures with the
Commission. Therefore, absent an examination by
the Commission staff, the Commission is not able
to determine which Currently Exempted
Government Securities ATSs currently have
adequate, written safeguards and written
procedures to protect subscribers’ confidential
trading information. At the same time, based on the
experience of the Commission, the Commission
believes that some Currently Exempted Government
Securities ATSs currently have, and maintain in
writing, safeguards and procedures to protect
subscribers’ confidential trading information, as
well as the oversight procedures to ensure such
safeguards and procedures are followed.
827 See FINRA Letter at 2–3, stating that nearly all
Government Securities ATSs currently are FINRA
members
PO 00000
Frm 00106
Fmt 4701
Sfmt 4702
the time of execution.828 Trades on
ATSs operated by FINRA members may
be required to be reported to TRACE, by
either the ATS, counterparties to the
trade, or both, depending on whether
the counterparties are FINRA members
and whether the ATS holds itself out as
a party to the trade.829
Neither Current Government
Securities ATSs nor Currently
Exempted Government Securities ATSs
are required to make disclosures on
public forms, and this might lead to
information asymmetries amongst
different subscribers. For example,
certain Government Securities ATSs
might make voluntary disclosures
regarding their operations as a signal of
quality to some customers,830 without
disclosing the same information to other
customers or market participants
generally. As a result, some subscribers
have limited information which may
affect their trading decisions.
There is no legal mechanism to
prevent Government Securities ATSs
from unreasonably denying or limiting
828 See supra note 228 and corresponding text
discussing TRACE reporting requirements for U.S.
Government securities.
829 FINRA Rule 6731 exempts certain ATSs from
TRACE reporting requirements as long as all of the
following conditions are met: All trades are
between ATS subscribers that are both FINRA
members; the ATS demonstrates that member
subscribers are fully disclosed to one another at all
times, the system does not permit automatic
execution and a member must take affirmative steps
to agree to a trade, the trade does not pass through
any ATS account and the ATS does not hold itself
out as a party to the trade; and the ATS does not
exchange TRACE-Eligible Securities or funds on
behalf of its subscribers, take either side of the trade
for clearing or settlement purposes, or in any other
way insert itself into the trade; the ATS and the
member subscribers acknowledge and agree in
writing that the ATS shall not be deemed a party
to the trade for purposes of trade reporting and that
trades shall be reported by each party to the
transaction; and the ATS agrees to provide to
FINRA on a monthly basis data relating to the
volume of trades by security executed by the ATS’s
member subscribers using the ATS’s system.
Furthermore, Rule 6732 exempts certain
transactions on ATS from TRACE reporting
requirements as long as all of the following
conditions are met: The trade is between FINRA
members; the trade does not pass through any ATS
account, and the ATS does not exchange TRACEEligible Securities or funds on behalf of the
subscribers, take either side of the trade for clearing
or settlement purposes, or in any other way insert
itself into the trade; the ATS agrees to provide to
FINRA on a monthly basis data relating to each
exempted trade occurring on the ATS’s system
pursuant to this Rule 6732; the ATS remits to
FINRA a transaction reporting fee for each
exempted sell transaction occurring on the ATS;
and the ATS has entered into a written agreement
with each party to the transaction that such trade
must be reported by such party. See also FINRA
Letter at 6–7, stating that a fixed income ATS is a
‘‘party to a transaction’’ in a TRACE-eligible
security occurring through its system and has
TRACE transaction reporting obligations, unless an
exception or exemption applies.
830 For example, the ATS may disclose order
execution statistics to some customers.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
subscribers’ access, because the Fair
Access Rule does not currently apply to
any ATS that trades government
securities.831 When a Government
Securities ATS has a significant share of
trading volume in government
securities, unfairly discriminatory
actions might hurt investors because
viable alternatives to trading on such a
high-volume system might be limited.
To the extent this happens, it results in
higher trading costs and a reduced
efficiency with which such excluded
participants achieve trading objectives,
which may also lead to concentration in
the market for dealers in government
securities.832 Furthermore, market
forces alone might not be sufficient to
prevent a Government Securities ATS
from unreasonably denying access to
some market participants.833
The Commission preliminarily
believes that Government Securities
ATSs may not fully internalize the cost
of the externalities associated with not
having robust, resilient systems, as
would be required by the provisions of
Regulation SCI and Rule 301(b)(6) of
Regulation ATS. Without appropriate
safeguards in place for Government
Securities ATSs, technological
vulnerabilities continue to exist and
could lead to the potential for costly
failures, disruptions, delays, intrusions,
and the reduction in systems uptime,834 which could harm the price
discovery process and price efficiency
of government securities. Systems issues
pose significant negative externalities
on the market, in that if a trading system
of a Government Securities ATS with
significant trading volume fails, this
failure will not only force the ATS to
forgo revenue but might also diminish
trading in government securities during
the disruption. This would increase the
trading costs of market participants that
have optimized their trading strategy
under the assumption that all
Government Securities ATSs with
significant volume are fully operational,
and might harm the price discovery
process and liquidity flows for
government securities.835 In addition,
831 See supra Section II.D.2, discussing the Fair
Access Rule requirements.
832 One commenter stated that registered
investment companies generally are not able to
directly access liquidity on most Treasury
interdealer platforms. See ICI Letter at 4.
833 See MFA Letter at 3, stating that currently
there is no mechanism to prevent Government
Securities ATSs from unreasonably denying or
limiting subscribers’ access to an ATS that is a
significant market for government securities.
834 Systems up-time is a measure of the time that
a computer system is running and available.
835 On January 11, 2019, the largest trading
platform in on-the-run U.S. Treasury Securities,
experienced a system outage approximately from 2
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
price discovery in securities that use
government security transaction prices
as risk-free rate benchmarks might also
be harmed.836
One commenter on the 2020 Proposal
stated that ‘‘many Government
Securities ATSs may already align with
industry standards that achieve many of
the same goals of Regulations SCI,
although in slightly different
manner.’’837 While the Commission
recognizes that Government Securities
ATSs have some incentives to maintain
robust systems to remain competitive
and thereby reduce systems issues, the
Commission believes that market forces
alone may not be sufficient to
significantly reduce systems issues,
because some of the impact of these
systems issues represent an externality
to the Government Securities ATS.838
A comment letter received in
response to the Treasury Request for
Information stated that many
Government Securities ATSs adopted
system testing and control procedures
that followed the recommended best
practices of the Treasury Market
Practices Group.839 However, these best
practices are meant only as useful
operational guideposts rather than
binding rules, and each trading venue
can choose if it wants to comply and
how to comply, which might provide
weak only incentives to internalize the
p.m. to 3:30 p.m. ET. While the outage resulted in
a modest reduction in market volume, had it
occurred at a time other than late on a Friday
afternoon when trading activity is normally already
low, the outage could have resulted in more adverse
consequences on the overall market. See also
Elizabeth Stanton, Nick Baker, & Matthew Leising,
Treasuries Hit by One-Hour Outage on Biggest
Electronic Platform, Bloomberg, January 13, 2019,
https://www.bloomberg.com/news/articles/2019-0111/brokertec-inter-dealer-treasury-broker-suffersoutage.
836 As noted in the October 15 Staff Report, price
discovery is especially important in the secondary
market for on-the-run U.S. Treasury Securities
because the transaction prices are used as risk-free
rate benchmarks to price other securities
transactions.
837 See BrokerTec Letter at 6.
838 A commenter on the 2020 stated ‘‘. . . we
believe that market forces alone may be insufficient
to significantly reduce systems issues in the market
for trading and execution services in government
securities.’’ See MFA Letter at 6.
839 See Letter from Mike Zolik, Nate Kalich, and
Larry Magargal, Ronin Capital LLC, to David R.
Pearl, Office of the Executive Secretary, U.S.
Department of the Treasury, dated March 19, 2016,
at 31–33, available at https://
www.treasurydirect.gov/instit/statreg/gsareg/
RoninCapital.pdf. See also BrokerTec Letter at 6.
The Treasury Market Practices Group promotes a
robust control environment for government
securities trading, using internal controls and risk
management. See Treasury Market Practices Group,
Best Practices For Treasury, Agency Debt, and
Agency Mortgage-Backed Securities Markets (July
2019), available at https://www.newyorkfed.org/
medialibrary/Microsites/tmpg/files/TMPG_
BestPractices_071119.pdf.
PO 00000
Frm 00107
Fmt 4701
Sfmt 4702
15601
externality costs associated with system
failures.
The Commission is aware of 1
Government Securities ATS operated by
a broker-dealer that also operates an
NMS Stock ATS that is an SCI entity
and so may already comply with much
of Regulation SCI.
b. Communication Protocol Systems in
the Market for Government Securities
Communication Protocol Systems
play a significant role in the market for
government securities. The Commission
estimates that there are 3
Communication Protocol Systems
operating in the market for government
securities that may meet the definition
of exchange under the proposed changes
to Exchange Act Rule 3b–16. The
Commission understands that these
systems are a significant component of
the dealer-to-customer segment of the
U.S. Treasury market and account for
approximately 30 to 40 percent of the
total trading volume in U.S.
Treasuries.840 One of the roles of such
systems is to provide a means to
communicate trading interest in the
dealer-to-customer market.841
The Commission understands that
investors who wish to transact in
government securities generally do so
with a dealer on a principal basis.
Communication Protocol Systems
typically facilitate the first step in a
principal trade, namely trading between
the dealer and customer. In this
capacity, the systems provide a way for
customers to obtain quotes from dealers
and to select a dealer to fill their order,
in addition to the other reasons for
using a Communication Protocol System
described in Section VIII.B.1. The
Commission understands that dealers
and PTFs may also use Communication
Protocol Systems to demand liquidity in
government securities, a decision which
may be motivated by the possibility of
executing block trades with less
information leakage compared to
ATSs.842
The Commission understands that
dealer respondents on RFQ systems in
the market for government securities
typically provide a continuous stream of
indicative, non-firm quotes that are
aggregated into a single quote and made
840 See infra Section VIII.B.2.d, Table VIII.5. Some
part of the stream axes volume accounted for in that
table may be ATS volume.
841 As described in Section III.A, the secondary
market for U.S. Treasury Securities is generally
bifurcated between the dealer-to-customer market
and the interdealer market. See also Bloomberg
Letter at 5, referencing that the bifurcating of the
market is due to some extent to structural issues in
clearing.
842 See supra Section VIII.B.1.a, discussing
information leakage and RFQs.
E:\FR\FM\18MRP2.SGM
18MRP2
15602
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
available to all participants who may
wish to initiate an RFQ on the trading
system. Such quotes may also be
disseminated over the internet to the
general public. These indicative quote
streams are an important service on RFQ
systems for at least two reasons. First,
they are a source of price information in
government securities, and the
Commission understands that some
market data vendors may rely
exclusively on such quote streams for
the information they provide on, for
example, the Treasury market. In
providing such transparency in the
Treasury market, these quote streams
may be used as a risk-free rate
benchmark, and to help price other
financial instruments. Second, the quote
streams give potential participants in
the RFQ a sense of what quotes they
would receive in response to a request
without having to make a request,
which helps these market participants
get a sense of the market without
revealing trading interest.
Communication Protocol Systems do
not meet the current definition of an
exchange and thus are not subject to
regulation either as an exchange or an
ATS. This means they face a regulatory
regime similar to that of Currently
Exempted Government Securities ATSs
as described in Section VIII.B.1.ii above.
Furthermore, depending on how much
of a role the Communication Protocol
System takes in facilitating the
transaction (e.g., acting as a
counterparty to each side of the trade),
and whether the Communication
Protocol System operator and/or parties
to the transaction are FINRA members,
transactions taking place through the
Communication Protocol System may
not be reported to TRACE at all.
The Commission estimates that a
single Communication Protocol System
trading in government securities is not
currently operated by a registered
broker-dealer. This system does not
currently incur the costs of registering
with the Commission as well as the
costs of SRO membership, and is not
subject to FINRA operational regulatory
reporting requirements.
and size. If there were agreement, the
parties would execute a trade. If not, the
liquidity demander could repeat this
process to find a more suitable
counterparty. The Commission
understands that a liquidity demander
would typically contact more than one
dealer, in order to compare quotes.
Bilateral voice trading can be
attractive to traders in government
securities because this method of
trading allows for flexibility, minimizes
information leakage relative to other
trading protocols, and may be
conducive to maintaining relationships.
The lack of information leakage may
cause bilateral voice trading to be a
useful method for traders seeking to
execute large block trades of
government securities.
c. Other Methods of Trading in U.S.
Government Securities
Market participants may also transact
in government securities via bilateral
voice trading. As the Commission
understands, a market participant
wishing to make a purchase or sale of
government securities would phone a
potential counterparty, typically a
dealer in government securities, to
inquire about specific securities. The
parties would then negotiate on price
d. Competition for U.S. Government
Securities Trading Services
Government securities are traded
through a diverse set of methods,
including ATSs, Communication
Protocol Systems, and bilateral
negotiation methods such as voice
trading. The Commission preliminarily
believes that each type of trading
method may be more prevalent in
separate segments of the government
securities market.
TABLE VIII.5—U.S. TREASURY SECURITIES TRADING PROTOCOL MARKET SHARE
Limit order book
Stream axes a
RFQ
26.3 ..............................................................................................................................................
29.9
10.4
Voice
33.4
This table reports volume share by trading protocol type in the market for U.S. Treasury Securities. Market Share (%) is the measure of the dollar volume as a percent of total dollar volume. Data is based on Coalition Greenwich’s Greenwich MarketView data from January 2021
through September 2021. Voice protocol is calculated as the remainder of volume after accounting for Limit Order Book, RFQ, and Stream
Axes reported directly to Coalition Greenwich from aggregated FINRA TRACE volume.
a Coalition
Greenwich’s Greenwich MarketView refers to this data value as ‘‘Stream/Click-to-Engage.’’
jspears on DSK121TN23PROD with PROPOSALS2
ATSs and Communication Protocol
Systems compete with one another to
attract order flow. Table VIII.5 shows
the percentage of TRACE-reported
Treasury Securities transactions that are
completed using different trading
protocols, and shows that the use of
ATSs and Communication Protocol
Systems to transact in Treasury
Securities are roughly evenly matched
in terms of volume.843 LOB volume
represents ATS trades, and the
843 One commenter pointed out that, at around 30
percent, U.S. Treasury market ATS market share is
at a similar level that NMS equities ATS market
share was in 1999 when Regulation ATS was
adopted. The commenter stated that the exemption
of Treasury securities from Regulation ATS gave
Treasury market structure time to develop, but the
market has now matured to a point where the
exemption should be reconsidered. See Bloomberg
Letter at 21.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Commission understands that some
amount of stream axes volume may also
be from ATSs. The remaining portion of
stream axes and the RFQ volume
represent Communication Protocol
Systems in this market.
The Commission understands that the
primary customers of ATSs tend to be
dealers and PTFs. The Commission
understands that many of the PTFs
trading on Government Securities ATSs
utilize latency-sensitive trading
strategies.844 Such strategies would
likely not be possible to implement
when trading on a Communication
Protocol System, or via bilateral voice
trading. This gives ATSs an advantage
in attracting such order flow. Because
844 See supra Section VIII.B.2.a.i for additional
discussion on the role of PTFs in the Treasury
market.
PO 00000
Frm 00108
Fmt 4701
Sfmt 4702
orders on LOB ATSs are generally
displayed to all participants on the ATS,
ATSs with LOBs may have more price
competition among liquidity providers
than alternatives. Also, ATSs, unlike
non-ATS trading services, can offer
certain additional execution protocols,
such as crossing mechanisms and
auctions, which generally meet the
current definition of an exchange.
Government Securities ATSs compete
on fees, trading features, and by
attracting liquidity to their system. As
described above in Section VIII.B.2.a, a
substantial amount of order flow in
government securities is concentrated
on the largest Government Securities
ATS.845
845 See
E:\FR\FM\18MRP2.SGM
supra Section VIII.B.2.a.i.
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
The primary customers of
Communication Protocol Systems are
those market participants in the dealerto-customer market. Customers seeking
to trade government securities may find
the sophistication and infrastructure
required to trade on ATSs to not be costeffective relative to the type and
quantity of trading they wish to
undertake. This may give the
Communication Protocol Systems an
advantage in attracting such traders. In
addition, Communication Protocol
Systems offer features that ATSs might
not, such as the ability to trade on a
fully disclosed, non-anonymous basis;
or the ability to connect trading in
Treasuries to related trades in corporate
bonds.846
Communication Protocol Systems
compete with each other through the
fees they charge, and through
innovation and improvement in the type
and quality of the protocols they offer.
The Commission preliminarily believes
that such competition among
Communication Protocol Systems may
explain the proliferation of different
types of protocols.
Both ATSs and Communication
Protocol Systems compete against the
option of transacting through bilateral
voice trading. Such methods of trading
in government securities have been
common historically and continue to be
used today. As described above in
Section VIII.B.2.c, these methods of
trading provide traders with the ability
to customize transactions on the basis of
a relationship between the two parties.
At the same time, these trades may be
more cumbersome and may suffer from
a lack of price competition relative to
Communication Protocol Systems and
ATSs.
The Commission preliminarily
believes that the differences in
regulatory regimes among ATSs and
between ATSs and Communication
Protocol Systems 847 can lead to an
uneven competitive landscape and
adversely impact the potential for robust
competition in the market for
government securities.848
846 See supra Sections VIII.B.1 and VIII.B.2.b for
additional details on the nature of Communication
Protocol Systems. See infra Section VIII.B.3.b for
additional details on the trading of corporate bonds
on Communication Protocol Systems.
847 See supra Section VIII.B.2.a.ii, discussing the
regulatory regime for Government Securities ATSs
and Section VIIIB.2.b, discussing the regulatory
regime for Communication Protocol Systems.
848 See ICE Bonds Letter II at 2, stating that the
significant regulatory burdens on fixed income
ATSs puts them at a competitive disadvantage to
non-ATS trading systems that are not subject to
these same regulatory obligations. See also ICE
Bonds Letter II at 5, stating that market participants
are harmed when electronic trading systems that
perform market place functions in fixed income
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
The Commission believes that the
current lack of public disclosure about
the operations and potential conflicts of
interest of Government Securities ATSs
and Communication Protocol Systems
that currently trade government
securities might hinder competition
among these ATSs and between
Government Securities ATSs and
Communication Protocol Systems in the
market for government securities.
Competition among Government
Securities ATSs and between
Government Securities ATSs and nonATS trading systems would affect the
trading costs of government securities
market participants, including dealers,
PTFs, hedge funds, and institutional
investors. Their trading costs include
bid-ask spreads,849 search costs in the
selection of trading venues and
counterparties, and trading venue fees.
When deciding which trading system
most suits their trading objectives,
market participants consider various
operational facets of the system, such as
order handling, order types, order
segmentation, trading functionalities,
and any potential conflicts of interest
that might arise from the operator of the
trading service or its affiliates. Trading
system fees would also be a factor for
market participants in deciding between
trading systems.
3. Current State of Corporate Debt
Market
Although smaller than the market for
government securities, the market for
corporate debt securities (‘‘corporate
bonds’’) represents a significant part of
securities are not subject to the same requirements
as a fixed income ATSs, and that if the regulatory
obligations of operating a fixed income ATS become
too burdensome or impair the ability of fixed
income ATSs to compete, it may discourage the
expansion of ATSs and potentially encourage
operators of fixed income ATSs to restructure their
operations to avoid being characterized as an ATS.
849 The estimated average daily relative quoted
spread for interdealer transactions for on-the-run
U.S. Treasury Securities is small, approximately 0.8
bps for 2-year Treasury Securities and 2.4 bps for
10-year Treasury Securities. The estimated average
daily relative quoted spread for interdealer
transactions for off-the-run U.S. Treasury Securities,
approximately 1.7 bps for 2-year Treasury
Securities and 5.4 bps for 10-year Treasury
Securities, is larger compared to that of on-the-run
Treasury Securities. Spreads have narrowed in the
past couple of years with a change to a smaller
minimum trading increment of 1⁄8 of 1/32 of $1. The
average daily relative quoted spread is computed as
the daily average of the difference between the
intraday offer and bid prices divided by the
corresponding price mid-quote. See also Paolo
Pasquariello & Clara Vega, The On-the-Run
Liquidity Phenomenon, 92 J. Fin. Econ. 1 (2009);
Tobias Adria, Michael Fleming, & Or Shachar,
Market Liquidity after the Financial Crisis (June, 28,
2017), Federal Reserve Bank of New York, Liberty
Street Economics, available at https://
libertystreeteconomics.newyorkfed.org/2017/06/
market-liquidity-after-the-financial-crisis.html.
PO 00000
Frm 00109
Fmt 4701
Sfmt 4702
15603
the fixed income market. In September
2021, the average daily dollar volume of
corporate bond trading was $26.4
billion, including $19.8 billion in
investment-grade bonds and $6.5 billion
in high-yield bonds.850 One commenter
stated that levels of trading in corporate
debt have typically been lower than in
other fixed income markets, such as
government securities: While corporate
bonds made up 20 percent of new
issuances in Q4 2020, they only made
up 4.4 percent of fixed income market
trading.851 However, the commenter
pointed out that the absolute dollar
volume of corporate bond trading
volume is still very significant, as is the
overall size of the market: As of January
2021, the corporate bond market is
valued at $9.3 trillion in investmentgrade and $2.4 trillion in high-yield
debt outstanding.852 Estimates put the
annualized growth rate of the corporate
bond market at 5.2 percent between
2008 and 2019, a growth rate second
only to that of government securities
within the fixed income space.853
Trading in corporate bonds tends to
be more illiquid than trading in
government securities, with liquidity
often concentrated in the largest and
most recently issued bonds.854 One
commenter referenced that only 18
percent of corporate bonds trade each
day, and only 8 percent have more than
five trades on any given day.855 Several
commenters stated that this is due in
part to the highly idiosyncratic nature of
corporate bond characteristics,856 which
850 See https://finramarkets.morningstar.com/
BondCenter/
TRACEMarketAggregateStats.jsp?bondType=C.
While there are many types of corporate bonds,
most tend to fall within two categories: Investmentgrade bonds and high-yield bonds (also commonly
referred to as ‘‘non-investment-grade’’ or ‘‘junk’’
bonds). High-yield bonds tend to have higher yields
than both government securities and investmentgrade bonds, but are also subject to a higher degree
of risk.
851 See Healthy Markets Letter at 8.
852 See id.
853 See https://vegaeconomics.com/trends-in-theus-corporate-bond-market-since-the-financial-crisis.
854 See A Financial System That Creates
Economic Opportunities: Capital Markets, U.S.
Department of the Treasury, October 2017, available
at https://www.treasury.gov/press-center/pressreleases/documents/a-financial-system-capitalmarkets-final-final.pdf (‘‘Treasury Report’’) at 85.
855 See Bloomberg Letter at 9, citing Financial
Times at https://www.ft.com/content/3175772a7ea0-3b61-ae53-063459e78c42. Another commenter
gave a similar number, estimating that only 17
percent of the more than 43,000 unique U.S.
investment-grade bonds traded on any given day in
2020. See MarketAxess Letter at 3.
856 See Bloomberg Letter at 20, mentioning that
the corporate bond market is non-standard and
highlighting the importance of market-making, and
MarketAxess Letter at 3, stating that liquidity is
lower for corporate bonds than for equities because,
while there are only a few thousand common
E:\FR\FM\18MRP2.SGM
Continued
18MRP2
15604
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
can differ along many different
dimensions, including issuer, tenor,
coupon rate, and covenants.857 One
commenter stated that, compared to the
equity market, the large number of
individual CUSIPs in the corporate debt
market has resulted in a meaningful
subset of corporate bonds without
market makers, which in turn lowers the
liquidity of these bonds.858
Corporate bondholders, who are
mainly institutional investors such as
mutual funds, pension funds, insurance
companies, and banks,859 have
traditionally facilitated their trades
through broker-dealers on a principal
basis.860 The past decade has seen an
increasing shift towards trading
arrangements in which dealers quickly
arrange offsetting trades when
intermediating between buyers and
sellers so as to avoid taking on
significant inventory risk for extended
periods of time. A more recent trend has
seen a rise in the direct participation of
institutional investors as corporate bond
liquidity providers: In April 2020, one
corporate bond RFQ platform reported a
record 900 firms providing liquidity,
including 700 asset managers.861
jspears on DSK121TN23PROD with PROPOSALS2
a. ATSs in the Market for Corporate
Debt
In September 2021, corporate bond
trading on ATSs accounted for 7.7
percent of total TRACE-reported
corporate bond trading volume in terms
of dollar volume.862 Currently, the
stocks, there are hundreds of thousands of CUSIPs
for corporate and municipal bonds. See also ICI
Letter at 8, stating that corporate bond liquidity
varies dramatically across bonds due to their
diverse nature, and that liquidity shifts can be
exacerbated during times of market stress.
857 See https://fredblog.stlouisfed.org/2015/10/
illiquidity-in-the-bond-market/.
858 See MarketAxess Letter at 3.
859 One commenter stated that registered
investment companies (‘‘funds’’) held 21 percent of
bonds issued by both U.S. corporate issuers and
foreign bonds held by U.S. residents as of year-end
2019. See ICI Letter at 1–2.
860 See, e.g., ≤https://www.marketwatch.com/
story/u-s-corporate-debt-soars-to-record-10-5trillion-11598921886. (Retrieved from Factiva
database); O’Hara, M., & Zhou, X.A. (2021).
Anatomy of a liquidity crisis: Corporate bonds in
the COVID–19 crisis. Journal of Financial
Economics.
861 See McDowell, Hayley. (2020, April 30).
‘‘MarketAxess reveals record number of buy-side
acted as liquidity providers in COVID–19 crisis,’’
THETRADE, available at https://
www.thetradenews.com/marketaxess-revealsrecord-buy-side-acted-liquidity-providers-covid-19crisis/.
862 See TRACE Monthly Volume Files, available
at https://www.finra.org/finra-data/browse-catalog/
trace-volume-reports/trace-monthly-volume-files.
One commenter referenced similar numbers for
2020, stating that corporate bond trades (including
both investment-grade and high-yield bonds) on all
ATSs represented 6.4 percent of the trade volume
and 18.7 percent of the trade count reported to
TRACE. See MarketAxess Letter at 1.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Commission understands that there are
12 ATSs with a Form ATS on file
trading corporate bonds.863 Protocols in
corporate bond ATSs include limit
order books (LOBs), displayed and nondisplayed venues, and auctions, among
others. According to Table VIII.6, the
most commonly reported protocol used
for trading corporate bonds via ATSs is
an auction. Typically, auctions operate
by periodically crossing at prices that
maximizes the amount of buy and sell
trading interest that can be executing at
that price.
Corporate bond ATSs are mostly used
by dealers, who may be either using
them to trade on behalf of retail
investors or to rebalance excess
inventories.864 A Division of Economic
Risk and Analysis (‘‘DERA’’) white
paper on corporate bond ATSs finds
that large dealers (i.e., those in the
highest quartile of trading volume and
number of bonds traded) are more likely
to provide corporate bond quotes on
ATSs than smaller dealers.865
Similar to Current Government
Securities ATSs, an ATS that trades in
corporate debt securities must comply
with the requirements of Regulation
ATS, including registering as a brokerdealer.866 Also, similar to Current
Government Securities ATSs, corporate
bond ATSs are not required to make
public disclosures, and, as discussed
above, this lack of disclosure
requirements might lead to information
asymmetries amongst different
863 In addition, a small percentage of corporate
bonds are exchange-traded on trading systems such
as NYSE Bonds and the Nasdaq Bond Exchange.
See, e.g., https://www.nyse.com/markets/bonds and
https://www.nasdaq.com/solutions/nasdaq-bondexchange. Trading volume in exchange-traded
bonds was reported to be around $19 billion as of
January 2020. See Uhlfelder, Eric, (Jan. 2020), A
Forgotten Investment Worth Considering:
Exchange-Traded Bonds, The Wall Street Journal,
available at https://www.wsj.com/articles/aforgotten-investment-worth-considering-exchangetraded-bonds-11578279781. (Retrieved from Factiva
database).
864 See Kozora, M., Mizrach, B., Peppe, M.,
Shachar, O., & Sokobin, J.S. (2020). Alternative
Trading Systems in the Corporate Bond Market.
FRB of New York Staff Report, (938).
865 See Craig, L., Kim, A., & Woo, S.W. (2020).
Pre-trade Information in the Corporate Bond
Market. U.S. Securities and Exchange Commission,
Division of Economic and Risk Analysis White
Paper. White papers and analyses are prepared by
SEC staff in the course of rulemaking and other
Commission initiatives. The U.S. Securities and
Exchange Commission disclaims responsibility for
any private publication or statement of any
employee or Commissioner. White papers express
the authors’ views and do not necessarily reflect
those of the Commission, the Commissioners, or
other members of the staff.
866 See supra Section II.D.2. See also supra
Section VIII.B.2.a.ii for a discussion about the
effects of these regulations and the costs to comply.
PO 00000
Frm 00110
Fmt 4701
Sfmt 4702
subscribers.867 Further, corporate bond
ATSs with significant volume 868 are
required to comply with the
requirements of the Fair Access Rule.869
Moreover, ATSs that trade in corporate
debt must also comply with Rule
301(b)(6) of Regulation ATS (‘‘Capacity,
Integrity, and Security Rule’’) if they
meet certain volume thresholds.870 The
requirements of Rule 301(b)(6), while
similar, are less rigorous and less costly
than the requirements of Regulation SCI.
All transactions in corporate bonds
that include at least one FINRA member
are required to be reported to TRACE
within 15 minutes of the time of
execution.871 Furthermore, trades on
ATSs operated by FINRA members may
be required to be reported to TRACE, by
either the ATS, counterparties to the
trade, or both, depending on whether
the counterparties are FINRA members
and whether the ATS holds itself out as
a party to the trade.872 Academic studies
have shown that TRACE reporting
requirements have reduced overall
trading costs in corporate bond
markets,873 but may increase the cost of
867 See supra Section VIII.B.2.b.ii for additional
discussion on the effects of a lack of public
disclosure.
868 An ATS trading in corporate debt securities is
subject to the Fair Access Rule if, during at least
four of the preceding six months, the ATS had five
percent or more of the average daily volume in
corporate debt securities traded in the United
States. See 17 CFR 242.301(b)(5)(i) and https://
www.sec.gov/tm/faq-regulation-ats-fair-access-rule.
869 See supra Section II.D.2. Also, see supra
Section VIII.B.2.b.ii describing the impact of the
Fair Access Rule.
870 See 17 CFR 242.301(b)(6) and supra note 157
and corresponding text. Rule 301(b)(6) currently
applies to an ATS that trades only corporate debt
securities with 20 percent or more of the average
daily volume traded in the United States during at
least four of the preceding six calendar months. One
commenter stated that, given current aggregate ATS
volumes, it is unlikely that any single ATS will
approach 20 percent of overall corporate debt
market volume. See MarketAxess Letter at 10.
871 See FINRA Rule 6730(a)(1) requiring FINRA
members to report transactions in TRACE-Eligible
Securities, which FINRA Rule 6710 defines to
include corporate debt securities. For each
transaction in corporate debt securities, a FINRA
member would be required to report the CUSIP
number or similar numeric identifier or FINRA
symbol; size (volume) of the transaction; price of
the transaction (or elements necessary to calculate
price); symbol indicating whether transaction is a
buy or sell; date of trade execution (‘‘as/of’’ trades
only); contra-party’s identifier; capacity (principal
or agent); time of execution; reporting side
executing broker as ‘‘give-up’’ (if any); contra side
introducing broker (in case of ‘‘give-up’’ trade); the
commission (total dollar amount), if applicable;
date of settlement; if the member is reporting a
transaction that occurred on an ATS pursuant to
FINRA Rule 6732, the ATS’s separate Market
Participant Identifier (‘‘MPID’’); and trade modifiers
as required. See FINRA Rule 6730(c).
872 See supra note 829 describing exemptions for
ATS transaction reporting to TRACE.
873 See, e.g., Edwards, A.K., Harris, L.E., &
Piwowar, M.S. (2007). Corporate bond market
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
trading through large dealers, who
previously were able to offer lower
transaction costs due to their
information advantages.874
jspears on DSK121TN23PROD with PROPOSALS2
b. Communication Protocol Systems in
the Market for Corporate Debt
Communication Protocol Systems
play a significant role in the market for
corporate debt. Table VIII.6, which
breaks down corporate bond dollar
volumes according to different trading
protocols, shows that corporate bond
trading on Communication Protocol
Systems (including anonymous and
disclosed RFQs, portfolio trading, and
stream axes), accounted for 23.1 percent
of total corporate bond trading volume
during the first half of 2021. Currently,
the Commission estimates that there are
8 Communication Protocol Systems
trading corporate bonds that may meet
the definition of exchange under the
proposed changes to Exchange Act Rule
3b–16.
One commenter stated that protocols
such as electronic RFQs in the fixed
income market evolved from single
dealer order routing and the use of the
‘‘three quote rule,’’ in which
institutional investors would seek three
quotes from three dealers in order to
assist them in getting the best prices.
According to the commenter, in more
liquid securities, electronification has
allowed traders to better organize pretrade data, allowing for new
Communication Protocol Systems that
enable functionalities such as RFQ Lists
and other multiple-security trade
messaging inquiries.875
‘‘Portfolio trading’’ is a multi-security
protocol that may be particularly useful
for corporate bond market participants.
This protocol is similar to RFQ Lists as
defined in Section II.B.2 and discussed
in Section VIII.B.1.b; however, while
RFQ Lists permit users to respond with
quotes for only some of the securities
listed, securities that are listed in a
portfolio trading protocol are executed
for the entire portfolio at a single price
with a single counterparty.876 One
industry report estimates that two to
five percent of TRACE trading volume
in investment-grade bonds is executed
transaction costs and transparency. The Journal of
Finance, 62(3), 1421–1451.
874 See Bessembinder, H., Maxwell, W., &
Venkataraman, K. (2006). Market transparency,
liquidity externalities, and institutional trading
costs in corporate bonds. Journal of Financial
Economics, 82(2), 251–288.
875 See Bloomberg Letter at 12.
876 See Husveth, Ted (2021) ‘‘Electronic Portfolio
Trading Rewrites the Corporate Bond Liquidity
Playbook,’’ Tradeweb, available at https://
www.tradeweb.com/newsroom/media-center/
insights/blog/electronic-portfolio-trading-rewritesthe-corporate-bond-liquidity-playbook/.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
via portfolio trading protocols.877
Furthermore, one report estimates that
portfolio trading volume increased by
159 percent between 2019 and 2021.878
The ‘‘all-or-none’’ nature of portfolio
trading can be especially beneficial for
corporate bond market participants who
wish to trade baskets of securities that
include some difficult-to-trade bonds.
Specifically, market participants may be
able to receive better prices for more
illiquid bonds, which may or may not
be balanced out by receiving worse
prices on more liquid bonds.879
Additionally, portfolio trading also
tends to be faster than list trading, as
there is less of a need to look at each
individual security. However, these
trades tend to be complex and may be
more difficult to automate, as they often
require extensive negotiations.880
While not necessarily its own
protocol, one functionality that is
increasingly being added to corporate
bond Communication Protocol Systems
involves so-called ‘‘net spotting.’’
Spotting is the practice of hedging
corporate bond transactions through
offsetting government security
transactions, which is useful for
participants as corporate bonds—
investment-grade bonds in particular—
are typically traded ‘‘on spread,’’ i.e.,
quoted relative to a benchmark
government bond yield. This practice
has led to interlinkages between the
corporate bond and government
securities markets.881 However, the
877 See McPartland, Kevin (2020), ‘‘All Electronic
Trading is Not Created Equal,’’ Greenwich
Associates, available at https://
www.greenwich.com/fixed-income/all-electronictrading-not-created-equal.
878 See McPartland, Kevin (2021), ‘‘Making the
Case for Portfolio Trading,’’ Greenwich Associates,
available at https://www.greenwich.com/fixedincome/making-case-portfolio-trading.
879 One commenter stated that submitting
multiple securities as a portfolio of liquid and lessliquid securities enables a liquidity provider to
potentially offer better prices than trading each
security individually. See Bloomberg Letter at 13.
880 See McPartland, Kevin (2020), ‘‘All Electronic
Trading is Not Created Equal,’’ Greenwich
Associates, available at https://
www.greenwich.com/fixed-income/all-electronictrading-not-created-equal; and Husveth, Ted (2021)
‘‘Electronic Portfolio Trading Rewrites the
Corporate Bond Liquidity Playbook,’’ Tradeweb,
available at https://www.tradeweb.com/newsroom/
media-center/insights/blog/electronic-portfoliotrading-rewrites-the-corporate-bond-liquidityplaybook/.
881 See Bloomberg Letter at 8, referencing the
Joint Staff Report on the U.S. Treasury Market on
October 15, 2014, available at https://
www.treasury.gov/press-center/pressreleases/
Documents/Joint_Staff_Report_Treasury_10-152014.pdf, stating that markets, including the U.S.
Treasury market, are connected through ‘‘automated
trading strategies that involve a nearly
instantaneous response to common trading signals
or that seek to arbitrage short-lived opportunities
across related interest-rate products.’’
PO 00000
Frm 00111
Fmt 4701
Sfmt 4702
15605
Commission understands that manual
spotting can suffer from inefficiencies
resulting from time delays in
completing trades in the two markets.
‘‘Net spotting,’’ which incorporates
automated spotting functionalities into
corporate bond Communication
Protocol Systems, may reduce these
inefficiencies. This practice calculates a
net interest rate exposure resulting from
a spot trade, producing a net position
that can be traded as a single
transaction.882 Net spotting may help to
reduce transaction costs of spot trades.
A growth in the popularity of this
practice is also likely to increase
interlinkages between trading protocols
in the corporate bond and government
securities markets. One trading system
operator estimates that, only six months
after adding net spotting functionality to
its trading system, almost 10 percent of
the corporate bond trading volume on
its trading system was using this
functionality.883
In recent years, driven in part by an
increase in the popularity of corporate
bond exchange-traded funds (ETFs),
there is some evidence that PTFs have
begun to enter the corporate bond
market.884 One factor that may correlate
with the entry of these firms is the
ability to use portfolio trading protocols
to more efficiently trade in the bonds
underlying corporate bond ETFs.885
Therefore, unlike in the market for
government securities, in which PTFs
prefer to trade on Government
Securities ATSs, PTFs may have a more
active presence on corporate bond
Communication Protocol Systems than
on corporate bond ATSs.886
Corporate bond Communication
Protocol Systems do not meet the
current definition of an exchange and
thus are not subject to exchange
registration or the requirements of
Regulation ATS, such as requirements
for robust systems.887 The Commission
882 See ‘‘Net Spotting: Reducing Trading Costs for
U.S. Corporate Bonds,’’ (2021), Tradeweb, available
at https://www.tradeweb.com/newsroom/mediacenter/insights/commentary/net-spotting-reducingtrading-costs-for-u.s.-corporate-bonds/.
883 See id.
884 See https://www.greenwich.com/blog/
what%E2%80%99s-next-high-frequency-traders,
which mentions that one PTF has begun to trade
using corporate bond RFQs.
885 See, e.g., Rennison, Joe, Armstrong, Robert,
and Wigglesworth, Robin, January 22, 2020, ‘‘The
new kings of the bond market,’’ Financial Times,
available at https://www.ft.com/content/9d6e520e3ba8–11ea-b232-000f4477fbca.
886 See supra Section VIII.B.2.b for a discussion
of PTFs’ role in government securities ATSs.
887 See supra Section VIII.B.2.b for discussion of
the effects of not being subject to such regulations.
One commenter stated that, given the lack of a
central clearing party for corporate and municipal
E:\FR\FM\18MRP2.SGM
Continued
18MRP2
15606
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
grown over time,893 traditionally
corporate bonds trading has taken place
bilaterally through either dealer-todealer or dealer-to-customer
negotiations, often using telephone
calls. There is evidence that such
manual transactions methods remain an
important part of the corporate bond
market: Table VIII.6 shows that 71.4
percent of trading in corporate bonds
was facilitated via bilateral voice trading
during the first half of 2021.
Transactions in corporate bonds that
do not take place on electronic
platforms will be reported to TRACE if
at least one party to the trade is a
member of FINRA.894
c. Other Methods of Trading in the
Market for Corporate Debt Securities
While the electronic trading of
corporate bonds through ATSs and
Communication Protocol Systems has
d. Competition for Corporate Debt
Securities Trading Services
The trading of corporate debt
securities takes place through a variety
of different methods, including ATSs,
Communication Protocol Systems, and
informal bilateral trading methods such
as voice trading. These different
methods compete with each other for
customers, and may appeal to different
segments of the corporate market
depending on that segment’s
preferences and trading needs. Trading
systems within the ATS and
Communication Protocol System spaces
also compete with one another on the
basis of fees, trading features, and their
ability to attract liquidity.
One commenter stated that the choice
of trading method is driven largely by
liquidity considerations, with less
liquid securities trading via manual
protocols such as voice trading, more
liquid securities using protocols such as
RFQs, and the most liquid securities
trading electronically on ATSs using
protocols such as LOBs and call
auctions.895 Other commenters stated
that the majority of corporate bonds are
not liquid enough to support order book
trading,896 which may be one reason
why there is not much corporate bond
trading volume in ATSs as compared to
Communication Protocol Systems, and
why there is less ATS trading in
corporate bonds as compared to other
securities, such as government
securities. As discussed in Section
VIII.B.1, customers who want to trade
electronically but are concerned about
information leakage may be more likely
to use Communication Protocol
Systems, particularly RFQs, as opposed
to ATSs. One study finds that corporate
bond ATSs may be most utilized for
smaller transactions in investment-grade
bonds, which are less vulnerable to
information asymmetry, and transaction
in bonds that have (all else being equal)
experienced a recent decrease in
secondary market trading volume, for
which search costs may be high.897
As shown in Table VIII.6, the majority
(65.4 percent) of non-voice trading in
corporate bonds is conducted on RFQs.
About one fourth of RFQ volume is
anonymous, and, while the majority of
corporate bond trading volume on RFQs
is disclosed, even participants on
disclosed RFQs often have greater
flexibility over the extent to which they
reveal their trading interest, for example
by limiting how many entities can view
their trading interest or by refraining
from responding to a quote request.898
RFQs may also help facilitate a wider
variety of functionalities that market
bond participants find particularly
useful, such as portfolio trading and net
spotting. Automated executions and
limited negotiation possibilities may
make these functionalities more difficult
to implement on many ATSs.
bond trades, each participant has the discretion
over which other participants they wish to extend
credit to and trade; therefore, fair access to a
corporate bond Communication Protocol System
may not have the same meaning given to it in the
equity ATS context as the system does not have the
ability to ensure that all participant have the same
access to liquidity. See MarketAxess Letter at 10.
Another commenter stated that Communication
Protocol Systems such as RFQs do not pose the
same technological risks as, e.g., fully automated
central limit order books (CLOBs) because trading
is slower, there are fewer algorithms that may
malfunction, and, if RFQ systems are unavailable,
parties can continue to negotiate and execute
transactions bilaterally away from the trading
system. See Tradeweb Letter at 6.
888 See supra notes 157 and 870. One commenter
stated that, other than Rule 301(b)(6)(ii)(F) and (G),
it expects that nearly all existing platforms already
meet or are trying to meet the requirements of Rule
301(b)(6). See MarketAxess Letter at 11. Another
commenter that runs a fixed-income
Communication Protocol System stated that it
invested in proper contingency planning, disaster
recovery, robustness, and resiliency to ensure there
is no disruption in service. See FlexTrade Systems
Letter at 3.
889 See, e.g., Bloomberg Letter at 18 and 23 and
MarketAxess Letter at 12.
890 One commenter stated that, even if
Communication Protocol System providers do not
meet the standard of brokerage activity, since
registered broker-dealers are using these trading
systems, they are supervised under FINRA
standards for brokers relying on outsourced
technology. The commenter states that these
systems are also monitored by broker-dealer, who
are incentivized to do so. See Bloomberg Letter at
30–31.
891 One commenter pointed out that FINRA has
recently proposed changes to TRACE reporting of
portfolio trades. See Bloomberg Letter at 14, citing
FINRA request for comment, Regulatory Notice 20–
24, September 15, 2020, available at https://
www.finra.org/sites/default/files/2020–07/
Regulatory-Notice-20-24.pdf.
892 See FINRA Rule 6730(a)(1) requiring FINRA
members to report transactions in TRACE-Eligible
Securities. See also supra note 228 and https://
www.finra.org/rules-guidance/notices/14-53.
893 One commenter stated that approximately 32
percent of investment-grade and 23 percent of highyield corporate bond daily dollar volumes are
executed electronically. See BDA Letter at 1.
894 See FINRA Rule 6730(a)(1) requiring FINRA
members to report transactions in TRACE-Eligible
Securities. See also supra note 228 and https://
www.finra.org/rules-guidance/notices/14-53 and
https://www.finra.org/filing-reporting/markettransparency-reporting/trace/faq/reportingcorporate-and-agencies-debt.
895 See Bloomberg Letter, Figure 2. See also
Bloomberg Letter at 14. See also MarketAxess Letter
at 2, stating that institutional investors in credit
markets prefer RFQs because they have found that
liquidity on demand results in the best pricing for
illiquid securities.
896 See, e.g., ICI Letter at 6 and MarketAxess
Letter at 3.
897 See Kozora, M., Mizrach, B., Peppe, M.,
Shachar, O., & Sokobin, J.S. (2020). Alternative
Trading Systems in the Corporate Bond Market.
FRB of New York Staff Report, (938).
898 See Section VIII.B.1 for a discussion on the
difference between disclosed and anonymous RFQs.
estimates that there are currently 2
Communication Protocol Systems with
sufficient corporate bond trading
volume such that they would otherwise
be over the threshold for the Capacity,
Integrity, and Security Rule 301(b)(6).888
Several commenters stated that the
resiliency of the fixed income market
during the COVID crisis showed that the
current structure of the fixed income
market, and of the electronic trading
market in particular, is already resilient
and robust.889
The Commission estimates that 6
Communication Protocol Systems for
corporate bonds are not currently
operated by registered broker-dealers.
These systems do not currently incur
the costs of registering with the
Commission as well as the costs of SRO
membership, and are not subject to
FINRA operational regulatory reporting
requirements.890
A corporate bond transaction on a
Communication Protocol System is
reported to TRACE if at least one party
to the transaction is a FINRA member,
and/or if the Communication Protocol
System itself is a member of FINRA.891
Depending on how much of a role the
Communication Protocol System takes
in facilitating the transaction (e.g.,
acting as a counterparty to each side of
the trade), and whether the
Communication Protocol System
operator and/or parties to the
transaction are FINRA members,
transactions taking place through the
Communication Protocol System may
not be reported to TRACE at all.892
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00112
Fmt 4701
Sfmt 4702
E:\FR\FM\18MRP2.SGM
18MRP2
15607
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
TABLE VIII.6—CORPORATE DEBT SECURITIES AND DOLLAR VOLUME SHARE BY TRADING PROTOCOL
Anonymous RFQ
Disclosed
RFQ
4.8 ................................
Limit order
book
Auction
13.9
3.0
Non-displayed
venue a
2.4
Portfolio
trading
0.1
Stream axes b
2.2
2.2
Voice
71.4
This table reports volume share by trading protocol type in the market for corporate debt securities. Market Share (%) is the measure of the dollar volume as a percent of total par dollar volume. Data is based on Coalition Greenwich’s Greenwich MarketView data from April 2021
through September 2021. Voice market share is calculated as a remainder of total market volume after accounting for electronic protocols
volume reported to Coalition Greenwich.
a Non-displayed
jspears on DSK121TN23PROD with PROPOSALS2
b Coalition
venues are referred to as ‘‘dark pools’’ in the Coalition Greenwich’s Greenwich MarketView data.
Greenwich’s Greenwich MarketView refers to this data value as ‘‘Stream/Click-to-Engage.’’
Customers may prefer other methods
such as bilateral voice trading because
they wish to transact in less liquid
bonds that may require more
intermediation to find a counterparty,
despite the possibility that the lack of
price competition may lead to higher
trading costs. One academic study
shows that the movement of corporate
bond trading volume from voice trading
to an RFQ-type protocol system mainly
reduced transaction costs for the most
liquid securities.899 However, one
commenter referenced that the
electronification of manual trading
methods, while improving operational
efficiencies, does not fundamentally
change liquidity in the corporate bond
market as the same intermediaries and
interactions between dealers and
customers are still involved.900
Similarly to the market for
government securities, the Commission
preliminarily believes that the
differences in regulatory regime
between ATSs and other trading
methods, including Communication
Protocol Systems such as RFQs and
others, can lead to an uneven
competitive landscape and adversely
impact the potential for robust
competition in the market for corporate
debt securities.901 Specifically, the lack
of public disclosure about the
operations and potential conflicts of
interest of Communication Protocol
Systems trading in corporate bonds
might hinder competition among these
trading systems and between
Communication Protocol Systems and
ATSs in the market for corporate bond
trading services.
The fact that ATSs are subject to
numerous regulatory requirements that
Communication Protocol Systems,
which may perform a similar market
place function, are not subject to may
place ATSs at competitive disadvantage
899 See Hendershott, T., & Madhavan, A. (2015).
Click or call? Auction versus search in the overthe-counter market. The Journal of Finance, 70(1),
419–447.
900 See Bloomberg Letter at 9 and10, citing
Treasury Report.
901 See supra Section VIII.B.2.d.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
compared to Communication Protocol
Systems as a result of the associated
compliance costs and potentially higher
barriers to entry. Furthermore, one
commenter stated that the different
regulatory treatment of fixed income
trading platforms, with some platforms
regulated as ATSs, some regulated as
broker-dealers, and others not regulated
at all, leaves room for regulatory
arbitrage.902
4. Current State of the Municipal
Securities Market
The market for municipal securities
(‘‘municipal bonds’’) represents another
important part of the fixed income
market. Daily trading volumes in the
municipal bond market averaged around
$12.4 billion during the 2020 calendar
year.903 Average trade sizes in this
market tend to be smaller than in other
fixed income markets: In September
2021, 81 percent of trades were for
$100,000 or less, reflecting the higher
presence of retail investors in this
market.904
The relatively large role of retail
investors in the market for municipal
bonds represents one important way in
which this market differs from the
markets for government securities and
corporate bonds. Unlike in the markets
for other fixed income securities, which
are mostly owned by institutional
investors, retail investors play a
prominent role in the ownership of
municipal bonds, with 45.2 percent of
municipal bonds held by households
and nonprofits as of 2020.905 This is
Tradeweb Letter at 6.
Municipal Securities Rulemaking Board,
Muni Facts, available at https://www.msrb.org/
News-and-Events/Muni-Facts.
904 See Municipal Securities Rulemaking Board,
Municipal Trade Statistics, available at https://
emma.msrb.org/MunicipalTradeStatistics/
ByTradeCharacteristic.aspx.
905 See ‘‘Trends in Municipal Bond Ownership’’
(2021), Municipal Securities Rulemaking Board,
available at https://www.msrb.org/Market-Topics/
Other-Market-Topics. Note that this source groups
together households and nonprofit organizations.
One commenter pointed out the role of registered
investment companies (‘‘funds’’) in this market,
stating that funds held 29 percent of municipal
largely due to the tax-exempt status of
most municipal bonds, which makes
them attractive to households but less
attractive to institutional investors such
as pension funds, whose holdings are
already tax-deferred or tax exempt.
Municipal bond markets also tend to be
highly localized, as investors that are
located in geographic proximity to an
issuer are more likely to be informed
about that issuer, and tax benefits are
often conferred on investors that are
located in the same state as the
issuer.906
Households tend to be buy-and-hold
investors, which may contribute to
overall low liquidity levels in the
secondary market for municipal bonds.
In 2018, less than one percent of
outstanding municipal bonds traded on
a typical day, and, as in the corporate
bond market, liquidity is mostly
concentrated in newly-issued bonds.907
Furthermore, there is evidence that
trading in municipal bonds has declined
in recent years, as secondary market
trading volume declined by about 19
percent between 2019 and 2021.908
The market for municipal bonds is
highly heterogeneous, and perhaps even
more fragmented than the market for
corporate bonds. In addition to a wide
diversity of bond characteristics,
including maturity, tax status, and
coupon type, there are more than 50,000
different issuers in the municipal bond
market, including state and local
governments, towns, cities, and
counties, who as of 2020 have issued
902 See
903 See
PO 00000
Frm 00113
Fmt 4701
Sfmt 4702
bonds outstanding as of year-end 2019. See ICI
Letter at 1–2.
906 See Schultz, P. (2012). The market for new
issues of municipal bonds: The roles of
transparency and limited access to retail investors.
Journal of Financial Economics, 106(3), 492–512.
907 See Bessembinder, H., Spatt, C., &
Venkataraman, K. (2020). A survey of the
microstructure of fixed-income markets. Journal of
Financial and Quantitative Analysis, 55(1), 1–45.
908 See ‘‘2021 Municipal Market Trading Update,’’
(2021), Municipal Securities Rulemaking Board,
available at https://www.msrb.org/Market-Topics/
Reports.
E:\FR\FM\18MRP2.SGM
18MRP2
15608
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
around one million unique bonds
valuing $3.9 trillion.909
The market for municipal bonds is
largely an OTC market, in which
investors place orders with dealers who
execute these orders by either
committing their own capital (via
principal trades) or by searching the
market for counterparties (via riskless
principal trades or agency trades).910
Academic research of regulatory data
has shown that the interdealer market in
municipal bonds has a decentralized
network structure composed of between
10 to 30 central dealers and more than
2,000 periphery dealers.911 Further
research shows that the highly
geographically localized nature of this
market can limit competition between
dealers.912
jspears on DSK121TN23PROD with PROPOSALS2
a. ATSs in the Market for Municipal
Securities
ATSs play an increasingly important
role in the municipal bond market.
Between August 2016 and April 2021,
an estimated 56.4 percent of municipal
bond interdealer trades (26 percent in
terms of dollar volume) were conducted
via ATSs.913 One commenter stated that,
in 2020, more than 1.7 million trades
were reported to the MSRB as being
executed on an ATS, 1.55 million of
which were for $100,000 or less,
showing that ATSs are of particular
significance for individual investors.914
The Commission understands that there
909 See Municipal Securities Rulemaking Board,
Muni Facts, available at https://www.msrb.org/
News-and-Events/Muni-Facts. This is compared to
the corporate bond market, in which there are
around 43,000 unique securities with a total market
size around $10.6 trillion. See also SIFMA letter at
9 (stating that there are 50,000 issuers of municipal
securities and one million unique municipal bonds,
compared to 30,000 unique corporate bonds).
910 See ‘‘Analysis of Municipal Securities PreTrade Data from Alternative Trading Systems’’
(2018), Municipal Securities Rulemaking Board,
available at https://www.sec.gov/spotlight/fixedincome-advisory-committee/msrb-staff-analysis-ofmunicipal-securities-pre-trade-data.pdf.
911 See Li, D., & Schu
¨ rhoff, N. (2019). Dealer
networks. The Journal of Finance, 74(1), 91–144.
912 See Schultz, P. (2013). State taxes, limits to
arbitrage and differences in municipal bond yields
across states. Unpublished working paper.
University of Notre Dame.
913 See ‘‘Characteristics of Municipal Securities
Trading on Alternative Trading Systems and
Broker’s Broker Platforms’’ (2021), Municipal
Securities Rulemaking Board, available at https://
www.msrb.org/Market-Topics/Reports. See also
Letter from Edward J. Sisk, Chair, Municipal
Securities Rulemaking Board, dated March 1, 2021
(‘‘MSRB Letter’’), stating that MSRB trade data
shows that ATSs were involved in 21 percent of all
trades and 55 percent of all inter-dealer trades in
the municipal bond market.
914 The commenter also stated that the median
size of trades reported as occurring on an ATS was
$25,000 and that, for trades of $100,000 or less,
ATSs accounted for 24 percent of all trades and 59
percent of all inter-dealer trades. See MSRB Letter
at 2–3.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
are currently 6 reporting ATSs trading
in municipal securities. One commenter
stated that tremendous consolidation in
the municipal securities ATS market
has occurred over time, such that there
are only a few remaining ATSs with
significant trading in municipal
bonds.915
As mentioned in the introduction to
Section VIII.B.4 above, municipal bond
owners are typically retail investors.
Retail investors are unlikely to subscribe
directly to ATSs, and so almost all
trades executed on ATSs are from dealer
quotes.916 A DERA white paper found
that, during a three-month period in
2014, 62 percent of trades on ATSs were
between dealers and customers,
including both retail and institutional
investors, while the remainder were
interdealer trades.917 The white paper
also found that large broker-dealers are
more likely to post quotes on ATSs than
small broker-dealers.918
In terms of available protocols,
municipal bond ATSs offer LOB-based
protocols, but many also offer protocols
similar to RFQs. For the latter, quote
information is only available to a
limited subset of ATS participants. This
shortage of public pre-trade information
may make it more difficult for retail
investors in this market, who may not
have access to quote information, to
ensure that they are getting the best
prices; in fact, the DERA white paper
found that smaller retail-sized
municipal bond trades tend to receive
worse prices than large trades.919
80 percent of all quoted municipal
bonds have only a single quote offered
by a single broker at any given point in
time, which corresponds to the
heterogeneous nature of this market.920
Another reason why municipal bonds
tend to be thinly quoted may be the
915 See
SIFMA letter at 11.
‘‘Characteristics of Municipal Securities
Trading on Alternative Trading Systems and
Broker’s Broker Platforms’’ (2021), Municipal
Securities Rulemaking Board, available at https://
www.msrb.org/Market-Topics/Reports.
917 See Craig, L., Kim, A., & Woo, S.W. (2018).
Pre-Trade Information in the Municipal Bond
Market. DERA White Paper, available at https://
www.sec.gov/files/DERA_WP_Pre-trade_
Information_in_the_Municipal_Bond_Market.pdf.
918 See id.
919 See id. The paper defines institutional-size
trades as trades greater than $100,000, and retailsize trades as trades less than $100,000, citing
Harris and Piwowar (2006), who use trade size of
$100,000 to distinguish retail- and institutional-size
customer trades. See Harris, L.E., & Piwowar, M.S.
(2006). Secondary trading costs in the municipal
bond market. The Journal of Finance, 61(3), 1361–
1397.
920 See ‘‘Characteristics of Municipal Securities
Trading on Alternative Trading Systems and
Broker’s Broker Platforms’’ (2021), Municipal
Securities Rulemaking Board, available at https://
www.msrb.org/Market-Topics/Reports.
916 See
PO 00000
Frm 00114
Fmt 4701
Sfmt 4702
difficulty in shorting municipal bonds,
as Internal Revenue Service (IRS) rules
regulating the shorting of tax-exempt
securities and difficulties in locating
securities to borrow makes shorting in
this market costly.921 A dealer likely
will not quote in a bond unless it
already owns that bond.
ATSs that trade in municipal bonds
face many of the same regulatory
requirements as those that trade in
corporate bonds, including complying
with Regulation ATS.922 This includes
requirements that ATSs with significant
volume in municipal securities markets
must comply with the Fair Access
Rule 923 and with Rule 301(b)(6) of
Regulation ATS (‘‘Capacity, Integrity,
and Security Rule’’).924
Broker-dealers operating in the
municipal bond market must be
registered with the Municipal Securities
Rulemaking Board (MSRB), which
creates rules governing their conduct
and transparency.925 Since 2005, all
MSRB-registered dealers must report
municipal bond trades within 15
minutes of the time of execution to the
MSRB’s Real-Time Transaction
Reporting System (RTRS).926 Since
921 See ‘‘Municipal Securities Pre-Trade Market
Activity: What Has Changed Since 2015?’’ (2020),
Municipal Securities Rulemaking Board, available
at https://www.msrb.org/Market-Topics/∼/
link.aspx?_
id=9089AC4BA1F144B388D090177FADCDD6&_
z=z.
922 See supra note 866 and Section VIII.B.2.a.ii for
a discussion of the impact of some of the elements
of Regulation ATS.
923 An ATS trading in municipal debt securities
is subject to the Fair Access Rule if, during at least
four of the preceding six months, the ATS had five
percent or more of the average daily volume in
municipal debt securities traded in the United
States. See 17 CFR 242.301(b)(5)(i) and https://
www.sec.gov/tm/faq-regulation-ats-fair-access-rule.
See supra Section VIII.B.2.a.ii for a discussion of
the impact of the Fair Access Rule.
924 See 17 CFR 242.301(b)(6) and supra note 157
and corresponding text. Rule 301(b)(6) currently
applies to an ATS that trades only municipal debt
securities with 20 percent or more of the average
daily volume traded in the United States during at
least four of the preceding six calendar months. See
supra Section VIII.B.3.a for a discussion of the
current impact of being subjected to Rule 301(b)(6).
925 The MSRB is an SRO that is overseen by the
SEC. See Municipal Securities Rulemaking Board,
The Role and Jurisdiction of the MSRB, available
at https://www.msrb.org/About-MSRB/About-theMSRB.
926 See MSRB Rule G–14 requiring brokers,
dealers and municipal securities dealers (‘‘dealers’’)
to report transactions in municipal securities. The
following transactions in municipal debt securities
are exempt from reporting requirements:
Transactions in securities without assigned CUSIP
numbers; transactions in Municipal Fund
Securities; and inter-dealer transactions for
principal movement of securities between dealers
that are not inter-dealer transactions eligible for
comparison in a clearing agency registered with the
Commission. Dealers are exempt from reporting if
they do not affect any transactions in municipal
securities or if they only deal in exempt
transactions.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
2016, dealer-reported trades to the
MSRB have been required to include an
indicator to identify trades that have
been executed on an ATS.927 Trades
that take place on an ATS are required
to be reported both by the member
dealers that transact with the ATS, as
well as by the ATS if that ATS has taken
a principal position between the buyer
and seller. If the ATS only facilitates the
connection between the buyer and seller
but does not take a principal or agency
position, it has no reporting requirement
under MSRB rules.928
jspears on DSK121TN23PROD with PROPOSALS2
b. Communication Protocol Systems in
the Market for Municipal Securities
At least 43.6 percent of interdealer
trades (74.1 percent in terms of dollar
volume) in the municipal bond market
take place via trading methods that are
not ATSs, including 38.3 percent direct
dealer-to-dealer and 5.3 percent on
broker’s broker platforms.929 At least
some of these transaction are likely to
take place via Communication Protocol
Systems. The Commission estimates
that there are currently 3
Communication Protocol Systems
operating in the municipal debt market
that may meet the definition of
exchange under the proposed changes to
Exchange Act Rule 3b–16.
Of particular interest in this context
are broker’s broker platforms. A broker’s
broker is defined by the MSRB as a
dealer that principally effects
transactions for other dealers or that
holds itself out as a broker’s broker.930
The broker’s broker does not participate
in the decision to buy or sell and does
not exercise discretion as to the price at
which a transaction is executed or
determine the timing of a trade.931
While broker’s brokers traditionally
conducted their activities via bilateral
means such as voice trading, they have
increasingly made use of electronic
systems.932 Most electronic broker’s
927 See MSRB Letter at 3. One commenter stated
that a difference between ATS trade reporting
requirements between FINRA and MSRB is that,
while the MSRB, like FINRA, requires an ATS flag
for reports to their Real-time Trade Reporting
System, this only applies to interdealer trades
conducted on ATSs, not trades with customers. See
BDA Letter at 3.
928 See Regulatory Notice 2015–07, Municipal
Securities Rulemaking Board, May 26, 2015,
available at https://www.msrb.org/Rules-andInterpretations/RegulatoryNotices?type=All&filter=2015.
929 See id.
930 See Municipal Securities Rulemaking Board,
MSRB Rule G–43.
931 See SIFMA, ‘‘The Role of Municipal Securities
Broker’s Brokers in the Municipal Markets,’’ 2017.
932 See ‘‘Characteristics of Municipal Securities
Trading on Alternative Trading Systems and
Broker’s Broker Platforms’’ (2021), Municipal
Securities Rulemaking Board, available at https://
www.msrb.org/Market-Topics/Reports.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
broker platforms use only quote
solicitation protocols and do not post
quotes; those that do post quotes
typically are registered as an ATS with
the SEC.933 However, only about 1.6
percent of all inter-dealer trades take
place on broker’s broker platforms that
are registered as ATSs.
The Commission estimates that 1
Communication Protocol System trading
in municipal bonds is not currently
operated by a registered broker-dealer.
This system is not subject to exchange
registration or the requirements of
Regulation ATS, and is not subject to
FINRA operational regulatory reporting
requirements.934
If the Communication Protocol
System only facilitates the connection
between the buyer and seller but does
not take a principal or agency position
to the transaction, the Communication
Protocol System may not currently be
required to report post-trade data under
MSRB rules.935 However, trades that
take place on a Communication Protocol
System will currently be reported to
MSRB’s RTRS if at least one party to the
transaction is a municipal bond dealer.
c. Other Methods of Trading in the
Market for Municipal Securities
Similar to other fixed income markets,
the market for municipal securities has
traditionally relied on bilateral voice
trading.936 As mentioned above in the
introduction to Section VIII.B.4, due to
the particularly fragmented and
localized nature of the municipal bond
market, competition between individual
dealers may be limited.937 Therefore, it
is likely that the lack of pre-trade price
transparency in a market traditionally
dominated by bilateral voice trading has
been particularly costly for municipal
bond customers, who lack both price
information and bargaining power when
negotiating prices with their dealers
over the phone. In fact, transaction costs
in the municipal bond market have
933 See ‘‘Characteristics of Municipal Securities
Trading on Alternative Trading Systems and
Broker’s Broker Platforms’’ (2021), Municipal
Securities Rulemaking Board, available at https://
www.msrb.org/Market-Topics/Reports.
934 In this respect they are similar to
Communication Protocol Systems in the market for
corporate debt. See supra Sections VIII.B.3.b and
VIII.B.3.d for a discussion of the impact of not being
subject to these regulations.
935 See Regulatory Notice 2015–07, Municipal
Securities Rulemaking Board, May 26, 2015,
available at https://www.msrb.org/Rules-andInterpretations/RegulatoryNotices?type=All&filter=2015.
936 One commenter estimated only 15 percent of
daily dollar trading volume in municipal bonds is
executed electronically. See BDA Letter at 1.
937 See Schultz, P. (2012). The market for new
issues of municipal bonds: The roles of
transparency and limited access to retail investors.
Journal of Financial Economics, 106(3), 492–512.
PO 00000
Frm 00115
Fmt 4701
Sfmt 4702
15609
typically been large compared to other
markets, and academic studies have
indeed attributed these large transaction
costs to a lack of price transparency and
subsequent information asymmetry
between dealers and customers.938 One
MSRB report found that technological
advancements in this market and the
movement away from voice trading and
towards electronic trading have helped
reduce transaction costs for dealercustomer trades by 51 percent between
2005 and 2018.939
Transactions that take place via
bilateral negotiations will only be
reported to MSRB’s RTRS if at least one
party to the transaction is a MSRBmember dealer.
d. Competition for Municipal Securities
Trading Services
The trading of municipal debt
securities takes place through a variety
of different methods, including
electronic protocols through ATSs and
Communication Protocol Systems, as
well as more traditional methods such
as telephone calls. These various
methods compete with one another in
attracting order flow.
Due to the buy-and-hold nature of
municipal bond trading, usually
brokers’ main task is to locate investors
that are willing to buy new issues.940
ATSs may help to reduce search costs.
Indeed, one study finds that dealers are
more likely access ATS systems for
trades that are more difficult to price
and that face substantial search costs,
such as smaller-sized trades and trades
involving municipal bonds with
complex features.941 Accordingly, 90
percent of quotes on municipal bond
ATSs are offer quotes.942 On the other
hand, the vast majority of RFQs on
municipal bond ATSs are requests for
938 See Harris, L.E., & Piwowar, M.S. (2006).
Secondary trading costs in the municipal bond
market. The Journal of Finance, 61(3), 1361–1397.
939 See ‘‘Transaction Costs for Customer Trades in
the Municipal Bond Market: What is Driving the
Decline?’’ (2018), Municipal Securities Rulemaking
Board, available at https://www.msrb.org/MarketTopics/∼/link.aspx?_
id=9089AC4BA1F144B388D090177FADCDD6&_
z=z.
940 See Schultz, P. (2012). The market for new
issues of municipal bonds: The roles of
transparency and limited access to retail investors.
Journal of Financial Economics, 106(3), 492–512.
941 See ‘‘Characteristics of Municipal Securities
Trading on Alternative Trading Systems and
Broker’s Broker Platforms’’ (2021), Municipal
Securities Rulemaking Board, available at https://
www.msrb.org/Market-Topics/Reports.
942 See ‘‘Municipal Securities Pre-Trade Market
Activity: What Has Changed Since 2015?’’ (2020),
Municipal Securities Rulemaking Board, available
at https://www.msrb.org/Market-Topics/∼/
link.aspx?_
id=9089AC4BA1F144B388D090177FADCDD6&_
z=z.
E:\FR\FM\18MRP2.SGM
18MRP2
15610
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
bids, reflecting that RFQ protocols are
more likely to be used when customers
want to sell.943
Meanwhile, empirical results show
that broker’s broker platforms, which
may have functionalities similar to
Communication Protocol Systems, are
more likely to be used for large-sized
trades, and less likely to be used for
municipal bonds with complex
features.944 The study implied that this
is because the lower price transparency
on many broker’s broker platforms,
which do not post quotes, makes these
systems less useful for trading securities
that are difficult to price.
Meanwhile, similar to the case of
corporate bond markets, RFQs may
instead be preferred by traders that want
to limit information leakage, such as in
case of large-sized trades.945
Furthermore, as in the market for
corporate bonds, one commenter stated
that the majority of municipal bonds are
not liquid enough to support order book
trading.946
More generally, for the reasons
described in Section VIII.B.4.c, the
movement of municipal bond trading
onto electronic platforms has helped to
reduce transaction costs. Specifically,
an increase in transparency in this
market has particularly been beneficial
for retail investors who otherwise have
little access to municipal bond
information.947
The Commission preliminarily
believes that, as in other fixed income
markets, the differences in regulatory
regime between ATSs and other trading
methods can lead to an uneven
competitive landscape and adversely
impact the potential for robust
competition in the market for municipal
debt securities.
5. Current State of the Equity Market
The market for U.S. equity securities
represents one of the largest U.S. and
global financial markets. As of 2020, the
capitalization of the U.S. equity market
was estimated to be more than $40
trillion.948 The market for equity trading
services is served by exchanges, ATSs,
other trading systems, such as OTC
systems, and other liquidity providers
943 See
id.
id.
945 See Section VIII.B.3.
946 See ICI Letter at 6–7.
947 See Craig, L., Kim, A., & Woo, S.W. (2018).
Pre-Trade Information in the Municipal Bond
Market. DERA White Paper, available at https://
www.sec.gov/files/DERA_WP_Pre-trade_
Information_in_the_Municipal_Bond_Market.pdf.
948 See ‘‘Market capitalization of listed domestic
companies (current US$)—United States,’’ The
World Bank, available at https://
data.worldbank.org/indicator/
CM.MKT.LCAP.CD?locations=US.
jspears on DSK121TN23PROD with PROPOSALS2
944 See
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
(such as internalizers). The type of
trading system on which an equity
security is eligible to trade will depend
on the equity security’s characteristics,
including whether the issuing company
periodically reports its financial
information and whether the security is
exchange-listed and/or registered with
the SEC. U.S. equity securities contain
NMS stocks (including ETFs), OTC
securities, and restricted stocks, in
addition to other types of securities.
a. Categorization and Trading
Characteristics of U.S. Equity Securities
The largest and most liquid part of the
U.S. equity market consists of national
market system (NMS) stocks. In general,
NMS stocks are exchange-listed equity
securities for which transactions are
reported pursuant to an effective
transaction reporting plan.949 As of
August 2021, there were around 5,669
equities listed across five exchanges.950
In September 2021, the average daily
trading volume in NMS stocks across all
market centers was $545 billion.951 The
market for trading services in NMS
stocks consists of 16 national securities
exchanges, and 34 ATSs, as well as
other off-exchange trading venues,
including broker-dealer internalizers
and wholesalers.952
One subset of NMS stocks that has
been increasing in popularity in recent
years includes exchange-traded funds
(ETFs). ETFs are securities that are
registered as open-end investment
companies or unit investment trusts
under the Investment Company Act of
1940 (the ‘‘1940 Act’’),953 that typically
949 See Regulation NMS Rules 600(b)(46) and (47)
(17 CFR 242.600(b)(46) and (47)).
950 See https://www.finra.org/filing-reporting/
oats/oats-reportable-securities-list. This includes
NYSE Arca, NYSE MKT, BZX Exchange (BATS),
NASDAQ, and New York Stock Exchange (NYSE).
951 See CBOE Historical Market Volume Data,
available at https://www.cboe.com/us/equities/
market_statistics/historical_market_volume/
market_history_monthly_2019.csv. The statistic is
calculated by summing the ‘‘Total Notional’’ value
for all entries in September 2021, and then dividing
this sum by the number of trading days in
September 2021 (21).
952 There are 34 NMS Stock ATSs operating with
a Form ATS–N on file. See Form ATS–N Filings
and Information, available at https://www.sec.gov/
divisions/marketreg/form-ats-n-filings.htm.
Wholesalers are broker-dealers to whom retail
brokers send their clients’ orders to be filled
internally (as opposed to sending the trade orders
to an exchange). Typically, a wholesaler promises
to provide price improvement relative to the NBBO
for filled orders. Wholesalers often pay retail
brokers for sending their clients’ orders to the
wholesaler.
953 This discussion does not address other types
of exchange-traded products that are not registered
under the 1940 Act, such as exchange-traded
commodity funds or exchange-traded notes. See
https://www.sec.gov/investor/alerts/etfs.pdf. It is
estimated that at year-end 2020, less than 3% of net
assets were held in ETFs that are not registered with
PO 00000
Frm 00116
Fmt 4701
Sfmt 4702
track financial instruments or bundles
of financial instruments (such as an
index), and are listed on national
securities exchanges. ETFs are
investment vehicles that issue shares
that can be bought or sold throughout
the day on securities exchanges in the
secondary market at a marketdetermined price. The ETF market has
seen significant growth in the past
decade, as the number of ETFs nearly
doubled from 1,134 to 2,204 and net
assets more than quintupled, from $939
billion to more than $5.3 trillion.954 ETF
secondary market trading made up 26
percent of total daily U.S. stock market
trading on average in 2020.955 At the
same time, ETF liquidity may be highly
concentrated, with studies estimating
that more than 85 percent of all ETF
value traded is concentrated in around
150 ETFs, or around five percent of all
ETFs.956 As with other NMS securities,
ETFs can be traded on exchanges and at
off-exchange venues.
There is also a significant market for
stocks that are not listed on a national
securities exchange, which are often
referred to as over-the-counter (OTC)
equities.957 As of August 2021, there
were 8,777 unlisted stocks that fell
under FINRA reporting requirements.958
Unlike NMS stocks, which may trade
on- or off-exchange, OTC equities may
only trade off-exchange, on ATSs or
through Communication Protocol
Systems for example.959 Liquidity in
OTC equities can be limited: A 2019
Commission analysis estimated that
only 44 percent of quoted OTC equities
are traded per day, and two percent did
not trade at all during the 2019 calendar
year.960
OTC equities tend to be held by small
investors. One academic study found
that institutions only held about 26
percent of OTC stocks, as compared to
71 percent of listed stocks, implying
or regulated by the SEC under the Investment
Company Act of 1940; see https://
www.icifactbook.org/21_fb_ch4.html.
954 See https://www.icifactbook.org/21_fb_
ch4.html.
955 See id.
956 See id.
957 The Commission estimates that quoted OTC
securities were valued at approximately $32.3
trillion in 2019, with 94.7 percent of the total
market capitalization coming from companies that
also have securities listed on public foreign
exchanges.
958 See https://www.finra.org/filing-reporting/
oats/oats-reportable-securities-list/.
959 See ‘‘Unraveling the Mystery of Over-theCounter Trading’’ (2016), FINRA, available at
https://www.finra.org/investors/insights/unravelingmystery-over-counter-trading.
960 See SEC Release No. 34–87115, ‘‘Publication
or Submission of Quotations Without Specified
Information’’ Proposed Rule and Concept Release,
available at https://www.sec.gov/rules/proposed/
2019/34-87115.pdf.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
that most owners of OTC stocks are
retail investors.961 A study found that
retail investors may be attracted to the
low price of OTC equities, which
include equities that trade under $5 per
share (so-called ‘‘penny stocks’’).962
Transparency in the market for OTC
securities can be limited. While some
OTC equity trading systems require
issuers to register their securities with
the SEC and/or periodically file their
financial statements (either with the
SEC or with the trading venue), other
systems may trade in OTC equities
without any reporting standards or
eligibility requirements.963 The market
for OTC equities is largely regulated by
FINRA under Section 15A of the
Securities Exchange Act of 1934, which
requires FINRA to, among other things,
establish rules governing the form and
content of quotations for securities sold
otherwise than on an exchange.
One particular type of unlisted
securities is referred to as restricted (or
sometimes ‘‘control’’) stocks. Restricted
stocks are either unregistered shares
issued by public companies in private
placements 964 or shares (both registered
and unregistered) held by an issuer or
its affiliates (such as insiders and large
shareholders). The secondary market for
restricted stocks is governed by SEC
Rule 144, and allows restricted stocks to
be sold to the public if several
conditions are met.965 While
investments in restricted stocks are
typically limited to only accredited
investors, new SEC rules adopted in
2015 under Section 401 of the Jumpstart
Our Business Startups (JOBS) Act, often
referred to as ‘‘Regulation A+,’’
expanded the ability for non-accredited
961 See Andrew Ang et al., Asset Pricing in the
Dark: The Cross-Section of OTC Stocks, 26 Rev. Fin.
Studs. 2985–3028 (2013).
962 See ‘‘Unraveling the Mystery of Over-theCounter Trading’’ (2016), FINRA, available at
https://www.finra.org/investors/insights/unravelingmystery-over-counter-trading.
963 See https://www.sec.gov/reportspubs/investorpublications/investorpubsmicrocapstockhtm.html.
Note that, as discussed in infra Section VIII.5.d,
recent amendments to 17 CFR 240.15c2–11 (Rule
15c2–11 of the Exchange Act) adopted in September
2020 limit public quoting in OTC equities for which
current financial statement information is not
publically available.
964 Unregistered securities typically avoid SEC
registration through one of two exemptions:
Regulation D offerings, which are mostly limited to
accredited (i.e., institutional or high-net-worth)
investors, and Regulation A offerings, which are
open to unaccredited investors.
965 See https://www.sec.gov/reportspubs/investorpublications/investorpubsrule144htm.html. These
conditions include a minimum holding period, the
availability of up-to-date information about the
issuing company, and certain limits to the size of
the trade. In addition, notice of trades by affiliates
are required to be filed with the SEC, and the trades
themselves must be handled by a broker as a
routine transaction (e.g., no special commissions).
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
investors to trade in certain unregistered
equities. Eligible restricted stocks can be
traded on a number of electronic
platforms that specialize in the
secondary market for restricted shares,
as well as through broker-dealers.966
b. ATSs in the Equity Market
As mentioned above, NMS stocks that
are listed on national securities
exchanges may trade both on exchanges
and at off-exchange trading venues,
including on ATSs. Currently there are
34 NMS Stock ATSs, collectively
handling an average of around 453
million trades during Q3 2021.967 Since
the adoption of Regulation NMS in
2005, the market for trading services has
become more fragmented, and the
proportion of NMS stocks trading offexchange has increased. For example, as
of July 2020, NMS Stock ATSs
comprised approximately 10 percent of
consolidated dollar volume, and other
off-exchange volume totaled
approximately 23 percent of
consolidated dollar volume.968
NMS Stock ATSs generally operate as
non-displayed venues, which do not
display quotes. Traditionally, market
participants that used non-displayed
venues to trade listed stocks have been
large institutional investors seeking to
execute block trades. However, average
trade sizes in many ATSs have shrunk
from block-size trades to smaller trade
sizes that match those of traditional
exchanges. In 2018, the Commission
found that, while eight NMS Stock
ATSs had average trade sizes larger than
10,000 shares, the vast majority had
average trade sizes between 100 and 460
shares, which is similar to average trade
sizes on the national securities
exchanges.969 One feature, among
others, that may attract some market
participants to non-displayed venues is
their lower information leakage as
compared to trades on exchanges.
NMS Stock ATSs are subject to
Regulation ATS and are also required to
file and publicly disclose Form ATS–N.
Furthermore, those with significant
volume are required to comply with the
requirements of Regulation SCI 970 and
966 See, e.g., Private Equity Exchange (https://
peqx.com/); Nasdaq Private Market (https://
www.nasdaq.com/secondmarket).
967 See https://www.finra.org/filing-reporting/otctransparency/ats-quarterly-statistics.
968 See Market Data Infrastructure Final Rule,
Release No. 90610 (Dec. 9, 2020), available at
https://www.sec.gov/rules/final/2020/34-90610.pdf.
969 See SEC Release No. 34–83663, ‘‘Regulation of
NMS Stock Alternative Trading Systems,’’ available
at https://www.sec.gov/rules/final/2018/3483663.pdf.
970 An ATS trading in NMS stock is subject to
Regulation SCI if, during at least four of the
preceding six months, the ATS had five percent or
PO 00000
Frm 00117
Fmt 4701
Sfmt 4702
15611
the Fair Access Rule.971 Trades in NMS
stocks that are transacted off-exchange,
which includes transactions on ATSs,
are required to be reported to one of
three FINRA Trade Reporting Facilities
(TRF).972 If the execution is handled by
an ATS, then in most cases the ATS has
the reporting obligation and must report
itself as a counterparty to both sides of
the trade.973
Furthermore, national securities
exchanges, national securities
associations and Industry Members 974
that receive or originate orders 975 in
Eligible Securities 976 are required to
more in any single NMS stock, and 0.25 percent or
more in all NMS stocks, of the average daily dollar
volume reported by applicable effective transaction
reporting plans, or one percent or more, in all NMS
stocks, of the average daily dollar volume reported
by applicable effective transaction reporting plans.
See https://www.sec.gov/divisions/marketreg/
regulation-sci-faq.shtml. See supra Section
VIII.B.2.a.ii for a discussion of the impact of
Regulation SCI.
971 An ATS trading in NMS stock is subject to the
Fair Access Rule if, during at least four of the
preceding six months, the ATS had five percent or
more of the average daily volume in an NMS stock
reported by an effective transaction reporting plan.
See 17 CFR 242.301(b)(5)(i) and https://
www.sec.gov/tm/faq-regulation-ats-fair-access-rule.
See supra Section VIII.B.2.a.ii for a discussion of
the impact of the Fair Access Rule.
972 These include FINRA/Nasdaq TRF Carteret,
FINRA/Nasdaq TRF Chicago, and FINRA/NYSE
TRF. See https://www.finra.org/filing-reporting/trf/
trf-exchange-participants.
973 See https://www.finra.org/filing-reporting/
market-transparency-reporting/trade-reporting-faq.
Certain transactions are exempt from FINRA TRF
reporting requirements; see https://www.finra.org/
filing-reporting/market-transparency-reporting/
trade-reporting-faq#500 and FINRA Rules
6282(f)(1), 6380A(e)(1), 6380B(e)(1), and 6622(e)(1).
974 The National Market System Plan Governing
the Consolidated Audit Trail (CAT NMS Plan) is a
national market system plan approved by the
Commission pursuant to Section 11A of the
Exchange Act and the rules and regulations
thereunder. See Securities Exchange Act Release
No. 79318 (November 15, 2016), 81 FR 84696
(November 23, 2016). The CAT NMS Plan and
subsequent amendments to the Plan are available at
https://catnmsplan.com/about-cat/cat-nms-plan.
Section 1.1 of the CAT NMS Plan defines an
Industry Member as a member of a national
securities exchange or a member of a national
securities association. ‘‘CAT Reporters’’ include
national securities exchanges, national securities
associations and Industry Members that are
required to record and report information to the
Central Repository pursuant to SEC Rule 613(c).
975 Section 1.1 of the CAT NMS Plan defines the
term ‘‘order,’’ with respect to Eligible Securities, as
having the meaning set forth in 17 CFR 242.613(j)(8)
(SEC Rule 613(j)(8)). SEC Rule 613(j)(8) defines an
‘‘order’’ as any order received by a member of a
national securities exchange or national securities
association from any person; any order originated
by a member of a national securities exchange or
national securities association; or any bid or offer.
976 Section 1.1 of the CAT NMS Plan defines
Eligible Securities as’’ (a) all NMS Securities and (b)
all OTC Equity Securities,’’ where OTC Equity
Securities are defined as any equity security, other
than an NMS Security, subject to prompt last sale
reporting rules of a registered national securities
association and reported to one of such
E:\FR\FM\18MRP2.SGM
Continued
18MRP2
15612
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
report any Reportable Event 977 to the
Consolidated Audit Trail (CAT), which
is designed to capture customer and
order event information from the time of
order inception through routing,
cancellation, modification, or execution
in a single, consolidated data source.
The Participants 978 have issued
guidance stating that trading interest
must be ‘‘firm’’ to fall within the
definition of an ‘‘order,’’ and thus be
reportable to CAT, and so certain
trading interest (e.g., conditional orders)
that may be available on some ATSs is
not reportable to the CAT until it is
‘‘firmed up’’/confirmed.979
OTC equities also trade on ATSs.
There are currently five ATSs operating
in the OTC equity market. As of Q3
2021, FINRA reports that OTC equity
ATSs collectively handled around 4
million trades.980 ATSs that offer
trading services in OTC equities also
typically operate as interdealer
quotation systems (IDQS), which
regularly disseminate broker-dealer
quotes.981 The majority of OTC equity
trading on ATSs is concentrated on one
platform, which executed more than 60
percent of OTC equity ATS trading in
Q1 2021. ATSs that trade in OTC
equities usually segment securities into
different markets or use eligibility status
symbols to inform investors regarding
issuers’ regulatory compliance and
association’s equity trade reporting facilities.’’ This
includes both OTC Equity Securities and
transactions in Restricted Equity Securities effected
pursuant to Securities Act Rule 144A. See CAT
NMS Plan, supra note 974.
977 According to Section 1.1 of the CAT NMS
Plan, ‘‘Reportable Event’’ includes, but is not
limited to, the original receipt or origination,
modification, cancellation, routing, execution (in
whole or in part) and allocation of an order, and
receipt of a routed order. See CAT NMS Plan, supra
note 974.
978 The Participants are the national securities
exchanges and national securities associations who
collectively control and operate the CAT.
979 See CAT FAQ B40, available at https://
www.catnmsplan.com/faq. This release refers to the
FAQs published by the Participants because the
Commission believes those FAQs are guiding the
how Industry Members are reporting information to
the CAT. The Commission has not approved the
FAQs so is expressing no view in this release
regarding such FAQs.
980 See https://www.finra.org/filing-reporting/otctransparency/ats-quarterly-statistics. Note that this
dataset aggregates volume across two OTC Link
LLC-operated ATSs under the label OTC LINK ECN
ATS.
981 Rule 15c2–11 of the Exchange Act defines an
inter-dealer quotation system as any system of
general circulation to brokers or dealers that
regularly disseminates quotations of identified
brokers or dealers, and further defines a qualified
inter-dealer quotation system as any inter-dealer
quotation system that meets the definition of an
‘‘alternative trading system’’ and operates pursuant
to the exemption from the definition of an
‘‘exchange.’’
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
disclosure.982 This is designed to inform
investors whether companies are
current or delinquent in their filing
requirements in the interest of
transparency.983 One academic study
found that OTC equities that are subject
to stricter disclosure requirements have
higher market quality, including higher
liquidity and lower crash risk.984
FINRA is the SRO that regulates
trading in OTC securities. The
Commission understands that the
current ATS market place for OTC
equities has evolved to replace the
functions formally performed by the
OTC Bulletin Board (OTCBB), a FINRAoperated inter-dealer quotation system
for OTC equities that was retired by
FINRA in November 2021.985 In its
filing with the SEC, FINRA cited
technological advancements and ‘‘the
subsequent increase in alternative
electronic venues with more extensive
functionality than the OTCBB’’ as
reasons for its retirement, which
highlights market participants’
preference for electronic trading systems
in this market.986 Concurrently to its
retirement of the OTCBB, FINRA has
adopted new Rule 6439 (Requirements
for Member Inter-Dealer Quotation
Systems), which implements additional
requirements for firms that operate
systems that regularly disseminate
quotes in OTC equities, including
requirements related to fair access,
982 For
example, the OTC Link LLC ATS is
organized into several market places, broadly
organized according to the issuers’ regulatory
compliance and disclosure: OTCQX, which
includes equities that are subject to and current
with the reporting requirements of the Exchange
Act, and that additionally meet numerous other
eligibility requirements; OTCQB, which includes
equities that are subject to and current with the
reporting requirements of the Exchange Act, but not
subject to any additional eligibility requirements;
and Pink Sheets, which includes equities without
any reporting or eligibility requirements. A fourth
tier, the so-called ‘‘Expert Market’’ or ‘‘Grey
Market,’’ contains equities that are not or cannot be
publically quoted, either due to regulatory
restrictions or lack of investor interest. See https://
www.sec.gov/reportspubs/investor-publications/
investorpubsmicrocapstockhtm.html. Additionally,
for another example, see https://
www.globalotc.com/brokers/eligible-securities.
983 See Cass Sanford, Understanding the Expert
Market, OTC Markets Blog (March 25, 2021),
available at https://blog.otcmarkets.com.
984 See Bru
¨ ggemann, U., Kaul, A., Leuz, C., &
Werner, I.M. (2018). The twilight zone: OTC
regulatory regimes and market quality. The Review
of Financial Studies, 31(3), 898–942.
985 See https://www.finra.org/rules-guidance/
notices/21-38.
986 See SEC Release No. 34–90067, October 1,
2020, ‘‘Self-Regulatory Organizations; Financial
Industry Regulatory Authority, Inc.; Notice of Filing
of a Proposed Rule Change to Adopt FINRA Rule
6439 (Requirements for Member Inter-Dealer
Quotation Systems) and Delete the Rules Related to
the OTC Bulletin Board Service,’’ available at
https://www.sec.gov/rules/sro/finra/2020/3490067.pdf.
PO 00000
Frm 00118
Fmt 4701
Sfmt 4702
transparency, and systems integrity.987
Furthermore, trades to which a FINRA
member is a party must be reported to
FINRA’s OTC Reporting Facility (ORF)
within ten seconds of execution.988 This
includes executions in OTC equities, as
well as executions in restricted stocks
effected under 17 CFR 230.144A
(Securities Act Rule 144A); however,
trades in restricted equity securities
effected under Rule 144A are reported
to the ORF for regulatory purposes only
and are not publicly disseminated.
Similarly to requirements for FINRA’s
TRF described above, if the execution is
handled by an ATS, then in most cases
the ATS has the reporting obligation
and must report itself as a counterparty
to both sides of the trade.989 In addition,
OTC equities fall within the definition
of ‘‘Eligible Securities’’ under the CAT
NMS Plan, and therefore any eligible
events in OTC equities are reportable to
CAT.990
In addition to its requirements under
FINRA, ATSs that trade in OTC equities
must comply with Regulation ATS,
including filing Form ATS and
periodically filing Form ATS–R, and
complying with Regulation SCI 991 and
the Fair Access Rule if volume
thresholds are met.992 However, ATSs
that trade in OTC equities are not
required to file and publicly disclose
Form ATS–N.
c. National Securities Exchanges for
NMS Stock
NMS Stock ATSs compete with
national securities exchanges in the
market for trading services in NMS
securities. Currently, 16 national
securities exchanges effect transactions
in NMS stocks. These exchanges
987 See https://www.finra.org/rules-guidance/
notices/21-28.
988 FINRA Rule Series 6620 and 7300 govern OTC
and restricted equity trade reporting to FINRA
Facilities. See https://www.finra.org/filingreporting/market-transparency-reporting/tradereporting-faq.
989 See supra note 973.
990 See supra notes 974 to 979 and corresponding
discussion.
991 An ATS trading in non-NMS stock is subject
to Regulation SCI if, during at least four of the
preceding six months, the ATS had five percent or
more of the average daily volume in transactions
that are reported to and calculated by a selfregulatory organization, such as FINRA. See https://
www.sec.gov/divisions/marketreg/regulation-scifaq.shtml. See supra Section VIII.B.2.a.ii for a
discussion of the impact of Regulation SCI.
992 An ATS trading in non-NMS stock is subject
to the Fair Access Rule if, during at least four of
the preceding six months, the ATS had five percent
or more of the average daily volume in non-NMS
stock transactions that are reported to and
calculated by a self-regulatory organization, such as
FINRA. See 17 CFR 242.301(b)(5)(i) and https://
www.sec.gov/tm/faq-regulation-ats-fair-access-rule.
See supra Section VIII.B.2.a.ii for a discussion of
the impact of the Fair Access Rule.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
accounted for 58 percent of NMS
security share volume and 65 percent of
NMS security dollar volume in
September 2021.993 National securities
exchanges have greater regulatory
obligations than NMS Stock ATSs. They
must register with the Commission on
Form 1, file proposed rule changes with
the Commission under Section 19(b) of
the Exchange Act, and are SROs. The
proposed rule changes of national
securities exchanges must be made
available for public comment,994 and in
general, these proposed rule changes
publicly disclose, among other things,
details relating to the exchange’s
operations, procedures, and fees. The
Commission reviews the rules of
national securities exchanges, a process
which requires, among other things, that
to approve certain rule changes, the
Commission find that the national
securities exchange’s proposed rule
changes are consistent with the
Exchange Act.995 National securities
exchanges and other SROs also have
regulatory obligations, such as enforcing
their rules and the Federal securities
laws with respect to their members,
which do not apply to market
participants such as ATSs.996
While national securities exchanges
have more regulatory obligations than
NMS Stock ATSs, they also enjoy
certain unique benefits that are not
afforded to NMS Stock ATSs. While
national securities exchanges are SROs,
and are thus subject to surveillance and
oversight by the Commission, they can
still establish norms regarding conduct,
trading, and fee structures for external
access. Trading venues that elect to
register as national securities exchanges
may gain added prestige by establishing
listing standards for their securities.
Additionally, national securities
exchanges can be direct participants in
NMS plans, which provides additional
sources of revenue and input into the
operation of the national market system
that is not available to NMS Stock
ATSs.997
993 See CBOE Historical Market Volume Data,
available at https://www.cboe.com/us/equities/
market_statistics/historical_market_volume/,
market_history_monthly_2021.csv. This statistic is
calculated by dividing the sum of all non-FINRA
entries for the month of September 2021 divided by
the sum of all entries for the month of September
2021.
994 See 15 U.S.C. 78s(b)(1).
995 See 15 U.S.C. 78s(b).
996 See, e.g., Section 19(b) of the Exchange Act,
15 U.S.C. 78s(b)(1), and Section 6(b) of the
Exchange Act, 15 U.S.C. 78f(b).
997 See Regulation ATS Adopting Release, supra
note 31, at 70880, 70902–70903 (Section discussing
generally some of the obligations and benefits of
registering as a national securities exchange).
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
d. Communication Protocol Systems in
the Equity Market
The Commission estimates that there
are currently 4 Communication Protocol
Systems operating in the market for
NMS stocks that may meet the
definition of exchange under the
proposed changes to Exchange Act Rule
3b–16. Furthermore, the Commission
understands that some NMS Stock ATSs
offer functionalities similar to
Communication Protocol Systems, such
as conditional orders and indications of
interest (IOIs), both of which can
interact with their limit order books. As
mentioned in Section II.B.2, the
Commission has observed that 26 NMS
Stock ATSs have disclosed on their
public Form ATS–N that they send or
receive messages indicating trading
interest, such as conditional orders.
While NMS Stock ATSs may make
use of Communication Protocol System
functionalities, there is limited evidence
that Communication Protocol Systems
play a significant role in the non-ATS
OTC market for liquid NMS stocks in
the U.S.998 One commenter stated that
NMS stocks and ETFs with limited
liquidity are now beginning to use
protocols such as RFQ to bridge
liquidity gaps.999 However, because the
Commission lacks data on the use of
protocols that would qualify as
Communication Protocol Systems by
non-ATS trading systems operating in
the OTC equity market, it is unable to
quantify to what extent Communication
Protocol Systems are used in the nonATS OTC market for NMS stocks. The
Commission requests comment on this
issue.
Communication Protocol System
operators cite their protocols’ abilities to
service very large orders, the option for
participants to pick and choose which
aspects of their order to disclose (e.g.,
price or size), and higher discretion as
advantages of these protocols over
trading on exchanges or ATSs.1000
However, some market participants
998 On the contrary, RFQ platforms are
increasingly playing a role in block trading in
European equities, particularly in the wake of the
2018 adoption of MiFID II, which placed limits on
other off-exchange sources of liquidity. See, e.g.,
Basar, Shanny. (2020, March 31). MarketsMedia,
available at https://www.marketsmedia.com/icapadds-to-equity-rfqs/.
999 See Bloomberg Letter at 3, 10, 20, and 23. The
commenter also referenced that trading in small and
micro NMS stocks on exchanges has been difficult
and has not necessarily improved with recent
technological changes. See Bloomberg Letter at 21,
citing https://www.nasdaq.com/articles/nasdaqsproposal-improve-trading-environment-small-andmedium-growth-companies-and.
1000 See ‘‘RFQ for Equities: One Year On,’’ (2019),
Tradeweb, available at https://www.tradeweb.com/
newsroom/media-center/insights/blog/rfq-forequities-one-year-on/.
PO 00000
Frm 00119
Fmt 4701
Sfmt 4702
15613
have expressed skepticism over
information leakage in the use of RFQs
for equity transactions, as their use may
signal that the participants are unable to
locate ‘‘natural’’ sources of liquidity.1001
Communication Protocol Systems
may also play a role in the trading of
U.S.-listed ETFs. However, the
Commission lacks data to quantify what
proportion of ETF volume trades via
Communication Protocol Systems. At
least one trading system operator claims
to offer several protocols, including
RFQ, for trading in U.S.-listed ETFs.1002
The use of Communication Protocol
Systems for trading in ETFs may be
motivated by a lack of liquidity in some
ETF securities, and associated risks
involved in trading in illiquid ETFs.1003
Similar to the corporate bond market,
the use of Communication Protocol
Systems may also be used for the
trading of bundles of securities in order
to facilitate transaction services for
participants that may be using the same
Communication Protocol System to
trade in the securities underlying
ETFs.1004
Unlike NMS Stock ATSs,
Communication Protocol Systems that
trade NMS stocks are not subject to any
of the requirements of Regulation SCI or
Regulation ATS, including the
requirement to file the public Form
ATS–N. Trades in NMS stocks that are
transacted elsewhere than on an
exchange, which may include
transactions executed on a
Communication Protocol System, are
required to be reported to FINRA TRF
as discussed in Section VIII.B.5.a if at
least one of the parties to the transaction
is a FINRA member.
Trading interest on Communication
Protocol Systems may not be required to
be reported to CAT, depending on the
nature of the solicitation and/or
response(s) as firm or non-firm. CAT
guidance issued by the Participants
1001 See, e.g., McDowell, Hayley. (2018, October
23). ‘‘Buy-side throws doubt on RFQ for equities as
‘last chance saloon’ for liquidity,’’ THETRADE,
available at https://www.thetradenews.com/buyside-throws-doubt-rfq-equities-last-chance-saloonliquidity/.
1002 See, e.g., ‘‘ETFs’’, Tradeweb, available at
https://www.tradeweb.com/our-markets/
institutional/equities/ETPs_Funds/. Additional
market participants may also be developing
Communication Protocol Systems for U.S.-listed
ETFs. See, e.g., Rennison, Joe, April 4, 2019,
‘‘MarketAxess muscles into ETF industry with Virtu
tie-up,’’ Financial Times, available at https://
www.ft.com/content/b88d53b6-5709-11e9-a3db1fe89bedc16e.
1003 See, e.g., Bae, K., & Kim, D. (2020). Liquidity
risk and exchange-traded fund returns, variances,
and tracking errors. Journal of Financial Economics,
138(1), 222–253.
1004 See supra Section VIII.B.3.b for a discussion
of portfolio trading on Communication Protocol
Systems in the corporate bond market.
E:\FR\FM\18MRP2.SGM
18MRP2
15614
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
provides that non-firm expressions of
trading interest that contain information
about the security name, side, size,
capacity and/or price, which includes
IOIs and RFQs, do not fall within the
definition of an ‘‘order’’ and are
therefore not reportable to CAT.1005
However, this guidance also states that
any response to an RFQ or other form
of solicitation response that is accessible
electronically and is immediately
actionable (i.e., no further manual or
electronic action is required by the
responder providing the quote in order
to execute or cause a trade to be
executed) is reportable whether or not it
is ultimately accepted. Furthermore,
once an order is ‘‘firmed up’’ by the
initiating participant and winning
bidder, the origination of the new order
by the initiating participant, the routing
of that new order to the winning bidder,
and the acceptance of that order by the
winning bidder are all reportable events,
with the initiating participant reporting
the new order and routing events, and
the winning bidder reporting the order
acceptance, as well as any subsequent
actions taken to process the order.1006
The Commission understands that the
majority of trading in OTC equities takes
place on IDQS, most of which are
registered as ATSs. However, there may
be some IDQS or other OTC equity
trading systems that are not registered as
ATSs and that operate using trading
protocols that would qualify as
Communication Protocol Systems.1007
The Commission estimates that there
may currently be 1 Communication
Protocol System operating in the OTC
equity market. Such a trading system
may not be subject to FINRA Rule 6439
or trade reporting requirements, or
quoting requirements under the
amended Rule 15c2–11 discussed in the
next paragraph, if it is not operated by
a FINRA member and does not meet the
definition of a ‘‘qualifying’’ IDQS. The
Commission lacks the data to estimate
the number or trading volume of IDQS
or other OTC equity trading systems that
operate as Communication Protocol
Systems and are not registered as
broker-dealers. The Commission
requests comment on this topic.
Communication Protocol Systems
may also play a role in the Grey Market
for OTC equities.1008 Recent
1005 See CAT FAQ B3, available at https://
www.catnmsplan.com/faq.
1006 See CAT FAQ B45, available at https://
www.catnmsplan.com/faq.
1007 See SEC Release No. 34–87115, ‘‘Publication
or Submission of Quotations Without Specified
Information’’ Proposed Rule and Concept Release,
available at https://www.sec.gov/rules/proposed/
2019/34-87115.pdf.
1008 See supra note 982.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
amendments to Rule 15c2–11 of the
Exchange Act adopted in September
2020 limit public quoting in OTC
equities for which current financial
statement information is not publically
available.1009 This limits the ability of
many OTC equities to trade on
ATSs,1010 but many OTC securities are
still traded even without publically
available quotes.1011 However, due to
the opacity of this market, the
Commission lacks data to estimate the
extent to which broker-dealers trading
in Grey Market equities are using
protocols that would qualify as
Communication Protocol Systems and
requests comment on this issue.
Communication Protocol Systems
may play a role in the secondary market
for restricted shares. The Commission
preliminarily estimates that there are
currently 10 Communication Protocol
Systems operating in the market for
restricted shares. Furthermore, an
estimated 2 of these are run by nonbroker-dealers, who therefore would not
currently be subject to the associated
costs of complying with broker-dealer
filing and conduct obligations,
including becoming a member of an
SRO, such as FINRA.1012
Unlike ATSs that trade OTC equities,
Communication Protocol Systems that
trade OTC equities are not subject to any
of the requirements of Regulation ATS.
Trades in OTC equities and restricted
equities effected under Securities Act
Rule 144A that are transacted elsewhere
than on an exchange, which may
include transactions executed on a
Communication Protocol System, are
required to be reported to FINRA’s OTC
ORF as described in Section VIII.B.5.a,
if at least one of the parties to the
transaction is a FINRA member.
e. Other Methods of Trading in Equities
The majority of off-exchange trading
in NMS stocks occurs outside of ATSs.
A DERA white paper estimated that, in
2014, non-ATS off-exchange trading in
NMS stocks represented nearly 17
percent of total equity market dollar
1009 See https://www.sec.gov/news/press-release/
2020-212.
1010 In compliance with the amendments, in
March 2021 OTC Markets announced that OTC
equities without current public information would
be moved off its Pink Sheets market place. See
https://blog.otcmarkets.com/2021/03/25/
understanding-the-expert-market/.
1011 In 2018, the Commission estimated that 5,915
OTC securities were traded at some point during
the year without having published quotations, and
3% of these securities had average daily trading
volumes above $100,000. See SEC Release No. 34–
87115, ‘‘Publication or Submission of Quotations
Without Specified Information’’ Proposed Rule and
Concept Release, available at https://www.sec.gov/
rules/proposed/2019/34-87115.pdf.
1012 See supra Section III.B.1.
PO 00000
Frm 00120
Fmt 4701
Sfmt 4702
volume; 1013 by July 2020, this number
increased to 23 percent, while trading
on ATSs was composed of only 10
percent of total equity market dollar
volume.1014 The DERA white paper
found that more than a third of non-ATS
trading volume in NMS stock comprised
of retail orders executed by OTC market
makers.1015 Block trades (i.e., trades
larger than 10,000 shares) made up a
higher percentage of non-ATS trading
volume than ATS trading volume.1016
Additionally, single-dealer platforms
(SDPs) accounted for nine percent of offexchange trading volume in Q3
2021.1017
The Commission believes that
manually negotiated trades via the
telephone are still taking place in the
market for NMS stocks, in particular for
large block trades by institutional
investors.1018 A survey taken in April
2014 estimated that more than 55
percent of buy-side U.S. equity trading
was still being executed via phone
calls.1019
Additionally, it is likely that
traditional bilateral negotiations are still
actively used in the market for OTC
equities as well, particularly in the Grey
Market and the market for restricted
equities, where electronic trading may
be limited due to restrictions on public
quoting activity. However, due to the
opacity of this market, it is difficult to
estimate the extent to which voice
trading still plays a role in the market
for OTC and restricted equities.
As described above in Section
VIII.B.5.a, trades in equities that are
transacted elsewhere than on an
1013 See Tuttle, L.A. (2014). OTC trading:
Description of non-ATS OTC trading in National
Market System stocks. DERA White Paper.
1014 See Market Data Infrastructure Final Rule,
Release No. 90610 (Dec. 9, 2020), available at
https://www.sec.gov/rules/final/2020/34-90610.pdf.
1015 See Tuttle, L.A. (2014). OTC trading:
Description of non-ATS OTC trading in National
Market System stocks. DERA White Paper. A more
recent study found that retail wholesalers
accounted for 49.9 percent of off-exchange trading
in Q3 2021. See Rosenblatt Securities, November 4,
2021, ‘‘A Closer Look at Off Exchange and Retail
Market Share.’’
1016 See Tuttle, L.A. (2014). OTC trading:
Description of non-ATS OTC trading in National
Market System stocks. DERA White Paper.
Specifically, defining block trades as trades of
10,000 or more shares, block trades comprised only
0.10 percent of dark ATS trading while they
comprise 2.53 percent of non-ATS OTC trading.
1017 SDPs do not permit participants to post
liquidity, but rather offer bilateral trading with the
counterparty operating the venue. See id.
1018 See, e.g., https://www.ft.com/content/
44841008-3cf7-11e4-a2ab-00144feabdc0.
1019 In the survey, market participants cited the
expertise and consulting services offered by brokers
as some of the benefits of using the phone to
conduct ‘‘high touch’’ trades. See https://
www.greenwich.com/press-release/high-touchexecution-consulting-services-and-performancedriving-technologies-spell.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
exchange, which may include
transactions executed via voice trading,
are required to be reported to either
FINRA’s TRF (in the case of NMS
stocks) or ORF (in the case of OTC or
restricted equities) if at least one of the
parties to the transaction is a FINRA
member. As described above, trades in
restricted equity securities are reported
for regulatory purposes only and are not
publicly disseminated.
jspears on DSK121TN23PROD with PROPOSALS2
f. Competition in the Market for Equity
Trading Services
As discussed above, since Regulation
NMS was adopted in 2005, the market
for equity trading services has become
more fragmented, with trading
fragmented not only across exchanges,
but across different trading systems
(exchanges, ATSs, and non-ATS offexchange trading venues). For instance,
from 2005 to 2013, there was a decline
in the market share of trading volume
for exchange-listed stocks on NYSE.1020
At the same time, there was an increase
in the market share of newer national
securities exchanges such as NYSE
Arca, Cboe BYX, and Cboe BZX.1021
This development increased
competition in the market for trading
services. Several academic studies have
shown that an increase in competition
between exchanges, or between
exchanges and ATSs, improves market
quality by reducing transactions costs
and increasing liquidity.1022
Trading venues compete with each
other along a number dimensions in
order to attract order flow. For example,
in addition to other ways, trading
venues can compete via fees, rebates,
speed, and trading protocols in order to
attract order flow.1023 However, the
actual level of competition that any
given trading venue faces may depend
on multiple factors including the
liquidity of a stock as well as the type
of trading venue and market participant
engaging in the trade. A market
participant’s preference for where to
trade can depend on a number of
factors, including, among other things,
1020 See Securities Exchange Act Release No.
76474 (Nov. 18, 2015), 80 FR 80998, 81112 (Dec.
28, 2015) (Regulation of NMS Stock Alternative
Trading Systems Proposing Release).
1021 See id.
1022 See, e.g., Foucault, T., & Menkveld, A.J.
(2008). Competition for order flow and smart order
routing systems. The Journal of Finance, 63(1), 119–
158; O’Hara, M., & Ye, M. (2011). Is market
fragmentation harming market quality? Journal of
Financial Economics, 100(3), 459–474.
1023 See, e.g., Cantillon, E., & Yin, P.L. (2011).
Competition between exchanges: A research
agenda. International journal of industrial
organization, 29(3), 329–336; Budish, E., Lee, R.S.,
& Shim, J.J. (2019). A Theory of Stock Exchange
Competition and Innovation: Will the Market Fix
the Market? National Bureau of Economic Research.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
speed, anonymity, and price impact.
The choice of trading venue may also be
limited by regulatory restrictions on
where certain equities may be traded
and by whom, as quoting activities in
some OTC stocks are restricted, and
some investors are prohibited from
trading in certain types of equities, such
as restricted stocks.
6. Current State of Options Markets
There are currently 16 exchanges
(‘‘options exchanges’’) and 1 ATS
offering listed options trading services.
During the month of October 2021,
approximately 39 million options
contracts, equating to approximately
$21 billion in total premiums, were
traded daily on exchanges.1024 The
market for listed options has been
historically dominated by institutional
investors; 1025 however, the market has
seen a dramatic increase in retail
investor participation in recent
years.1026
a. Currently Regulated Trading Systems
in the Market for Listed Options
The market for listed options trading
services is dominated by registered
exchanges. This dominance stems from
the role of the Options Clearing
Corporation (OCC), which is the sole
entity clearing trades for exchange-listed
options, security futures, and OTC
options.1027 Central clearing of listed
options incentivizes the use of
exchanges. Exchanges offer traders a
centralized location to interact with
other traders in the market. Exchanges
compete with each other by offering
different cost structures to participate
on the exchange, and differing order
types to allow customers advanced
trading strategies. Largely due to
regulation,1028 options exchanges offer
the ability to route orders to competing
options exchanges in the event of a
competing option exchange having the
best price for a given options order.
1024 See OCC Monthly & Weekly Volume
Statistics, available at https://www.theocc.com/
Market-Data/Market-Data-Reports/Volume-andOpen-Interest/Monthly-Weekly-Volume-Statistics.
These statistics were calculated by downloading the
monthly files for ‘‘Equity,’’ ‘‘Index,’’ and ‘‘ETF’’
options for October 2021. The OCC combined value
from each file was added together and divided by
the trading days in October 2021 to generate these
statistics.
1025 See Bennett, Jay, John Colon, and John Feng.
(2010). FIA, available at https://secure.fia.org/files/
css/magazinearticles/article-1446.pdf.
1026 See Thyagaraju Adinarayan, ‘‘Retail trading
fever drives U.S. equity option volumes to record
monthly high’’, Reuters, (2021, February 3).
(Retrieved from Factiva database).
1027 See ‘‘What Is OCC?’’ The Options Clearing
Corporation, available at https://www.theocc.com/
Company-Information/What-Is-OCC.
1028 See https://www.sec.gov/rules/final/3443591.htm.
PO 00000
Frm 00121
Fmt 4701
Sfmt 4702
15615
Thus, while there is competition
amongst options exchanges for trading
services, they are joined together in an
integrated market system.
There is one ATS in the market for
listed options. As the Commission
understands, this ATS offers
participants an RFQ protocol.1029 A
customer may accept the quote the ATS
returns from the RFQ protocol.
However, the orders are routed to an
exchange for execution.
As described above, the ATS in the
market for listed option trading services
competes with exchanges by offering the
potential of price improvement on
orders, the ability to view market
liquidity without submitting a firm
order, and the ability to interact with
multiple market makers, across multiple
exchanges, simultaneously. It should be
noted, however, that this competition is
not direct; the ATS ultimately sends
orders to exchanges, and thus could be
seen as complementary to exchanges.
Options exchanges are subject to
many of the same regulations as NMS
Stock trading systems. Options
exchanges are part of the NMS and are
required to participate in many NMS
plans. Options exchanges also are
subject to Regulation SCI.
Similar to other security types, an
ATS that trades in listed option
securities must comply with Regulation
ATS and broker-dealer filing and
conduct obligations, including
becoming a member of an SRO, such as
FINRA. In addition, listed options fall
within the definition of ‘‘eligible
securities’’ under the CAT NMS Plan,
and therefore any eligible events in
listed options are reportable to CAT.1030
b. Communication Protocol Systems in
the Market for Listed Options
As the Commission understands,
there is currently 1 Communication
Protocol System trading in listed
options that may meet the definition of
exchange under the proposed changes to
Exchange Act Rule 3b–16.1031 This
Communication Protocol System
operates in a similar fashion to the
single ATS in the market for listed
options described above in Section
VIII.B.6.a. This system offers an RFQ
protocol that allows a customer to
request a quote for a specified option.
The system then surveys market makers
1029 See ‘‘Liquidity Management Software For US
Listed Options Market’’, DASH Financial, available
at https://dashfinancial.com/execution-services/
dash-ats/.
1030 See supra notes 974 to 979 and corresponding
discussion.
1031 See ‘‘Request-for-Quote Options Trading’’,
Tradeweb, available at https://
www2.tradeweb.com/optionsweb.
E:\FR\FM\18MRP2.SGM
18MRP2
15616
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
of options exchanges. The system
returns the quotes to the customer,
where the customer has the ability to
accept one of the proposed trades. The
trade is then executed on the option
exchange. The Commission requests
comment on the full role of
Communication Protocol Systems in the
market for listed options.
Communication Protocol Systems
compete with options exchanges and
ATSs for trading services. Similar to
ATSs, Communication Protocol Systems
in the market for listed options
ultimately interact with exchanges in
their trading operations; thus, the
competition between Communication
Protocol Systems and exchanges might
be better characterized as a
complementary relationship. As the
Commission understands, competition
between ATSs and Communication
Protocol Systems in the market for listed
options occurs primarily through the
quality of their trading systems, cost
structures, and speed of RFQ protocol
completion.
Communication Protocol Systems in
the market for listed options are not
formally regulated by any regulatory
authority. This lack of regulation puts
listed option ATSs at a disadvantage
compared to Communication Protocol
Systems. The Commission believes that
the participation of the OCC in centrally
clearing options trades on exchanges is
a major factor contributing to the
decision of traders to trade on options
exchanges compared to using
Communication Protocol Systems and
ATSs.
As in the market for equities, trading
interest in listed options on
Communication Protocol Systems may
not be required to be reported to CAT,
depending on the nature of the
solicitation and/or response(s) as firm or
non-firm.1032
7. Other Securities
a. Repurchase and Reverse Repurchase
Agreements
jspears on DSK121TN23PROD with PROPOSALS2
The market for repurchase and reverse
repurchase agreements 1033 plays a role
both in the stability of the banking and
financial system and in the transmission
of U.S. monetary policy. Repurchase
agreements account for between $4
trillion and $6 trillion in notional value
1032 See supra notes 1005 and 1006 and
corresponding discussion.
1033 See supra Section III.A for a discussion of
‘‘repos’’ (repurchase agreements and reverse
repurchase agreements on government securities).
While U.S. Treasury Securities are frequently used
as the underlying collateral of repurchase and
reverse repurchase agreements, other securities may
also be used, such as corporate bonds and stocks.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
trades daily.1034 Moreover, reverse
repurchase agreements have become an
important tool of monetary policy.
Specifically, the market for reverse
repurchase agreements is used by banks
to lend out excess reserves, while the
market for repurchase agreements is
used to borrow to meet reserve
requirements.1035
The Commission estimates that there
are currently 4 ATSs 1036 facilitating
trades in repurchase and reverse
repurchase agreements. Furthermore,
the Commission estimates that 3
Communication Protocol Systems
facilitate trading in repurchase and
reverse repurchase agreements that may
meet the definition of exchange under
the proposed changes to Exchange Act
Rule 3b–16.1037 The Commission
understands that these systems typically
use U.S. Treasury securities as collateral
for trades in repurchase and reverse
repurchase agreements conducted on
their systems. The Commission
understands that RFQ systems for
repurchase and reverse repurchase
agreements are a relatively recent and
rapidly growing phenomenon.1038
Repurchase and reverse repurchase
agreement transactions usually involve
collateral haircuts and counterparty risk
inherent in the contract. Counterparty
risk may give market participants an
1034 See Board of Governors of the Federal
Reserve System (US), All Sectors; Federal Funds
and Security Repurchase Agreements; Asset, Level
[BOGZ1FL892050005Q], retrieved from FRED,
Federal Reserve Bank of St. Louis; https://
fred.stlouisfed.org/series/BOGZ1FL892050005Q,
December 2, 2021.
1035 See, e.g., Cheng, Jeffrey and David Wessel.
‘‘What is the repo market, and why does it matter?’’
(2020). Brookings Institute, available at https://
www.brookings.edu/blog/up-front/2020/01/28/
what-is-the-repo-market-and-why-does-it-matter/.
1036 These ATSs are Current Government
Securities ATSs. See supra note 5.
1037 See, e.g., ‘‘Tradeweb Reports September 2021
Total Volume of $21.7 Trillion and Average Daily
Volume of $1.02 Trillion,’’ (2021). Tradeweb,
available at https://www.tradeweb.com/newsroom/
media-center/news-releases/tradeweb-reportsseptember-2021-total-volume-of-$21.7-trillion-andaverage-daily-volume-of-$1.02-trillion/; CME
Group. (2021, July 2). ‘‘CME Group Reports Q2 and
June 2021 Monthly Market Statistics,’’ CME Group,
available at https://www.cmegroup.com/mediaroom/press-releases/2021/7/02/cme_group_
reportsq2andjune2021monthlymarket
statistics.html; ‘‘MarketAxess Announces Monthly
Volume Statistics for September 2021,’’ (2021).
MarketAxess, available at https://
investor.marketaxess.com/news-releases/newsrelease-details/marketaxess-announces-monthlyvolume-statistics-september-2021; ‘‘MarketAxess
3Q21: Stat Sheet,’’ (2021), MarketAxess, available at
https://www.marketaxess.com/pdf/match-repo-statsheet.pdf; ‘‘GLMX Gains ATS and Broker-Dealer
Status,’’ (2018). THETRADE, available at https://
www.thetradenews.com/glmx-gains-ats-brokerdealer-status/.
1038 See ‘‘Bloomberg launches electronic repo
trading system,’’ (2005), Finextra, available at
https://www.finextra.com/newsarticle/14580/
bloomberg-launches-electronic-repo-trading-system.
PO 00000
Frm 00122
Fmt 4701
Sfmt 4702
incentive to maintain balances across
multiple liquidity providers to reduce
exposure to a single liquidity provider.
This incentive to maintain balances
across multiple liquidity providers may
be alleviated, at least partially, if trades
in repurchase and reverse repurchase
agreements with liquidity providers are
centrally cleared as in triparty repo
trades.1039 The interest in maintaining
balances across multiple liquidity
provider in bilateral transactions has
spurred the introduction and adoption
of electronic RFQ platforms.1040
Under FINRA Rule 6730(e),
repurchase and reverse repurchase
agreement transactions involving
TRACE-Eligible Securities are not
reportable to TRACE.1041 However,
repurchase and reverse repurchase
agreement holdings and transactions are
currently subject to several other
reporting requirements.1042
The Commission is unable to
determine the full scope of the role
1039 See
supra note 521 defining triparty repos.
also Trott, Tom, (2018), ‘‘Electronic RFQ
Repo Markets,’’ Tradeweb, available at https://
www.tradeweb.com/newsroom/media-center/
insights/commentary/electronic-rfq-repo-markets/
and Trott, Tom, (2018). ‘‘Electronic RFQ Repo
Markets: The Solution for Reporting Challenges and
Laying the Building Blocks for Automation,’’
Tradeweb, available at https://www.tradeweb.com/
4a6f74/globalassets/newsroom/media-center/
insights/commentary/repo_-tradeweb.pdf.
1041 See ‘‘6730. Transaction Reporting’’, FINRA,
available at https://www.finra.org/rules-guidance/
rulebooks/finra-rules/6730.
1042 See https://www.financialresearch.gov/briefs/
files/OFRbr-2015-03-repo-sec-lending.pdf. The
Treasury’s Office of Financial Research (OFR)
requires daily reporting by covered central
counterparties of centrally cleared U.S. repurchase
and reverse repurchase agreement transactions,
which covers about half of the estimate U.S. market
for repurchase and reverse repurchase agreements.
See 84 FR 4975 (Feb. 20, 2019) (https://
www.federalregister.gov/documents/2019/02/20/
2019-02639/ongoing-data-collection-of-centrallycleared-transactions-in-the-us-repurchaseagreement-market). OFR publishes daily aggregate
data on rates and volumes of repurchase and
reverse repurchase agreement transactions in each
segment, by tenor or collateral. See https://
www.financialresearch.gov/data/us-repo-data/. The
Federal Reserve Bank of New York (FRBNY) reports
daily demand, utilization, rates and participants of
the Federal Reserve’s Reverse Repo Facility.
Primary dealers are subject to weekly reporting
requirements by the Federal Reserve Bank of New
York using Form FR2004, which describes the
repurchase and reverse repurchase agreement
positions, cumulative transactions, and outstanding
financial arrangements and becomes publically
available a day after reporting. FR2004 does not,
however, include information on haircuts, rates,
and counterparty exposures. Non-primary dealers
are not required to submit FR2004, and
consequently there is less available data on their
bilateral transactions. U.S. chartered depository
institutions and bank holding companies are
required to report netted repurchase and reverse
repurchase agreement positions on a quarterly
basis, which becomes publically available. Much of
the publically available data from regulatory
agencies is consolidated and produced quarterly by
the Federal Reserve Board in the form of the
Financial Accounts of the United States (Z.1).
1040 See
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
played by Communication Protocol
Systems in the market for repurchase
and reverse repurchase agreements
because the Commission lacks data on
the volume facilitated by these systems.
The Commission requests comment on
the full role of Communication Protocol
Systems in this market.
jspears on DSK121TN23PROD with PROPOSALS2
b. Asset-Backed Securities
Asset-backed securities (ABS) are
securities that are collateralized by an
underlying pool of assets, usually
constructed from bundled loans such as
mortgages, leases, credit card balances,
and student loans. A broad definition of
asset-backed securities may include
assets such as Collateralized Bond
Obligations (CBO), Collateralized Debt
Obligations (CDO), Collateralized Loan
Obligations (CLO), and Non-Agency
Commercial Mortgage Backed Securities
(CMBS), along with non-agency
mortgage-backed securities (MBS). The
majority of holders of ABS are large
institutional investors. Data from 2015
shows that asset managers are the
largest holders of ABS, making up
around 60 percent of buyers, followed
by hedge funds (18 percent) and banks
(10 percent).1043
The presence of large institutions in
this market is also evident in looking at
the secondary market trading data. In
September 2021, average daily trading
volume in the ABS market was around
$8 billion. At the same time, there was
only an average of 823 trades per day,
reflecting that average trade sizes in this
market are very large.1044 Due to the
complexity and heterogeneity of ABS
products, liquidity in this market tends
to be low. The majority of ABS never
trade after issuance.1045
There is evidence that the size of the
ABS market has shrunk since the 2008
financial crisis. Not only have new
issues of ABS declined sharply after the
financial crisis, but overall daily trading
volume in secondary ABS markets fell
by 16 percent between 2013 and
2017.1046 The Commission understands
1043 See https://www.greenwich.com/fixedincome-fx-cmds/understanding-us-fixed-incomemarket.
1044 See https://www.finra.org/finra-data/browsecatalog/trace-volume-reports/trace-monthlyvolume-files. We include trading data for Asset
Backed Securities (‘‘ABS’’) and Collateralized Bond
Obligations (CBO), Collateralized Debt Obligations
(CDO), Collateralized Loan Obligations (CLO), and
Non-Agency Commercial Mortgage Backed
Securities (CMBS). See https://www.finra.org/finradata/browse-catalog/trace-volume-reports/abouttrace-monthly-volume-reports for definitions.
1045 See Bessembinder, H., Maxwell, W.F., &
Venkataraman, K. (2013). Trading activity and
transaction costs in structured credit products.
Financial Analysts Journal, 69(6), 55–67.
1046 See He, A., & Mizrach, B. (2017). Analysis of
securitized asset liquidity. Research Note, FINRA
Office of the Chief Economist.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
that very little ABS trading takes place
on ATSs. In September 2021, less than
0.1 percent of the average daily trading
volume in ABS was reported to TRACE
as having taken place on ATSs.1047 The
Commission estimates that there are
currently 3 ATSs offering trading in
ABS. Additionally, the Commission
estimates that 1 ATS trades non-agency
MBS securities.1048
As the data mentioned above shows,
99.9 percent of ABS trading volume
takes place through trading methods
other than ATSs, and some of this
trading volume may take place using
protocols that qualify as
Communication Protocol Systems. The
Commission estimates that there are 3
Communication Protocol Systems
trading in ABS that may meet the
definition of exchange under the
proposed changes to Exchange Act Rule
3b–16. As in other fixed income
markets, Communication Protocol
Systems trading in ABS do not meet the
current definition of an exchange and
thus are not subject to the exchange
regulatory framework. The Commission
estimates that 1 Communication
Protocol System trading in ABS is not
currently operated by a registered
broker-dealer. This system does not
currently incur the costs of registering
with the Commission as well as the
costs of SRO membership, and is not
subject to FINRA operational regulatory
reporting requirements.
It is likely that the vast majority of
trading in ABS still takes place via
bilateral voice trading. Industry
participants have pointed out that the
complexity of this market makes it more
likely that traders want discussions with
and access to individualized guidance
from dealers and analysts in deciding
whether to trade, which can be difficult
to achieve on more automated electronic
platforms.1049
Since 2011, FINRA has required
FINRA members to report transaction
prices and quantities in ABS to
TRACE.1050 In 2015, FINRA began
1047 See https://www.finra.org/finra-data/browsecatalog/trace-volume-reports/trace-monthlyvolume-files.
1048 Note that Form ATS doesn’t have a specific
category for ABS. The number of ATSs trading in
ABS is estimated from a combination of the number
of ATSs that report Form ATS–R volume for ‘‘Other
Debt Securities,’’ which could include asset-backed
securities, and TRACE MPIDs with ABS-related
volumes and ATS flags.
1049 See ‘‘ABS East 2014: Securitization Shrugs off
Electronic Trading,’’ (2014). American Banker,
available at https://asreport.americanbanker.com/
news/abs-east-2014-securitization-shrugs-offelectronic-trading.
1050 See FINRA Rule 6730(a)(1) requiring FINRA
members to report transactions in TRACE-Eligible
Securities, which FINRA Rule 6710 defines to
include asset-backed securities. For each
PO 00000
Frm 00123
Fmt 4701
Sfmt 4702
15617
publishing post-trade price information
for ABS, which is available to the public
no later than 15 minutes after the trade
is executed.1051
C. Economic Effects and Effects on
Efficiency, Competition, and Capital
Formation
The Commission has considered the
economic effects of the proposed
amendments to Exchange Act Rule 3b–
16, Regulation ATS, and Regulation SCI.
The Commission recognizes that
under the proposed amendments, a
bank-operated Currently Exempted
Government Securities ATS or
Communication Protocol System could
choose to register as an exchange rather
than choose to comply with the
Regulation ATS exemption, which
includes registering as a brokerdealer.1052 A bank-operated Currently
Exempted Government Securities ATS
or Communication Protocol System that
chooses to register as an exchange
would be an SRO and subject to the
requirements under Section 6 of the
Exchange Act.1053 The Commission
preliminarily believes that registering as
a national securities exchange would
enhance regulatory oversight, market
surveillance, and investor
protection.1054 Registering as an
exchange would also result in costs
associated with applying to register as a
national securities exchange and
complying with the requirements under
Section 6(b) of the Exchange Act, such
as the requirement to be so organized
and have the capacity to carry out the
transaction in asset-backed securities, a FINRA
member would be required to report the CUSIP
number or similar numeric identifier or FINRA
symbol; size (volume) of the transaction; price of
the transaction (or elements necessary to calculate
price); symbol indicating whether transaction is a
buy or sell; date of trade execution (‘‘as/of’’ trades
only); contra-party’s identifier; capacity (principal
or agent); time of execution; reporting side
executing broker as ‘‘give-up’’ (if any); contra side
introducing broker (in case of ‘‘give-up’’ trade); the
commission (total dollar amount), if applicable;
date of settlement; if the member is reporting a
transaction that occurred on an ATS pursuant to
FINRA Rule 6732, the ATS’s separate Market
Participant Identifier (‘‘MPID’’); and trade modifiers
as required. See FINRA Rule 6730(c).
1051 See https://www.finra.org/media-center/
news-releases/2015/finra-brings-transparency-assetbacked-securities-market.
1052 As proposed, Currently Exempted
Government Securities ATSs that are operated by
banks would be required to structure their business
to either comply with Regulation ATS or register as
a national securities exchange. See supra footnote
261. The Commission also expects Currently
Exempted Government Securities ATSs currently
registered as broker-dealers will continue to operate
as broker-dealers under the proposal rather than
register as a national securities exchange.
1053 See supra Section II.A.
1054 See Regulation ATS Adopting Release at
70903–07 for a discussion of benefits and costs for
registering as a national securities exchange.
E:\FR\FM\18MRP2.SGM
18MRP2
15618
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
purposes of the Exchange Act and
enforce member compliance with
Federal securities laws and the rules of
the exchange.1055 However, the
Commission expects that many
Communication Protocol Systems
would not elect to register as an
exchange but instead would register as
a broker-dealer and comply with
Regulation ATS because the regulatory
costs associated with registering and
operating as an exchange would be
higher than those associated with
registering as a broker-dealer and
complying with Regulation ATS.1056
Similarly, the Commission preliminarily
believes that a bank-operated Currently
Exempted Government Securities ATS
would also choose to structure its
business to comply with the relatively
lighter regulatory requirements of
Regulation ATS.
The Commission has attempted,
where possible, to quantify the benefits
and costs anticipated to result from the
amendments to Exchange Act Rule 3b–
16, Regulation ATS, and Regulation SCI.
However, as explained in more detail
below, because the Commission does
not have, and in certain cases does not
believe it can reasonably obtain data to
inform the Commission on certain
economic effects, the Commission is
unable to quantify certain economic
effects. Further, even in cases where the
Commission has some data, it might not
be practicable to perform a quantitative
analysis due to the number and type of
assumptions necessary to quantify
certain economic effects, which would
likely render any such quantification
unreliable. Therefore, certain parts of
the discussion below are qualitative in
nature and focus on the direction of the
various effects of the amendments. The
inability to quantify certain benefits and
costs, however, does not mean that the
overall benefits and costs of the
proposed amendments are insignificant.
jspears on DSK121TN23PROD with PROPOSALS2
1. Benefits
The Commission has considered the
benefits of the proposed amendments to
Exchange Act Rule 3b–16, Regulation
ATS, and Regulation SCI.
a. Enhancement of Regulatory Oversight
and Investor Protection
The proposed amendments to
Exchange Act Rule 3b–16, which would
include Communication Protocol
Systems within the definition of
exchange, along with the proposed
amendments to remove the exemption
1055 See generally supra Section II.D.1 (discussing
the national securities exchange registration
requirements under Sections 6 of the Exchange
Act).
1056 See supra Section II.B.3.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
from compliance with Regulation ATS
for Currently Exempted Government
Securities ATSs and apply the enhanced
disclosure and filing requirements of
Rule 304 to all Government Securities
ATSs would enhance regulatory
oversight and investor protection.1057
The proposed amendments would
enhance regulatory oversight and
investor protection and help facilitate
market surveillance by extending the
broker-dealer registration requirement of
Regulation ATS to Currently Exempted
Government Securities ATSs that are
operated by banks (i.e., bank-operated
Currently Exempted Government
Securities ATSs) and Communication
Protocol Systems that are not operated
by registered broker-dealers (i.e., nonbroker-dealer-operated Communication
Protocol Systems).1058 Registering as a
broker-dealer would require, among
other things, the filing of Form BD and
SRO membership. Such requirements
would allow the Commission and an
SRO to examine bank-operated
1057 The proposed amendments would enhance
regulatory oversight and investor protection by
requiring: Non-broker-dealer-operated
Communication Protocol Systems and bankoperated Currently Exempted Government
Securities ATSs to register as a broker-dealers;
Communication Protocol Systems and Currently
Exempted Government Securities ATSs to safeguard
subscribers’ confidential trading information;
Communication Protocol Systems and Currently
Exempted Government Securities ATSs to comply
with recordkeeping and reporting requirements;
Communication Protocol Systems that are not
Government Securities ATSs nor NMS Stock ATSs
to file Form ATS; and Government Securities ATSs
and Communication Protocol Systems that are NMS
Stock ATSs to file Form ATS–N. One commenter
on the 2020 Proposal stated that removing the
exemption for Currently Exempted Government
Securities ATSs would significantly improve
market transparency and resiliency, and that
requirements to provide transparency to market
participants regarding key aspects of the platform,
and comply with fair access requirements would
promote market integrity and help to ensure that
multilateral U.S. Treasury trading venues are
subject to appropriate regulatory oversight. See
Citadel Letter at 1. Another commenter stated that
the extension of Regulation ATS to include
Currently Exempted Government Securities ATSs
would help foster investor protection and market
integrity. See FINRA Letter at 2.
1058 Non-broker-dealer-operated Communication
Protocol Systems without a broker-dealer affiliate
would be required to register as broker-dealers with
the Commission and become members of an SRO
under the proposed Rule 301(b)(1). Proposed Rule
301(b)(1) would enhance regulatory oversight over
the estimated 1 bank-operated Currently Exempted
Government Securities ATS and 9 non-brokerdealer-operated Communication Protocol Systems
(6 non-broker-dealer-operated Communication
Protocol Systems without a broker-dealer affiliate
and 3 non-broker-dealer-operated Communication
Protocol Systems with a broker-dealer affiliate). See
also Section VIII.C.2.a.ii for a discussion about a
bank-operated Currently Exempted Government
Securities ATS and non-broker-dealer-operated
Communication Protocol Systems with a brokerdealer affiliate adopting a registered affiliate
structure to comply with the proposed Rule
301(b)(1).
PO 00000
Frm 00124
Fmt 4701
Sfmt 4702
Currently Exempted Government
Securities ATSs and non-broker-dealeroperated Communication Protocol
Systems for compliance with Federal
securities laws.1059 Furthermore, upon
registering as broker-dealers and
becoming members of an SRO, these
Currently Exempted Government
Securities ATSs and Communication
Protocol Systems would be required to
report certain transactions to an SRO for
public dissemination, which would
help facilitate market surveillance by
the SRO.1060
The magnitude of benefits from this
increase in transaction transparency
depends on the portion of transactions
executed by bank-operated Currently
Exempted Government Securities ATSs
and non-broker-dealer-operated
Communication Protocol Systems.
However, these platforms are not subject
to transaction reporting obligations, and
thus, the Commission cannot estimate
the magnitude of this benefit because
the Commission does not have data on
transactions executed by the estimated 1
bank-operated Currently Exempted
Government Securities ATS and 9 nonbroker-dealer-operated Communication
Protocol Systems.1061
1059 The broker-dealer registration would enable
the Commission to examine the trading operations
of registered broker-dealer operators and FINRA to
examine its members and markets that its members
operate. See also supra Section II.D.2.
1060 FINRA Rule 6730(a)(1) would require its
members to report transactions of certain securities
to FINRA. See FINRA Rule 6730(a)(1) requiring
FINRA members to report transactions in TRACEEligible Securities, which FINRA Rule 6710 defines
to include any debt security that is U.S. dollardenominated and is: Issued by a U.S. or foreign
private issuer, and, if a restricted security, sold
pursuant to Securities Act Rule 144A; issued or
guaranteed by an Agency or a GovernmentSponsored Enterprise; or a U.S. Treasury Security.
Debt securities issued by foreign sovereigns and
Money Market Instruments are explicitly excluded.
Note that, under FINRA Rule 6730(e), repurchase
and reverse repurchase transactions involving
TRACE-Eligible Securities are not reportable to
TRACE. See also MSRB Rule G–14 requiring
brokers, dealers and municipal securities dealers
(‘‘dealers’’) to report transactions in municipal
securities. See supra note 829 describing
exemptions for ATS transaction reporting to TRACE
and supra note 926 describing exemptions for
transaction reporting to MSRB’s RTRS. Trades in
restricted equities effected under Securities Act
Rule 144A that are transacted elsewhere than on an
exchange are required to be reported to FINRA’s
OTC Reporting Facility (ORF) if at least one of the
parties to the transaction is a FINRA member. See
supra note 988.
1061 The Commission estimates that there is
currently 1 non-broker-dealer-operated
Communication Protocol System trading in
government and agency securities, corporate and
municipal debt securities, and ABS/MBS. The
Commission also estimates that there are 5
additional non-broker-dealer-operated
Communication Protocol Systems trading in
corporate debt securities, 2 trading in restricted
equities, and 1 trading in repos. One commenter on
the 2020 Proposal stated that, even if benefits from
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
Furthermore, the proposed
requirements with respect to
safeguarding subscribers’ confidential
trading information would enhance
investor protection by helping to
prevent Currently Exempted
Government Securities ATSs and
Communication Protocol Systems from
potentially abusing such information.
The requirements to establish written
safeguards and procedures to protect
subscribers’ confidential trading
information and to separate ATS
functions from other broker-dealer
functions for Currently Exempted
Government Securities ATSs and
Communication Protocol Systems
would reduce the chance that a
subscriber’s confidential information is
accessed or shared inappropriately.1062
While the Commission lacks
information on the extent to which the
confidential trading information of
subscribers to Currently Exempted
Government Securities ATSs and
Communication Protocol Systems is
currently accessed or shared
inappropriately,1063 the requirements
would promote the protection of
confidential information even if such
information is not being inappropriately
accessed or shared.
Moreover, the proposed amendment
to apply the recordkeeping 1064 and
reporting requirements 1065 of
expanding Regulation ATS to bank-operated
Currently Exempted Government Securities ATSs
are limited by the Commission’s estimate that there
is only one bank-operated Currently Exempted
Government Securities ATS today, the Proposal
will also help maintain and promote the integrity
of the Treasuries audit trail in the future to the
extent it limits the opportunity for trades to be done
on non-broker-dealer ATSs to avoid inclusion in the
TRACE audit trail. See FINRA Letter at 4.
1062 One commenter on the 2020 Proposal stated
that requiring Currently Exempted Government
Securities ATSs to adopt written safeguards and
written procedures to protect subscribers’
confidential trading information and to separate
ATS functions from other broker-dealer functions
can help protect the integrity of a subscriber’s
confidential trading information that could
otherwise be at risk of unauthorized disclosure and
subject to potential misuse, and that such
safeguards and practices also can help prevent the
sharing of confidential subscriber trading
information by ATSs with other customers or
having the operator of the ATS use the confidential
trading information of other subscribers to
advantage its own trading on the ATS. See MFA
Letter at 3.
1063 Although the Commission currently lacks
this information, we describe above a potential
scenario where the confidential trading information
of a subscriber could be impermissibly shared with
the personnel of the broker-dealer operator or any
of its affiliates, and the broker-dealer operator, in
turn, could potentially abuse that relationship to
provide itself or its affiliates with a direct
competitive advantage over that subscriber. See
supra Section VIII.B.2.a.ii.
1064 See supra Section II.D.2 for a discussion
about the requirements of Rule 302 and 303.
1065 Rule 301(b)(9) would require filing of Form
ATS–R.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Regulation ATS to Currently Exempted
Government Securities ATSs and
Communication Protocol Systems
would help improve regulatory
oversight because the requirements to
keep and preserve records of customer
trading interest and transactions would
create an audit trail of trading activities
on these systems.1066 This information
would allow the Commission to better
monitor the types of investors that trade
on these systems, help the Commission
understand the role these systems play
in their respective securities markets,
and improve the ability of the
Commission or an SRO to detect and
investigate potential irregularities that
might occur in markets in which these
systems operate.
By requiring Currently Exempted
Government Securities ATSs and
Communication Protocol Systems to
provide certain information on Form
ATS–R, such as a list of all securities
traded and all subscribers that were
participants on the ATS during a
reporting quarter, the Commission
would be able to better monitor the
trading on ATSs and evaluate for
compliance with the Federal securities
laws including Fair Access Rule and
Regulation SCI, if applicable. The
information collected on Form ATS–R
regarding fair access grants, denials, and
limitations of access to ATSs along with
the proposed amendment to ask the
ATS to indicate whether it was subject
to the Fair Access Rule during any
portion of the period covered by the
report would help the Commission
oversee those ATSs to evaluate for
compliance with the Fair Access Rule.
Furthermore, requiring information with
respect to repurchase and reverse
repurchase transactions on Form ATS–
R would help the Commission identify
and monitor important ATSs in the
market for repurchase and reverse
repurchase agreements.
The proposed amendments to require
Government Securities ATSs 1067 and
Communication Protocol Systems that
are NMS Stock ATSs 1068 to file Form
1066 One commenter on the 2020 Proposal stated
that requiring currently exempted Government
Securities ATSs to comply with the recordkeeping
and reporting requirements of Regulation ATS and
requiring such ATSs to file a confidential Form
ATS–R with the Commission would improve the
Commission’s ability to monitor currently
exempted Government Securities ATSs and
improve its oversight of the market for government
securities execution services overall. See MFA
Letter 3.
1067 Government Securities ATSs would include
Currently Exempted Government Securities ATSs,
Current Government Securities ATSs, and
Communication Protocol Systems that trade
government securities.
1068 The filing of Form ATS–N would be a new
requirement for Government Securities ATSs.
PO 00000
Frm 00125
Fmt 4701
Sfmt 4702
15619
ATS–N would help facilitate the
Commission’s regulatory oversight and
enhance investor protection. Under the
proposed amendments, Current
Government Securities ATSs would file
Form ATS–N in lieu of Form ATS for
their government securities trading
operations. In addition, under the
proposed amendments, Currently
Exempted Government Securities ATSs
and Communication Protocol Systems
that are either Government Securities
ATSs or NMS Stock ATSs would be
required to file Form ATS–N.
Information reported on Form ATS–N
would provide the Commission with
increased and better quality information
on Current Government Securities ATSs
and improve the effectiveness and
efficiency of the examination process of
Government Securities ATSs and
Communication Protocol Systems that
are NMS Stock ATSs by facilitating the
Commission and the ATS SRO’s ability
to better examine for compliance with
the Federal securities laws.
Furthermore, the Commission’s
review process to declare Form ATS–N
ineffective that is set forth in the
proposed amendments would help
ensure the quality of information
disclosed in Form ATS–N. One
commenter on the 2020 Proposal stated
that market participants are incentivized
to make disclosures that are robust,
readable and sufficient because of the
competitive forces and the variety of
regulatory tools the Commission and
other regulators have at their disposal to
police the quality and content of
statements made on the previously
proposed Form ATS–G.1069 While
competitive forces would likely
incentivize Government Securities ATSs
to make robust, readable and sufficient
disclosures, the Commission
preliminarily believes that extending
the ability for the Commission to be able
to declare a Government Securities
ATS’s Form ATS–N or Form ATS–N
amendment ineffective would improve
the quality of information disclosed by
these ATSs as compared to the
information currently filed on Form
ATS by Current Government Securities
ATSs, which is not subject to the
Commission’s review and effectiveness
process. The Commission’s recent
experience with Form ATS–N for NMS
Stock ATSs informs this belief. Since
February 2019, the Commission has
reviewed initial Form ATS–N filings
and amendments thereto and engaged in
direct conversation with all NMS Stock
Currently, NMS Stock ATSs are required to file
Form ATS–N. See NMS Stock ATS Adopting
Release, supra note 2.
1069 See SIFMA Letter at 4.
E:\FR\FM\18MRP2.SGM
18MRP2
15620
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
ATSs about their Form ATS–N filings.
The Commission believes that this
review process has helped ensure that
such disclosures are complete and
comprehensible. Many NMS Stock
ATSs have opted to seek the
Commission staff’s input about pending
material amendments prior to filing,
which has contributed to clearer and
more effective disclosures. When new
NMS Stock ATSs seek to begin
operations, the initial Form ATS–N
provides the Commission with detailed
information about how the ATS will
operate. With this knowledge, the
Commission is better able to monitor for
compliance and evaluate how NMS
Stock ATSs as a group are evolving.
Requiring Communication Protocol
Systems that are not NMS Stock ATSs
nor Government Securities ATSs to file
confidential Form ATS would improve
the Commission oversight of those
Communication Protocol Systems and
promote investor protection. The
information regarding the manner of
operation, the procedures governing
execution, reporting, clearance, and
settlement of transactions, types of
securities traded, and subscriber
information disclosed in Form ATS
would help the Commission monitor
securities markets for which
Communication Protocol Systems
provide trading services, and oversee
the compliance with Federal securities
laws. These benefits from requiring
Form ATS, while similar in kind, would
be smaller in magnitude compared to
the benefits from requiring Form ATS–
N because of the differences between
the information disclosed in Form ATS
and Form ATS–N.1070
jspears on DSK121TN23PROD with PROPOSALS2
b. Reduction of Trading Costs and
Improvements to Execution Quality
The proposed amendments would
help enhance operational transparency,
reduce trading costs, and improve
execution quality for market
participants 1071 by requiring public
disclosure of Form ATS–N and applying
the Fair Access Rule to certain ATSs.
The public disclosure of Form ATS–N
for Government Securities ATSs and
Communication Protocol Systems that
1070 Form ATS–N requires detailed disclosure
about the manner of operations of ATSs, including
display, execution and priority procedures, order
segmentation, counterparty selection, fair access,
eligibility of services, fees, and suspension of
trading. See NMS Stock ATS Adopting Release,
supra note 2.
1071 Market participants would include
prospective subscribers of Government Securities
ATSs and Communication Protocol Systems that
trade NMS stocks. For example, prospective
subscribers would benefit from the public
disclosure of Form ATS–N in their selection of
trading venues.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
trade NMS stocks would also help
enhance operational transparency, and
thus, reduce search costs and trading
costs for market participants.1072 The
reduced search costs and trading costs
would result in better execution quality
for market participants. Specifically,
based on Commission staff’s experience
with its review of initial Form ATS–N
filings for NMS Stock ATSs, Form ATS–
N would result in more standardized
public information about Government
Securities ATSs and Communication
Protocol Systems that trade NMS stocks
including how trading interests are
handled, fee structures, the ATS’s
interaction with related markets,
liquidity providers, activities the ATS
undertakes to surveil and monitor its
market, and any potential conflicts of
interest that might arise from the
activities of the broker-dealer operator
or its affiliates. As a result, search costs
for market participants would be lower
because consistent disclosure
requirements for all Government
Securities ATSs and NMS Stock ATSs,
including Communication Protocol
Systems, would facilitate market
participants’ comparison of Government
Securities ATSs and NMS Stock ATSs
when deciding which venue best suits
their trading objectives. In addition,
based on the Commission’s experience,
fees can be a primary factor for market
participants in deciding where to send
their orders.1073 Fee disclosures on
Form ATS–N and requiring consistent
and timely fee amendments on Form
ATS–N would help market participants
compare and analyze the fee structures
and fee ranges across Government
Securities ATSs and NMS Stock ATSs
in an expedited manner and decide
which ATS offers them the best pricing
1072 One commenter on the 2020 Proposal stated
that it agrees with the Commission that the
proposed public disclosure of the operational
aspects of Government Securities ATSs could
improve investors’ ability to select trading venues
and lower trading costs. See FINRA Letter at 2.
Another commenter stated that increasing
accessibility to and standardizing information
regarding the operations and activities of fixed
income trading venues benefits investors by helping
them make more informed decisions about where
to send their orders. See MFA Letter at 9. A third
commenter stated that more operational
transparency would aid investors in conducting
analysis of executions, and that transparency
regarding pricing, market activity and market
quality promotes healthy competition in the market
place, supports fair and equitable access to
potential participants and offers investor protection.
See SIFMA Letter at 1 and 2.
1073 As discussed above, market participants may
select trading venues based on factors other than
fees. For example, investors interested in effecting
transactions in U.S. Treasury Securities and
corporate debt securities simultaneously may find
information regarding a trading venue’s interaction
with related markets on Form ATS–N useful in the
selection of trading venue.
PO 00000
Frm 00126
Fmt 4701
Sfmt 4702
according to the characteristics of their
order flow and the type of participant
they are, which would lower their
search costs and hence trading costs.
Furthermore, the proposed
requirement that Government Securities
ATSs 1074 and Communication Protocol
Systems that trade NMS stocks file Form
ATS–N subject to the Commission’s
review and effectiveness process would
help ensure the quality of information
disclosed in Form ATS–N with
attendant benefits to market participants
who utilize Form ATS–N, including
helping market participants select a
trading venue that best suits their
trading objectives.1075
With regard to the Commission’s
proposal to require Government
Securities ATSs and NMS Stock ATSs
to file fee amendments with respect to
fee changes, under the current filing
requirements of Form ATS–N, there
could be a considerable lapse of time
from the actual fee change to the public
disclosure of the fee change on Form
ATS–N if an NMS Stock ATS files a fee
change as an updating amendment.1076
If there is such delay in the public
disclosure of fee changes on Form ATS–
N, requiring NMS Stock ATSs to file a
fee amendment no later than the date it
makes a change to a fee or fee disclosure
would result in more timely public
disclosure of fee changes for NMS Stock
ATSs. Because the fee is an important
factors in the selection of trading
venues, the proposed fee amendment on
Form ATS–N would allow market
participants to use more up-to-date fee
information in the selection of trading
venues, which could lower trading costs
for market participants.
However, the Commission is unable
to quantify these benefits to market
participants because the Commission
lacks data on the amount of information
that is currently available to different
market participants regarding the
operations of Government Securities
ATSs and Communication Protocol
Systems that are NMS Stock ATSs
operations and the activities of their
broker-dealer operators and their
affiliates. The magnitude of the
anticipated benefits discussed above
1074 Government Securities ATSs would include
Currently Exempted Government Securities ATSs,
Current Government Securities ATSs, and
Communication Protocol Systems that trade
government securities.
1075 For more discussion on the impact of the
effective process on the quality of Form ATS–N
disclosures, see supra Section VIII.C.1.a.
1076 In the Commission staff’s experience
reviewing Form ATS–N amendments, some NMS
Stock ATSs have filed updating amendments no
later than 30 days from the end of the calendar
quarter in which the ATS implemented the fee
change. See also supra Section IV.A.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
would also depend on a number of
factors, including the extent to which
market participants would change their
behavior as a result of receiving the
public disclosure of more
comprehensive, comparable, and
uniform information of this type in
Form ATS–N. It is inherently difficult to
predict how different market
participants would use the information
contained in Form ATS–N in evaluating
and choosing the Government Securities
ATSs and NMS Stock ATSs that best
serve their trading objectives.
The Commission believes that
applying the Fair Access Rule to
Government Securities ATSs, which
would require the establishment and
objective application of fair access
standards, would increase trading venue
options available to market participants
who are currently excluded. To the
extent that there are market participants
that wish to trade on significant
Government Securities ATSs but are
currently excluded from doing so,
applying the Fair Access Rule to
Government Securities ATSs would
lower their trading costs.1077 As
discussed in Section VIII.B.2.a.ii, market
forces alone may not be sufficient to
prevent a significant Government
Securities ATS from unreasonably
denying access to some market
participants.1078 Under the proposed
amendments, if a Government Securities
ATS meets certain aggregate volume
thresholds,1079 the ATS would be
1077 The Commission estimates 8 Government
Securities ATSs would be subject to the Fair Access
Rule. One commenter on the 2020 Proposal stated
that registered investment companies generally are
not able to directly access liquidity on most
Treasury interdealer platforms. See ICI Letter at 4.
Other commenters stated that applying the Fair
Access Rule to Government Securities ATSs would
ensure that market participants are not
unreasonably denied access from important sources
of liquidity for a particular security (see SIFMA
Letter at 5) and would ensure that qualified market
participants have access to the U.S. Government
Securities market (see FIA PTG Letter at 2). Another
commenter stated that including the trading of U.S.
Treasury Securities and Agency Securities in the
Fair Access Rule can prevent discriminatory actions
that would otherwise result in higher trading costs
for investors and the reduction in trading efficiency.
See MFA Letter at 4.
1078 See also supra note 833 and accompanying
text.
1079 The proposed Fair Access threshold for U.S.
Treasury Securities is 3 percent or more of the
average weekly dollar volume traded in the United
States. The proposed Fair Access threshold for
Agency Securities is 5 percent or more of the
average daily dollar volume traded in the United
States. The Fair Access threshold for NMS stocks
and equity securities are 5 percent or more of the
average daily share volume in an individual
security. The Fair Access threshold for corporate
debt and municipal securities is 5 percent or more
of the average daily dollar volume. See supra
Section III.B.4 for a discussion about the volume
thresholds for government securities in applying
the Fair Access Rule. See also supra Section V.A.2
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
required to establish and apply
reasonable written standards for
granting, limiting, and denying access to
subscribers and applicants.1080 As a
result, for example, there would be a
mechanism to prevent a Government
Securities ATS that met the aggregate
volume thresholds 1081 from
unreasonably denying access to one
institutional investor while granting
access to another similarly-situated
institutional investor.1082
Significant ATSs that trade NMS
stocks, non-NMS stock equity securities,
corporate debt securities, or municipal
securities are subject to the Fair Access
Rule of Regulation ATS.1083 However,
Communication Protocol Systems and
passive systems that trade NMS stocks
are currently not subject to the Fair
Access Rule, but would be under the
proposed amendments.1084 Applying
the Fair Access Rule to those significant
Communication Protocol Systems
would generate the benefits discussed
above for market participants in the
markets for corporate debt securities,
municipal securities, and non-NMS
stocks. Additionally, the proposed
amendments would help ensure that the
benefits of the Fair Access Rule would
also apply if a Communication Protocol
System or passive system reached
significant size and met the aggregate
volume thresholds in the future.
To the extent that there are market
participants currently excluded from
trading on significant ATSs, the
proposed amendments to aggregate
volume across affiliated ATSs in
calculating certain volume thresholds
under the Fair Access Rule would
increase the number of smaller affiliate
ATSs available to market participants
who are currently excluded, which
for a discussion about the aggregation of volume
threshold.
1080 See supra Section V.A.3.
1081 See supra Section III.B.4 for discussion about
volume thresholds.
1082 One commenter on the 2020 Proposal stated
that applying fair access requirements to
Government Securities ATSs would enhance the
ability of funds to onboard and participate on these
platforms directly, and that the fair access to these
additional pools of liquidity would benefit fund
shareholders. See ICI Letter at 4.
1083 The Commission estimates 2 Communication
Protocol Systems that trade corporate debt
securities and 1 Communication Protocol System
that trades municipal securities would be subject to
the Fair Access Rule. Furthermore, the Commission
estimates that 3 Communication Protocol Systems
that trade non-NMS stock equity securities would
be subject to the Fair Access Rule, but that no
Communication Protocol System and no passive
system that trades NMS stocks would be subject to
the Fair Access Rule.
1084 Communication Protocol Systems would be
subject to Rule 3b–16 and Regulation ATS. See
supra Section II.D. The exemption for passive
systems under Rule 301(b)(5)(iii) of Regulation ATS
would be removed. See supra Section V.A.5.
PO 00000
Frm 00127
Fmt 4701
Sfmt 4702
15621
would lower their trading costs for
them. The proposed amendments to
apply certain aggregate volume
thresholds would increase the number
of smaller affiliate ATSs that would be
subject to the Fair Access Rule. Smaller
affiliate ATSs that would not have met
the current volume thresholds
individually would be subject to the
Fair Access Rule if they meet the
proposed aggregate volume thresholds.
The Commission estimates that no
current smaller affiliate ATS that trades
NMS stocks, non-NMS stock equity
securities, corporate debt securities, or
municipal securities and does not
already currently meet the Fair Access
volume thresholds would meet the
volume thresholds if volume is
aggregated across affiliated ATSs.1085
c. Enhancement of Price Discovery and
Liquidity
Applying broker-dealer registration
requirements of Regulation ATS,
Regulation SCI, and the Capacity,
Integrity, and Security Rule (i.e., Rule
301(b)(6) of Regulation ATS) under the
proposed amendments would help
enhance the price discovery process and
liquidity in securities markets.1086
The proposed broker-dealer
registration requirements of Regulation
ATS, including SRO membership
requirements, for bank-operated
Currently Exempted Government
Securities ATSs and non-broker-dealeroperated Communication Protocol
Systems would enhance the price
discovery process in securities markets.
As discussed in Section II.B.3, upon
registering as broker-dealers and
becoming members of an SRO, bankoperated Currently Exempted
Government Securities ATSs and nonbroker-dealer-operated Communication
Protocol Systems would be required to
report certain transactions to an SRO for
1085 This estimate is computed using the
regulatory version of FINRA’s Trade Reporting
Facility data and NYSE’s TAQ data (accessed via
WRDS). See supra note 1079 for details on the Fair
Access thresholds. See supra note 310 for the
application of the Fair Access Rule on the trading
of NMS stocks, non-NMS stock equity securities,
municipal securities, and corporate debt securities.
See also supra Section V.A.2 for a discussion about
the aggregation of volume threshold.
1086 The proposed amendments would help
enhance the price discovery process and liquidity
in securities markets through: Applying the brokerdealer registration requirements of Regulation ATS
to bank-operated Currently Exempted Government
Securities ATSs and non-broker-dealer-operated
Communication Protocol Systems; applying
Regulation SCI to Government Securities ATSs that
meet certain volume thresholds; applying Rule
301(b)(6) to significant Communication Protocol
Systems that trade corporate debt securities or
municipal securities; and applying Regulation SCI
to significant Communication Protocol Systems that
trade NMS stocks and non-NMS stock equity
securities.
E:\FR\FM\18MRP2.SGM
18MRP2
15622
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
public dissemination, which would
help enhance price discovery by
providing the market with better posttrade price transparency in the
government securities market and other
securities markets in which the
Communication Protocol Systems
provide trading services.1087
The Commission believes that
applying the proposed requirements of
Regulation SCI to Government
Securities ATSs that meet certain
volume thresholds would help prevent
systems issues from occurring and
reduce their severity when they do
occur, and thus, limit interruptions to
the price discovery process and
liquidity flow in the government
securities market.1088 As discussed in
Section VIII.B.2.a.ii, market forces alone
may not be sufficient to induce
significant Government Securities ATSs
to establish standards that would help
significantly reduce systems issues.1089
A systems outage at a significant
Government Securities ATS would not
1087 FINRA members are subject to transaction
reporting obligation under FINRA Rule 6730, while
municipal bond dealers are subject to transaction
reporting obligations under MSRB Rule G–14. See
supra note 1060, discussing transaction reporting
requirements for fixed income securities and supra
note 1061, describing the non-broker-dealeroperated Communication Protocol Systems that are
not currently subject to reporting requirements. As
discussed in supra Section VIII.C.1.a, the
Commission is unable to estimate the magnitude of
this benefit because the Commission lacks the
necessary data. Except for government securities,
reported transactions in all other TRACE-Eligible
Securities (which includes Agency securities,
corporate debt securities, and ABS) are publically
disseminated via FINRA TRACE. FINRA
disseminates weekly summary of U.S. Treasury
Securities transactions produced from TRACE data.
See FINRA Rule 6740. Reported transactions in
municipal debt securities are publicly disseminated
via EMMA, which is a service operated by the
MSRB. See supra note 658. Trades in restricted
equity securities effected pursuant to Rule 144A are
reported to the FINRA’s ORF for regulatory
purposes only and are not publicly disseminated.
1088 The Commission estimates that 4
Government Securities ATSs would be subject to
Regulation SCI. See Table VIII.1 in supra Section
VIII.B.2.a.i and Section VIII.B.2.d. See Sections
VIII.B.2.a and VIII.B.2.b for discussions about the
importance of real-time price information on
Government Securities ATS and indicative quotes
on Communication Protocol Systems that trade U.S.
Treasury Securities in price discovery of various
securities. The proposed amendments to Regulation
SCI would promote the establishment of more
robust systems that are less likely to experience a
system disruption by requiring Government
Securities ATSs that meet the definition of SCI
entity to establish and enforce written policies and
procedures to ensure that their SCI systems have
adequate levels of capacity, integrity, resiliency,
availability, and security to maintain the SCI
entity’s operational capability. Furthermore, the
extension of Regulation SCI would help strengthen
the infrastructure and improve the resiliency of the
automated systems of Government Securities ATSs
that are important to the government securities
markets. See also Section III.C.
1089 See also supra note 838 and accompanying
text.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
only disrupt price discovery 1090 and
liquidity flow, but also would reduce
trading venue options resulting in
higher trading costs for market
participants.
The Commission recognizes that one
Government Securities ATS is operated
by a broker-dealer operator of an NMS
Stock ATS that is a SCI entity, and
therefore, might already have modified
some of the policies and procedures of
Regulation SCI as needed for systems
related to trading of U.S. Treasury
Securities and Agency Securities.1091
However, imposing the requirements of
Regulation SCI on this ATS’s systems
related to trading of U.S. Treasury
Securities and Agency Securities would
further strengthen these policies and
procedures, which would help improve
the robustness of SCI systems and SCI
indirect systems.
Furthermore, extending Regulation
SCI to significant Government Securities
ATSs would help prevent disruptions in
trading of linked fixed income
securities, such as corporate debt
securities, and thus, enhance the price
discovery process and liquidity in those
fixed income securities markets. U.S.
Treasury Securities are used as a
hedging instrument for hedging interest
rate risk. The Commission understands
that investors trading corporate debt
securities simultaneously trade U.S.
Treasury Securities in the direction that
offsets the interest rate risk from the
corporate debt securities trades. Systems
issues at significant Government
Securities ATSs would disrupt these
hedging activities that use U.S. Treasury
Securities, which in turn, would disrupt
and the price discovery process and
liquidity flow in corporate debt
securities.
One commenter on the 2020 Proposal
stated that it did not support applying
Regulation SCI to Government
Securities ATSs because trading venues
for government securities are not
interconnected.1092 This commenter
stated that unlike the equities markets,
where linkages among venues under
Regulation NMS can cause systems
issues at a single ATS with a relatively
more modest trading volume to present
issues for the broader market, the
government securities market has no
similar linkages among venues.1093
1090 See supra Sections VIII.B.2.a and VIII.B.2.b
for discussions about the importance of real-time
price information on Government Securities ATS
and indicative quotes on Communication Protocol
Systems that trade U.S. Treasury Securities in price
discovery of various securities.
1091 See supra Section VIII.B.2.a.ii for a
discussion of Government Securities ATSs of
existing SCI entities.
1092 See Tradeweb Letter at 3.
1093 See Tradeweb Letter at 3.
PO 00000
Frm 00128
Fmt 4701
Sfmt 4702
Other commenters on the 2020 Proposal
expressed the view that application of
Regulation SCI is appropriate.1094
The Commission believes that a
system outage at a significant
Government Securities ATS could
disrupt trading at another significant
Government Securities ATS even if
these Government Securities ATSs are
not connected. For example, if a
significant Government Securities ATS
is experiencing a system outage, there
could be a sudden surge in message
traffic (e.g., quoting activities) and
trading at other significant Government
Securities ATSs. If a sudden surge in
message traffic and trading exceeds the
system capacity of the Government
Securities ATS, this could result in
systems issues and disrupt trading at the
ATS. The requirements of Regulation
SCI, including the requirements with
respect to capacity planning, would
help prevent such systems issues at
significant Government Securities ATSs
and enhance the price discovery process
and liquidity in the government
securities market.
NMS Stock ATSs that meet certain
volume thresholds are subject to the
requirements of Regulation SCI for SCI
ATS.1095 Subjecting significant
Communication Protocol Systems that
are NMS Stock ATSs to Regulation SCI
would likely generate the benefits
discussed in the Regulation SCI
Adopting Release.1096
Significant ATSs that trade corporate
debt securities or municipal securities
are subject to Rule 301(b)(6).1097 The
application of Rule 301(b)(6) to
significant Communication Protocol
Systems that trade corporate debt
securities or municipal securities would
help reduce disruptions in the price
discovery process of corporate debt
1094 See supra notes 357–362 and corresponding
text. One commenter stated that applying
Regulation ATS and Regulation SCI to interdealer
Treasury platforms is appropriate and would
promote operational transparency, fair access, and
system security and resiliency and that, given the
linkage between the interdealer and the dealer-tocustomer segments of the market, these benefits in
turn would help dealers and other liquidity
providers better facilitate trading with customers
such as funds. See ICI Letter at 3 and 4. Other
commenters on the 2020 Proposal opposed
requiring Government Securities ATSs to comply
with Regulation SCI. See supra notes 363–367 and
corresponding text.
1095 The Commission estimates that no
Communication Protocol System that trades NMS
stocks would be subject to Regulation SCI.
1096 See Regulation SCI Adopting Release, supra
note 3.
1097 See supra Section II.D.2 for a discussion
about volume threshold for Rule 301(b)(6) of
Regulation ATS. The Commission estimates that 2
Communication Protocol Systems that trade
corporate debt securities and no Communication
Protocol Systems that trade municipal securities
would be subject to Rule 301(b)(6).
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
securities and municipal securities due
to failures or capacity issues with
respect to automated systems of
significant Communication Protocol
Systems, and thus, enhance the price
discovery process and liquidity in those
markets.
d. Electronic Filing Requirements
With respect to the filing location and
data language of the proposed
disclosure requirements for Government
Securities ATSs and Communication
Protocol Systems that are NMS Stock
ATSs, requiring these disclosures to be
filed on Form ATS–N would benefit
market participants by improving the
usability, accessibility, and reliability of
the new disclosures. Form ATS–N is
filed on the EDGAR system in a
structured, machine-readable XMLbased data language that is specific to
Form ATS–N (‘‘custom XML,’’ here
‘‘ATS–N-specific XML’’).1098 By
requiring a structured data language and
a publicly accessible filing location for
the required disclosures, the
Commission would allow market
participants to download the disclosed
information directly into their databases
and analyze the information using
various tools and applications. This
would make it easier for market
participants to aggregate the information
and compare multiple ATSs to help
select the venue that best suits their
trading objectives, thereby potentially
avoiding the cost of paying a third party
data vendor to extract and structure the
disclosed information on their behalf.
The Commission believes requiring
all Government Securities ATSs and
Communication Protocol Systems that
are NMS Stock ATSs to submit the
required disclosures in ATS–N-specific
XML will facilitate more effective and
thorough review and analysis of those
ATSs by the Commission, which should
yield greater insights into the operations
of those ATSs and the activities of their
operators and affiliates. Additionally,
Commission staff would be better able
to assemble and review a larger pool of
data regarding Government Securities
ATSs and Communication Protocol
Systems that are NMS Stock ATSs. Both
of these outcomes would benefit market
participants by facilitating the
Commission’s examination process, and
thus, would help protect investors and
ensure the sufficiency of information in
the market related to Government
Securities ATSs and Communication
Protocol Systems that are NMS Stock
ATSs.
Requiring all Government Securities
ATSs to file the required disclosures on
EDGAR would benefit market
participants by ensuring that the
disclosures are in a centralized, publicly
accessible filing location with validation
capabilities. Providing a centralized
filing location would prevent market
participants from incurring additional
costs to locate and retrieve Government
Securities ATS disclosures from various
15623
filing or posting locations. Similarly,
because EDGAR is a publicly accessible
system, an EDGAR requirement would
prevent market participants from
incurring additional costs that will arise
if an operator or other party were to
place any barriers to access the
Government Securities ATS disclosures
(such as a website registration
requirement). Because EDGAR provides
basic validation capabilities, an EDGAR
requirement would reduce the
incidence of non-discretionary errors,
thereby improving the quality of the
Government Securities ATS disclosures.
Requiring all Forms ATS and ATS–R
to be filed on EDGAR would provide a
centralized filing location with
validation capabilities for submitted
filings, and would also increase filing
efficiencies for ATSs by removing the
need to print and mail paper
versions.1099 All ATSs subject to
Regulation ATS are required to file a
Form ATS–R, and all ATSs that do not
trade NMS stocks or government
securities (which, under the proposal,
would include Communication Protocol
Systems), would file a Form ATS.
2. Costs
The Commission has considered the
costs of the proposed amendments to
Exchange Act Rule 3b–16, Regulation
ATS, and Regulation SCI. The aggregate
compliance costs are presented in Table
VIII.7 below.
TABLE VIII.7—TOTAL IMPLEMENTATION COSTS a AND OTHER COMPLIANCE COSTS b
Type of entity
Number of
entities
Aggregate initial costs
Communication Protocol Systems (Government Securities ATS) ...
Currently Exempted Government Securities ATSs ..........................
Current Government Securities ATSs ..............................................
Communication Protocol Systems (NMS Stock ATS) .....................
Current NMS Stock ATSs ................................................................
Other Communication Protocol Systems .........................................
Other Current ATSs .........................................................................
Subscriber ........................................................................................
4
7
17
4
34
14
59
....................
$2.4 million ∼ $6.6 million c ...
$1.5 million ∼ $3.5 million e ...
$1.4 million ∼ $3.5 million g ...
$209,000 i ..............................
$77,000 k ...............................
$2 million m ............................
$374,000 o .............................
...............................................
$2.4 million ∼ $5.1 million.d
$1.3 million ∼ $2.7 million.f
$1.3 million ∼ $2.6 million.h
$59,000.j
$16,000.l
$660,000.n
$115,000.p
$10,000.q
Total ..........................................................................................
139
$8 million ∼ $16 million .........
$5.9 million ∼ $11 million.
jspears on DSK121TN23PROD with PROPOSALS2
a See
infra note 1127.
b See id.
c See infra Table VIII.9.
d See id.
e See infra Table VIII.10.
f See id.
g See infra Table VIII.11.
h See id.
i See infra Table VIII.12.
j See id.
k See infra Table VIII.13.
l See id.
m See infra Table VIII.14.
n See id.
o See infra Table VIII.15.
p See id.
q This figure represents costs per ATS subscriber. See also infra note aa in Table VII.8.
1098 See
supra Section V.B.
VerDate Sep<11>2014
20:33 Mar 17, 2022
1099 See
Jkt 256001
PO 00000
id.
Frm 00129
Fmt 4701
Sfmt 4702
E:\FR\FM\18MRP2.SGM
18MRP2
Aggregate ongoing costs
15624
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
a. Compliance Costs 1100
The proposed amendments to extend
Regulation ATS to Communication
Protocol Systems, Currently Exempted
Government Securities ATSs, and
Current Government Securities ATSs
and Regulation SCI to significant
Government Securities ATSs and
certain Communication Protocol
Systems would result in a number of
compliance costs. The Commission
believes that compliance costs could be
passed through (e.g., via higher fees) to
market participants, resulting in higher
trading costs.
The requirements with respect to
becoming a broker-dealer, filing Form
ATS and Form ATS–N, and complying
with the Fair Access Rule of Regulation
ATS and Regulation SCI under the
proposed amendments would result in
compliance costs.1101 The initial and
ongoing implementation costs and other
compliance costs per entity associated
with these requirements are presented
in Table VIII.8.1102 The aggregates of
these compliance costs are presented in
Table VIII.9 through Table VIII.15.
TABLE VIII.8—PER ATS IMPLEMENTATION COSTS AND OTHER COMPLIANCE COSTS FOR EACH PROPOSED AMENDMENT
Rule
Compliance action
Initial costs per
entity
Reg ATS, 301(b)(1) ...............
Form BD filing .....................................................................
Form ID filing ......................................................................
Other compliance costs (non-PRA based) .........................
Form ATS filing ...................................................................
Fair Access .........................................................................
Capacity, Integrity, and Security of automated systems ....
Form ATS–R filing ..............................................................
$900 a .............................
50 b .................................
316,000 c ........................
6,400 f .............................
........................................
........................................
........................................
........................................
3,200 l .............................
Reg
Reg
Reg
Reg
ATS,
ATS,
ATS,
ATS,
301(b)(2)
301(b)(5)
301(b)(6)
301(b)(9)
...............
...............
...............
...............
Reg ATS, 301(b)(10) .............
Reg ATS, 302 ........................
Reg ATS, 303 ........................
Reg ATS, 304 ........................
Written safeguards and procedures to protect subscribers’
trading information.
Recordkeeping ....................................................................
Record preservation ...........................................................
Form ATS–N filing ..............................................................
Reg SCI .................................
Implementation costs (PRA based) ....................................
Reg SCI .................................
Reg SCI .................................
Other compliance costs (non-PRA based) .........................
Subscriber costs (non-PRA based) ....................................
........................................
........................................
49,000 p ..........................
43,000 q ..........................
2,300 r ............................
777,000 u ........................
388,000 v ........................
320,000 ∼ 2.4 million y ...
........................................
Ongoing costs per
entity
$300 d
57,700 e
1,500 g
17,000 h
5,000 i
6,000 j
500 k
1,000 m
3,400 n
1,100 o
3,300 s
3,300 t
924,000 w
924,000 x
214,000 ∼ 1.6 million z
10,000 aa
Manager at $332 × 2.75 hours = $914. See also supra note 787.
Manager at $332 × 0.15 hour = $50. See also supra note 790.
See infra note 1120.
d Compliance Manager at $332 × 0.95 hour = $316. See also supra note 788.
e See infra note 1120.
f (Attorney at $446 × 13 hours) + (Compliance Clerk at $75 × 7.5 hours) = $6,366. See also supra note 759.
g (Attorney at $446 × 3 hours) + (Compliance Clerk at $75 × 2 hours) = $1,489. See also supra note 760.
h Attorney at $446 × 37 hours = $16,513. See also supra note 764.
i Attorney at $446 × 11.25 hours = $5,021. See also supra note 766.
j ((Attorney at $446 × 3 hours) + (Compliance Manager at $332 × 0.25 hour)) × 4 times = $6,114. See also supra note 770.
k ((Compliance Manager at $332 × 0.25 hour) + (Compliance Clerk at $75 × 0.5 hour)) × 4 times = $483. See also supra note 771.
l (Attorney at $446 × 7 hours) + (Compliance Clerk at $75 × 1 hour) = $3,199. See also supra note 773.
m (Attorney at $446 × 2 hours) + (Compliance Clerk at $75 × 2 hours) = $1,043. See also supra note 774.
n Compliance Clerk at $75 × 45 hours = $3,383. See also supra note 776.
o Compliance Clerk at $75 × 15 hours = $1,128. See also supra note 777.
p (Attorney at $446 × 57.1 hours) + (Chief Compliance Manager at $570 × 0.5 hour) + (Compliance Manager at $332 × 36.05 hours) + (Sr.
Systems Analyst at $305 × 33.75 hours) + (Sr. Marketing Manager at $328 × 1 hour) + (Compliance Clerk at $75 × 8 hours) = $48,987. See also
supra note 781.
q (Attorney at $446 × 44.1 hours) + (Chief Compliance Manager at $570 × 0.5 hour) + (Compliance Manager at $332 × 36.05 hours) + (Sr.
Systems Analyst at $305 × 33.75 hours) + (Sr. Marketing Manager at $328 × 1 hour) + (Compliance Clerk at $75 × 1 hour) = $42,659. See also
supra note 782.
r (Attorney at $446 × 2.5 hours) + (Compliance Manager at $332 × 1.5 hours) + (Sr. Systems Analyst at $305 × 1.5 hours) + (Compliance Clerk
at $75 × 2.5 hours) = $2,260. See also supra note 783.
a Compliance
b Compliance
jspears on DSK121TN23PROD with PROPOSALS2
c
1100 Compliance costs consist of implementation
costs, which are the monetized costs of PRA
burdens and other compliance costs (non-PRA
based costs).
1101 The proposed requirements would include:
broker-dealer registration requirements for nonbroker-dealer-operated Communication Protocol
Systems and bank-operated Currently Exempted
Government Securities ATSs; the requirements with
respect to written safeguards and procedures for
subscribers’ trading information, recordkeeping,
record preservation, and Form ATS–R for
Communication Protocol Systems and Currently
Exempted Government Securities ATSs; the
requirements of Form ATS for Communication
Protocol Systems that are not Government
Securities ATSs nor NMS Stock ATSs; the
requirements with respect to capacity, integrity, and
security of automated systems for Communication
Protocol Systems that trade corporate debt
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
securities or municipal securities; the requirements
of Form ATS–N for Government Securities ATSs
and Communication Protocol Systems that are NMS
Stock ATSs; the requirements to amend Form ATS–
N for NMS Stock ATSs; the requirements to amend
Form ATS and Form ATS–R and such forms be
filed electronically; the requirements of the Fair
Access Rule for significant Government Securities
ATSs and significant Communication Protocol
Systems; and the requirements of Regulation SCI for
significant Government Securities ATSs and
significant Communication Protocol Systems.
1102 The Commission estimates the wage rate
associated with PRA burden hours based on salary
information for the securities information compiled
by SIFMA. The estimated wage figure for attorneys,
for example, is based on published rates for
attorneys, modified to account for a 1,800 hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits, and overhead
PO 00000
Frm 00130
Fmt 4701
Sfmt 4702
yielding an effective hourly rate for 2013 of $380
for attorneys. See Securities Industry and Financial
Markets Association, Management & Professional
Earnings in the Securities Industry—2013, available
at https://www.sifma.org/resources/research/
management-and-professional-earnings-in-thesecurities-industry-2013/. The 2013 professional
wage rates are adjusted for an inflation rate of 17.45
percent based on the Bureau of Labor Statistics data
on Consumer Price Index for all Urban Consumers
(CPI–U) between September 2013 and September
2021. Therefore, the current inflation adjusted
effective hourly wage rates for attorneys are
estimated at $446 ($380 × 1.1745), $570 ($485 ×
1.1745) for chief compliance managers, $332 ($283
× 1.1745) for compliance managers, $305 ($260 ×
1.1745) for senior systems analysts, $328 ($279 ×
1.1745) for senior marketing manager, and $75 ($64
× 1.1745) for compliance clerks.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
15625
s ((Attorney at $446 × 5.5 hours) + (Compliance Manager at $332 × 2 hours) + (Compliance Clerk at $75 × 1.9 hours)) × 5 times = $3,262. See
also supra note 784.
t See id.
u The PRA burden hours are based on the 2018 SCI PRA Supporting Statement. The Commission estimates an initial PRA burden for new
SCI entities of 2,034.3 hours. See also supra note 794. The PRA burden hours are monetized by applying inflation adjusted professional wage
rates obtained via the methodology presented in supra note 1102.
v See id. The Commission estimates an initial PRA burden for existing SCI entities of 1,017.15 hours. See also supra note 793.
w See id. The Commission estimates an ongoing PRA burden for all SCI entities of 2,458.65 hours. See also supra note 795.
x See id.
y See infra Section VIII.C.2.a.vi for discussion about non-PRA based initial compliance costs per entity.
z See infra Section VIII.C.2.a.vi for discussion about non-PRA based ongoing compliance costs per entity.
aa See infra Section VIII.C.2.a.vi for discussion about non-PRA based compliance costs per ATS subscriber.
TABLE VIII.9—COMMUNICATION PROTOCOL SYSTEMS THAT ARE GOVERNMENT SECURITIES ATSS
Number of
entities
Compliance
Aggregate initial costs
Aggregate ongoing costs
Regulation SCI ........................................
BD Registration.
Fair Access ..............................................
Other ........................................................
2
$2.2 million ∼ $6.4 million a .....................
$2.3 million ∼ $5 million.b
2
4
..................................................................
209,000.d .................................................
33,000.c
59,000.e
Total ..................................................
4
2.4 million ∼ 6.6 million ...........................
2.4 million ∼ 5.1 million.
cost figure is obtained by the summing initial implementation costs ($777,000) and non-PRA based compliance costs ($320,000 ∼ $2.4
million) associated with Regulation SCI presented in supra Table VIII.8 for 2 Communication Protocol Systems that trade government securities.
b This cost figure is obtained by summing the ongoing implementation costs ($924,000) and non-PRA based compliance costs ($214,000 ∼
$1.6 million) associated with Regulation SCI presented in supra Table VIII.8 for 2 Communication Protocol Systems that trade government securities.
c This cost figure is the ongoing implementation cost associated with Rule 301(b)(5) presented in supra Table VIII.8 for 2 Communication Protocol Systems that trade government securities.
d This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(10) and 304 ($49,000) presented in
supra Table VIII.8 for 4 Communication Protocol Systems that trade government securities.
e This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(9) ($6,000), 301(b)(10), 302, 303, and
304 ($3,300) presented in supra Table VIII.8 for 4 Communication Protocol Systems that trade government securities.
a This
TABLE VIII.10—CURRENTLY EXEMPTED GOVERNMENT SECURITIES ATSS
Number of
entities
Compliance
Aggregate initial costs
Aggregate ongoing costs
Regulation SCI ........................................
BD Registration.
Fair Access ..............................................
Other ........................................................
1
$1.1 million ∼ $3.2 million a .....................
$1.1 million ∼ $2.5 million.b
3
7
..................................................................
365,000 d .................................................
50,000.c
103,000.e
Total ..................................................
7
1.5 million ∼ 3.5 million ...........................
1.3 million ∼ 2.7 million.
cost figure is obtained by summing the initial implementation costs ($777,000) and non-PRA based compliance costs ($320,000 ∼ $2.4
million) associated with Regulation SCI presented in supra Table VIII.8 for 1 Currently Exempted Government Securities ATS.
b This cost figure is obtained by summing the ongoing implementation costs ($924,000) and non-PRA based compliance costs ($214,000 ∼
$1.6 million) associated with Regulation SCI presented in supra Table VIII.8 for 1 Currently Exempted Government Securities ATS.
c This cost figure is the ongoing implementation cost associated with Rule 301(b)(5) presented in supra Table VIII.8 for 3 Currently Exempted
Government Securities ATSs.
d This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(10) and 304 ($49,000) presented in
supra Table VIII.8 for 7 Currently Exempted Government Securities ATSs.
e This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(9) ($6,000), 301(b)(10), 302, 303, and
304 ($3,300) presented in supra Table VIII.8 for 7 Currently Exempted Government Securities ATSs.
a This
TABLE VIII.11—CURRENT GOVERNMENT SECURITIES ATS
Number of
entities
jspears on DSK121TN23PROD with PROPOSALS2
Compliance
Aggregate initial costs
Aggregate ongoing costs
Regulation SCI ........................................
Fair Access ..............................................
Other ........................................................
1
3
17
$708,000 ∼ $2.8 million a .........................
..................................................................
725,000 d .................................................
$1.1 million ∼ $2.5 million.b
50,000.c
64,000.e
Total ..................................................
17
1.4 million ∼ 3.5 million ...........................
1.3 million ∼ 2.6 million.
cost figure is obtained by summing the ongoing implementation costs ($924,000) and non-PRA based compliance costs ($214,000 ∼
$1.6 million) associated with Regulation SCI presented in supra Table VIII.8 for 1 Current Government Securities ATS.
b This cost figure is obtained by summing the ongoing implementation costs ($924,000) and non-PRA based compliance costs ($214,000 ∼
$1.6 million) associated with Regulation SCI presented in supra Table VIII.8 for 1 Current Government Securities ATS.
c This cost figure is the ongoing implementation cost associated with Rule 301(b)(5) presented in supra Table VIII.8 for 3 Current Government
Securities ATSs.
d This cost figure is the initial implementation cost associated with Rule 304 ($43,000) presented in supra Table VIII.8 for 17 Current Government Securities ATSs.
e This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(9) ($500) and 304 ($3,300) presented
in supra Table VIII.8 for 17 Current Government Securities ATSs.
a This
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00131
Fmt 4701
Sfmt 4702
E:\FR\FM\18MRP2.SGM
18MRP2
15626
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
TABLE VIII.12—COMMUNICATION PROTOCOL SYSTEMS THAT ARE NMS STOCK ATSS
Number of
entities
Compliance
Aggregate initial costs
Aggregate ongoing costs
Regulation SCI.
Fair Access.
BD Registration.
Other ........................................................
4
209,000 a .................................................
59,000.b
Total ..................................................
4
209,000 ....................................................
59,000.
a This
cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(10) and 304 ($49,000) presented in
supra Table VIII.8 for 4 Communication Protocol Systems that trade NMS stocks.
b This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(9), 301(b)(10), 302, 303, and 304
($3,300) presented in supra Table VIII.8 for 4 Communication Protocol Systems that trade NMS stocks.
TABLE VIII.13—CURRENT NMS STOCK ATSS
Number of
entities
Compliance
Aggregate initial costs
Aggregate ongoing costs
Regulation SCI.
Fair Access.
Other ........................................................
34
77,000 a ...................................................
16,000.b
Total ..................................................
34
77,000 ......................................................
16,000.
a This
cost figure is the initial implementation cost associated with Rule 304 ($2,300) presented in supra Table VIII.8 for 34 Current NMS Stock
ATSs.
b This cost figure is the ongoing implementation cost associated with Rule 301(b)(9) ($500) presented in supra Table VIII.8 for 34 Current NMS
Stock ATSs.
TABLE VIII.14—OTHER COMMUNICATION PROTOCOL SYSTEMS
Number of
entities
Compliance
Aggregate initial costs
Aggregate ongoing costs
Rule 301(b)(6) .........................................
Fair Access ..............................................
BD Registration .......................................
Other ........................................................
2
6
6
14
..................................................................
..................................................................
1.9 million c ..............................................
133,000 e .................................................
$10,000.a
99,000.b
360,000.d
191,000.f
Total ..................................................
14
2 million ...................................................
660,000.
a This
cost figure is the ongoing implementation cost associated with Rule 301(b)(6) presented in supra Table VIII.8 for 2 Communication Protocol Systems that trade corporate debt securities.
b This cost figure is the ongoing implementation cost associated with Rule 301(b)(5) presented in supra Table VIII.8 for 6 Communication Protocol Systems that trade corporate debt securities or municipal securities.
c This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(1) presented in supra Table VIII.8 for 6
Communication Protocol Systems that trade neither government securities nor NMS stocks.
d This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(1) presented in supra Table VIII.8 for
6 Communication Protocol Systems that trade neither government securities nor NMS stocks.
e This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(2) and 301(b)(10) presented in supra
Table VIII.8 for 14 Communication Protocol Systems that trade neither government securities nor NMS stocks.
f This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(2), 301(b)(9) ($6,000), 301(b)(10),
302, and 303 presented in supra Table VIII.8 for 14 Communication Protocol Systems that trade neither government securities nor NMS stocks.
TABLE VIII.15—OTHER CURRENT ATSS
Number of
entities
jspears on DSK121TN23PROD with PROPOSALS2
Compliance
Aggregate initial costs
Aggregate ongoing costs
Rule 301(b)(6).
Fair Access.
Other ........................................................
59
374,000 a .................................................
115,000.b
Total ..................................................
59
374,000 ....................................................
115,000.
a This
cost figure is the initial implementation cost associated with Rule 301(b)(2) presented in supra Table VIII.8 for 59 Current ATSs that
trade neither government securities nor NMS stocks.
b This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(2) and 301(b)(9) ($500) presented in
supra Table VIII.8 for 59 Current ATSs that trade neither government securities nor NMS stocks.
One commenter stated that the
proposed amendments in the 2020
Proposal would require a Legacy
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Government Securities ATS to separate
trading activity in government securities
and repos from non-NMS stock trading
PO 00000
Frm 00132
Fmt 4701
Sfmt 4702
activity, which could impose
administrative and operational burdens
on both Government Securities ATSs
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
and subscribers.1103 The Commission
believes that the proposed amendments
do not require separating operations,
and thus, Legacy Government Securities
ATSs would not incur costs associated
with separating operations.1104
jspears on DSK121TN23PROD with PROPOSALS2
i. Implementation Costs: 1105
Currently Exempted Government
Securities ATSs and Communication
Protocol Systems that would be newly
subject to the requirements of
Regulation ATS would incur
implementation costs associated with,
among other things, written safeguards
and procedures to protect subscribers’
trading information,1106
recordkeeping,1107 record
preservation,1108 and Form ATS–R.1109
Currently Exempted Government
Securities ATSs and Communication
Protocol Systems that trade NMS stocks
or government securities would incur
higher implementation costs due to the
heightened requirements of filing Form
ATS–N compared to other
Communication Protocol Systems that
would file Form ATS.1110
Current ATSs and Communication
Protocol Systems that trade neither
NMS stocks nor government securities
would incur implementation costs
associated with re-filing or filing the
modernized Form ATS.1111 Current
NMS Stock ATSs would incur
implementation costs associated with
amending revised Form ATS–N.1112
1103 See ICE Bonds Letter I at 3 and 4. The
commenter on the 2020 Proposal stated that this
separation requirement would result in fewer
venues and higher trading costs for subscribers to
trade and hedge and concentrate trading among a
few large Government Securities ATSs because
smaller Legacy Government Securities ATSs may
determine to exit due to the prohibitive costs
associated with this separation requirement. This
commenter also provided a list of costs associated
with separating operation. See also supra Section
III.B.1 and note 250.
1104 See supra Section III.B.I.
1105 Implementation costs are the monetized costs
of PRA burdens. See also supra note 1100.
1106 See the implementation costs associated with
Rule 301(b)(10) in supra Table VIII.8.
1107 See the implementation costs associated with
Rule 302 in supra Table VIII.8.
1108 See the implementation costs associated with
Rule 303 in supra Table VIII.8.
1109 See the implementation costs associated with
Rule 301(b)(9) in supra Table VIII.8.
1110 See the implementation costs associated with
Rule 301(b)(2) and Rule 304 in supra Table VIII.8.
1111 The initial and ongoing implementation costs
per entity associated with Rule 301(b)(2) are
approximately $6,400 and $1,500, respectively. See
supra notes f and g in Table VIII.8. See also supra
Section VII.D.1.a for a discussion about the
implementation costs associated with Rule
301(b)(2).
1112 The implementation cost associated with
amending revised Form ATS–N is approximately
$2,300 per entity. See supra note r in Table VII.8.
See also supra Section VII.D.3 for a discussion
about the implementation costs associated with
Rule 304.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Furthermore, all current ATSs,
Currently Exempted Government
Securities ATSs, and Communication
Protocol Systems would incur
implementation costs to re-file or file
the revised electronic Form ATS–R.1113
Government Securities ATSs that
meet certain volume thresholds would
be subject to the Fair Access Rule of
Regulation ATS. The Commission
estimates 3 Currently Exempted
Government Securities ATSs, 3 Current
Government Securities ATSs, and 2
Communication Protocol Systems that
trade government securities would be
subject to the Fair Access Rule. These
entities would incur the implementation
costs per entity presented in Table
VIII.8.
Significant NMS Stock ATSs and
ATSs that trade corporate debt
securities, municipal securities, or nonNMS stock equity securities are subject
to the Fair Access Rule. The
Commission estimates 2
Communication Protocol Systems that
trade corporate debt securities, 1
Communication Protocol System that
trades municipal securities, and 3
Communication Protocol Systems that
trade non-NMS stock equity securities
would be subject to the Fair Access
Rule. These entities would incur the
same implementation costs per entity
presented in Table VIII.8.
Significant ATSs that trade corporate
debt securities or municipal securities
are subject to Rule 301(b)(6). The
Commission estimates that 2
Communication Protocol Systems that
trade corporate debt securities would be
subject to Rule 301(b)(6) and incur the
implementation costs per entity
presented in Table VIII.8.
The Commission believes that the
2018 estimates of initial PRA burdens
for new SCI entities and ongoing PRA
burdens for all SCI entities under
Regulation SCI are largely applicable to
Government Securities ATSs.1114 For
the purpose of implementation cost
estimation, two groups of Government
Securities ATSs are considered: 1115
Government Securities ATSs that are
existing SCI entities; and Government
1113 The implementation costs associated with
filing or re-filing electronic Form ATS–R is
approximately $500 per entity. See supra note k in
Table VII.8. See supra Section VII.D.1.d for a
discussion about the implementation costs
associated with Rule 301(b)(9).
1114 See 2018 SCI PRA Supporting Statement,
supra notes 793, 794, and 795.
1115 Government Securities ATSs are divided into
two groups in discussing implementation costs
because Government Securities ATSs operated by a
broker-dealer operator of an NMS Stock ATS that
is a SCI entity would have lower initial
implementation costs. See also 2018 SCI PRA
Supporting Statement, supra note 793.
PO 00000
Frm 00133
Fmt 4701
Sfmt 4702
15627
Securities ATSs that are entirely new
SCI entities currently not subject to
Regulation SCI. For the first group
(Government Securities ATSs that are
existing SCI entities), the Commission
believes that such entities would incur
approximately 50 percent of the
Commission’s initial PRA burden
estimates for entirely new SCI entities.
Furthermore, for the second group
(Government Securities ATSs that are
new SCI entities currently not subject to
Regulation SCI), the Commission
believes that such entities would incur
the same estimated initial PRA burdens
as those estimated for new SCI entities
in the 2018 SCI PRA Supporting
Statement. The Commission also
believes that the same ongoing PRA
burdens for all SCI entities estimated in
the 2018 SCI PRA Supporting Statement
are applicable to Government Securities
ATSs in both the first and the second
group.
The Commission estimates that 4
Government Securities ATSs would be
subject to the requirements of
Regulation SCI and incur the
implementation costs per entity
presented in Table VIII.8. Among the
four Government Securities ATSs that
satisfy the volume thresholds, the
Commission believes that one
Government Securities ATS (referred as
the first group above) would incur
approximately 50 percent of initial PRA
burden estimates for an entirely new
SCI entity included in the 2018 SCI PRA
Supporting Statement, and three
Government Securities ATSs (referred
as the second group above) would incur
the same estimated initial PRA burdens
as those estimated for new SCI entities
included in the 2018 SCI PRA
Supporting Statement. In addition, the
Commission believes that all four
Government Securities ATSs would
incur the same ongoing PRA burdens as
all other SCI entities included in the
2018 SCI PRA Supporting Statement.
Significant ATSs that trade either
NMS stocks or non-NMS stock equity
securities are subject to the
requirements of Regulation SCI. The
Commission estimates that no
Communication Protocol System that
trades NMS stocks or non-NMS stock
equity securities would be subject to
Regulation SCI. If a significant
Communication Protocol System that
trades NMS stocks or equity securities
that are not NMS stocks exists, it would
incur the same range of implementation
costs per entity presented in Table
VIII.8.
The estimated implementation costs
for Communication Protocol Systems
and Currently Exempted Government
Securities ATSs associated with Rule
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
15628
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
301(b)(9) and (10), Rule 302, and Rule
303 would represent a larger fraction of
revenue for a small (measured in trading
volume) ATS relative to that for a large
ATS. This is because these costs would
be fixed costs that these ATSs would
incur regardless of the amount of
trading activity that takes place on
them. Furthermore, regardless of their
size and transaction volume, all
Government Securities ATSs and
Communication Protocol Systems that
are NMS Stock ATSs would need to
ensure that their disclosures meet the
requirements of Form ATS–N and that
they correctly file their Form ATS–N
under Rule 304. Such Government
Securities ATSs and Communication
Protocol Systems might develop internal
processes to ensure correct and
complete reporting on Form ATS–N,
which would result in a fixed
implementation cost. These
implementation costs would fall
disproportionately on smaller
(measured in trading volume) such
Government Securities ATSs and
Communication Protocol Systems in
terms of implementation costs relative
to trading volume (as opposed to larger
such Government Securities ATSs and
Communication Protocol Systems in
terms of implementation costs relative
to trading volume), because all
Government Securities ATSs and
Communication Protocol Systems that
are NMS Stock ATSs would likely incur
these fixed implementation costs.
However, smaller such Government
Securities ATSs and Communication
Protocol Systems that are not operated
by multi-service broker-dealer operators
and that generally do not engage in
other brokerage or dealing activities in
addition to their ATSs would likely
incur lower implementation costs
because certain sections of revised Form
ATS–N would not be applicable to
Government Securities ATSs and
Communication Protocol Systems that
are NMS Stock ATSs.
The implementation costs associated
with Rule 304 would also vary across
Government Securities ATSs and
Communication Protocol Systems that
are NMS Stock ATSs depending on the
complexity of the ATS and the services
that it offers. For example, some such
ATSs might not segment subscriber
order flow or offer counterparty
selection protocols. These ATSs would
not be required to complete Part III,
Items 13 and 14 of revised Form ATS–
N. As a result, such Government
Securities ATSs and Communication
Protocol Systems that are NMS Stock
ATSs would incur lower
implementation costs because these
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
ATSs would apply lesser burden hours
to complete their Form ATS–N.
ii. Costs Associated With Broker-Dealer
Requirements
Under the proposed Rule 301(b)(1),
Currently Exempted Government
Securities ATSs that are banks (i.e.,
bank-operated Currently Exempted
Government Securities ATSs) and
Communication Protocol Systems that
are non-broker-dealers (i.e., non-brokerdealer-operated Communication
Protocol Systems) would be subject to
broker-dealer registration requirements.
The Commission believes that nonbroker-dealer-operated Communication
Protocol Systems without a brokerdealer affiliate would incur additional
compliance costs related to registering
with the Commission as broker-dealers,
becoming members of an SRO, such as
FINRA, and maintaining broker-dealer
registration and SRO membership,
compared to those operated by brokerdealers and those with a broker-dealer
affiliate. The initial costs would include
the costs associated with filing Form BD
and Form ID, FINRA membership
application fees, and any legal or
consulting costs necessary for
effectively completing the application to
be a member of FINRA (e.g., ensuring
compliance with FINRA rules 1116
including drafting policies and
procedures as may be required). The
ongoing costs would include the costs
associated with amending Form BD, and
ongoing fees associated with FINRA
membership and legal work relating to
FINRA membership.
The Commission recognizes that the
costs associated with obtaining and
maintaining FINRA membership would
vary significantly depending on entity
characteristics, activities, and the degree
of the firm’s reliance on outside legal or
consulting for effectively completing the
application process and maintaining
FINRA membership. The initial
registration costs for FINRA
membership 1117 would depend on,
among other things, the number of
associated persons being registered. The
ongoing costs to remain a FINRA
member would vary based on the scope
of brokerage activities, revenue,1118 size
1116 See supra Section II.D.2 for a discussion
about FINRA rules.
1117 See https://www.finra.org/registration-examsce/classic-crd/fee-schedule#examfees for the
schedule of FINRA registration fees.
1118 FINRA imposes a Gross Income Assessment
as follows: $1,200 on a Member Firm’s annual gross
revenue up to $1 million; a charge of 0.1215% on
a Member Firm’s annual gross revenue between $1
million and $25 million; a charge of 0.2599% on
a Member Firm’s annual gross revenue between $25
million and $50 million; a charge of 0.0518% on
a Member Firm’s annual gross revenue between $50
PO 00000
Frm 00134
Fmt 4701
Sfmt 4702
(i.e., the number of registered persons
and the number of branch offices), and
trading volume.1119 Thus, entities with
a smaller number of registered persons,
fewer brokerage activities, smaller
trading volume, and lower revenue
would face lower costs.
As outlined in Table VIII.8, the
Commission estimates an initial cost of
approximately $317,000 to register as a
broker-dealer with the Commission and
become a member of FINRA.1120
Additionally, the Commission estimates
an ongoing annual cost of
approximately $58,000 to maintain the
broker-dealer registration and FINRA
membership.1121 The Commission
preliminarily believes that these costs
related to broker-dealer registration and
FINRA membership are relevant to nonbroker-dealer-operated Communication
Protocol Systems without a brokerdealer affiliate. However, these cost
estimates are uncertain because the
million and $100 million; a charge of 0.0365% on
a Member Firm’s annual gross revenue between
$100 million and $5 billion; a charge of 0.0397%
on a Member Firm’s annual gross revenue between
$5 and $25 billion; and a charge of 0.0855% on a
Member Firm’s annual gross revenue greater than
$25 billion. When a firm’s annual gross revenue
exceeds $25 million, the maximum of current year’s
revenue and average of the last three years’ revenue
is used as the basis for the income assessment. See
also https://www.finra.org/rules-guidance/notices/
09–68.
1119 Fees for reporting trades to FINRA may
depend on the types of security, the size of trade,
and the types of message (e.g., cancellation
message, correction message). For example, fees for
reporting trades to FINRA TRACE as follows:
$0.475/trade for trade size up to and including
$200,000 par value; $0.000002375 times the par
value of the transaction (i.e., $0.002375/$1,000) for
trade size over $200,000 and up to and including
$999,999.99 par value; $2.375/trade for trade size of
$1,000,000 par value or more; $1.50/trade for all
transactions in securitized products that are Agency
Pass-Through Mortgage-Backed Securities traded to
be announced (‘‘TBA’’) or SBA-Backed ABS traded
TBA (each ‘‘TBA transaction’’); $1.50/trade for
cancellation or correction; and $3/trade for late
trades. See also https://www.finra.org/rulesguidance/rulebooks/finra-rules/7730.
1120 See Exchange Act Release No. 33–9974
(October 30, 2015), 80 FR 71388, 71509 (November
16, 2015) (‘‘Regulation Crowdfunding Adopting
Release’’). These estimates are adjusted for an
inflation rate of 15.33 percent based on the Bureau
of Labor Statistics data on CPI–U between October
2015 and September 2021. In addition to the initial
costs to become a member of FINRA, this cost
includes the initial implementation costs of $950
for filing Form BD and Form ID tabulated in Table
VIII.8. The Commission recognizes that the cost of
registering and becoming a member of a national
securities association varies significantly among
brokers, depending on facts and circumstances. The
Commission estimates the range of cost to be
between $57,500 and $576,500, and thus, chose the
average amount of $317,000 for purposes of this
discussion.
1121 See id. See also Regulation Crowdfunding
Adopting Release at 71509. In addition to the
ongoing annual costs to maintain a membership
with FINRA, this cost includes the ongoing annual
implementation costs of $300 to amend Form BD
tabulated in Table VIII.8.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
Commission does not have information
on the estimated 6 non-broker-dealeroperated Communication Protocol
Systems without a broker-dealer
affiliate, such as the number of
associated persons of the broker entity
and their licensing requirements, the
scope of the proposed brokerage
activities, and the degree of reliance on
outside legal or consulting expertise
necessary for effectively completing the
application to be a member of FINRA.
Furthermore, the Commission is unable
to provide cost estimates related to trade
reporting obligations 1122 because these
costs would depend on various factors,
such as the number of trades and the
costs of updating systems for trade
reporting requirements, for which the
Commission does not have information.
In addition to the costs associated
with broker-dealer registration and
FINRA membership, a non-brokerdealer-operated Communication
Protocol System without a broker-dealer
affiliate could incur costs related to
restructuring its business and
incorporating itself or a separate entity
(i.e., an affiliate) to be registered as a
broker-dealer. Such restructuring costs
would include any costs that may be
associated with making necessary
changes to its business practices, fees
for consulting and legal services, fees for
incorporation and the amendment of its
certificate of incorporation and its
bylaws, and tax consequences. Fees for
incorporation and amending the
certificate of incorporation and its
bylaws may be minimal. For example,
fees for incorporation and amending the
certificate of incorporation and its
bylaws in the state of Delaware would
range approximately between $89 and
$200 depending on the entity type of
incorporation.1123 However, certain
restructuring costs, such as costs
associated with making changes to
business practices to comply with the
broker-dealer registration requirements,
could be significant. The Commission
estimates that up to 6 non-broker-dealeroperated Communication Protocol
Systems without a broker-dealer affiliate
could be required to restructure their
business in order to comply with the
broker-dealer registration requirements.
1122 See supra note 1119 for fees for reporting
trades to FINRA. The Commission estimates that 2
non-broker-dealer-operated Communication
Protocol Systems without a broker-dealer affiliate
trade restricted securities, which may be subject to
FINRA transaction reporting requirements. Thus,
with respect to those restricted securities, these
Communication Protocol Systems may incur costs
associated with reporting trades to FINRA.
1123 See fee schedules for incorporation and
amending the certificate of incorporation and its
bylaws in the state of Delaware at: https://
corpfiles.delaware.gov/Aug09feesch.pdf.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
The Commission is unable to provide
estimates on certain restructuring
related costs for a non-broker-dealeroperated Communication Protocol
System because the Commission does
not have information regarding the
scope of its restructuring, such as the
need and the extent of required changes
in current business practices, the need
and the extent of consulting services,
and its choice of entity type for
incorporation.
Upon becoming broker-dealers,
operators of these Communication
Protocol Systems would be subject to
certain broker-dealer requirements with
respect to maintaining net capital,
reporting, and recordkeeping.1124 The
compliance costs associated with
maintaining net capital, reporting, and
recordkeeping would depend on the
business structure of a broker-dealer
(i.e., the capital structure of a brokerdealer and the scope of a broker-dealer’s
activities). For example, the costs would
vary significantly depending on the
types of securities a broker-dealer holds,
the level of net capital a broker-dealer
maintains, and whether a broker-dealer
carries customer accounts, carries for
other broker-dealers, is a registered
investment adviser, is affiliated with an
investment adviser, or transacts in
principal capacity. However, to the
extent that an operator of
Communication Protocol System limits
its activities to trading operations and
does not expand into these other
business activities, the operator would
incur minimal costs with respect to net
capital, reporting, and recordkeeping
requirements upon registering as a
broker-dealer. The Commission is
unable to estimate the costs associated
with these broker-dealer requirements
because the Commission does not have
information about whether or how the
current business structures of the
estimated 6 Communication Protocol
Systems that are not operated by a
registered broker-dealer nor how a
broker-dealer affiliate might change
upon registering as a broker-dealer.
The Commission believes that a bankoperated Currently Exempted
Government Securities ATS or a nonbroker-dealer-operated Communication
Protocol System would not incur
compliance costs associated with
registering as a broker-dealer and
becoming a member of an SRO (e.g.,
FINRA) if it has a broker-dealer affiliate.
It is the Commission’s understanding
that ATSs that are banks often are
1124 Registered Broker-dealers would be subject to
requirements under the rules, such as 17 CFR
240.15c3–1, 204.17a–1, 204.17a–3, 240.17a–4, and
240.17a–5 (Rule 15c3–1, Rule 17a–1, Rule 17a–3,
Rule 17a–4, and Rule 17a–5).
PO 00000
Frm 00135
Fmt 4701
Sfmt 4702
15629
operated by bank affiliates that are
themselves registered broker-dealers,
rather than by the banks themselves.1125
A bank-operated Currently Exempted
Government Securities ATS might adopt
a similar registered affiliate structure for
its government securities trading
operations. For a non-broker-dealeroperated Communication Protocol
System that is affiliated with an existing
broker-dealer, it would be more costeffective for the Communication
Protocol System to move its operations
to an existing broker-dealer affiliate
rather than restructure itself to become
a broker-dealer or create a new brokerdealer entity to comply with the brokerdealer registration requirements. Thus,
the Commission expects that such nonbroker-dealer-operated Communication
Protocol Systems would choose the
more cost-effective way of moving its
trading operations to its registered
broker-dealer affiliate.
A broker-dealer affiliate that is adding
ATS or Communication Protocol System
operations would incur additional
ongoing costs associated with
maintaining FINRA membership if
adding trading operations increases
revenue, the number of registered
persons or branch offices, trading
volume, or expands the scope of
brokerage activities.1126 Furthermore, a
broker-dealer affiliate that is adding
ATS or Communication Protocol System
operations could incur additional costs
associated with maintaining adequate
net capital level, reporting, and
recordkeeping depending on the
changes in business structure of the
broker-dealer. For the reasons discussed
above, the Commission is unable to
provide estimates on these additional
costs for the estimated 1 bank-operated
Currently Exempted Government
Securities ATS and 2 non-brokeroperated Communication Protocol
Systems that are affiliated with an
existing broker-dealer.
iii. Costs Associated With
Ineffectiveness Declaration
In addition to the implementation
costs associated with filing and
amending Form ATS–N, the
Commission preliminarily believes that
the proposed ability for the Commission
to declare a Form ATS–N or Form ATS–
1125 See supra Section III.B.2 for a discussion
about ATSs that are banks.
1126 For an entity that may adopt a registered
affiliate structure, it is possible that it may have to
file a Continuing Membership Application with
FINRA noticing material changes to business
operations resulting from adding ATS operations.
See (under material change) https://www.finra.org/
registration-exams-ce/classic-crd/fee-schedule
regarding the fees for the Continuing Membership
Application with FINRA.
E:\FR\FM\18MRP2.SGM
18MRP2
15630
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
N amendment ineffective could result in
direct costs for Government Securities
ATSs and Communication Protocol
Systems that are NMS Stock ATSs.1127
If the Commission declares a
Government Securities ATS’s or an
NMS Stock ATS’s Form ATS–N or Form
ATS–N amendment ineffective, then the
ATS might have to cease operations, roll
back a change in operations, or delay
the start of operations until it is able to
address the deficiencies in the
previously filed form.
An ineffective Form ATS–N could
also impose indirect costs on the overall
market for government securities and
NMS stock trading services resulting
from a potential reduction in
competition or the removal of a sole
provider of a niche service within the
market.1128
However, the Commission believes
that there would not be a substantial
burden imposed in connection with
resubmitting Form ATS–N or a Form
ATS–N amendment or from an
ineffective declaration in general.1129
Because Government Securities ATSs,
Communication Protocol Systems that
are NMS Stock ATSs, and market
participants would not incur these costs
unless the Commission declares a Form
ATS–N or amendment ineffective, such
Government Securities ATSs and
Communication Protocol Systems
would be incentivized to comply with
the requirements of Form ATS–N, as
well as Federal securities laws,
including the other requirements of
Regulation ATS, to avoid an
ineffectiveness declaration. These
incentives would encourage such
Government Securities ATSs and
Communication Protocol Systems to
initially submit a more accurate and
complete Form ATS–N and
amendments thereto, which would
reduce the likelihood that they are
declared ineffective.
Additionally, Current Government
Securities ATSs and Communication
Protocol Systems that are NMS Stock
ATSs would not have to bear the costs
of immediately ceasing operations
under the proposal without having an
effective Form ATS–N on file with the
Commission because Current
1127 See
Rule 304(a)(1)(iv)(B).
infra Section VIII.C.3.a.i.d for a
discussion about the impact of a declaration of
ineffectiveness on competition in the market for
government securities and repo trading services.
1129 One commenter on the 2020 Proposal stated
that the use of the same initial filing, amendment
review, and effectiveness process for the previously
proposed Form ATS–G as is currently in place for
the Form ATS–N should reduce compliance
burdens for market participants and reduce
potential market confusion. See Tradeweb Letter at
10.
jspears on DSK121TN23PROD with PROPOSALS2
1128 See
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Government Securities ATSs would be
able to continue operations pursuant to
a previously filed initial operation
report on Form ATS and Currently
Exempted Government Securities ATSs
and Communication Protocol Systems
that trade NMS stocks would also be
able to continue operations pending the
Commission’s review of their initial
Form ATS–N. However, if after notice
and opportunity for hearing, the
Commission declares an initial Form
ATS–N filed by a Current Government
Securities ATS, Currently Exempted
Government Securities ATS, or
Communication Protocol System
ineffective, the ATS would be required
to cease operations until an initial Form
ATS–N is effective.
One commenter stated that the
Commission’s imposition of an
‘‘effectiveness’’ regime to previously
proposed Form ATS–G under the 2020
proposal is an unnecessary
administrative burden on Government
Securities ATSs, and will be
particularly burdensome on those
Government Securities ATSs with
limited volumes in government
securities.1130 The implementation costs
associated with the requirements of
Form ATS–N, including the costs for
developing internal processes to ensure
correct and complete reporting on Form
ATS–N to avoid an ineffectiveness
declaration, would be fixed costs, and
thus, would represent a larger fraction
of revenue for a small (measured in
trading volume) ATS relative to that for
a large ATS. However, the Commission
preliminarily believes that this adverse
effect on small ATSs would be mitigated
to some extent, because, as discussed in
Section VIII.C.2.a.i, the Commission
believes that certain smaller
Government Securities ATSs and
Communication Protocol Systems that
trade NMS stocks would likely incur
lower implementation costs.1131
iv. Costs Associated With the Fair
Access Rule
The Commission preliminarily
believes that applying the Fair Access
Rule could impose compliance costs
1130 See
ICE Bonds Letter I at 5.
Government Securities ATSs and
Communication Protocol Systems that trade NMS
stocks that are not operated by multi-service brokerdealer operators and that generally do not engage
in other brokerage or dealing activities in addition
to their ATSs would likely incur lower
implementation costs because certain sections of
revised Form ATS–N would not be applicable to
these ATSs. Furthermore, smaller such Government
Securities ATSs and Communication Protocol
Systems that operate simpler systems would likely
incur lower implementation costs associated with
the requirements of Form ATS–N because certain
sections of revised Form ATS–N would not be
applicable to these ATSs.
1131 Smaller
PO 00000
Frm 00136
Fmt 4701
Sfmt 4702
(non-PRA based) on Government
Securities ATSs, Communication
Protocol Systems that trade NMS stocks,
non-NMS stock equity securities,
corporate debt securities, or municipal
securities, and passive systems that
trade NMS stocks. Under the proposal,
Government Securities ATSs,
Communication Protocol Systems that
trade NMS stocks, non-NMS stock
equity securities, corporate debt
securities, or municipal securities, and
passive systems that trade NMS stocks
that meet the specified aggregate volume
thresholds could no longer treat
subscribers differently with respect to
access to the services of the ATS
without a reasonable basis. For example,
an ATS could not offer one class of
subscriber a service (e.g., an order
interaction procedure, order type,
trading protocol, or connectivity
method) without offering the service to
all subscribers unless the ATS had a
reasonable basis for the differential
treatment. In addition, an ATS could
not charge fees that unreasonably
prohibit certain market participants
from accessing the services of the
ATS.1132 If ATSs must change fee
structures, order interaction procedures,
trading protocols, or access provisions
and adapt their operating model due to
the Fair Access Rule, those ATSs would
incur costs related to changing business
operations.
The Commission, however, is unable
to quantify the potential compliance
costs discussed above. In particular, the
Commission lacks data on the extent to
which Communication Protocol
Systems that trade NMS stocks, nonNMS stock equity securities, corporate
debt securities, or municipal securities,
passive systems that trade NMS stocks,
and Government Securities ATSs that
meet the aggregate volume thresholds
currently grant access to the ATS
services to all subscribers on the same
terms, and on the specific types of
services and subscribers in question. In
addition, the Commission lacks similar
data for other trading venues in the
government securities, corporate debt
securities, and municipal securities
market, which might offer differential
access to services. Thus, the
Commission is not able to estimate the
costs associated with changing fee
structures and adapting operating
models.
Significant ATSs that trade NMS
stocks, non-NMS stock equity securities,
corporate debt securities, or municipal
securities are subject to the Fair Access
1132 See supra Section V.A.3 for a discussion
about reasonableness and fees under the proposed
amendments to the Fair Access Rule.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Rule. The proposed amendments to
aggregate volume across affiliated ATSs
in calculating certain volume thresholds
could increase the number of smaller
affiliate ATSs that would be subject to
the Fair Access Rule. Smaller affiliate
ATSs that would not have met the
current volume thresholds individually
would be subject to the Fair Access Rule
if they meet the proposed aggregate
volume thresholds. As discussed above,
if ATSs must adapt their operating
models as a result of being subject to the
Fair Access Rule, those ATSs would
incur costs related to changing business
operations. The Commission estimates
that no current smaller affiliate ATS that
trades NMS stocks, non-NMS stock
equity securities, corporate debt
securities, or municipal securities and
does not already currently meet the Fair
Access volume thresholds would meet
the volume thresholds 1133 and be
subject to the Fair Access Rule if
volume is aggregated across affiliated
ATSs.1134
jspears on DSK121TN23PROD with PROPOSALS2
v. Costs Associated With Rule 301(b)(6)
In addition to the implementation
costs associated with reporting outages
and recordkeeping under the proposed
Rule 301(b)(6), the Commission
preliminarily believes that significant
Communication Protocol Systems that
trade corporate debt securities or
municipal securities could incur
compliance costs (non-PRA based) to
ensure adequate capacity, integrity, and
security with respect to those systems
that support order entry, order routing,
order execution, transaction reporting,
and trade comparison.1135 To the extent
that these significant Communication
Protocol Systems currently do not meet
certain standards under the proposed
Rule 301(b)(6), they would incur
compliance costs associated with,
among other things, capacity planning,
and conducting periodic capacity stress
tests of critical systems that process
transactions.1136 For example, a
Communication Protocol System would
incur the costs associated with
upgrading systems (e.g., investing in
computer hardware and software) if its
critical systems that process
1133 See supra note 1079 for details on the Fair
Access thresholds. See supra note 310 for the
application of the Fair Access Rule on the trading
of NMS stocks, non-NMS stock equity securities,
municipal securities, and corporate debt securities.
See also supra Section V.A.2 for a discussion about
the aggregation of volume threshold.
1134 See supra note 1085.
1135 The Commission estimates that 2
Communication Protocol Systems that trade
corporate debt securities or municipal securities
would exceed the thresholds under the proposed
Rule 301(b)(6). See supra Section VIII.C.2.a.i.
1136 See supra note 157.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
transactions do not have adequate
capacity. In addition, significant
Communication Protocol Systems
would incur costs associated with the
independent review of their systems on
an annual basis.
The Commission believes that the
compliance costs for one of these
significant Communication Protocol
Systems would depend on the extent to
which its existing policies with respect
to maintaining adequate capacity,
integrity, and security of systems that
support order entry, order routing, order
execution, transaction reporting, and
trade comparison already comply with
the standards under the proposed Rule
301(b)(6). The Commission is unable to
estimate these compliance costs because
it lacks information on the existing
policies for maintaining adequate
capacity, integrity, and security of such
systems for significant Communication
Protocol Systems that trade corporate
debt securities or municipal
securities.1137 However, the
Commission believes that compliance
costs associated with Rule 301(b)(6)
would be significantly less than those of
Regulation SCI because the scope and
requirements of Rule 301(b)(6) would be
narrower than those of Regulation
SCI.1138
vi. Costs Associated With Regulation
SCI
Government Securities ATSs that
meet certain volume thresholds would
incur compliance costs (non-PRA based
costs) as SCI entities.1139 The Regulation
SCI Adopting Release in 2014 estimated
that an SCI entity would incur an initial
cost of between approximately $320,000
and $2.4 million. Additionally, an SCI
entity would incur an ongoing annual
cost of between approximately $214,000
and $1.6 million. The Commission
1137 See supra note 888 (discussing commenter
statements on the extent to which fixed incomes
systems already comply with the provisions of Rule
301(b)(6)).
1138 For example, Rule 301(b)(6) would apply to
a narrower set of systems, as compared to
Regulation SCI: Rule 301(b)(6) of Regulation ATS
applies only to systems that support order entry,
order routing, order execution, transaction
reporting, and trade comparison, which is narrower
than the definition of SCI system. Furthermore,
Rule 301(b)(6) would not require significant
Communication Protocol Systems that trade
corporate debt securities or municipal securities to
maintain a geographically diverse backup facility.
1139 While NMS Stock ATSs that meet certain
volume thresholds are also subject to Regulation
SCI, the Commission estimates that no
Communication Protocol Systems that trade NMS
stocks would be subject to Regulation SCI. The
Commission preliminarily believes that a
Communication Protocol System that trades NMS
stocks would incur the same implementation costs
and other compliance costs (non-PRA based),
including ATS’s participant costs, in the same range
as those presented in Table VIII.8.
PO 00000
Frm 00137
Fmt 4701
Sfmt 4702
15631
believes that these compliance costs are
largely applicable to Government
Securities ATSs.
One commenter on the 2020 Proposal
stated that Regulation SCI imposes a
specific manner in which SCI Entities
must organize their asset inventories,
and that redesigning and implementing
new asset inventories to comply with
Regulation SCI would require
significant investment and would
impose material upfront compliance
costs that may divert resources rather
than encourage meaningful
investment.1140 Although Regulation
SCI would require SCI Entities to
identify systems based on their
functionality, as discussed above, the
Commission believes that Regulation
SCI is designed to provide flexibility in
applying industry standards to establish
policies and procedures.1141 This
flexibility may not require SCI Entities
to redesign their systems to comply with
Regulation SCI. However, to the extent
that an SCI Entity would be required to
redesign its systems, the Commission
believes that the costs would be
included in the compliance costs
associated with Regulation SCI
discussed above.1142
However, the Commission is
uncertain about the actual level of costs
Government Securities ATSs would
incur because these costs might differ
from the types of SCI entities considered
in the Regulation SCI Adopting Release,
which did not include fixed income
ATSs.1143 The Commission is also
uncertain about the actual level of costs
Government Securities ATSs would
incur because the actual costs might
differ based on various factors, such as
complexity of SCI entities’ systems and
the degree to which SCI entities employ
third-party systems. The Commission
believes that Government Securities
ATSs with relatively simpler systems
would incur lower compliance costs
compared to those with more complex
systems.1144 Also, any SCI systems
operated by a third-party on behalf of an
SCI entity would be subject to the
requirements of Regulation SCI. The
Commission believes that Government
Securities ATSs with higher
dependency on SCI systems operated by
1140 See
BrokerTec Letter at 7.
supra note 374 and accompanying text.
1142 See supra Table VIII.8 for the compliance
costs associated with Regulation SCI.
1143 See Regulation SCI Adopting Release, supra
note 3. In the Regulation SCI Adopting Release,
fixed income ATSs are excluded from the
regulation.
1144 See id. The Regulation SCI Adopting Release
explains that compliance costs would depend on
the complexity of SCI entities’ systems and they
would be higher for SCI entities with more complex
systems.
1141 See
E:\FR\FM\18MRP2.SGM
18MRP2
15632
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
third-party vendors might incur higher
compliance costs compared to those
with lower dependency on third-party
systems.1145
In addition, the Commission believes
that some Government Securities ATSs’
participants required to participate in
the testing of business continuity and
disaster recovery plans would incur
Regulation SCI-related connectivity
costs of approximately $10,000
apiece.1146 If larger members or
participants of SCI Government
Securities ATSs already maintain
connections to backup facilities
including for testing purposes, the
compliance costs associated with the
business continuity and disaster
recovery plans testing requirements in
Rule 1004 for those larger member or
participants might be limited.
The Commission believes that the
costs to comply with Regulation SCI
discussed above would also fall on
third-party vendors employed by
Government Securities ATSs to provide
services used in their SCI systems. The
costs for third-party vendors imposed by
Regulation SCI would depend on the
extent to which Government Securities
ATSs use third-party systems that fall
under the definition of SCI systems and
the portion of third-party vendors
operating SCI systems on behalf of large
(i.e., over the volume threshold)
Government Securities ATSs that
already comply with the requirements
of Regulation SCI. It is possible that
some third-party vendors operating SCI
systems on behalf of large Government
Securities ATSs already comply with
the requirements of Regulation SCI
because they also operate the SCI
systems for other SCI (e.g., SCI ATSs,
SCI SROs). The additional compliance
costs from the proposed amendments of
Regulation SCI for these third-party
vendors would be minimal. However, at
this time, it is difficult to estimate the
cost for third-party vendors because the
Commission does not know the extent
to which Government Securities ATSs
use third-party systems that fall under
the definition of SCI systems.
jspears on DSK121TN23PROD with PROPOSALS2
b. Indirect Costs
The Commission believes that the
proposed amendments could result in
1145 See id. The Regulation SCI Adopting Release
discusses that compliance costs could in part
depend on the extent to which an SCI entity uses
third-party systems because ensuring compliance of
systems operated by a third-party with Regulation
SCI may be more costly than ensuring compliance
of internal systems with Regulation SCI.
1146 See id. The Regulation SCI Adopting Release
estimated connectivity costs as part of business
continuity and disaster recovery plans to be
approximately $10,000 per SCI entity member or
participant.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
indirect costs for market participants
and certain Government Securities
ATSs and Communication Protocol
Systems.
The public disclosure requirements of
Form ATS–N under the proposal could
generate indirect costs for some
subscribers by causing Government
Securities ATSs and Communication
Protocol Systems that are NMS Stock
ATSs to stop sharing information that
they might currently offer to only some
subscribers. Form ATS–N would require
Government Securities ATSs and NMS
Stock ATSs to publicly disclose any
platform-wide order execution metrics
that they share with any subscriber. To
avoid publicly disclosing this
information, an ATS might stop sharing
the information with subscribers. The
trading costs of subscribers that
currently use this information to help
make trading decisions would increase
if the information is no longer available
to them. The risk of ATSs disclosing
less information than they currently do
depends on several factors, such as the
commercial purpose for releasing such
information. If the subscribers who
receive such information demand the
information as a condition of
subscribing, ATSs would have a
commercial incentive to continue
disclosing it. Thus, the Commission
believes that this risk might be low.
The Commission believes that the
public disclosure of Form ATS–N
would generate indirect costs, in the
form of transfers, for some subscribers of
Government Securities ATSs or
Communication Protocol Systems that
are NMS Stock ATSs who might
currently have more information
regarding some ATS features, such as
order priority and matching procedures,
than other subscribers. The public
disclosure of these features would
reduce informed subscribers’
information advantage over other
subscribers on such Government
Securities ATSs or Communication
Protocol Systems and increase their
trading costs. In this regard, the
Commission recognizes that this effect
would be a transfer to those subscribers
who would receive the proposed
information, from those subscribers
currently exclusively receive such
information.
Some Government Securities ATSs
and Communication Protocol Systems
that are NMS Stock ATSs would
experience indirect costs from the
public disclosure of Form ATS–N to the
extent that this form would reveal
information to competitors. If a
Government Securities ATS or NMS
Stock ATS in part relies on certain
operational characteristics (e.g., order
PO 00000
Frm 00138
Fmt 4701
Sfmt 4702
types, trading functionalities) to attract
customer order flow and generate
trading revenues, it is possible that the
public disclosure of these characteristics
in Form ATS–N would make it easier
for other trading venues to adopt the
operational characteristics, which
would lower trading volume and reduce
revenue of the disclosing ATS. Such
costs to the disclosing ATS would
constitute transfers to competing ATSs
rather than a net cost to the market.
That said, the Commission believes
that the risk of these transfers is low
because it is not likely the responsive
information to the revised Form ATS–N
would include detailed enough
information regarding operational facets
such that the public disclosure of the
information would allow another ATS
to replicate the functionality to the
extent it would adversely affect the
competitive position of the disclosing
ATS in the market.1147
The Commission believes that
Government Securities ATSs and
Communication Protocol Systems that
trade NMS stocks, non-NMS stock
equity securities, corporate debt
securities, or municipal securities, and
passive systems that trade NMS stocks
could indirectly experience costs in the
form of lost revenue if they meet or
exceed the Fair Access Rule thresholds
and need to alter their business model
to comply with the requirements of the
Fair Access Rule. If they need to alter
their terms of service or operations it
may lead some subscribers that
currently trade on the venue and benefit
from the existing terms of service or
operations to reduce the order flow they
route to the venue or even leave the
venue entirely, which could reduce the
ATS’s revenue. However, this revenue
loss may be mitigated if the ATS is also
able to attract new subscribers or
additional order flow that was
previously not able to access the
venue.1148 The Commission is not able
to estimate the loss of revenues that
Government Securities ATSs,
Communication Protocol Systems that
trade NMS stocks, and passive systems
that meet the aggregate volume
thresholds could incur as a result of
applying the Fair Access Rule, because
the venues may alter their business
operations in response to being subject
1147 See
supra note 467 and accompanying text.
Commission believes that, even if, an
ATS has to change its business operations as a
result of exceeding the Fair Access Rule threshold
and is able to attract additional order flow or
subscribers, the ATS’s profits will likely be lower.
If an ATS could have increased its profits by
altering its business model before it was subject to
the Fair Access Requirements, it would presumably
have done so.
1148 The
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
to the requirements of the Fair Access
Rule and how the venue’s existing
subscribers may consequently alter their
order flow or subscription to the ATS.
The Commission believes that market
participants could incur indirect costs
related to Government Securities ATSs,
Communication Protocol Systems that
trade NMS stocks, non-NMS stock
equity securities, corporate debt
securities, or municipal securities, and
passive systems that trade NMS stocks
being subject to the Fair Access Rule. As
discussed in Section VIII.C.1.b, applying
the Fair Access Rule could lower
trading costs for market participants
who are able to gain access to a trading
venue from which they were previously
excluded. This could impose costs on
existing subscribers who may currently
benefit from limiting access to the
trading venue, though the Commission
recognizes these costs would amount to
transfers. To the extent this occurs, it is
possible that some existing subscribers
may redirect some or all of their trading
interest to another trading venue that is
not subject to the Fair Access Rule in
order to preserve some of the benefits
they may receive from a trading venue
limiting access. These existing
subscribers may incur search costs to
find other venues to trade on as well as
costs associated with administrative and
operational procedures (e.g., means of
access, connectivity, order entry) to
trade on a new trading venue. To the
extent that existing subscribers shift
their trading from the trading venue that
is subject to the Fair Access Rule to a
trading venue that is not subject to the
rule, the benefits marker participants
receive from gaining access to trading
venues subject to the Fair Access Rule
could be reduced.
Furthermore, compared to larger and
more established ATSs, it is possible
that younger ATSs rely more on
providing catered services, including
more advantageous access, to specific
clients or a clientele, in order to grow
their businesses. If being subject to the
Fair Access Rule prohibits these ATSs
from doing this, these ATSs could
restrict trading on their systems when
they are close to meeting the volume
thresholds under the Fair Access Rule.
This may not result in a significant
increase in trading costs for market
participants, because the order flow that
was being sent to those ATSs would
likely be absorbed and redistributed
amongst other ATSs or non-ATS
venues. However, if an ATS that is the
sole provider of a niche service limits
the trading in certain securities to avoid
being subject to the Fair Access Rule, it
could be more difficult for some market
participants to find an alternative
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
trading venue for that niche service,
which would result in a larger increase
in trading costs.
Similarly, the proposed amendments
to apply certain aggregate volume
thresholds to the Fair Access Rule in the
markets for government securities,
corporate debt and municipal securities,
and equity securities could also cause
market participants to incur similar
indirect costs. If the aggregate volume of
ATSs operated by a common brokerdealer or operated by affiliated brokerdealers approaches the Fair Access
volume thresholds, then the operators
could restrict trading in one or more
securities on their systems in order to
avoid being subject to the requirements
of the Fair Access Rule. However, ATSs
in the markets for government
securities, corporate debt securities, and
municipal securities may be unlikely to
restrict trading in individual securities
on their systems because the aggregated
volume threshold is applied
categorically rather than to individual
securities.
Market participants could also incur
indirect costs from the proposed
amendments to apply certain aggregate
volume thresholds to the Fair Access
Rule if it causes a broker-dealer or
affiliated broker-dealers that operate
multiple ATSs to shut down one or
more their smaller ATSs in order to
avoid triggering the Fair Access
threshold. This could cause market
participants that subscribed to one of
the shutdown platforms to incur search
costs to find another venue to trade on.
The Commission believes that market
participants could incur indirect costs
related to applying Regulation SCI to
Government Securities ATSs and
Communication Protocol Systems in
equity securities and with applying Rule
301(b)(6) to Communication Protocol
Systems in the market for corporate debt
securities or municipal securities. If a
Government Securities ATS or
Communication Protocol System that
trades NMS stocks is close to satisfying
the volume thresholds of Regulation SCI
or Rule 301(b)(6), it could limit the
trading in certain securities on its
systems to stay below the volume
thresholds in order to avoid being
subject to Regulation SCI or Rule
301(b)(6). If this occurs for a
Government Securities ATS or
Communication Protocol System that is
the sole provider of a niche service, as
discussed above, some market
participants would incur higher trading
costs.
Additionally, in order to stay below
the volume thresholds under Regulation
SCI or Rule 301(b)(6), an ATS could
break itself up into smaller ATSs. If this
PO 00000
Frm 00139
Fmt 4701
Sfmt 4702
15633
results in its subscribers changing their
administrative and operational
procedures (e.g., means of access,
connectivity, order entry), the
subscribers would incur costs associated
with making those administrative and
operational changes to utilize the ATS,
or otherwise incur search costs to find
another venue to trade.
3. Efficiency, Competition, and Capital
Formation
The Commission has considered the
effects of the proposed amendments on
efficiency, competition, and capital
formation, and discussed these effects
below.
a. Competition
The Commission preliminarily
believes that the proposed amendments
to Regulation ATS and Regulation SCI
would affect competition in the market
for trading services.1149
i. Regulation ATS
The Commission believes that the
proposed amendments to Rule 3b–16
and Regulation ATS would promote
competition by requiring current ATSs
and Communication Protocol Systems
to operate on a more equal basis.
Additionally, the Commission believes
that the regulatory requirements and
compliance costs associated with the
proposed amendments to Rule 3b–16
and Regulation ATS could act as a
deterrent or a barrier to entry for
potential ATSs or cause some smaller
existing trading venues to exit the
market for trading services.1150
However, based on the estimated costs
in Section VIII.C.2.a.i above, the
burdens imposed by these regulatory
requirements or compliance costs may
not be large enough for these effects to
be significant. Even if a smaller trading
venue ceased operating, the
Commission believes it may not have a
significant adverse effect on overall
competition among trading venues,
because the market for trading services
is competitive and the trading volume
from the venue would likely be
1149 See supra Section VIII.C.1 for a discussion
about benefits from the requirements of Regulation
ATS and Regulation SCI and Section VIII.C.2 for a
discussion about costs of the requirements of
Regulation ATS and Regulation SCI.
1150 The expected compliance costs of Regulation
SCI could act as a barrier to entry for new entrants
who expect to eventually become SCI ATSs. If the
expected compliance costs reduce the number of
potential new entrants, this would reduce the
potential competition from new entrants. However,
these effects may not be significant because the
entry decision at the margin, when the venue is
small, may not be significantly influenced by what
would happen if the venue later became large
enough and met the requirements of Regulation SCI.
E:\FR\FM\18MRP2.SGM
18MRP2
15634
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
absorbed and redistributed amongst
other ATSs or non-ATS venues.1151
Although the proposed amendments
to Exchange Act Rule 3b–16 and
Regulation ATS may not significantly
increase the barriers to entry for new
trading venues or cause some existing
smaller trading venues to exit the
market, the Commission lacks certain
information necessary to quantify the
extent to which entities that otherwise
would seek to operate as a trading venue
in the markets for government
securities, repos, corporate, municipal,
or equity securities would be dissuaded
from doing so. Specifically the decision
for a trading venue to continue
operating or to cease operating depends
on numerous factors and the
Commission lacks information about
many of those factors. For example, the
Commission does not have information
on the extent to which an existing
Communication Protocol Systems
would potentially need to alter its
operations or business model as a result
of the proposed amendments to Rule
3b–16 and Regulation ATS.
jspears on DSK121TN23PROD with PROPOSALS2
(a) Regulatory Framework
To the extent that current ATSs and
Communication Protocol Systems
compete,1152 the proposed changes to
Exchange Act Rule 3b–16, which would
subject Communication Protocol
Systems to the exchange regulatory
framework, which can include
complying with Regulation ATS,1153
1151 The competitive effects would vary based on
the types of securities and the role that ATSs and
Communication Protocol Systems play in each
securities market. See supra Sections VIII.B.2.d,
VIII.B.3.d, VIII.B.4.d, and VIII.B.5.f for a discussion
about competition in the market for trading services
in different securities markets. Furthermore, the
Commission acknowledges that the effects on
competition could be greater if a smaller trading
venue that is the sole provider of a niche service
were shut down. To the extent this occurs, it could
adversely impact competition because it would
require some market participants to find other
venues to trade on that may not minimize their
trading costs to the same extent. However, even in
this case, the overall effects on competition may
still be limited because a competitor could create
similar business models if demand were adequate,
and if it did not do so, it seems likely new entrants
would do so if demand were sufficient.
1152 See supra Sections VIII.B.2.d, VIII.B.2.d,
VIII.B.2.d, and VIII.B.7 (discussing how current
ATSs in some markets tend to be interdealer
markets and Communication Protocol Systems tend
to be dealer-to-customer markets).
1153 Under the proposal, Communication Protocol
Systems that choose not to register as exchanges can
instead register as broker-dealers and comply with
Regulation ATS. Furthermore, under the proposal,
Communication Protocol Systems operated by nonbroker-dealers would be subject to the same
regulatory requirements as ATSs, including the
broker-dealer registration requirement of Regulation
ATS. The Commission estimates that 6 non-brokerdealer-operated Communication Protocol Systems
without a broker-dealer affiliate exist. The
Commission assumes that, under the proposed
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
would promote competition by
requiring current ATSs and
Communication Protocol Systems to
operate on a more equal basis in
securities markets. One commenter on
the Concept Release stated that nonATS trading platforms that are neither
registered as exchanges nor as ATSs
perform core market place functions in
fixed income securities (e.g., corporate
and municipal bonds) trading.1154 This
commenter also noted that these nonATS trading platforms are operated by
either broker-dealers or unregulated
entities. Furthermore, this commenter
stated that the significant regulatory
burdens on ATSs put ATSs at a
competitive disadvantage to non-ATS
trading platforms that are not subject to
the same regulatory obligations.
Extending the requirements of
Regulation ATS to Communication
Protocol Systems would help eliminate
a competitive disadvantage for ATSs
arising from uneven regulatory
requirements in the market for trading
services.1155 As discussed in Section
II.B.3, the proposed amendment would
subject both broker-dealer-operated and
non-broker-dealer-operated
Communication Protocol Systems to the
requirements of Regulation ATS. To
comply with the broker-dealer
registration requirements of Regulation
ATS, a non-broker-dealer-operated
Communication Protocol System would
be required to become a member of an
SRO (e.g., FINRA) and comply with the
requirements of the SRO, to which ATSs
are currently required.
Similarly, extending Regulation ATS
to Currently Exempted Government
Securities ATSs 1156 and
amendments, Communication Protocol Systems
would choose to register as broker-dealers and
comply with Regulation ATS, rather than register as
exchanges. See supra note 1056 and accompanying
text.
1154 See ICE Bonds Letter II at 2 and 3.
1155 See supra Sections VIII.B.2, VIII.B.3, VIII.B.4,
VIII.B.5, and VIII.B.6 for discussions regarding
regulatory requirements for ATSs in the government
securities, corporate debt securities, municipal
securities, equities, and options market,
respectively. One commenter on the Concept
Release stated that applying a consistent regulatory
framework to trading platforms that provide
equivalent services to market participants, while
also distinguishing between platforms that offer
distinct trading protocols, would level the
competitive landscape and allow market
participants to choose trading platforms and
protocols based on the merits of the services
provided. Furthermore, this commenter also stated
that it would not be appropriate to regulate all types
of electronic trading protocols in the same manner
regardless of their systemic risk profiles or to
regulate electronic trading protocols more strictly
than equivalent non-electronic trading protocols.
See Tradeweb Letter at 4.
1156 Under the proposal, bank-operated Currently
Exempted Government Securities ATSs would be
subject to the same regulatory requirements as non-
PO 00000
Frm 00140
Fmt 4701
Sfmt 4702
Communication Protocol Systems that
trade government securities would help
promote competition by eliminating a
Current Government Securities ATS’s
competitive disadvantage that might
arise due to uneven regulatory
requirements in the market for
government securities and repo trading
services.1157
The Commission acknowledges that
some Government Securities ATSs and
Communication Protocol Systems could
restructure their operations to be nonATSs to avoid being subject to
Regulation ATS and Regulation SCI if
the requirements are too burdensome or
impair the ability of the trading venue
to compete. However, the risk of this
occurring may be mitigated because the
proposed amendments to Rule 3b–16
may make it difficult for Government
Securities ATSs and Communication
Protocol Systems to restructure their
operations to be non-ATSs.1158 To the
extent this does occur, the benefits and
enhancements to competition discussed
above would be reduced.1159
One commenter on the Concept
Release stated that the flexibility of the
current regulatory framework allows
financial technology firms1160 to
bank-operated Currently Exempted Government
Securities ATSs and Current Government Securities
ATSs. The Commission estimates that 1 bankoperated Currently Exempted Government
Securities ATS exists.
1157 Current Government Securities ATSs might
be at a competitive disadvantage to Currently
Exempted Government Securities ATSs and
Communication Protocol Systems, which do not
currently incur compliance costs associated with
the requirements of Regulation ATS. As discussed
above, Currently Exempted Government Securities
ATSs, bank-operated Currently Exempted
Government Securities ATSs, Communication
Protocol Systems, and Current Government
Securities ATSs compete in the market for
government securities and repo trading services
with different regulatory requirements. For
example, due to reporting requirements of
Regulation ATS, it would be more difficult or costly
for a Current Government Securities ATS to
implement significant operational changes to
compete with Currently Exempted Government
Securities ATSs and Communication Protocol
Systems if the Current Government Securities
ATS’s competitive advantage is driven by
operational facets that would be reported on Form
ATS. See also supra Sections II, III, VIII.B.2.a, and
VIII.B.2.b for a discussion about the differences in
regulatory requirements between Current
Government Securities ATSs, Currently Exempted
Government Securities ATSs, and Communication
Protocol Systems under the current regulatory
framework.
1158 Additionally, although non-ATS venues
would compete with ATSs in the market for
government securities and repo trading services,
non-ATS venues cannot offer the same services as
ATSs without becoming ATSs.
1159 See supra Section VIII.C.1 for a discussion
about benefits from the requirements of Regulation
ATS and Regulation SCI.
1160 For the purpose of this discussion, financial
technology firm is interpreted to be a type of
Communication Protocol System (e.g., RFQ system).
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
innovate and compete fiercely.1161 This
commenter also stated that this
structure creates relatively low costs for
entry (and exit) in the development of
new technologies.1162 Subjecting
Communication Protocol Systems to the
requirements of Regulation ATS could
reduce operational flexibility. For
example, it would be more costly for a
Communication Protocol System to
implement significant changes to
operational facets that would be
required to be reported on Form ATS or
Form ATS–N. The Commission
acknowledges that this reduction in
operational flexibility could, under
certain circumstances, make it more
difficult to innovate.1163 That said, in
addition to the other benefits discussed
above,1164 the Commission believes that
the proposed amendments would foster
competition by requiring current ATSs
and Communication Protocol Systems
to operate on a more equal basis in the
market for trading services. This, in
turn, would help promote innovation.
(b) Compliance Costs of Regulation ATS
The Commission preliminarily
believes that the compliance costs
associated with the requirements of
Regulation ATS would have different
effects on the competitive position of
ATSs depending on their size. However,
the Commission believes that these
initial and ongoing compliance costs
may not have a significant adverse
impact on overall competition in the
market for trading services.
As a result of the proposed extension
of Regulation ATS to Communication
Protocol Systems and Currently
Exempted Government Securities ATSs,
these ATSs would be subject to Rule
301(b)(9) and (10), Rule 302, and Rule
303. Most of the estimated compliance
costs 1165 associated with these rules
1161 See
Bloomberg Letter at 10 and 17.
Bloomberg Letter at 23.
1163 For example, it would take longer for a
Communication Protocol System that trades
government securities to implement an innovative
operational facet that required a significant change
to its systems, e.g. an innovative trading protocol,
because they it need to file a Form ATS–N material
amendment 30 days before implementing the
system change. See supra IV.A.
1164 See supra Section VIII.C.1.
1165 The compliance costs associated with the
requirements of Regulation ATS are generally
represented by implementation costs (the
monetized costs of PRA burdens). See also supra
note 1100. See supra Section VIII.C.2.a.i for a
discussion on the implementation costs associated
with Rule 301(b)(9) and (10), Rule 302, and Rule
303. Communication Protocol Systems that are not
broker-dealers and Currently Exempted
Government Securities ATSs that are banks would
incur additional compliance costs associated with
the broker-dealer registration requirements under
Rule 301(b)(1). See infra Section VIII.C.3.1.i.c) for
a discussion of the competitive effects of brokerdealer registration requirements.
jspears on DSK121TN23PROD with PROPOSALS2
1162 See
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
would be fixed costs to those ATSs
regardless of the amount of trading
activity that takes place on them, and
thus, these compliance costs would
represent a larger fraction of revenue for
a small (measured in trading volume)
ATS relative to that for a large ATS.1166
Furthermore, most of the estimated
compliance costs associated with the
requirements of Form ATS–N under
Rule 304, which all Government
Securities ATSs and Communication
Protocol Systems that trade NMS stocks
would incur, would be fixed costs. This
could have an adverse impact on small
ATSs in competing against larger ATSs,
which could act as a deterrent or a
barrier to entry for potential ATSs or
result in small ATSs exiting the market
for trading services.1167 However, if
small Government Securities ATSs and
Communication Protocol Systems that
trade NMS stocks engage in providing
simpler services, these small ATSs are
likely to incur lower compliance
costs.1168
One commenter on the Concept
Release stated that the regulatory
burdens associated with subjecting all
electronic platforms to the requirements
of Regulation ATS could ultimately
reduce the number of different
platforms available.1169 Another
commenter on the Concept Release
stated that the changes contemplated to
Rule 3b–16 could end up raising costs
for new financial technology (i.e.,
fintech) 1170 entrants (liquidity
solutions) to enter, stifle innovation and
damage the current ability of market
participants to locate liquidity in all
illiquid security markets.1171 This
1166 See supra Section VIII.2.a.i for a discussion
about the impact of implementation costs for small
ATSs.
1167 Based on the estimated costs in Section
VIII.C.2.a.i above, the Commission preliminarily
believes that the compliance costs may not be large
enough for these effects to be significant. See supra
note 1151 and accompanying text.
1168 See supra Section VIII.C.2.
1169 See SIFMA Letter at 9 and 11. Another
commenter on the Concept Release stated that the
revision of the definition of ‘‘exchange’’ in
Exchange Act Rule 3b–16 (‘‘Rule 3b–16’’) to expand
the applicability of Regulation ATS to firms
currently regulated as non-ATS broker-dealers may
cause disruption if not undertaken carefully. See
Tradeweb Letter at 2. An additional commenter
stated that the Commission must be careful in
implementing any reforms to the oversight of
corporate bond and municipal securities trading
venues to ensure that there are no unintended
consequences for investors, such as the reduction
in the availability of the types of platforms that
investors utilize to effect transactions in these
securities. See MFA Letter at 8.
1170 For the purpose of this discussion, fintech is
interpreted to be a type of Communication Protocol
System (e.g., RFQ system).
1171 See Bloomberg Letter at 3. This commenter
on the Concept Release stated that adding fintechs,
such as RFQ systems, to the definition of exchange
PO 00000
Frm 00141
Fmt 4701
Sfmt 4702
15635
commenter also stated that a change in
the definition of exchange would insert
unnecessary intermediation between
dealers and their customers and damage
liquidity formation.1172
As discussed above, the compliance
costs from the proposed amendments to
Regulation ATS may not significantly
increase the barriers to entry for new
trading venues or cause some existing
Communication Protocol Systems and
Currently Exempted Government
Securities ATSs to exit the market.
Therefore, the Commission believes that
the compliance costs associated with
Regulation ATS may not have a
significant adverse impact on
competition in the markets for trading
services. As discussed above, while the
Commission acknowledges the
proposed amendments could reduce
operational flexibility, which could,
under certain circumstances, make it
more difficult to innovate, the
Commission believes increased
competition from the proposed
amendments providing a more equal
regulatory basis would help promote
innovation.1173 To the extent the
proposed amendments force an
innovative fintech to exit the market, it
may be able to restructure itself (rather
than operate as an ATS) as a third-party
vendor and continue to provide certain
innovative services, or otherwise sell its
technology to another ATS, which
would mitigate to some extent any
adverse impact the proposed
amendments may have on innovation.
To the extent the proposed
amendments result in a Communication
Protocol System that trades less liquid
securities exiting the market for trading
services, it could increase the trading
costs of its subscribers if they need to
find a new trading venue or are forced
to go through multiple intermediaries
(i.e., broker-dealers) to find
counterparties. However, as discussed
above, the Commission preliminarily
believes this may not result in a
significant increase in trading costs for
market participants because the trading
would erect high regulatory hurdles for innovation
and new fintech entrants. See also Bloomberg Letter
at 28. Another commenter on the Concept Release
similarly expressed concern that any revisions to
the regulatory framework for fixed income
electronic trading should not stifle the investment
and innovation that has led to the variety of existing
trading protocols, and that it would be a mistake to
interrupt this evolution through the increased
imposition of an equity-based regulatory
framework. See MarketAxess Letter at 3.
1172 See Bloomberg Letter at 20. This commenter
also stated that a change in the definition of
exchange would threaten to distort the market
structure by creating a one-size-fits-all approach
that is biased against the trading of less-liquid
instruments, damaging liquidity formation. See id.
1173 See supra Section VIII.C.3.a.i.a).
E:\FR\FM\18MRP2.SGM
18MRP2
15636
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
interest that was being sent to the
Communication Protocol System would
likely be absorbed and redistributed
amongst other ATSs or non-ATS
venues.1174
(c) Broker-Dealer Registration
Requirements
In addition to the compliance costs
associated with the requirements of
Regulation ATS, non-broker-dealeroperated Communication Protocol
Systems without a broker-dealer affiliate
would incur additional compliance
costs related to registering with the
Commission as broker-dealers,
becoming members of an SRO, such as
FINRA, and maintaining broker-dealer
registration and SRO membership.1175
Although these additional compliance
costs could harm the competitive
position of these Communication
Protocol Systems and raise barriers to
entry for entrants who are not brokerdealers nor affiliated with another
broker-dealer, the Commission
preliminarily believes that the
compliance costs associated with the
proposed broker-dealer registration
requirements may not have a significant
adverse effect on overall competition in
the market for trading services.
Although the Commission
acknowledges uncertainty about the
compliance costs associated with the
proposed broker-dealer registration
requirements,1176 there are two reasons
why these costs may not be significant
enough to make a non-broker-dealeroperated Communication Protocol
Systems exiting the market likely. First,
the Commission believes that the
estimated average costs may not be
significant enough to make exiting the
market likely.1177 Second, the
Commission believes that the adverse
effect on competition may be limited to
existing small Communication Protocol
Systems and this adverse effect may be
mitigated to some extent because small
Communication Protocol Systems
would incur lower compliance costs
associated with the broker-dealer
1174 See
supra Section VIII.C.2.b.
Commission estimates there are 6 nonbroker-dealer-operated Communication Protocol
Systems without a broker-dealer affiliate. See supra
Section VIII.C.2.a.ii.
1176 As discussed above, the costs would vary
significantly across firms and the Commission’s
estimate is uncertain because it does not have
information on the non-broker-dealer-operated
Communication Protocol Systems without a brokerdealer affiliate. See id.
1177 The Commission estimates an initial cost of
approximately $317,000 to register as a brokerdealer with the Commission and become a member
of FINRA and an ongoing annual cost of
approximately $58,000 to maintain the brokerdealer registration and FINRA membership. See id.
jspears on DSK121TN23PROD with PROPOSALS2
1175 The
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
registration requirements.1178 To the
extent that one of these Communication
Protocol Systems ceased operating, the
Commission believes it may not have a
significant adverse effect on overall
competition among trading venues,
because the market for trading services
is competitive and the trading volume
from the venue would likely be
absorbed and redistributed amongst
other ATSs or non-ATS venues.1179
(d) Ineffectiveness Declaration
The proposed ability for the
Commission to be able to declare a Form
ATS–N or Form ATS–N amendment
ineffective could result in compliance
costs for Government Securities ATSs
and Communication Protocol Systems
that are NMS Stock ATSs and may affect
competition in the market for
government securities, repos, and NMS
stock trading services. However, based
on Commission staff’s experience with
NMS Stock ATSs that filed an initial
Form ATS–N, the Commission
preliminarily believes this would be an
unlikely result.1180 To the extent the
Commission declares an initial Form
ATS–N or amendment ineffective, the
ATS would either have to cease
operations 1181 or, in the case of an
amendment, roll back any changes it
made and operate pursuant to its
previous Form ATS–N that is effective
until it is able to address the
deficiencies and file a new Form ATS–
N that becomes effective.1182 To the
extent the Commission declares an
initial Form ATS–N or amendment
ineffective, some broker-dealer
operators of Government Securities
ATSs and Communication Protocol
Systems in NMS Stocks might find that
the costs of addressing deficiencies in
Form ATS–N outweigh the benefits of
continuing to operate the trading venue,
particularly if the trading venue does
not constitute a significant source of
profit for a broker-dealer operator.
The ability of the Commission to
declare Form ATS–N ineffective could
also raise barriers to entry for new
ATSs, as it might create uncertainty as
to whether the Commission would
declare its initial Form ATS–N effective
or ineffective and as to the cost of
1178 See id for a discussion about the costs
associated with the broker-dealer registration
requirements under Rule 301(b)(1).
1179 See supra note 1151 and accompanying text.
1180 Unlike the current rules applicable to NMS
Stock ATSs under Rule 304 of Regulation ATS with
respect to ineffectiveness, the Commission does not
have a process to declare a Form ATS ineffective
because of the quality of the disclosures and cause
the ATS cease operating pursuant the exemption.
See Rule 304(a)(1)(iv)(B).
1181 See Rule 304(a)(1)(iv)(B).
1182 See id.
PO 00000
Frm 00142
Fmt 4701
Sfmt 4702
avoiding an ineffective declaration. If a
new ATS’s initial Form ATS–N is
declared ineffective, it would require
time and additional expenditures to
address the deficiencies delaying the
commencing of operations, which
would deter some potential ATSs from
entry into the market for trading
services. However, because an
ineffectiveness declaration would be an
unlikely result,1183 the Commission
believes it would not significantly raise
the barriers to entry for new ATSs.
(e) Fair Access
The Commission believes that
applying the Fair Access Rule to
Government Securities ATSs,
Communication Protocol Systems, and
passive systems could increase
competition between market
participants in the markets for
government securities, repos, corporate
and municipal securities, and equity
securities. As discussed above, to the
extent that there are market participants
currently excluded from trading on
significant Government Securities ATSs,
Communication Protocol Systems, or
passive systems, applying the Fair
Access Rule to Government Securities
ATSs, Communication Protocol
Systems, and passive systems could
increase trading venue options available
to these market participants, which
could lower their trading costs.1184 This,
in turn, could increase competition
among market participants trading on
these platforms, which could be
significant sources of liquidity and
represent a significant portion of trading
volume in their respective markets.1185
However, these competitive effects may
be reduced to the extent that some
existing subscribers of trading venues
that are subject to the Fair Access Rule
redirect their trading interest to other
trading venues not subject to the Fair
Access Rule in order to preserve some
of the benefits they may receive from a
trading venue limiting access.1186 If the
1183 See supra Section VIII.C.2.a.iii (discussing
the Commission’s belief that the potential costs of
an ineffectiveness declaration would incentivize
Government Securities ATSs and Communication
Protocol Systems to initially submit a more accurate
and complete Form ATS–N and amendments,
which would reduce the likelihood that they are
declared ineffective).
1184 See supra Section VIII.C.1.b.
1185 One commenter on the 2020 Proposal stated
that, since the bilateral fixed-income market is a
heavily relationship-driven business, the Fair
Access rule would better ensure that broker-dealers
and their affiliates cannot engage in retaliatory
behavior, and thus improve access and competition
for the largest, most systemically important
markets. See AFREF Letter at 3.
1186 See supra Section VIII.C.2.b (discussing the
indirect costs to market participants related to the
requirements of the Fair Access Rule).
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
proposed amendments to apply certain
aggregate volume thresholds increase
the number of smaller affiliate ATSs
that would be subject to the Fair Access
Rule, it could also increase competition
among market participants, to the extent
certain market participants are currently
excluded from accessing these
platforms.
The Commission believes that the
proposed amendments to apply certain
aggregate volume thresholds to the Fair
Access Rule could harm competition
among trading venues in the markets for
government securities, corporate debt
and municipal securities, and equity
securities. As discussed above, if the
aggregate volume of ATSs operated by a
common broker-dealer or operated by
affiliated broker-dealers approaches the
Fair Access volume thresholds, then the
operators could restrict trading on their
systems in one or more securities in
order to avoid being subject to the
requirements of the Fair Access
Rule.1187 However, ATSs in the markets
for government securities and corporate
debt and municipal securities may be
unlikely to restrict trading in individual
securities on their systems because the
aggregated volume threshold is applied
categorically rather than to individual
securities. If these venues restrict
trading in some securities, it would
reduce competition among trading
venues to attract order flow in these
securities.
Additionally, the proposed
amendments to apply certain aggregate
volume thresholds to the Fair Access
Rule could also harm competition
among trading venues if they cause a
broker-dealer or affiliated broker-dealers
that operate multiple ATSs to shut
down one or more their smaller ATSs in
order to avoid triggering the Fair Access
threshold.1188 However, because the
trading volume on these smaller ATSs
would likely be absorbed and
redistributed amongst other ATSs or
non-ATS venues, the Commission
believes that the overall effects on
competition among trading venues may
not be significant.
(f) Public Disclosure
The increase in transparency due to
the public disclosure of Form ATS–N
would promote competition in the
markets for government securities,
repos, and NMS stock trading services.
The increase in competition could result
in lower venue fees, improve the
efficiency in customer trading interest
or order handling procedures, and
promote innovation. For instance,
1187 See
1188 See
supra Section VIII.C.2.b.
id.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
because the public disclosure of Form
ATS–N would make it easier for market
participants to compare fees across
ATSs,1189 market participants could
choose to send their orders to ATSs that
offer lower fees, which in turn, could
induce ATSs to lower their fees to
attract new subscribers. If non-ATS
venues compete with ATSs for trading
services, the increased operational
transparency of ATSs might also
incentivize non-ATS trading venues to
reduce their fees to compete with ATSs.
Because the public disclosure of Form
ATS–N would make it easier for market
participants to compare the quality of
trading services, such as innovative
trading functionalities, order handling
procedures, and execution statistics—if
they are made available, across
venues,1190 market participants would
be more likely to send their trading
interests or orders to ATSs that offer
better trading services. This would
promote greater competition in the
market for trading services and
incentivize ATSs to innovate, including,
in particular, technology related to
trading services to improve the quality
of such services to attract more
subscribers.
Similarly, the public disclosure of
Form ATS–N would also result in
market participants redirecting their
trading interest away from ATSs that
offer lower quality trading services
compared to other ATSs, which could
result in these ATSs earning less
revenue. If the loss in revenue causes
these ATSs to become unprofitable, they
might choose to exit the market.1191
The proposed amendment to require
timely fee change disclosure on Form
ATS–N would promote competition
between current NMS Stock ATSs and
other trading venues in the market for
NMS stocks, including exchanges.1192 In
the Commission staff’s experience, NMS
1189 Under the proposed amendments,
Government Securities ATSs (inclusive of
Communication Protocol Systems, as proposed) and
Communication Protocol Systems that trade NMS
stocks would need to begin disclosing their Form
ATS–N. Current NMS Stock ATSs already
publically disclose their Form ATS–N.
1190 See supra Section VIII.C.1.b for a discussion
about benefits from public disclosure of Form
ATS–N.
1191 See supra note 1151 and accompanying text
for a discussion on the effects of ATSs exiting the
market for trading services.
1192 Under the proposed amendments,
Government Securities ATSs would also be
required to file fee amendments on Form ATS–N.
This could promote competition among
Government Securities ATSs because timely fee
disclosure of fee changes by Government ATSs
would make it easier for market participants to
compare fees between trading venues. This could
incentivize trading venues in the market for
Government Securities to reduce their fees to
compete to attract order flow.
PO 00000
Frm 00143
Fmt 4701
Sfmt 4702
15637
Stock ATSs have taken varied
approaches to the reporting of fees.
Current NMS Stock ATSs that treat fee
changes as material changes in filing
Form ATS–N are required to wait 30
calendar days from the filing date to
implement a fee change.1193 In other
cases, NMS Stock ATSs have filed
updating amendments no later than 30
days following the end of the calendar
quarter in which a fee change was made.
The Commission believes that requiring
NMS Stock ATSs to file a fee
amendment no later than the date it
makes the change to a fee or fee
disclosure would require those NMS
Stock ATSs to provide the public with
sufficient notice about a fee change
while enabling those NMS Stock ATSs
to nimbly change fees in competing
against other trading venues.
Furthermore, under Section 19(b) of the
Exchange Act, national securities
exchanges can implement fee changes
upon filing with the Commission.1194
To the extent that NMS Stock ATSs
compete with exchanges in fees to
attract order flow, the proposed
amendment would promote competition
by helping to level the playing field
between NMS Stock ATSs and
exchanges in terms of the timeframes in
which they can initiate and disclose fee
changes.1195
1193 See supra Section IV.A for a discussion about
fee amendments on Form ATS–N.
1194 Under Section 19(b)(3), SRO rule changes
that: Constitute a stated policy, practice, or
interpretation with respect to the meaning,
administration, or enforcement of an existing rule
of the SRO; establish or changing a due, fee, or
other charge imposed by the SRO; or are concerned
solely with the administration of the SRO, are
immediately effective upon filing. However, the
Commission may suspend one of these SRO rule
changes within 60 days of the date the SRO rule
change is filed with the Commission, if it appears
to the Commission that such action is necessary or
appropriate in the public interest, for the protection
of investors, or the maintenance of fair and orderly
markets, to remove impediments to, and perfect the
mechanisms of, a national market system, or
otherwise in furtherance of the purposes of the
Exchange Act. If the Commission does suspend a
SRO rule change, then it shall institute proceedings
under Section 19(b)(2)(B) to determine whether the
proposed SRO rule change should be approved or
disapproved. See 15 U.S.C. 78s(b)(2) and 15 U.S.C.
78s(b)(3).
1195 Currently, an amendment to a fee could result
in an ATS filing an updating amendment or a
material amendment, depending on the nature of
the change and the ATS’s assessment of whether
such change was material. If an NMS Stock ATS
would file an updating amendment to disclose a fee
change, then the proposed amendment would help
level the playing field by reducing the amount of
time that the NMS Stock ATS would have before
it had to disclose a fee change, bringing it more in
line with the disclosure timeframes of exchanges.
If an NMS Stock ATS would file a material
amendment to disclose a fee change, then the
proposed amendment would help level the playing
field because the NMS Stock ATS would no longer
have to give 30 days’ notice before initiating the fee
E:\FR\FM\18MRP2.SGM
Continued
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
15638
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
The public disclosure of a
Government Securities ATS’s or
Communication Protocol System that
trades NMS stock’s previously nonpublic information regarding innovative
operational facets could adversely
impact competition in the market for
trading services and also reduce the
incentives for these trading venues to
innovate. If the competitive advantage
of an ATS in the market is driven by
certain operational innovations, the
disclosure of this information could
result in other competing ATSs with
similar operational platforms
implementing similar methodologies,
which could cause market participants
to send their trading interest or orders
to those other ATSs. To the extent some
ATSs may rely on these innovations to
attract trading interest, this could cause
some existing ATSs to exit the market
or raise the barriers to entry for new
ATSs, which could adversely impact
competition.1196 Additionally, it could
reduce the incentives for ATSs to
innovate if publicly disclosing new
innovations results in the disclosing
ATS earning less revenue from new
innovations it develops. However, the
Commission believes that the risk of
these adverse effects occurring would be
low, because the information disclosed
on Form ATS–N is not likely to include
detailed enough information regarding
operational facets or innovations such
that the public disclosure would
adversely affect the competitive position
of the disclosing ATS.1197
One commenter on the 2020 Proposal
stated that the Commission should not
require making commercially sensitive
information filed on the previously
proposed Form ATS–G publicly
available, which the commenter
classified as information on certain fees
or charges for use of the ATS’s services
and on aggregate, platform-wide order
flow and execution statistics that the
ATS already otherwise collects and
publishes to one or more
subscribers.1198 The commenter stated
that the public disclosure of such
information would have a negative
impact on innovation and competition
among ATSs. As discussed above, the
Commission believes that the
ii. Regulation SCI
The Commission believes that the
requirements imposed by Regulation
SCI may not have a significant adverse
effect on competition in the market for
trading services or on market
participants’ trading costs.
The Commission believes that the
compliance costs imposed by
Regulation SCI may not have a
significant adverse effect on competition
among SCI ATSs, non-SCI ATSs, and
non-ATS venues in the government
securities market due to mitigating
factors.1201 The compliance costs
imposed by Regulation SCI would have
some impact on competition in the
market for government securities trading
services. Specifically, because non-SCI
ATSs do not have to incur the
compliance costs associated with
Regulation SCI, non-SCI ATSs and nonATS venues would gain a competitive
advantage in the market for trading
change, bringing it more in line with the notice
timeline in which exchanges can initiate fee
changes.
1196 See supra note 1151 and accompanying text
for a discussion on the effects of ATSs exiting the
market for trading services.
1197 See supra note 467 and accompanying text.
1198 See Tradeweb Letter at 3, 10, and 11.
Similarly, another commenter stated that
publication of compliance procedures/processes is
not commonplace and risks requiring disclosure of
proprietary information. See ICE Bonds Letter I at
6.
1199 See ICE Bonds Letter I at 5 and ICE Bonds
Letter II at 4.
1200 See supra Section VIII.C.3.a.i.a).
1201 NMS Stock ATSs that meet certain volume
thresholds are subject to Regulation SCI. The
Commission estimates that no Communication
Protocol System that is an NMS Stock ATS would
be subject to Regulation SCI. The Commission
preliminarily believes that subjecting significant
Communication Protocol Systems that are NMS
Stock ATSs to Regulation SCI would affect
competition as discussed in the Regulation SCI
Adopting Release.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
responsive information to the Form
ATS–N is not likely to include
commercially sensitive or other
information the public disclosure of
which would result in the disclosing
ATSs exiting the market for trading
services and ultimately reduce
transparency.
One commenter on the 2020 Proposal
stated that if the disclosure
requirements of previously proposed
Form ATS–G are too burdensome or
impair the ability of Government
Securities ATSs to compete, it will
discourage the expansion of ATSs and
potentially encourage operators of
Government Securities ATS to
restructure their operations to avoid
being characterized as an ATS, which
would ultimately result in less
transparency rather than more.1199 As
discussed above, although the
Commission acknowledges that some
Government Securities ATSs could
restructure their operations to be nonATSs to avoid being subject to the
public disclosure of Form ATS–N, the
risk of this occurring may be mitigated
because the proposed amendments to
Rule 3b–16 may make it difficult for
them to restructure their operations to
be non-ATSs.1200
PO 00000
Frm 00144
Fmt 4701
Sfmt 4702
services over SCI ATSs, with which
they compete.1202 If SCI ATSs pass on
the compliance costs to their subscribers
in the form of higher fees, SCI ATSs
would lose order flow or their
subscribers to other non-SCI ATSs and
non-ATS venues with lower fees.
Adverse competitive effects, however,
would be mitigated because an SCI ATS
would likely have more robust systems,
fewer disruptive systems issues, and
better up-time compared to non-SCI
ATSs. Furthermore, any adverse
competitive effect may be minor if an
SCI ATS is large and has a more stable
and established subscriber base than
other ATSs and non-ATS venues.
The compliance costs associated with
participating in business continuity and
disaster recovery plan testing would
affect competition among subscribers of
SCI ATSs and also would raise barriers
to entry for new subscribers. Because
some subscribers would incur
compliance costs associated with Rule
1004 and others would not, it would
adversely impact the ability for those
subscribers of SCI ATSs to compete.
However, it is difficult to gauge the
extent of impact on competition because
the Commission does not have sufficient
information, for example, on whether
certain subscribers of SCI ATSs
currently maintain connections to
backup facilities, including for testing
purposes. If larger subscribers of SCI
ATSs already maintain connections to
backup facilities including for testing
purposes, the adverse impact on
competition would be mitigated because
the incremental compliance costs
associated with the business continuity
and disaster recovery plan testing
requirements under Rule 1004 would be
limited for those larger subscribers. The
Commission believes that new
subscribers are less likely to be
designated immediately to participate in
business continuity and disaster
recovery plan testing than are existing
larger subscribers because new
subscribers might not initially satisfy
the ATS’s designation standards as they
establish their businesses.
It is difficult to estimate the costs of
Regulation SCI for third-party vendors
that operate SCI systems or indirect SCI
systems 1203 on behalf of SCI ATSs.1204
If Regulation SCI imposes compliance
costs on such vendors, the compliance
costs would affect the competition
1202 The expected compliance costs could act as
a barrier to entry for new entrants who expect to
eventually become SCI ATSs, but the Commission
preliminarily believes this would not be a likely
possibility. See supra note 1150.
1203 See supra note 348 for the definition of
indirect SCI systems.
1204 See supra Section VIII.C.2.a.vi.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
among third-party vendors in the market
for SCI systems or indirect SCI systems.
If the costs associated with Regulation
SCI for third-party vendors outweigh the
benefits of continuing to operate SCI
systems or indirect SCI systems on
behalf of SCI ATSs, these third-party
vendors would exit the market for SCI
systems or indirect systems. In this
respect, Regulation SCI would adversely
impact such vendors and reduce the
ability for some third-party vendors to
compete in the market for SCI systems
and indirect SCI systems, with attendant
costs to SCI ATSs. If this happens, SCI
ATSs would incur costs from having to
find a new vendor, form a new business
relationship, and adapt their systems to
those of the new vendor. SCI ATSs
might also elect to perform the relevant
functions internally. If the current thirdparty vendors are the most efficient
means of performing certain functions
for SCI ATSs, and to the extent that any
third-party vendor exits the market,
finding new vendors or performing the
functions internally would represent a
reduction in efficiency for SCI ATSs.
jspears on DSK121TN23PROD with PROPOSALS2
b. Efficiency and Capital Formation
The Commission believes the
proposed amendments to Rule 3b–16,
Regulation ATS, and Regulation SCI
could promote price efficiency and
capital formation by reducing trading
costs and the potential for systems
disruptions on ATSs that capture a
significant portion of trading
volume.1205 However, if ATSs restrict
trading volume in certain securities to
stay below the Fair Access Rule,
Regulation SCI, and Rule 301(b)(6)
thresholds, it could adversely affect
price efficiency and capital formation.
As discussed above, the proposed
requirement for certain Communication
Protocol Systems and Government
Securities ATSs to publically disclose
Form ATS–N could help reduce trading
costs for market participants.1206
Additionally, subjecting significant
Communication Protocol Systems and
Government Securities ATS to the Fair
Access Rule could also help reduce
market participants’ trading costs.1207 A
reduction in trading costs could, in turn,
reduce limits to arbitrage and help
facilitate informed traders impounding
information into security prices, which
1205 See supra Sections VIII.B.2.a and VIII.B.2.b
for discussions about the importance of real-time
price information on Government Securities ATS
and indicative quotes on Communication Protocol
Systems that trade U.S. Treasury Securities in price
discovery of various securities. See supra Section
VIII.C.1.c, discussing the benefits of reducing
system disruptions through Regulation SCI and
Rule 301(b)(6).
1206 See supra Section VIII.C.1.b
1207 See id.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
could enhance price efficiency.1208
Furthermore, extending Regulation SCI
and Rule 301(b)(6) would help improve
systems up-time 1209 for ATSs and
would also promote more robust
systems that directly support execution
facilities, order matching, and the
dissemination of market data, which
could also enhance price efficiency.1210
In particular, enhanced price efficiency
in the secondary market for on-the-run
U.S. Treasury Securities might also
enhance the price efficiency of risky
securities because the transaction prices
of on-the-run U.S. Treasury Securities
are used as risk-free rate benchmarks to
price risky securities transactions.1211
Enhanced price efficiency could also
promote capital formation. Price
efficiency of securities is important
because prices that accurately convey
information about fundamental value
improve the efficiency in allocating
capital across projects and entities,
which helps promote capital formation.
On the other hand, the Commission
believes that the proposed amendments
of the Fair Access Rule, Regulation SCI,
and Rule 301(b)(6) could also adversely
affect price efficiency and capital
formation if ATSs that are close to
satisfying the volume threshold limit
trading over some period restrict trading
or cease operating to stay below the
volume thresholds and avoid being
subject to these rules.1212 To the extent
that this keeps ATSs from getting larger,
it would increase fragmentation, and
thus, adversely affect price efficiency in
those markets, harming capital
formation.
D. Reasonable Alternatives
The Commission considered several
alternatives to the proposal: (1) Require
Currently Exempted Government
Securities ATSs and certain
Communication Protocol Systems to file
Form ATS, but not publicly disclose
Form ATS; (2) require differing levels of
public disclosure by Government
Securities ATSs depending on their
trading volume; (3) extend the
transparency requirements (i.e., Form
1208 See, e.g., Shleifer, A. and Vishny, R. (1997).
The Limits of Arbitrage. The Journal of Finance,
52(1), 35–55 (discussing limits to arbitrage);
Grossman, S. and Stiglitz, J. (1980). On the
impossibility of informationally efficient markets.
American Economic Review, 70, 393–408
(discussing informed traders and price efficiency).
1209 Systems up-time is a measure of the time that
a computer system is running and available.
1210 See supra Section VIII.C.1.c.
1211 Based on the Commission’s understanding,
Government Securities ATSs disseminate their
Treasury trades via private feeds and third-party
vendors. These prices also serve as benchmarks for
pricing other financial products. See October 15
Staff Report, supra note 188.
1212 See supra Section VIII.C.2.b.
PO 00000
Frm 00145
Fmt 4701
Sfmt 4702
15639
ATS–N) of Regulation ATS to all ATSs
and Communication Protocol Systems;
(4) apply Rule 301(b)(6) of Regulation
ATS to Government Securities ATSs; (5)
alter the volume thresholds for the Fair
Access Rule; (6) alter the Government
Securities ATS volume thresholds for
Regulation SCI; (7) exclude
Communication Protocol Systems from
the definition of ‘‘exchange’’ but require
them to register as broker-dealers; (8)
require Forms ATS–N, ATS, and ATS–
R to be submitted in Inline XBRL; and
(9) require the content of Form ATS–N
to be posted on individual ATS
websites.
1. Require Government Securities ATSS
To File a Non-Public Form ATS
One alternative could require
Government Securities ATSs (inclusive
of Communication Protocol Systems, as
proposed) to file Form ATS and
subsequent amendments with the
Commission, instead of filing Form
ATS–N. This alternative would allow
Current Government Securities ATSs to
continue to file current Form ATS.
However, Form ATS would be deemed
confidential for all Government
Securities ATSs and would not have to
be publicly disclosed. Under this
alternative, compliance costs would be
lower because the costs to prepare a
Form ATS for Government Securities
ATSs is less than preparing a Form
ATS–N. Furthermore, Government
Securities ATSs would not incur
additional costs associated with
amending Form ATS–N to address any
deficiencies to avoid an ineffectiveness
determination, because Rule 304 of
Regulation ATS does not apply to Form
ATS filings. However, this alternative
would reduce regulators’ insight into
Government Securities ATSs compared
to the proposal because Form ATS
would require the disclosure of less
information about the operations of
Government Securities ATSs and the
activities of their broker-dealer
operators and their affiliates, as
compared to Form ATS–N.
The lack of public disclosure of Form
ATS under the alternative could result
in market participants making less
informed decisions regarding where to
send their orders, and thus, could result
in lower execution quality than they
would obtain under the proposal.
Additionally, this alternative could
result in higher search costs for
subscribers to identify potential trading
venues for their orders. Because
Government Securities ATSs would not
have to publicly disclose their fees or
details about their operations, there
would be less competition among
Government Securities ATSs and
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
15640
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
between Government Securities ATSs
and non-ATS trading venues compared
to the proposal. If there is less
competition for order flow in the market
for government securities and repo
trading services, there could also be less
incentive for Government Securities
ATSs to innovate.
Government Securities ATSs to limit the
trading in government securities on
their ATSs to stay small and not trigger
additional disclosure requirements. If
this were to happen, it could limit
market participants’ options for trading
venues, which could result in higher
trading costs relative to the proposal.
2. Initiate Differing Levels of Public
Disclosure Depending on Government
Securities ATS Dollar Volume
3. Extend the Transparency
Requirements of Regulation ATS to All
ATSs and Communication Protocol
Systems
As another alternative, the
Commission could extend the
transparency requirements (i.e., the
public disclosure on Form ATS–N
under Rule 304) of Regulation ATS to
all ATSs and Communication Protocol
Systems. Under this alternative,
investors would receive information
about the ATS operations and the
activities of the broker-dealer operators
and affiliates of all ATSs and
Communication Protocol Systems.
While the disclosure requirements of
individual systems would be similar to
what is required under the proposal,
investors would be able to access
detailed information on ATSs and
Communication Protocol Systems that
currently do not file Form ATS–N. This
could help market participants make
better-informed decisions about where
to send their orders to achieve their
trading objectives as compared to under
the proposal. Compared to the proposal,
the public disclosure of Form ATS–N by
all ATSs and Communication Protocol
Systems would further promote
competition, which could result in
lower venue fees, improve the efficiency
in handling of customer trading interest
procedures, and promote innovation.
Under this alternative, ATSs and
Communication Protocol Systems that
currently do not file Form ATS–N
would incur the compliance costs
discussed in Section VIII.C.2.a to
comply with Regulation ATS.
Additionally, the public disclosure of
details regarding the operational facets
of these ATSs and Communication
Protocol Systems could adversely
impact competition and raise barriers to
entry in the market for trading services,
and could also lower the incentives for
these ATSs and Communication
Protocol Systems to innovate. However,
the Commission believes that the risk of
this is likely to be low.1215
The Commission could require
different levels of disclosure (i.e., under
Rule 304) among Government Securities
ATSs based on the dollar volume in
government securities traded on the
platform. In particular, this alternative
would subject Government Securities
ATSs with lower dollar volumes to
lower levels of disclosure on the revised
Form ATS–N. This alternative could
provide smaller Government Securities
ATSs with a competitive advantage over
larger ones because smaller Government
Securities ATSs would incur lower
compliance costs relative to the
proposal, which could translate into
lower entry barriers relative to such
barriers under the proposal. Because
these small Government Securities
ATSs would not have to disclose as
much information pertaining to their
operational facets to their competitors,
they would have a competitive
advantage over more established
Government Securities ATSs and other
trading venues. This approach therefore
would promote competition in the
market. To the extent the public
disclosure of Form ATS–N would have
discouraged innovation,1213 this
alternative also would promote
innovation because these small
Government Securities ATSs would not
be deterred from innovating by the
possibility of having to disclose certain
operational facets, which could also
benefit market participants who trade
on these ATSs by improving the
execution quality of their trades.
However, because some Government
Securities ATS would not have to
publicly disclose as much information
on their Form ATS–N, market
participants may not be as able to
compare Government Securities ATSs to
select the most appropriate venue for
the their trading objectives, which could
increase market participant search costs
and trading costs relative to the
proposal.1214 Additionally, this
alternative could incentivize small
1213 As discussed above, the risk that the public
disclosure of Form ATS–N would reduce the
incentives for ATSs to is likely to be low. See supra
Section VIII.C.3.a.i.f).
1214 See supra Section VIII.C.1.b.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
1215 See supra Section VIII.C.3.a.i.f) for a
discussion about the risk that the responsive
information to the revised Form ATS–N would
include information regarding operational facets
such that the public disclosure of the information
would adversely affect the competitive position of
the disclosing ATS or Communication Protocol
Systems and why the Commission believes that this
PO 00000
Frm 00146
Fmt 4701
Sfmt 4702
4. Apply Rule 301(b)(6) of Regulation
ATS to Government Securities ATSs
Another alternative for the
Commission is to apply the Capacity,
Integrity, and Security Rule in Rule
301(b)(6) 1216 of Regulation ATS to
Government Securities ATSs instead of
extending Regulation SCI. The scope
and requirements of the Capacity,
Integrity, and Security Rule would be
narrower than those of Regulation SCI.
For example, Rule 301(b)(6) of
Regulation ATS would apply to a
narrower set of systems, as compared to
Regulation SCI. Rule 301(b)(6) of
Regulation ATS applies only to systems
that support order entry, order routing,
order execution, transaction reporting,
and trade comparison, which is
narrower than the definition of SCI
system. This could result in the
establishment of less robust systems in
Government Securities ATSs compared
to the proposal. This may increase the
duration and severity of any system
distributions, and result in more system
issues occurring on Government
Securities ATSs, which may, in turn,
cause more interruptions in the price
discovery process and liquidity flows
and increase the occurrence of periods
with pricing inefficiencies compared to
the proposal.1217 Furthermore, the
Commission believes that compliance
costs associated with the Capacity,
Integrity, and Security Rule would be
significantly less than those under the
proposal because the scope and
requirements of the Capacity, Integrity,
and Security Rule would be narrower
than those of Regulation SCI. For
example, the Capacity, Integrity, and
Security Rule would not require
Government Securities ATSs to
maintain a backup facility to comply
with the requirements of Regulation SCI
related to business continuity and
disaster recovery plans. To the extent
that Government Securities ATSs pass
on these compliance costs to their
subscribers, the significantly lower
compliance costs of this alternative
could result in lower trading costs for
market participants compared to the
proposal. Furthermore, the lower
compliance costs of this alternative
could lower barriers to entry in the
market for government securities trading
services and increase competition
compared to the proposal, which would
risk is likely to be low. See also supra note 467 and
accompanying text.
1216 As also explained above, Rule 301(b)(6)
addresses the capacity, integrity, and security
requirements of automated systems for ATSs that
meet certain volume thresholds. See supra note
157.
1217 See supra Section VIII.C.1.c.
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
also result in lower trading costs for
market participants.
As another alternative, the
Commission could apply the Capacity,
Integrity, and Security Rule in Rule
301(b)(6) to smaller Government
Securities ATSs and extend Regulation
SCI to larger Government Securities
ATSs as proposed. For example, the
Commission could require a
Government Securities ATS that falls
within a volume range for U.S. Treasury
Securities of 5 percent and 10 percent
to comply with Rule 301(b)(6) of
Regulation ATS and a Government
Securities ATS that exceeds a 10
percent volume threshold for U.S.
Treasury Securities to comply with
Regulation SCI. Under this alternative,
the Commission believes that the
smaller Government Securities ATSs
subject to Rule 301(b)(6) would incur
significantly lower compliance costs, as
compared to the proposal, where these
smaller Government Securities ATSs
would be subject to Regulation SCI.1218
To the extent that Government
Securities ATSs pass on the additional
compliance costs associated with Rule
301(b)(6) or Regulation ATS to their
subscribers, the Commission believes
that the trading costs for subscribers to
these smaller Government Securities
ATSs would be smaller, as compared to
the proposal. Furthermore, the lower
compliance costs of this alternative
incurred by smaller Government
Securities ATSs could lower barriers to
entry in the market for government
securities trading services and increase
competition compared to the proposal,
which could also result in lower trading
costs for market participants.
5. Alter the Volume Thresholds for the
Fair Access Rule
Another alternative for the
Commission is to alter the volume
thresholds for the Fair Access Rule.1219
A higher aggregate volume threshold for
the Fair Access Rule would result in a
smaller number of ATSs and
Communication Protocol Systems that
are subject to the Fair Access Rule than
under the proposal. With fewer ATSs
and Communication Protocol Systems
subject to the Fair Access Rule, some
market participants may not be able to
trade on as many ATSs and
Communication Protocol Systems as
they could have under the proposal,
which could result in these market
participants experiencing higher trading
costs or worse execution quality than
1218 See
supra Section VIII.C.2.a.
supra Sections VII.D.1.b and VIII.C.2.a for
estimates of the number of additional trading
venues that would be subject to the Fair Access
Rule under the proposal.
1219 See
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
they would under the proposal. With a
higher aggregate volume threshold for
the Fair Access Rule, fewer ATSs and
Communication Protocol Systems
would incur compliance costs discussed
in Section VIII.C.2.a to comply with the
Fair Access Rule than under the
proposal. This could lower the barriers
to entry for new ATSs compared to the
proposal.1220 Additionally, a higher
aggregate volume threshold could result
in fewer broker-dealers shutting down
some of their ATSs to avoid being
subject to the Fair Access Rule
compared to the proposal.1221 Both
lower barriers to entry and fewer ATSs
exiting the market could increase
competition compared to the proposal,
resulting in lower trading costs for
market participants. Since the aggregate
volume threshold would be higher,
broker-dealers operators would be less
likely to restrict trading in certain
securities in one or more of their
systems in order to avoid the
requirements of the Fair Access Rule.
This would cause less order flow to be
absorbed and redistributed amongst
other trading venues, which could result
in lower trading costs compared to the
proposal, especially if the sole provider
of a niche service is less likely to limit
the trading in certain securities.
A lower aggregate volume threshold
for the Fair Access Rule would cause a
greater number of small ATSs and
Communication Protocol Systems to be
subject to the Fair Access Rule
compared to the proposal. This would
allow market participants that currently
may be restricted in their access to
access a greater number of ATSs and
Communication Protocol Systems and
provide them with more options in the
selection of trading venues than under
the proposal. Thus, compared to the
proposal, these market participants
could better access the trading venue
that best meets their trading objectives,
which result in the experiencing lower
trading costs. With a lower aggregate
volume threshold for the Fair Access
Rule, ATSs and Communication
Protocol Systems would incur greater
compliance costs discussed in Section
VIII.C.2.a to comply with the Fair
Access Rule than under the proposal,
which could increase the barriers to
entry for new ATSs. Additionally, a
lower aggregate volume threshold for
the Fair Access Rule could cause a
1220 The Commission believes that this would
lower the barriers to entry compared to the proposal
for both new ATSs that are the sole ATS operated
by a broker-dealer, as well as new ATSs that are
operated by a broker-dealer or affiliated brokerdealers that already operate one or more ATSs.
1221 See supra Sections VIII.C.2.a.iv and
VIII.C.3.a.i.e.
PO 00000
Frm 00147
Fmt 4701
Sfmt 4702
15641
greater number of small ATSs and
Communication Protocol Systems to
exit the market for trading services
compared to the proposal. Both higher
barriers to entry and more ATSs
shutting down could result in less
competition compared to the proposal,
which could result in market
participants facing higher trading costs.
Broker-dealers operators that are near
the lower volume threshold would be
more likely to restrict trading in one or
more of their systems in order to avoid
the requirements of the Fair Access
Rule. This would result in more order
flow being absorbed and redistributed
amongst other trading venues compared
to the proposal, which could result in
higher trading costs, especially if the
sole provider of a niche service is more
likely to limit the trading in certain
securities.
6. Alter the Government Securities ATS
Volume Thresholds for Regulation SCI
Another alternative for the
Commission is to alter the Government
Securities ATS volume thresholds for
Regulation SCI.1222 A higher volume
threshold for Regulation SCI would
result in a smaller number of
Government Securities ATSs being
subject to Regulation SCI than under the
proposal. Compared to the proposal,
this could result in the establishment of
less robust systems in Government
Securities ATSs that would be subject to
Regulation SCI under the proposal but
fall below the higher volume threshold.
This may increase the duration and
severity of any system distributions, and
result in more system issues occurring
on these Government Securities ATSs,
which may, in turn, cause more
interruptions in the price discovery
process and liquidity flows and increase
the occurrence of periods with pricing
inefficiencies compared to the
proposal.1223 With a higher volume
threshold for Regulation SCI, the
Commission believes that a smaller
number of Government Securities ATSs
would incur compliance costs discussed
in Section VIII.C.2.a to comply with
Regulation SCI requirements than under
the proposal. This could lower barriers
to entry in the market for government
securities execution services compared
to the proposal, which could increase
competition, resulting in lower trading
costs or better execution quality for
investors. Compared to the proposal, a
higher volume threshold for Regulation
1222 See supra Sections VII.D.6 and VIII.C.2.a for
estimates of the number of additional trading
venues that would be subject to Regulation SCI
under the proposal.
1223 See supra Section VIII.C.1.c.
E:\FR\FM\18MRP2.SGM
18MRP2
15642
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
SCI could also lead to less Government
Securities ATSs restricting trading in
certain government securities on their
platform in order to stay below the
volume threshold. This would cause
less order flow to be absorbed and
redistributed amongst other trading
venues, which could result in lower
trading costs compared to the proposal,
especially if the sole provider of a niche
service is less likely to limit the trading
in certain securities.
A lower volume threshold for
Regulation SCI would result in a larger
number of Government Securities ATSs
being subject to Regulation SCI than
under the proposal. Compared to the
proposal, a lower volume threshold for
Regulation SCI likely would promote
the establishment of more robust
systems, help reduce the duration and
severity of any system distributions, and
help prevent system issues from
occurring on smaller Government
Securities ATSs that met the lower
volume thresholds. This, in turn, could
help prevent interruptions in the price
discovery process and liquidity flows
and thus may reduce the chance of
periods with pricing inefficiencies
occurring compared to the proposal.
With a lower volume threshold for
Regulation SCI, more Government
Securities ATSs would incur
compliance costs discussed in Section
VIII.C.2.a to comply with Regulation SCI
requirements than under the proposal,
which could increase the barriers to
entry for new Government Securities
ATSs. This could decrease competition,
resulting in higher trading costs or
worse execution quality for investors
compared to the proposal. Compared to
the proposal, a lower volume threshold
for Regulation SCI could also lead to
more Government Securities ATSs
restricting trading in certain government
securities on their platform in order to
stay below the volume threshold. This
would cause more order flow to be
absorbed and redistributed amongst
other trading venues, which could result
in higher trading costs compared to the
proposal, especially if the sole provider
of a niche service is more likely to limit
the trading in certain securities.
7. Exclude Communication Protocol
Systems From the Definition of
‘‘Exchange’’ but Require Them To
Register as Broker-Dealers
The proposed amendments to
Exchange Act Rule 3b–16 would require
Communication Protocol Systems to
either register as an exchange or register
as a broker-dealer and comply with
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Regulation ATS.1224 As an alternative,
the Commission could require
Communication Protocol Systems to
register as broker-dealers, but continue
to exclude them from the definition of
‘‘exchange’’ under Rule 3b–16, and thus,
the requirements of Regulation ATS and
Regulation SCI.1225 Under this
alternative, operators of Communication
Protocol Systems would still need to
register as broker-dealers with the
Commission and FINRA, so they would
still be subject to Commission and
FINRA inspections and examinations.
However, the benefits of enhanced
regulatory oversight and investor
protection would be less than in the
proposal because Communication
Protocol Systems would not be subject
to the additional reports and
requirements of Regulation ATS, which
include having to report additional
information to the Commission on Form
ATS and Form ATR, or, if applicable,
Form ATS–N.1226
Additionally, compared to the
proposal, the reduction in market
participant trading costs and
improvements in their execution quality
would not be as large because
Communication Protocol Systems that
trade government securities or NMS
stocks would not be required to file and
publicly disclose Form ATS–N and
because significant Communication
Protocol Systems would not be subject
to the Fair Access Rule.1227
Furthermore, because significant
Communication Protocol Systems
would not be subject to Regulation SCI
or Rule 301(b)(6) of Regulation ATS, the
enhancements to the price discovery
process and liquidity in securities
markets would be reduced relative to
the proposal.1228
Under this alternative,
Communications Protocol Systems
would still incur the costs of registering
as a broker-dealer, but would not incur
1224 As discussed above, Communication Protocol
Systems function similarly to exchanges as market
places and that including them within the
definition of ‘‘exchange’’, rather than only
subjecting them to the requirements of brokerdealers, would appropriately regulate a market
place that brings together buyers and sellers of
securities. See supra Section II.
1225 The Commission assumes that, under the
proposed amendments, Communication Protocol
Systems would choose to register as broker-dealers
and comply with Regulation ATS, rather than
register as national securities exchanges. See supra
note 1056 and accompanying text.
1226 See supra Section VIII.C.1.a.
1227 See supra Section VIII.C.1.b. Under this
alternative, significant Communication Protocol
Systems in the NMS stock market would also not
be required to display their best quotes in the SIP,
because they would not be subject to the order
display and execution access requirements of Rule
301(b)(3) of Regulation ATS.
1228 See supra Section VIII.C.1.c.
PO 00000
Frm 00148
Fmt 4701
Sfmt 4702
the additional costs associated with
Regulation ATS, including the costs
associated with the Fair Access Rule
and Regulation SCI and Rule
301(b)(6).1229 This could result in less
Communication Protocol Systems
exiting the market and create lower
barriers to entry for new
Communication Protocol Systems
compared to the proposal, which,
relative to the proposal, could increase
competition. Increased competition, in
turn, could lower market participant
trading costs and increase innovation
among Communication Protocol
Systems relative to the proposal. Since
significant Communication Protocol
Systems would not be subject to the Fair
Access Rule or Regulation SCI and
Capacity, Integrity, and Security Rule,
Communication Protocol Systems
would not have an incentive to restrict
trading volume in certain securities to
avoid reaching the volume threshold
associated with these rules. This could
cause less order flow to be absorbed and
redistributed amongst other trading
venues, which could result in lower
trading costs compared to the proposal,
especially if a Communication Protocol
System that is the sole provider of a
niche service is less likely to limit the
trading in certain securities.1230
8. Require Forms ATS–N, ATS, and
ATS–R To Be Submitted in Inline XBRL
The proposal would require
Government Securities ATSs to file
Form ATS–N, which is submitted in
ATS–N-specific XML. In addition, the
proposal would require confidential
Forms ATS and ATS–R, which are
currently submitted as paper
documents, to be submitted to the
Commission electronically via EDGAR
in unstructured HTML or ASCII.1231 As
an alternative, the Commission might
require Form ATS–N, as well as Forms
ATS and ATS–R, to be submitted in the
Inline eXtensible Business Reporting
Language (‘‘Inline XBRL’’) data
language. Inline XBRL is a derivation of
XML that is designed for business
reporting information and is both
machine-readable and humanreadable.1232 This alternative might
1229 See
supra Section VIII.C.2.
supra Section VIII.C.2.b.
1231 See supra Section V.B. The EDGAR system
generally requires filers to use ASCII or HTML for
their document submissions, subject to certain
exceptions. See Regulation S–T, 17 CFR
232.101(a)(1)(iv); 17 CFR 232.301; EDGAR Filer
Manual (Volume II) version 60 (December 2021), at
5–1.
1232 Such a requirement would be implemented
by revising Regulation S–T (17 CFR part 232) and
including an Instruction to Forms ATS–N, ATS,
and ATS–R which cites to Regulation S–T. In
conjunction with the EDGAR Filer Manual,
1230 See
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
include numerical detail tagging of
quantitative disclosures (e.g., platformwide statistics) and text block tagging
for narrative disclosures (e.g., trade
reporting arrangements).1233 Compared
to the proposal, the Inline XBRL
alternative for Forms ATS–N, ATS, and
ATS–R would provide more
sophisticated validation, presentation,
and reference features for filers and data
users. However, the Inline XBRL
alternative would also impose initial
implementation costs (e.g., training staff
to prepare filings in Inline XBRL,
licensing Inline XBRL filing preparation
software) upon filers that do not have
prior experience structuring data in the
Inline XBRL data language. By contrast,
because Form ATS–N may be filed
using a fillable web form, filers that lack
experience structuring data in EDGAR
Form-specific XML would not incur
technical implementation costs related
to filing Form ATS–N under the
proposal.
9. Require the Content of Form ATS–N
To Be Posted on Individual ATS
Websites
jspears on DSK121TN23PROD with PROPOSALS2
Under the proposal, Form ATS–N
would be filed on the EDGAR system.
Alternatively, the Commission might
require the content of Form ATS–N to
be posted on the individual ATSs’
websites. Requiring the content of Form
ATS–N to be posted on the individual
ATSs’ websites rather than EDGAR
would impose additional direct costs on
data users, who would need to navigate
to and manually retrieve data from
different ATSs’ websites to aggregate,
compare, and analyze the data. In
addition, individual websites would not
provide the validation capabilities that
an EDGAR requirement would enable,
and would thus, impose on data users
the indirect costs associated with lower
reliability of the data. An individual
website requirement would provide a
small benefit to bank-operated
Government Securities ATSs relative to
the proposal’s EDGAR requirement, as
those entities would not be required to
incur the $50 compliance cost of
submitting a Form ID to begin making
EDGAR filings.1234
Regulation S–T governs the electronic submission
of documents filed with the Commission.
Modifying a structured data language requirement
for a Commission filing or series of filings can
generally be accomplished through changes to
Regulation S–T, and would not require dispersed
changes to the various rules and forms that would
be impacted by the data language modification.
1233 See supra Sections IV.D.4.y and IV.D.4.t.
1234 See supra Section VIII.C.2.a.i. The
Commission estimates that one Currently Exempted
Government Securities ATS is operated by a bank.
See supra Section VII.C.1.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
E. Request for Comments
The Commission is sensitive to the
potential economic effects, including
costs and benefits, of the proposed Rule.
The Commission has identified certain
costs and benefits associated with the
proposal and requests comment on all
aspects of its preliminary economic
analysis, including with respect to the
specific questions below. The
Commission encourages commenters to
identify, discuss, analyze, and supply
relevant data, information, or statistics
regarding any such costs or benefits.
177. Do you agree with the
Commission’s characterization of the
relevant baseline against which it
considered the effects of the proposed
amendments?
178. Do you agree with the
Commission’s characterization of
Communication Protocol Systems?
Please provide any relevant details that
you believe are missing from the
Commission’s description.
179. Do you agree with the
Commission’s characterization of the
current state of the government
securities market?
180. Do you agree that PTFs provide
liquidity to Government Securities
ATSs?
181. Do you agree that trading in the
Treasury securities market is
concentrated in a few large ATSs?
Please provide data to support your
position.
182. The Commission invites
comment on the role of PTFs in trading
Agency Securities. The Commission
also requests comment on the providers
of liquidity in the market for Agency
Securities.
183. Do you agree with the
Commission’s characterization of the
regulatory environment for Government
Securities ATSs? Please provide any
details you feel are relevant to
understanding the impact of the
variation in regulation across different
ATSs in this market. Also, do you agree
that the differences in regulation across
different entities providing trading
services in this market has placed some
of them at a competitive disadvantage?
184. Please provide any additional
details you feel are relevant to the role
of Communication Protocol Systems in
the government securities market.
185. Do you agree with the
Commission’s characterization of the
role played by the RFQ indicative quote
streams? Please provide any details you
feel are important to understanding
their role in the market.
186. Do you agree with the
Commission’s characterization of the
competition baseline for government
securities trading services?
PO 00000
Frm 00149
Fmt 4701
Sfmt 4702
15643
187. Do you agree with the
Commission’s characterization of the
state of the corporate debt market?
Please provide any additional details
you believe are relevant to
understanding this market.
188. Do you agree with the
Commission’s description of the
implications of the difference in
regulation for Communication Protocol
Systems compared to ATSs in the
corporate debt market?
189. Do you agree with the
Commission’s description of the
competition baseline for providing
trading services in the corporate debt
market? Do you agree with the
Commission’s characterization of the
role of the existing regulatory regime in
creating the current competitive
environment?
190. Do you agree with the
Commission’s description of the
municipal debt market?
191. Do you agree with the
Commission’s description of broker’s
brokers and their role in the municipal
bond market? Please provide any details
you feel are necessary to fully
understanding this point.
192. The Commission requests any
information pertaining to the role of
Communication Protocol Systems in the
market for municipal debt generally.
193. Do you agree with the
Commission’s description of the equity
market? In particular, please provide
any additional details you feel are
relevant to understanding the role of
Communication Protocol Systems in
this market.
194. The Commission requests
comment on the extent to which
Communication Protocol Systems are
used in the non-ATS OTC market for
NMS stocks.
195. The Commission lacks the data
to estimate the number or trading
volume of IDQS or other OTC equity
trading systems that operate
Communication Protocol Systems and
are not registered as ATSs or with
FINRA, and requests comment on this
topic.
196. Do you agree with the
Commission’s description of the options
market?
197. The Commission requests
comment on the full role of
Communication Protocol Systems in the
market for listed options.
198. Do you agree with the
Commission’s description of the market
for repurchase and reverse repurchase
agreements?
199. The Commission requests
comment on the full role of
Communication Protocol Systems in the
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
15644
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
market for repurchase and reverse
repurchase agreements.
200. Do you agree with the
Commission’s description of the market
for asset-backed securities?
201. The Commission requests
comment on the full role of
Communication Protocol Systems in the
asset-backed securities market.
202. The Commission requests
comment on whether Communication
Protocol Systems play a role in the
trading of to-be-announced mortgagebacked securities.
203. The Commission requests
comment on whether Communication
Protocol Systems play a role in asset
classes besides those discussed in
Section VIII.B, and on what role they
play in those asset classes.
204. Do you agree that the proposed
amendments would enhance regulatory
oversight and investor protection? Do
you agree that requiring Communication
Protocol Systems to register as brokerdealers would help lead to these
benefits? Do you believe that the
proposed amendments would lead to
improvements in the safeguarding of
confidential information?
205. Do you agree that the proposed
amendments would reduce trading costs
and improve execution quality for
market participants? Do you agree that
Regulation SCI would improve the
resiliency of the systems that provide
trading services in the government
securities markets? Do you agree that
Rule 301(b)(6) would improve the
resiliency of systems in the applicable
securities markets?
206. Do you agree with the
Commission’s assessment of the costs of
the proposed amendments? If not,
please provide as many quantitative
estimates to support your position on
costs as possible.
207. The Commission requests that
commenters provide any insights or
data they may have on the costs
associated with the proposed brokerdealer requirements for Communication
Protocol Systems that are operated by
non-broker-dealers?
208. Are the initial implementation
cost estimates for new and existing SCI
entities and the ongoing implementation
cost estimates for all SCI entities under
Regulation SCI largely applicable to
Government Securities ATSs? How
would these costs vary between Current
Government Securities ATSs and
Communication Protocol Systems that
trade government securities? Please
explain.
209. Would Government Securities
ATSs also incur direct compliance costs
(non-PRA based) as SCI entities? The
Regulation SCI Adopting Release in
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
2014 estimated that an SCI entity would
incur an initial cost of between
approximately $320,000 and $2.4
million. Additionally, an SCI entity
would incur an ongoing annual cost of
between approximately $213,600 and
$1.6 million. Are these estimated costs
applicable to Government Securities
ATSs? How might the actual level of
costs Government Securities ATSs
would incur differ from the estimates in
the Regulation SCI Adopting Release
because they differ from existing SCI
entities? How might other factors, such
as the complexity of SCI entities’
systems and the degree to which SCI
entities employ third-party systems,
affect the estimated costs? How would
these costs vary between Current
Government Securities ATSs and
Communication Protocol Systems that
trade government securities? Please
explain and provide cost estimates or a
range for cost estimates, if possible.
210. Do you agree with the
Commission’s assessment of the indirect
costs of applying the Fair Access rule?
211. Do you agree that ATSs could
break themselves up to stay below the
volume threshold for Regulation SCI?
Please explain.
212. Do you agree with the
Commission’s assessment of the impact
of the proposed amendments on
efficiency, competition and capital
formation? Do you agree that the
proposed amendments would allow for
competition among trading systems on a
more equal basis? Do you agree with the
Commission’s assessment as to the risks
of increasing barriers to entry and
causing current trading systems to exit
the market?
213. To what extent would the
proposed amendments to Exchange Act
Rule 3b–16 and Regulation ATS
increase the barriers to entry for new
trading venues or cause some existing
trading venues to exit the market? How
would these effects vary based on the
size and/or type of trading venue and
the securities market in which it
operates? Please explain in detail.
214. How would the proposed
amendments affect innovation? Please
explain. If so, which provisions of the
proposed amendments would affect
innovation the most and how? Please
explain.
215. Do you agree with the
Commission’s assessment of the effects
of an alternative to require Currently
Exempted Government Securities ATSs
and certain Communication Protocol
Systems to file a non-public Form ATS?
216. Do you agree with the
Commission’s assessment of the effects
of an alternative to initiate differing
levels of public disclosure depending on
PO 00000
Frm 00150
Fmt 4701
Sfmt 4702
Government Securities ATS (inclusive
of a Communication Protocol System, as
proposed) or other Communication
Protocol System dollar volume?
217. Do you agree with the
Commission’s assessment of the effects
of an alternative to extend the
transparency requirements of Regulation
ATS to all ATSs and Communication
Protocol Systems?
218. Do you agree with the
Commission’s assessment of the effects
of an alternative to apply Rule 301(b)(6)
of Regulation ATS to Government
Securities ATSs?
219. Do you agree with the
Commission’s assessment of the effects
of an alternative to alter the volume
thresholds for the Fair Access Rule?
220. Do you agree with the
Commission’s assessment of the effects
of an alternative to alter the Government
Securities ATS volume thresholds for
Regulation SCI?
221. Do you agree with the
Commission’s assessment of the effects
of an alternative to require
Communication Protocol Systems to
register as broker-dealers but exempt
them from the requirements of Rule 3b–
16, Regulation ATS, and Regulation
SCI?
222. Do you agree with the
Commission’s assessment of the effects
of an alternative to require Forms ATS–
N, ATS, and ATS–R to be submitted in
Inline XBRL?
223. Do you agree with the
Commission’s assessment of the effects
of an alternative to require the content
of Form ATS–N to be posted on
individual ATS websites?
224. How would the economic effects
of the proposal differ if Forms ATS–N,
ATS, and ATS–R were proposed to be
submitted using the Commission’s
Electronic Form Filing System/SRO
Rule Tracking System (‘‘EFFS/SRTS’’)?
IX. Consideration of Impact on the
Economy
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996,1235 the Commission requests
comment on the potential effect of the
proposed amendments on the United
States economy on an annual basis. The
Commission also requests comment on
any potential increases in costs or prices
for consumers or individual industries,
and any potential effect on competition,
investment, or innovation. Commenters
are requested to provide empirical data
and other factual support for their views
to the extent possible.
1235 5
E:\FR\FM\18MRP2.SGM
U.S.C. 603.
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
X. Regulatory Flexibility Act
Certification
Section 3(a) of the Regulatory
Flexibility Act of 1980 1236 (‘‘RFA’’)
requires the Commission to undertake
an initial regulatory flexibility analysis
of the impact of the proposed rule
amendments on small entities unless
the Commission certifies that the rule, if
adopted, would not have a significant
economic impact on a substantial
number of small entities.1237 For
purposes of Commission rulemaking in
connection with the RFA,1238 a small
entity includes a broker or dealer that:
(1) Had total capital (net worth plus
subordinated liabilities) of less than
$500,000 on the date in the prior fiscal
year as of which its audited financial
statements were prepared pursuant to
Rule 17a–5(d) under the Exchange
Act,1239 or, if not required to file such
statements, a broker-dealer with total
capital (net worth plus subordinated
liabilities) of less than $500,000 on the
last day of the preceding fiscal year (or
in the time that it has been in business,
if shorter); and (2) is not affiliated with
any person (other than a natural person)
that is not a small business or small
organization.1240
All Government Securities ATSs
would be required to register as brokerdealers, including those that are
currently exempt from such
requirement.1241 In addition, all
1236 5
U.S.C. 603(a).
U.S.C. 605(b).
1238 Although Section 601(b) of the RFA defines
the term ‘‘small entity,’’ the statute permits agencies
to formulate their own definitions. The Commission
has adopted definitions for the term ‘‘small entity’’
for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as
relevant to this proposed rulemaking, are set forth
in Rule 0–10 under the Exchange Act, 17 CFR
240.0–10. See Securities Exchange Act Release No.
18451 (January 28, 1982), 47 FR 5215 (February 4,
1982) (File No. AS–305).
1239 17 CFR 240.17a–5(d).
1240 See 17 CFR 240.0–10(c). See also 17 CFR
240.0–10(i) (providing that a broker or dealer is
affiliated with another person if: Such broker or
dealer controls, is controlled by, or is under
common control with such other person; a person
shall be deemed to control another person if that
person has the right to vote 25 percent or more of
the voting securities of such other person or is
entitled to receive 25 percent or more of the net
profits of such other person or is otherwise able to
direct or cause the direction of the management or
policies of such other person; or such broker or
dealer introduces transactions in securities, other
than registered investment company securities or
interests or participations in insurance company
separate accounts, to such other person, or
introduces accounts of customers or other brokers
or dealers, other than accounts that hold only
registered investment company securities or
interests or participations in insurance company
separate accounts, to such other person that carries
such accounts on a fully disclosed basis).
1241 See supra Section III.B.2. See also 17 CFR
242.301(b)(1).
jspears on DSK121TN23PROD with PROPOSALS2
1237 5
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Communications Protocol Systems that
choose to comply with Regulation ATS
in lieu of exchange registration will be
required to register as brokerdealers.1242 The Commission examined
recent FOCUS data for the 17 brokerdealers that currently operate Legacy
Government Securities ATSs and
concluded that 1 of the broker-dealer
operators of these ATSs had total capital
of less than $500,000 on the last day of
the preceding fiscal year (or in the time
that it has been in business, if shorter).
The Commission notes that this brokerdealer operator has never reported any
transaction volume in any government
security or repo to the Commission on
Form ATS–R. Given that this ATS has
never reported any transaction volume
in government securities to the
Commission, the Commission believes
that this ATSs is unlikely to submit a
Form ATS–N if the proposed
amendments to Regulation ATS are
adopted.1243 The Commission has
recently examined recent FOCUS data
for 4 broker-dealers that the
Commission estimates are Currently
Exempted Government Securities ATSs
and concluded that none of the brokerdealer operators of ATSs that currently
trade government securities had total
capital of less than $500,000 on the last
day of the preceding fiscal year (or in
the time that it has been in business, if
shorter). The Commission has also
recently examined recent FOCUS data
for 7 systems that the Commission
estimates are Communication Protocol
Systems operated by broker-dealers or
affiliates of broker-dealers and trade
various securities asset classes
including, among others, government
securities. The Commission concluded
that none of these broker-dealer
operators of ATSs had total capital of
less than $500,000 on the last day of the
preceding fiscal year (or in the time that
it has been in business, if shorter).
Consequently, the Commission certifies
that the proposed amendments to
Regulation ATS would not, if adopted,
have a significant economic impact on
a substantial number of small entities.
The Commission encourages written
comments regarding this certification.
The Commission solicits comment as to
whether the proposed amendments
could have impacts on small entities
that have not been considered. The
Commission requests that commenters
describe the nature of any impacts on
small entities and provide empirical
1242 See
supra Section II.D.2.
order to be as inclusive as is reasonable,
the Commission is nevertheless counting this ATS
for purposes of projecting expected costs under the
PRA.
1243 In
PO 00000
Frm 00151
Fmt 4701
Sfmt 4702
15645
data to support the extent of such effect.
Such comments will be placed in the
same public file as comments on the
proposed amendments to Regulation
ATS. Persons wishing to submit written
comments should refer to the
instructions for submitting comments in
the front of this release.
XI. Statutory Authority and Text of
Proposed Amendments
Pursuant to Exchange Act, 15 U.S.C.
78a et seq., and particularly Sections
3(b), 5, 6, 11A, 15, 15C, 17(a), 17(b), 19,
23(a), and 36 thereof (15 U.S.C. 78c(b),
78e, 78f, 78o, 78o–5, 78q(a), 78q(b), 78s,
78w(a), and 78mm), the Commission
proposes amendments to Form ATS–N
under the Exchange Act, Regulation
ATS under the Exchange Act, and 17
CFR parts 232, 240, 242, and 249.
List of Subjects in 17 CFR Parts 232,
240, 242, and 249
Administrative practices and
procedure, Brokers, Confidential
business information, Fraud, Reporting
and recordkeeping requirements,
Securities.
For the reasons stated in the
preamble, title 17, chapter II of the Code
of Federal Regulations is proposed to be
amended as follows:
PART 232—REGULATION S–T—
GENERAL RULES AND REGULATIONS
FOR ELECTRONIC FILINGS
1. The general authority citation for
part 232 continues to read as follows:
■
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j,
77s(a), 77z–3, 77sss(a), 78c(b), 78l, 78m, 78n,
78o(d), 78w(a), 78ll, 80a–6(c), 80a–8, 80a–29,
80a–30, 80a–37, 7201 et seq.; and 18 U.S.C.
1350, unless otherwise noted.
*
*
*
*
*
2. Amend § 232.101 by:
a. Removing the periods at the end of
paragraphs (a)(1)(xiii) and (xiv) and
adding semicolons in their places;
■ b. Removing the word ‘‘and’’ at the
end of paragraphs (a)(1)(xviii) and (xix);
■ c. Removing the periods at the end of
paragraphs (a)(1)(xx) and (xxi) and
adding semicolons in their places; and
■ d. Adding paragraphs (a)(1)(xxii) and
(xxiii).
The additions read as follows:
■
■
§ 232.101 Mandated electronic
submissions and exceptions.
(a) * * *
(1) * * *
(xxii) Form ATS (§ 249.637 of this
chapter); and
(xxiii) Form ATS–R (§ 249.638 of this
chapter).
*
*
*
*
*
E:\FR\FM\18MRP2.SGM
18MRP2
15646
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES ACT OF
1934
3. The general authority citation for
part 240 continues to read as follows:
■
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f,
78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m,
78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q,
78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll,
78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b–
3, 80b–4, 80b–11, and 7201 et seq., and 8302;
7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18
U.S.C. 1350; Pub. L. 111–203, 939A, 124 Stat.
1376 (2010); and Pub. L. 112–106, sec. 503
and 602, 126 Stat. 326 (2012), unless
otherwise noted.
*
*
*
*
*
■ 4. Amend § 240.3b–16 by:
■ a. Revising paragraphs (a)(1) and (2)
and (b)(1) and (2);
■ b. Adding paragraph (b)(3);
■ c. Redesignating paragraph (e) as
paragraph (f); and
■ d. Adding new paragraph (e).
The revisions and additions read as
follows:
jspears on DSK121TN23PROD with PROPOSALS2
(a) * * *
(1) Brings together buyers and sellers
of securities using trading interest; and
(2) Makes available established, nondiscretionary methods (whether by
providing a trading facility or
communication protocols, or by setting
rules) under which buyers and sellers
can interact and agree to the terms of a
trade.
(b) * * *
(1) Routes trading interest to a
national securities exchange, a market
operated by a national securities
association, or a broker-dealer for
execution;
(2) Allows persons to enter trading
interest for execution against the bids
and offers of a single dealer; and
(i) As an incidental part of these
activities, matches trading interest that
is not displayed to any person other
than the dealer and its employees; or
(ii) In the course of acting as a market
maker registered with a self-regulatory
organization, displays the limit orders of
such market maker’s, or other brokerdealer’s, customers; and
(A) Matches customer orders with
such displayed limit orders; and
(B) As an incidental part of its market
making activities, crosses or matches
orders that are not displayed to any
person other than the market maker and
its employees; or
(3) Allows an issuer to sell its
securities to investors.
*
*
*
*
*
20:33 Mar 17, 2022
Jkt 256001
PART 242—REGULATIONS M, SHO,
ATS, AC, NMS, AND SBSR AND
CUSTOMER MARGIN REQUIREMENTS
FOR SECURITY FUTURES
5. The authority citation for part 242
continues to read as follows:
■
Authority: 15 U.S.C. 77g, 77q(a), 77s(a),
78b, 78c, 78g(c)(2), 78i(a), 78j, 78k–1(c), 78l,
78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a),
78q(b), 78q(h), 78w(a), 78dd–1, 78mm, 80a–
23, 80a–29, and 80a–37.
6. Amend § 242.300 by:
a. In paragraph (b), removing ‘‘orders’’
and adding in its place ‘‘trading
interest’’;
■ b. Revising paragraph (c);
■ c. Adding a sentence at the end of
paragraph (k); and
■ d. Adding paragraphs (l) through (s).
The revision and additions read as
follows:
■
■
§ 240.3b–16 Definitions of terms used in
Section 3(a)(1) of the Act.
VerDate Sep<11>2014
(e) For purposes of this section, the
term trading interest means an order as
the term is defined under paragraph (c)
of this section or any non-firm
indication of a willingness to buy or sell
a security that identifies at least the
security and either quantity, direction
(buy or sell), or price.
*
*
*
*
*
§ 242.300
Definitions.
*
*
*
*
*
(c) Affiliate means, with respect to a
specified person, any person that,
directly or indirectly, controls, is under
common control with, or is controlled
by, the specified person.
*
*
*
*
*
(k) * * * An NMS Stock ATS shall
not trade securities other than NMS
stocks.
(l) Government Securities ATS means
an alternative trading system, as defined
in paragraph (a) of this section, that
trades government securities, as defined
in section 3(a)(42) of the Act (15 U.S.C.
78c(a)(42)) or repurchase and reverse
repurchase agreements on government
securities. A Government Securities
ATS shall not trade securities other than
government securities or repurchase and
reverse repurchase agreements on
government securities.
(m) Covered ATS means an NMS
Stock ATS or Government Securities
ATS, as applicable.
(n) Legacy Government Securities
ATS means a Government Securities
ATS operating as of [effective date of the
final rule] that was either:
(1) Formerly not required to comply
with this section and §§ 242.301
through 242.304 (Regulation ATS)
pursuant to the exemption under
§ 240.3a1–1(a)(3) of this chapter prior to
[effective date of the final rule]; or
PO 00000
Frm 00152
Fmt 4701
Sfmt 4702
(2) Operating pursuant to an initial
operation report on Form ATS on file
with the Commission as of [effective
date of the final rule].
(o) U.S. Treasury Security means a
security issued by the U.S. Department
of the Treasury.
(p) Agency Security means a debt
security issued or guaranteed by a U.S.
executive agency, as defined in 5 U.S.C.
105, or government-sponsored
enterprise, as defined in 2 U.S.C. 622(8).
(q) Trading Interest means an order, as
defined in paragraph (e) of this section,
or any non-firm indication of a
willingness to buy or sell a security that
identifies at least the security and either
quantity, direction (buy or sell), or
price.
(r) Newly Designated ATS means an
alternative trading system operating as
of [effective date of the final rule] that
meets the criteria under § 240.3b–16(a)
of this chapter as of [effective date of the
final rule] but did not meet the criteria
under § 240.3b–16(a) of this chapter in
effect prior to [effective date of the final
rule].
(s) Covered Newly Designated ATS
means a Newly Designated ATS that is
a Government Securities ATS or NMS
Stock ATS.
■ 7. Amend § 242.301 by:
■ a. Removing and reserving paragraphs
(a)(4)(ii)(A) through (C);
■ b. Revising paragraphs (b)(1) and
(b)(2)(i);
■ c. In paragraph (b)(2)(vi), adding the
words ‘‘and information filed pursuant
to paragraph (b)(9) of this section’’ after
the words ‘‘pursuant to this paragraph
(b)(2)’’;
■ d. Revising paragraphs (b)(2)(vii) and
(viii) and (b)(5)(i) introducotry text;
■ e. In paragraph (b)(5)(i)(A), adding the
word ‘‘share’’ after the phrase ‘‘average
daily’’;
■ f. In paragraph (b)(5)(i)(B), adding the
word ‘‘share’’ after the phrase ‘‘average
daily trading’’;
■ g. In paragraphs (b)(5)(i)(C):
■ i. Adding the word ‘‘dollar’’ after the
phrase ‘‘average daily’’;
■ ii. Adding the phrase ‘‘as provided by
the self-regulatory organization to which
such transactions are reported’’ after the
phrase ‘‘in the United States’’; and
■ iii. Removing the word ‘‘or’’ at the end
of the paragraph;
■ h. In paragraph (b)(5)(i)(D):
■ i. Adding the word ‘‘dollar’’ after the
phrase ‘‘average daily’’;
■ ii. Adding the phrase ‘‘as provided by
self-regulatory organizations to which
such transactions are reported’’ after the
phrase ‘‘in the United States’’; and
■ iii. Removing the period and adding a
semicolon in its place;
■ i. Adding paragraphs (b)(5)(i)(E), (F),
and (G);
E:\FR\FM\18MRP2.SGM
18MRP2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
j. Removing paragraph (b)(5)(iii);
k. Redesignating paragraph (b)(5)(ii) as
paragraph (b)(5)(iii) and revising the
newly redesiganted paragraph;
■ l. Adding new paragraph (b)(5)(ii);
■ m. In paragraphs (b)(6)(i)(A) and (B),
adding the word ‘‘dollar’’ after the
phrase ‘‘average daily’’;
■ n. Removing paragraph (b)(6)(iii);
■ o. In paragraph (b)(9)(i):
■ i. Removing the words ‘‘Separately
file’’ and adding ‘‘File’’ in their place;
and
■ ii. Removing the phrase ‘‘for
transactions in NMS stocks, as defined
in paragraph (g) of this section, and
transactions in securities other than
NMS stocks’’; and
■ p. In paragraph (b)(9)(ii):
■ i. Removing the words ‘‘Separately
file’’ and adding ‘‘File’’ in their palce;
and
■ ii. Removing the phrase ‘‘for
transactions in NMS stocks and
transactions in securities other than
NMS stocks’’.
The revisions and additions read as
follows:
■
■
§ 242.301 Requirements for alternative
trading systems.
jspears on DSK121TN23PROD with PROPOSALS2
*
*
*
*
*
(b) * * *
(1) Broker-dealer registration. The
alternative trading system shall register
as a broker-dealer under section 15 of
the Act (15 U.S.C. 78o) or section
15C(a)(1)(A) of the Act (15 U.S.C. 78o–
5(a)(1)(A)). Notwithstanding the
preceding sentence, provided that it
complies with the applicable conditions
in § 240.3a1–1(a)(2) of ths chapater, an
alternative trading system that is not
registered as a broker-dealer and is
either:
(i) A Legacy Government Securities
ATS that was formerly not required to
comply with §§ 242.300 through
242.304 (Regulation ATS) pursuant to
the exemption under § 240.3a1–1(a)(3)
of this chapter prior to [effective date of
the final rule]; or
(ii) A Newly Designated ATS, may
provisionally operate pursuant to the
exemption under § 240.3a1–1(a)(2) of
this chapter, until the earlier of:
(A) The date the alternative trading
system registers as a broker-dealer under
section 15 of the Act or section
15C(a)(1)(A) of the Act and becomes a
member of a national securities
association; or
(B) [date 210 calendar days after the
effective date of the final rule].
(2) * * *
(i) The alternative trading system
(other than a Covered ATS) shall file an
initial operation report on Form ATS,
§ 249.637 of this chapter, in accordance
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
with the instructions therein, at least 20
days prior to commencing operation as
an alternative trading system.
Notwithstanding the preceding
sentence, a Newly Designated ATS
(other than a Covered Newly Designated
ATS) shall file an initial operation
report on Form ATS, in accordance with
the instructions therein, no later than
[date 30 calendar days after the effective
date of the final rule].
*
*
*
*
*
(vii) An ATS must file a Form ATS or
Form ATS–R in accordance with the
instructions therein. The reports
provided for in paragraphs (b)(2) and (9)
of this section shall be filed on Form
ATS or Form ATS–R, as applicable, and
include all information as prescribed in
Form ATS or Form ATS–R, as
applicable, and the instructions thereto.
Any such document shall be executed
at, or prior to, the time Form ATS or
Form ATS–R is filed and shall be
retained by the ATS in accordance with
§ 242.303 and § 232.302 of this chapter,
and the instructions in Form ATS or
Form ATS–R, as applicable. Duplicates
of the reports provided for in paragraphs
(b)(2)(i) through (v) of this section must
be filed with surveillance personnel
designated as such by any selfregulatory organization that is the
designated examining authority for the
alternative trading system pursuant to
§ 240.17d–1 of this chapter
simultaneously with filing with the
Commission. Duplicates of the reports
required by paragraph (b)(9) of this
section shall be provided to surveillance
personnel of such self-regulatory
authority upon request. All reports filed
pursuant to this paragraph (b)(2) and
paragraph (b)(9) of this section (except
for types of securities traded provided
on Form ATS and Form ATS–R) will be
accorded confidential treatment subject
to applicable law.
(viii) A Legacy Government Securities
ATS operating pursuant to an initial
operation report on Form ATS on file
with the Commission as of [effective
date of the final rule] shall be subject to
the requirements of paragraphs (b)(2)(i)
through (vii) of this section until that
ATS files an initial Form ATS–N with
the Commission pursuant to
§ 242.304(a)(1)(iv)(A). Thereafter, the
Legacy Government Securities ATS
shall file reports pursuant to § 242.304
and shall not be subject to the
requirements of paragraphs (b)(2)(i)
through (vii) of this section. A Legacy
Government Securities ATS that was
formerly not required to comply with
Regulation ATS pursuant to the
exemption under § 240.3a1–1(a)(3) of
this chapter prior to [effective date of
PO 00000
Frm 00153
Fmt 4701
Sfmt 4702
15647
the final rule], or a Covered Newly
Designated ATS, shall file reports
pursuant to § 242.304 and shall not be
subject to the requirements of
paragraphs (b)(2)(i) through (vii) of this
section. As of [effective date of the final
rule], an entity seeking to operate as a
Government Securities ATS shall not be
subject to the requirements of
paragraphs (b)(2)(i) through (vii) of this
section and shall file reports pursuant to
§ 242.304. An NMS Stock ATS or entity
seeking to operate as an NMS Stock ATS
shall not be subject to the requirements
of paragraphs (b)(2)(i) through (vii) of
this section and shall file reports
pursuant to § 242.304. An ATS that is
not a Covered ATS shall be subject to
paragraph (b)(2) of this section. Each
Covered ATS that is operated by a
broker-dealer that is the registered
broker-dealer for more than one ATS
must comply with Regulation ATS,
including the filing requirements of
§ 242.304.
*
*
*
*
*
(5) Fair access. (i) An alternative
trading system shall comply with the
requirements in paragraph (b)(5)(iii) of
this section, if during at least 4 of the
preceding 6 calendar months, such
alternative trading system had:
*
*
*
*
*
(E) With respect to U.S. Treasury
Securities, 3 percent or more of the
average weekly dollar volume traded in
the United States as provided by the
self-regulatory organization to which
such transactions are reported; or
(F) With respect to Agency Securities,
5 percent or more of the average daily
dollar volume traded in the United
States as provided by the self-regulatory
organization to which such transactions
are reported.
(G) Provided, however, that a Newly
Designated ATS or Legacy Government
Securities ATS shall not be required to
comply with the requirements in
paragraph (b)(5)(iii) of this section until
one month after initially satisfying any
of the paragraphs (b)(5)(i)(A) through (F)
of this section.
(ii) For purposes of calculating the
volume thresholds of paragraph (b)(5)(i)
of this section, the average transaction
volume for a security or security
category of alternative trading systems
that are operated by a common brokerdealer, or alternative trading systems
operated by affiliated broker-dealers,
will be aggregated.
(iii) An alternative trading system
shall:
(A) Establish and apply reasonable
written standards for granting, limiting,
and denying access to the services of the
E:\FR\FM\18MRP2.SGM
18MRP2
15648
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
alternative trading system that, at a
minimum:
(1) Provide the date that each
standard is adopted, effective, and
modified;
(2) Set forth any objective and
quantitative criteria upon which each
standard is based;
(3) Identify any differences in access
to the services of the alternative trading
system by an applicant and current
participants;
(4) Justify why each standard,
including any differences in access to
the services of the alternative trading
system, is fair and not unreasonably
discriminatory; and
(5) Provide the information required
by paragraphs (b)(5)(iii)(A)(1) through
(4) of this section about any standards
for granting, limiting, or denying access
to the alternative trading system
services that are performed by a person
other than the broker-dealer operator.
(B) Make and keep records of:
(1) All grants of access including, for
all participants, the reasons for granting
such access under the standards
provided in paragraph (b)(5)(iii)(A) of
this section; and
(2) All denials or limitations of access
and reasons, for each applicant and
participant, for denying or limiting
access to the services of the alternative
trading system under the standards
provided in paragraph (b)(5)(iii)(A) of
this section; and
(C) Report the information required
on Form ATS–R (§ 249.638 of this
chapter) regarding grants, denials, and
limitations of access.
*
*
*
*
*
§ 242.302 Recordkeeping requirements for
alternative trading systems.
8. Amend § 242.302 by:
a. In the introductory text to
paragraph (c), removing ‘‘order’’ and
adding in its place ‘‘trading interest’’;
■ b. In paragraphs (c)(1), (3), (5), and (8)
through (15), removing ‘‘order’’
wherever it appears and adding in its
place ‘‘trading interest’’; and
■ c. In paragraph (c)(5), removing ‘‘a’’
before the phrase ‘‘buy or sell’’.
■
■
§ 242.303 Record preservation
requirements for alternative trading
systems.
9. Amend § 242.303 by:
a. In paragraph (a)(1)(iii), adding ‘‘,
including each version,’’ after the
phrase ‘‘at least one copy’’ and adding
‘‘written’’ before the word ‘‘standards’’;
■ b. In paragraph (a)(1)(iv), adding ‘‘,
including each version,’’ after the
phrase ‘‘At least one copy’’; and
■ c. In paragraph (a)(1)(v), adding ‘‘,
including each version,’’ after the
phrase ‘‘At least one copy’’.
jspears on DSK121TN23PROD with PROPOSALS2
■
■
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
10. Amend § 242.304 by:
a. Revising the section heading;
b. In the introductory text to
paragraph (a), removing ‘‘an NMS Stock
ATS’’ and adding in its place ‘‘a
Covered ATS’’;
■ c. In paragraphs (a)(1)(i) through (iii):
■ i. Removing ‘‘an NMS Stock ATS’’
wherever it appears and adding in its
place ‘‘a Covered ATS’’; and
■ ii. Removing ‘‘NMS Stock ATS’’
wherever it appears and adding in its
place ‘‘Covered ATS’’;
■ d. In paragraph (a)(1)(i), adding a
sentence at the end of the paragraph;
■ e. In paragraph (a)(1)(ii)(A)(1),
removing the phrase ‘‘the Form ATS–N
is unusually lengthy or raises novel or
complex issues that require additional
time for review’’ and adding in its place
‘‘the Commission determines that a
longer period is appropriate’’;
■ f. In paragraph (a)(1)(ii)(B), removing
the phrase ‘‘paragraphs (a)(2)(i)(B) and
(C)’’ and adding in its place ‘‘paragraphs
(a)(2)(i)(B), (C), and (E)’’;
■ g. In paragraph (a)(1)(iv):
■ i. Revising the paragraph heading; and
■ ii. Removing ‘‘Legacy NMS Stock
ATS’’ wherever it appears and adding in
its place ‘‘Legacy Government Securities
ATS or Covered Newly Designated
ATS’’;
■ h. Revising paragraph (a)(1)(iv)(A)
introductory text;
■ i. In the introductory text to paragraph
(a)(1)(iv)(B), removing ‘‘120’’ and adding
in its place ‘‘180’’;
■ j. In paragraph (a)(1)(iv)(B)(1),
removing ‘‘the initial Form ATS–N is
unusually lengthy or raises novel or
complex issues that require additional
time for review’’ and ‘‘initial 120calendar day’’ and adding in their
places ‘‘the Commission determines that
a longer period is appropriate’’ and
‘‘initial 180-calendar day’’, respectively;
■ k. In the introductory text to
paragraph (a)(2)(i), removing ‘‘An NMS
Stock ATS’’ and adding ‘‘A Covered
ATS’’ in its place;
■ l. In paragraph (a)(2)(i)(A), removing
‘‘except as provided by paragraph
(a)(2)(i)(D) of this section,’’ and ‘‘NMS
Stock ATS’’ and adding in their places
‘‘or the length of any extended review
period pursuant to paragraph
(a)(2)(ii)(A) of this section,’’ and
‘‘Covered ATS’’, respectively;
■ m. In paragraph (a)(2)(i)(B), removing
‘‘or (D)’’ and adding ‘‘(D), or (E)’’ in its
place;
■ n. In paragraph (a)(2)(i)(C), removing
‘‘or’’ at the end of the paragraph;
■ o. In paragraph (a)(2)(i)(D):
■ i. Removing ‘‘Items 24 and 25’’ and
‘‘Order Display and Fair Access
Amendment’’ and adding in their places
‘‘Items 23 and 24’’ and ‘‘Contingent
Amendment’’, respectively; and
■
■
■
PO 00000
Frm 00154
Fmt 4701
Sfmt 4702
ii. Removing the period at the end of
the paragraph and adding ‘‘; or’’ in its
place;
■ p. Adding paragraph (a)(2)(i)(E);
■ q. Revising paragraph (a)(2)(ii);
■ r. In paragraphs (a)(3) and (4), (b), and
(c):
■ i. Removing ‘‘An NMS Stock ATS’’
and ‘‘an NMS Stock ATS’’ and adding
in their places ‘‘A Covered ATS’’ and ‘‘a
Covered ATS’’, respectively; and
■ ii. Removing ‘‘NMS Stock ATS’’
wherever it appears and adding in its
place ‘‘Covered ATS’’;
■ s. In paragraph (b)(2)(iii)(A):
■ i. Removing the colon at the end of the
paragrpah heading and adding a period
in its place; and
■ ii. Adding ‘‘, or any extended review
period,’’ after ‘‘the expiration of the
review period’’; and
■ t. In paragraph (b)(2)(iii)(B):
■ i. Revising the heading; and
■ ii. In the first sentence, removing
‘‘Updating, Correcting, and Order
Display and Fair Access Amendments’’
and adding ‘‘Updating, Correcting, Fee,
and Contingent Amendments’’ in it
place.
The revisions and addition read as
follows:
■
§ 242.304
Covered ATSs.
(a) * * *
(1) * * *
(i) * * * Notwithstanding the
preceding sentence, a Legacy
Government Securities ATS that was
formerly not required to comply with
§§ 242.300 through 242.304 (Regulation
ATS) pursuant to the exemption under
§ 240.3a1–1(a)(3) of this chapter prior to
[effective date of the final rule] or
Covered Newly Designated ATS, may
continue to operate pursuant to the
exemption under § 240.3a1–1(a)(2) of
this chapter until its initial Form ATS–
N becomes effective.
*
*
*
*
*
(iv) Transition for Legacy Government
Securities ATSs and Covered Newly
Designated ATSs—(A) Initial Form
ATS–N filing requirements. A Legacy
Government Securities ATS or a
Covered Newly Designated ATS shall
file with the Commission an initial
Form ATS–N, in accordance with the
conditions of this section, no later than
[date 90 calendar days after the effective
date of the final rule]. An initial Form
ATS–N filed by a Legacy Government
Securities ATS operating pursuant to an
initial operation report on Form ATS on
file with the Commission as of [effective
date of the final rule] shall supersede
and replace for purposes of the
exemption the previously filed Form
ATS of the Legacy Government
Securities ATS. A Legacy Government
E:\FR\FM\18MRP2.SGM
18MRP2
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Securities ATS or Covered Newly
Designated ATS may operate, on a
provisional basis, pursuant to the filed
initial Form ATS–N, and any
amendments thereto, during the review
of the initial Form ATS–N by the
Commission. An initial Form ATS–N
filed by a Legacy Government Securities
ATS or Covered Newly Designated ATS,
as amended, will become effective,
unless declared ineffective, upon the
earlier of:
*
*
*
*
*
(2) * * *
(i) * * *
(E) No later than the date that the
information required to be disclosed in
Part III, Item 18 on Form ATS–N has
become inaccurate or incomplete (‘‘Fee
Amendment’’).
(ii) Commission review period;
ineffectiveness determination. (A) The
Commission will, by order, declare
ineffective any Form ATS–N
amendment filed pursuant to
paragraphs (a)(2)(i)(A) through (E) of
this section, no later than 30 calendar
days from filing with the Commission,
or, if applicable, the end of the extended
review period, if the Commission finds
that such action is necessary or
appropriate in the public interest, and is
consistent with the protection of
investors. The Commission may extend
the amendment review period for:
(1) An additional 30 calendar days, if
the Commission determines that a
longer period is appropriate; or
(2) Any extended review period to
which a duly authorized representative
of the Covered ATS agrees in writing.
(B) A Form ATS–N amendment
declared ineffective shall prohibit the
Covered ATS from operating pursuant
to the ineffective Form ATS–N
amendment. A Form ATS–N
amendment declared ineffective does
not prevent the Covered ATS from
subsequently filing a new Form ATS–N
amendment.
(C) During review by the Commission
of a Material Amendment, the Covered
ATS shall amend the Material
Amendment pursuant to the
requirements of paragraphs (a)(2)(i)(B)
through (C) of this section. To make
material changes to a filed Material
Amendment during the Commission
review period, an ATS shall withdraw
its filed Material Amendment and must
file the new Material Amendment
pursuant to (a)(2)(i)(A) of this section.
*
*
*
*
*
(b) * * *
(2) * * *
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
(iii) * * *
(B) Updating, Correcting, Fee, and
Contingent Amendments. * * *
*
*
*
*
*
■ 11. Amend § 242.1000 by:
■ a. Adding, in alphabetical order, a
definition for ‘‘Agency Securities’’;
■ b. In the definition of ‘‘SCI alternative
trading system or SCI ATS’’:
■ i. Removing the word ‘‘or’’ at the end
of paragraph (1)(ii);
■ ii. Redesignating paragraph (3) as
paragraph (5);
■ iii. Adding a new paragraph (3) and
paragraph (4); and
■ iv. In newly redesignated paragraph
(5), removing ‘‘paragraphs (1) or (2)’’
and adding in its place ‘‘paragraph (1),
(2), (3), or (4)’’; and
■ c. Adding, in alphabetical order, a
definition for ‘‘U.S. Treasury
Securities’’.
The additions read as follows:
§ 242.1000
Definitions.
*
*
*
*
*
Agency Security has the meaning set
forth in § 242.300(p).
*
*
*
*
*
SCI alternative trading system or SCI
ATS * * *
(3) Had with respect to U.S. Treasury
Securities, five percent (5%) or more of
the average weekly dollar volume traded
in the United States as provided by the
self-regulatory organization to which
such transactions are reported; or
(4) Had with respect to Agency
Securities, five percent (5%) or more of
the average daily dollar volume traded
in the United States as provided by the
self-regulatory organization to which
such transactions are reported.
*
*
*
*
*
U.S. Treasury Security has the
meaning set forth in § 242.300(o).
PART 249—FORMS, SECURITIES
EXCHANGE ACT OF 1934
12. The general authority citation for
part 249 continues to read as follows:
■
Authority: 15 U.S.C. 78a et seq. and 7201
et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350;
Sec. 953(b) Pub. L. 111–203, 124 Stat. 1904;
Sec. 102(a)(3) Pub. L. 112–106, 126 Stat. 309
(2012), Sec. 107 Pub. L. 112–106, 126 Stat.
313 (2012), Sec. 72001 Pub. L. 114–94, 129
Stat. 1312 (2015), and secs. 2 and 3 Pub. L.
116–222, 134 Stat. 1063 (2020), unless
otherwise noted.
*
*
*
*
*
13. Amend Form ATS (referenced in
§ 249.637) by:
■ a. In the General Instructions, Item
A.2, after ‘‘commencing operation’’
■
PO 00000
Frm 00155
Fmt 4701
Sfmt 4702
15649
adding ‘‘and a Newly Designated ATS
(other than a Covered Newly Designated
ATS, as defined in Rule 300(s) of the
Exchange Act (17 CFR 242.300(s))) must
file an initial operation report on Form
ATS no later than [date 30 calendar
days after the date of effective date of
the final rule].’’.
■ b. In the General Instructions, revising
Items A.3 through A.6.
■ c. In the General Instructions, revising
the fifth and seventh paragraphs of Item
A.7.
■ d. In the General Instructions, adding
new paragraph A.8.
■ e. In the Explanation of Terms, in the
definition of ‘‘Subscriber’’, removing the
word ‘‘order’’ and adding ‘‘trading
interest’’ in its place.
■ f. In the Explanation of Terms, adding
the definition of ‘‘Trading Interest’’ and
‘‘Newly Designated ATS’’ in
alphabetical order.
■ g. At the top of page 1 of the form,
removing ‘‘INITIAL OPERATION
REPORT’’, ‘‘AMENDMENT TO INITIAL
OPERATION REPORT’’, ‘‘CESSATION
OF OPERATIONS REPORT’’ and
accompanying check boxes and adding
text under a new heading ‘‘Type of
Filing (select one)’’.
■ h. At the top and side of page 1 to the
Form removing:
■ i. ‘‘Form ATS Page 1 Execution Page’’;
■ ii. ‘‘Date filed (MM/DD/YY)’’; and
■ ii. ‘‘[OFFICIAL USE ONLY]’’.
■ i. Revising Items 2 through 5.
■ j. Removing Items 6 through 11.
■ k. Removing the text on page 1 of the
form beginning ‘‘EXECUTION’’, the
signature block below, the instruction
that states ‘‘This page must always be
completed in full with original, manual
signature and notarization. Affix notary
stamp or seal where applicable.’’ and
‘‘DO NOT WRITE BELOW THIS LINE—
FOR OFFICIAL USE ONLY’’.
■ l. On page 2 of the form, removing the
following text:
Alternative trading system name: lll
Filing date: lllllllllllll
CRD Number: llllllllllll
SEC File Number: 8– llllllll
■ m. At the top and side of page 2 to the
Form removing:
■ i. ‘‘Form ATS Page 2 Execution Page’’;
■ ii. ‘‘Date filed (MM/DD/YY)’’; and
■ iii. ‘‘[OFFICIAL USE ONLY]’’.
The revisions and additions read as
follows:
Note: The text of Form ATS does not and
this amendment will not appear in the Code
of Federal Regulations.
BILLING CODE 8011–01–P
E:\FR\FM\18MRP2.SGM
18MRP2
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00156
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.038</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15650
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00157
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15651
EP18MR22.039</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00158
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.040</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15652
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00159
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15653
EP18MR22.041</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00160
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.042</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15654
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
jspears on DSK121TN23PROD with PROPOSALS2
*
*
*
*
■ 14. Amend Form ATS–R (referenced
in § 249.638) by:
■ a. In the General Instructions, revising
Items A.3 through A.6.
■ b. In the General Instructions, revising
the fifth and seventh paragraphs of Item
A.7.
■ c. In the Explanation of Terms,
removing the definitions of ‘‘Nasdaq
National Market Securities’’ and
‘‘Nasdaq SmallCap Market Securities’’.
■ d. In the Explanation of Terms, adding
the definitions of ‘‘Agency Securities,’’
‘‘Foreign Sovereign Debt Securities,’’
‘‘U.S. Treasury Securities,’’ and
‘‘Trading Interest’’.
■ e. In the Explanation of Terms, in the
definition of ‘‘Subscriber,’’ removing the
word ‘‘order’’ and adding in its place
the word ‘‘trading interest’’.
■ f. On page 1 of the form, immediately
before Section 1, adding text under a
new heading ‘‘Type of Filing’’.
VerDate Sep<11>2014
20:33 Mar 17, 2022
g. At the top and side of page 1 to the
Form removing:
■ i. ‘‘Form ATS Page 1 Execution Page’’;
■ ii. ‘‘Date filed (MM/DD/YY)’’; and
■ iii. ‘‘[OFFICIAL USE ONLY]’’.
■ h. Revising Item 1.
■ i. Removing the text on page 1 of the
form beginning ‘‘EXECUTION’’, the
signature block below, the instruction
that states ‘‘This page must always be
completed in full with original, manual
signature and notarization. Affix notary
stamp or seal where applicable.’’ and
‘‘DO NOT WRITE BELOW THIS LINE—
FOR OFFICIAL USE ONLY’’.
■ j. On pages 2 and 3 of the form,
removing the following text:
■
*
Jkt 256001
DO NOT WRITE BELOW THIS LINE—
FOR OFFICIAL USE ONLY
k. At the top and side of page 2 to the
Form removing:
■ i. ‘‘Form ATS Page 2 Execution Page’’;
■ ii. ‘‘Date filed (MM/DD/YY)’’; and
■ iii. ‘‘[OFFICIAL USE ONLY]’’.
■ l. At the top and side of page 3 to the
Form removing:
■ i. ‘‘Form ATS Page 3 Execution Page’’;
■ ii. ‘‘Date filed (MM/DD/YY)’’; and
■ iii. ‘‘[OFFICIAL USE ONLY]’’.
■ m. Revising Item 4.
■ n. Adding Item 5.C.
■ o. Revising Item 6.
■ p. Adding Item 8.
■ q. Adding a signature block at the end
of the form.
The additions and revisions read as
follows:
■
Note: The text of Form ATS–R does not
Alternative trading system name: lll
and
this amendment will not appear in the
Filing date: lllllllllllll
CRD Number: llllllllllll Code of Federal Regulations.
SEC File Number: 8– llllllll BILLING CODE 8011–01–P
PO 00000
Frm 00161
Fmt 4701
Sfmt 4702
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.043</GPH>
BILLING CODE 8011–01–C
15655
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00162
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.044</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15656
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00163
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15657
EP18MR22.045</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00164
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.046</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15658
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00165
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15659
EP18MR22.000</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00166
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.047</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15660
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00167
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15661
EP18MR22.001</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
15. Revise Form ATS–N (referenced in
§ 249.640).
■
jspears on DSK121TN23PROD with PROPOSALS2
Note: Form ATS–N is attached as
Appendix A to this document. Form ATS–N
will not appear in the Code of Federal
Regulations.
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
Dated: January 26, 2022.
Vanessa A. Countryman,
Secretary.
APPENDIX A—MARKED FORM ATS–
N
Note: The following appendix will not
appear in the Code of Federal Regulations.
PO 00000
Frm 00168
Fmt 4701
Sfmt 4702
Deleted text is [bracketed]. New text
is italicized.
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.048</GPH>
15662
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00169
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15663
EP18MR22.002</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00170
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.003</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15664
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00171
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15665
EP18MR22.004</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00172
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.005</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15666
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00173
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15667
EP18MR22.006</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00174
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.007</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15668
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00175
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15669
EP18MR22.008</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00176
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.009</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15670
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00177
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15671
EP18MR22.010</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00178
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.011</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15672
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00179
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15673
EP18MR22.012</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00180
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.013</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15674
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00181
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15675
EP18MR22.014</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00182
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.015</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15676
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00183
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15677
EP18MR22.016</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00184
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.017</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15678
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00185
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15679
EP18MR22.018</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00186
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.019</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15680
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00187
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15681
EP18MR22.020</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00188
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.021</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15682
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00189
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15683
EP18MR22.022</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00190
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.023</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15684
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00191
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15685
EP18MR22.024</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00192
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.025</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15686
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00193
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15687
EP18MR22.026</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00194
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.027</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15688
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00195
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15689
EP18MR22.028</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00196
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.029</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15690
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00197
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15691
EP18MR22.030</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00198
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.031</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15692
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00199
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15693
EP18MR22.032</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
VerDate Sep<11>2014
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00200
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.033</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
15694
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00201
Fmt 4701
Sfmt 4725
E:\FR\FM\18MRP2.SGM
18MRP2
15695
EP18MR22.034</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
15696
Federal Register / Vol. 87, No. 53 / Friday, March 18, 2022 / Proposed Rules
[FR Doc. 2022–01975 Filed 3–17–22; 8:45 am]
VerDate Sep<11>2014
20:33 Mar 17, 2022
Jkt 256001
PO 00000
Frm 00202
Fmt 4701
Sfmt 9990
E:\FR\FM\18MRP2.SGM
18MRP2
EP18MR22.035</GPH>
jspears on DSK121TN23PROD with PROPOSALS2
BILLING CODE 8011–01–C
]]>Agencies
[Federal Register Volume 87, Number 53 (Friday, March 18, 2022)]
[Proposed Rules]
[Pages 15496-15696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01975]
[[Page 15495]]
Vol. 87
Friday,
No. 53
March 18, 2022
Part II
Securities and Exchange Commission
-----------------------------------------------------------------------
17 CFR Parts 232, 240, 242, et al.
Amendments Regarding the Definition of ``Exchange'' and Alternative
Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities,
National Market System (NMS) Stocks, and Other Securities; Proposed
Rule
Federal Register / Vol. 87 , No. 53 / Friday, March 18, 2022 /
Proposed Rules
[[Page 15496]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 232, 240, 242, and 249
[Release No. 34-94062; File No. S7-02-22]
RIN 3235-AM45
Amendments Regarding the Definition of ``Exchange'' and
Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency
Securities, National Market System (NMS) Stocks, and Other Securities
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing to amend Rule 3b-16 under Securities Exchange Act of 1934
(``Exchange Act''), which defines certain terms used in the statutory
definition of ``exchange'' under Section 3(a)(1) of the Exchange Act to
include systems that offer the use of non-firm trading interest and
communication protocols to bring together buyers and sellers of
securities. In addition, the Commission is re-proposing amendments to
its regulations under the Exchange Act that were initially proposed in
September 2020 for ATSs to take into consideration systems that may
fall within the definition of exchange because of the proposed
amendments and operate as an ATS. The Commission is re-proposing, with
certain revisions, amendments to its regulations for ATSs that trade
government securities as defined under Section 3(a)(42) of the Exchange
Act (``government securities'') or repurchase and reverse repurchase
agreements on government securities (``Government Securities ATSs'').
The Commission is also proposing to amend Form ATS-N for NMS Stock
ATSs, which would require existing NMS Stock ATSs to amend their
existing disclosures. In addition, the Commission is proposing to amend
the fair access rule for ATSs. The Commission is also proposing to
require electronic filing of and to modernize Form ATS-R and Form ATS,
which would require existing Form ATS filers to amend their existing
disclosures. Further, the Commission is re-proposing amendments to its
regulations regarding systems compliance and integrity to apply to ATSs
that meet certain volume thresholds in U.S. Treasury Securities or in a
debt security issued or guaranteed by a U.S. executive agency, or
government-sponsored enterprise (``Agency Securities'').
DATES: Comments should be received on or before April 18, 2022.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/regulatory-actions/how-to-submit-comments); or
Send an email to [email protected]. Please include
File Number S7-02-22 on the subject line.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-02-22. 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/proposed.shtml). Comments are also 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
a.m. and 3 p.m. Operating conditions may limit access to the
Commission's public reference room. 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.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any materials will
be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Regulation ATS: Tyler Raimo, Assistant
Director, at (202) 551-6227; Matthew Cursio, Special Counsel, at (202)
551-5748; David Garcia, Special Counsel, at (202) 551-5681; Megan
Mitchell, Special Counsel, at (202) 551-4887; Amir Katz, Special
Counsel, at (202) 551-7653; and Joanne Kim, Attorney Advisor, at (202)
551-4393, and for Regulation SCI: David Liu, Special Counsel, at (312)
353-6265 and Sara Hawkins, Special Counsel, at (202) 551-5523, Office
of Market Supervision, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to
the following rules under the Exchange Act: (1) 17 CFR 232.101 (Rule
101 of Regulation S-T); (2) 17 CFR 240.3b-16 (Rule 3b-16); (3) 17 CFR
242.300 (Rule 300 of Regulation ATS); \1\ (4) 17 CFR 242.301 (Rule 301
of Regulation ATS); (5) 17 CFR 242.302 (Rule 302 of Regulation ATS);
(6) 17 CFR 242.304 (Rule 304 of Regulation ATS); \2\ and (7) 17 CFR
242.1000 (Rule 1000 of Regulation SCI).\3\
---------------------------------------------------------------------------
\1\ ``Regulation ATS'' consists of 17 CFR 242.300 through
242.304 (Rules 300 through 304 under the Exchange Act). See also
Regulation ATS Adopting Release, infra note 31.
\2\ The Commission adopted Rule 304 on July 18, 2018. See
Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR
38768 (August 7, 2018) (``NMS Stock ATS Adopting Release'').
\3\ The Commission adopted 12 CFR 242.1000 through 242.1007
(Regulation SCI) on November 19, 2014. See Securities Exchange Act
Release No. 73639 (November 19, 2014), 79 FR 72252 (December 5,
2014) (``Regulation SCI Adopting Release'').
---------------------------------------------------------------------------
I. Introduction
In September 2020, the Commission issued a proposal to amend
Regulation ATS and Regulation SCI for Government Securities ATSs
(``2020 Proposal'').\4\ The Commission recognized the critical role of
government securities in the U.S. and global economy, the significant
volume in government securities transacted on systems currently
operating as ATSs, and these ATSs' growing importance to investors and
overall securities market structure. Notwithstanding their importance
for government securities, the investor protection and fair and orderly
market principles of Regulation ATS have limited application to
Government Securities ATSs.\5\ For
[[Page 15497]]
example, an ATS that limits its securities activities to government
securities or reverse repurchase agreements on government securities
(``repos'') and registers as a broker-dealer or is a bank (i.e., a
Currently Exempted Government Securities ATS) is exempt from exchange
registration and is not required to comply with Regulation ATS.
Further, ATSs that trade both government securities and non-government
securities (e.g., corporate bonds) are subject to Regulation ATS but
are not required to comply with many of its investor protection and
fair and orderly markets provisions, including public transparency
rules and the obligation to provide fair access to investors if the ATS
has significant trading volume. In addition, ATSs that trade government
securities are not subject to the systems integrity provisions of
Regulation SCI.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 90019 (September 28,
2020), 85 FR 87106 (December 31, 2020).
\5\ For the purposes of this re-proposal, the term ``Government
Securities ATS'' refers to an ATS that trades government securities
or repos and includes ATSs that would be subject to Regulation ATS
after the effective date of any final rule. This term includes three
categories of ATSs. First, a ``Currently Exempted Government
Securities ATS'' means an ATS that trades government securities or
repos, is operating as of the effective date of any final rule, and
was formerly not required to comply with Regulation ATS under 17 CFR
240.3a1-1(a)(3) (Exchange Act Rule 3a1-1(a)(3)) exemption prior to
the effective date of any final rule. Second, a ``Current Government
Securities ATS'' means an ATS that trades government securities or
repos and is operating pursuant to an initial operation report on
Form ATS on file with the Commission as of the effective date of any
final rule. Finally, when referring to regulatory requirements after
the effective date of any final rule, the term ``Government
Securities ATS'' also includes a Communication Protocol System that
trades U.S. Government securities or repos on U.S. Government
securities and that chooses to operate as an ATS after the effective
date of any final rule. A ``Communication Protocol System'' would
include a system that offers protocols and the use of non-firm
trading interest to bring together buyers and sellers of securities.
The re-proposal also uses the term ``Legacy Government Securities
ATS,'' which includes all ATSs that trade government securities or
repos and are operating as of the effective date of any final rule,
regardless of whether the ATSs are operating pursuant to an initial
operation report on Form ATS on file with the Commission (i.e., all
Current Government Securities ATSs and Currently Exempted Government
Securities ATSs).
---------------------------------------------------------------------------
To promote operational transparency, investor protection, system
integrity, fair and orderly markets, and regulatory oversight for
Government Securities ATSs, the Commission proposed in the 2020
Proposal to: Eliminate the exemption from compliance with Regulation
ATS for Currently Exempted Government Securities ATSs; require all
Government Securities ATSs to publicly file Form ATS-G, on which they
would disclose information about their operations and potential
conflicts of interest; provide a process for the Commission to review
Form ATS-G disclosures for clarity, completeness, and potential
violations of law and, if necessary, declare ineffective Form ATS-G
filings; and require an ATS that has significant volume for U.S.
Treasury Securities or Agency Securities to: (1) Establish reasonable
standards for access to the ATS and apply those standards to all
prospective and current subscribers in a fair and non-discriminatory
manner pursuant Rule 301(b)(5) of Regulation ATS (``Fair Access
Rule''); and (2) comply with the operational capability, security,
business continuity planning, incident reporting, and related
requirements under Regulation SCI.\6\ The Commission issued a concept
release (``Concept Release'') in addition to the 2020 Proposal on the
regulation of fixed income electronic trading platforms.\7\ The Concept
Release requested comments on a wide range of topics, including the
different regulatory treatment among fixed income electronic trading
platforms that use diverse trading protocols or business models and
various aspects of government securities, corporate bonds, and
municipal securities trading, including their operations, services,
fees, market data, and participants.
---------------------------------------------------------------------------
\6\ The Commission also had proposed to amend Regulation ATS to:
Require that Form ATS and Form ATS-R be filed with the Commission
electronically through the Electronic Data Gathering, Analysis and
Retrieval (EDGAR) system and modernize both forms; eliminate
confidential treatment of the types of securities that an ATS trades
as disclosed on the ATS's Form ATS and Form ATS-R; update and
correct Form ATS-N; change the reasons for which the Commission
could extend the initial Form ATS-N review period; require NMS Stock
ATSs to post on their websites the most recently disseminated Form
ATS-N, except for any amendment that the Commission has declared
ineffective or that has been withdrawn; and remove the exclusion
from compliance with the Fair Access Rule and Rule 301(b)(6) under
Regulation ATS for an ATS that matches non-displayed customer orders
using prices disseminated by an effective transaction reporting
plan.
\7\ See 2020 Proposal, supra note 4.
---------------------------------------------------------------------------
The Commission received comments in response to the 2020 Proposal
and Concept Release.\8\ Commenters expressed broad support for the 2020
Proposal. In general, commenters supported the proposed requirements to
remove the exemption for Currently Exempted Government Securities ATSs
and to require public disclosures on Form ATS-G.\9\ However, some
commenters expressed concern regarding aspects of the 2020 Proposal,
including the proposed enhanced disclosure requirements and
effectiveness regime \10\ and the proposal to require Government
Securities ATSs that meet certain volume thresholds to register as
national securities exchanges.\11\ In addition, commenters who opined
on the Fair Access Rule and Regulation SCI had differing views about
whether and how to apply them to Government Securities ATSs.\12\
---------------------------------------------------------------------------
\8\ These comment letters are available at https://www.sec.gov/comments/s7-12-20/s71220.htm and discussed throughout this proposal.
\9\ See, e.g., letter from Marcia E. Asquith, Executive Vice
President & Corporate Secretary, Financial Industry Regulatory
Authority, Inc., dated March 1, 2021 (``FINRA Letter'') at 2; letter
from Rob Toomey, Managing Director & Associate General Counsel,
Securities Industry and Financial Markets Association, Chris
Killian, Managing Director, Securitization and Credit, Securities
Industry and Financial Markets Association, and Leslie Norwood,
Managing Director, Associate General Counsel, Securities Industry
and Financial Markets Association, dated March 1, 2021 (``SIFMA
Letter'') at 2; letter from Elisabeth Kirby, Head of U.S. Market
Structure, Tradeweb Markets Inc., dated March 1, 2021 (``Tradeweb
Letter'') at 2; letter from Jennifer W. Han, Chief Counsel & Head of
Regulatory Affairs, Managed Funds Association, dated March 1, 2021
(``MFA Letter'') at 2-3; and Tyler Gellasch, Executive Director,
Healthy Markets Association, dated March 22, 2021 (``Healthy Markets
Letter'') at 7.
\10\ See letter from Robert Laorno, General Counsel, ICE Bonds
Securities Corporation, dated March 8, 2021 (``ICE Bonds Letter I'')
at 5.
\11\ See letter from Kathleen M. Cronin, Senior Managing
Director, General Counsel and Corporate Secretary, CME Group Inc.,
dated February 26, 2021 (``BrokerTec Letter'') at 3-4.
\12\ See, e.g., SIFMA Letter at 5 (supporting the proposed
volume thresholds); Americans for Financial Reform Education Fund,
dated March 1, 2021 (``AFREF Letter'') at 3 (supporting the proposed
threshold with respect to Regulation SCI and stating that they
believe the proposed threshold for the Fair Access Rule is too low);
Healthy Markets Letter at 10-11 (recommending a lower threshold for
Regulation SCI); letter from Gregory Babyak, Global Head of
Regulatory Affairs, Bloomberg L.P., dated March 1, 2021 (``Bloomberg
Letter'') at 5-6 (stating that the proposed thresholds are too
high); ICE Bonds Letter I at 5 (suggesting a 20 percent threshold
for application of Regulation SCI); Tradeweb Letter at 3, 11
(recommending a ``more material'' threshold for applying Regulation
SCI). See also infra Sections III.B.4 and III.C.
---------------------------------------------------------------------------
In addition, the Commission received substantial comment on the
Concept Release, in particular concerning the regulatory framework for
fixed income electronic trading platforms. Many commenters recognized
that certain electronic trading platforms for fixed income securities
are not regulated as registered exchanges or ATSs despite performing
the same market function as those regulated markets.\13\ Several
commenters expressed support for the Commission to expand the scope of
its exchange regulation to encompass more fixed income platforms,\14\
while several other commenters believed that such action is not
necessary or appropriate.\15\
---------------------------------------------------------------------------
\13\ See, e.g., letter from Stephen John Berger, Managing
Director, Global Head of Government and Regulatory Policy, Citadel,
dated March 1, 2021 (``Citadel Letter''); letter from Joanna
Mallers, Secretary, FIA Principal Traders Group, dated March 1, 2021
(``FIA PTG Letter'') at 2; letter from Robert Laorno, General
Counsel, ICE Bonds Securities Corporation, dated March 15, 2021
(``ICE Bonds Letter II'') at 2-4; FINRA Letter at 6; MFA Letter at
8; Tradeweb Letter at 4.
\14\ See, e.g., Citadel Letter; FIA PTG Letter; ICE Bonds Letter
II.
\15\ See, e.g., letter from Sarah A. Bessin, Associate General
Counsel, Investment Company Institute and Nhan Nguyen, Counsel,
Investment Company Institute, dated March 1, 2021 (``ICI Letter'')
at 2, 7; letter from Scott Pintoff, General Counsel, MarketAxess,
dated March 1, 2021 (``MarketAxess Letter'') at 2-4; Bloomberg
Letter at 17-20.
---------------------------------------------------------------------------
Advances in technology and innovation since Regulation ATS was
adopted in 1998 \16\ have changed the methods by which securities
markets bring together buyers and sellers of
[[Page 15498]]
securities. As discussed further below, innovations in trading
protocols have increased efficiencies and access to discover liquidity
and prices, search for a counterparty, and agree upon the terms of a
trade. Instead of using exchange markets that offer only the use of
firm orders and provide matching algorithms, market participants are
able to connect to numerous Communication Protocol Systems, which offer
the use of protocols and non-firm trading interest to bring together
buyers and sellers of securities. Communication Protocol Systems today
perform similar market place functions of bringing together buyers and
sellers as registered exchanges and ATSs and have become an
increasingly preferred choice of trading venue, particularly for fixed
income securities. However, as a function of how Exchange Act Rule 3b-
16 currently defines the terms in Section 3(a)(1) of the Exchange Act,
Communication Protocol Systems do not fall within the definition of
exchange. As a result, Communication Protocol Systems are not subject
to the same regulatory requirements as registered exchanges and ATSs
and the investors using them do not receive the investor protection,
fair and orderly markets, transparency, and oversight benefits stemming
from exchange regulation. Further, by Communication Protocol Systems
falling outside the definition of exchange, a disparity has developed
among similar markets that bring together buyers and sellers of
securities, in which some are regulated as exchanges and others are
not. This regulatory disparity can create a competitive imbalance and a
lack of investor protections.\17\
---------------------------------------------------------------------------
\16\ See Regulation ATS Adopting Release, infra note 31.
\17\ See infra Section VIII.C.3.a.
---------------------------------------------------------------------------
Given the changing conditions among markets to bring together
buyers and sellers of securities, and taking into consideration comment
letters submitted in response to the 2020 Proposal and the Concept
Release, the Commission is proposing to amend Exchange Act Rule 3b-16
regarding what ``shall be considered to constitute, maintain, or
provide `a market place or facilities for bringing together purchasers
and sellers of securities or for otherwise performing with respect to
securities the functions commonly performed by a stock exchange' as
those terms are used'' in the statutory definition of ``exchange''
under Exchange Act Section 3(a)(1).\18\ The proposed amendments to
Exchange Act Rule 3b-16(a) would include Communication Protocol Systems
that make available for trading any type of security, including, among
others, government securities, corporate bonds, municipal securities,
NMS stocks, equity securities that are not NMS stocks, private
restricted securities, repurchase agreements and reverse repurchase
agreements, foreign sovereign debt, and options. Including
Communication Protocol Systems within the definition of ``exchange''
would appropriately regulate a market place that brings together buyers
and sellers of securities, extend the benefits of the exchange
regulatory framework to investors that use such systems, and reduce
regulatory disparities among like markets.
---------------------------------------------------------------------------
\18\ 17 CFR 240.3b-16(a).
---------------------------------------------------------------------------
In addition, because the Commission is proposing to amend Exchange
Act Rule 3b-16 to include Communication Protocol Systems within the
definition of exchange and taking into consideration comments received
in response to the 2020 Proposal and the Concept Release, the
Commission is re-proposing and revising previously proposed amendments
to Regulation ATS and Regulation SCI for Government Securities ATSs
that include the following: \19\ (1) Re-proposing to eliminate the
exemption from compliance with Regulation ATS for an ATS that trades
only government securities or repos and is operated by a broker-dealer
or is a bank; (2) re-proposing, with certain revisions, to require a
Government Securities ATS that has significant volume for U.S. Treasury
Securities or Agency Securities to comply with the Fair Access Rule
under Regulation ATS and Regulation SCI; \20\ (3) re-proposing to apply
the enhanced disclosure and filing requirements of Rule 304 of
Regulation ATS, which are currently applicable to NMS Stock ATSs, to
all Government Securities ATSs; (4) proposing to require Government
Securities ATSs to file Form ATS-N, as revised, instead of previously
proposed Form ATS-G; \21\ (5) proposing several changes to Form ATS-N
that would be applicable to both Government Securities ATSs and NMS
Stock ATSs, including questions about the ATS's interaction with
related markets, liquidity providers, and activities the ATS undertakes
to surveil and monitor its market; (6) proposing amendments to Form
ATS-N that would require existing NMS Stock ATSs to file an amendment
to their existing disclosures on Form ATS-N; (7) proposing to add a new
type of amendment to Form ATS-N to report changes to fee disclosures;
(8) proposing to amend the Form ATS-N review and effectiveness process
to permit the Commission to extend the review period for Form ATS-N
amendments; \22\ (9) proposing to make certain changes to the Fair
Access Rule that would apply to all ATSs that are subject to the rule;
\23\ and (10) re-proposing electronic filing of Form ATS-R and Form ATS
and proposing certain changes to the categories of securities reported
on Form ATS-R.\24\
---------------------------------------------------------------------------
\19\ U.S. Treasury Securities and Agency Securities are not
classes of securities for purposes of Exchange Act Rule 3a1-1(b).
\20\ The Commission is re-proposing to amend Regulation ATS to
require that Form ATS and Form ATS-R be filed with the Commission
electronically through EDGAR and to modernize both forms; eliminate
confidential treatment of the types of securities that an ATS trades
as disclosed on the ATS's Form ATS and Form ATS-R; and remove the
exclusion from compliance with the Fair Access Rule and Rule
301(b)(6) under Regulation ATS for an ATS that matches non-displayed
customer orders using prices disseminated by an effective
transaction reporting plan. Covered ATSs would not be required to
post on their websites the most recently disseminated Form ATS-N,
but would be required to provide pursuant to Rule 304(b)(3)(i) a
direct URL hyperlink to the Commission's website that contains the
documents made public by the Commission under Rule 304(b)(2).
\21\ In the 2020 Proposal, the Commission proposed that
Government Securities ATSs file proposed Form ATS-G. Given the
significant overlap between proposed Form ATS-G and existing Form
ATS-N, the Commission is now proposing that Government Securities
ATSs file Form ATS-N, which is currently filed by NMS Stock ATSs,
and proposing to revise Form ATS-N to apply disclosures for
Government Securities ATSs that would fall under the proposed
definition of ``exchange.'' See Appendix A for the proposed
revisions to Form ATS-N. The Commission believes that this would
limit the number of unique forms and simplify filing requirements.
\22\ The Commission is also re-proposing to change the reasons
for which the Commission could extend the initial Form ATS-N review
period. See infra Section IV.A.
\23\ See infra Section V.A.
\24\ See infra Section V.B.
---------------------------------------------------------------------------
II. Proposed Amendments Regarding the Definition of Exchange
A. Exchange Regulatory Framework
Exchange Act Section 3(a)(1) states that the term ``exchange''
means any organization, association, or group of persons, whether
incorporated or unincorporated, which constitutes, maintains, or
provides a market place or facilities for bringing together purchasers
and sellers of securities or for otherwise performing with respect to
securities the functions commonly performed by a stock exchange as that
term is generally understood, and includes the market place and the
market facilities maintained by such exchange.\25\
---------------------------------------------------------------------------
\25\ See 15 U.S.C. 78c(a)(1).
---------------------------------------------------------------------------
Section 5 of the Exchange Act \26\ requires an organization,
association, or
[[Page 15499]]
group of persons that meets the definition of ``exchange'' under
Section 3(a)(1) of the Exchange Act,\27\ unless otherwise exempt, to
register with the Commission as a national securities exchange pursuant
to Section 6 of the Exchange Act.\28\ As discussed further below,
registered national securities exchanges are self-regulatory
organizations (``SROs''),\29\ and must comply with regulatory
requirements applicable to both national securities exchanges and
SROs.\30\
---------------------------------------------------------------------------
\26\ 15 U.S.C. 78e.
\27\ See infra note 31.
\28\ 15 U.S.C. 78f. A ``national securities exchange'' is an
exchange registered as such under Section 6 of the Exchange Act.
\29\ Section 3(a)(26) of the Exchange Act defines a self-
regulatory organization as any national securities exchange,
registered securities association, registered clearing agency, or
(with limitations) the Municipal Securities Rulemaking Board
(``MSRB''). See 15 U.S.C. 78c(a)(26). See also Securities Exchange
Act Release No. 76474 (November 18, 2015), 80 FR 80998, 81025
(December 28, 2015) (``NMS Stock ATS Proposing Release'') at 81000-
01 nn.20-26 and accompanying text (discussing certain differences
between certain obligations and benefits applicable to national
securities exchanges and those applicable to ATSs).
\30\ See, e.g., 15 U.S.C. 78f and 78s.
---------------------------------------------------------------------------
In the Exchange Act, Congress provided a broad definition of the
term ``exchange,'' permitting the Commission to apply the definition
flexibly as the securities markets evolve over time.\31\ In 1998, the
Commission adopted Regulation ATS.\32\ At that time, the Commission
recognized that advances in technology had increasingly blurred the
line between exchange and broker-dealer activities \33\ and that ATSs
that existed then were used by market participants as functional
equivalents of exchanges.\34\ To more accurately describe the range of
markets that performed exchange functions at that time, the Commission
concurrently adopted Exchange Act Rule 3b-16 to define terms \35\ used
in the statutory definition of ``exchange'' under Exchange Act Section
3(a)(1).
---------------------------------------------------------------------------
\31\ See Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844, 70850 and 70898 (December 22, 1998)
(``Regulation ATS Adopting Release''). See also 15 U.S.C. 78e and
78f. The Commission noted that it was recognized at the time the
Exchange Act was enacted that a regulatory structure for securities
exchanges would ``be of little value tomorrow if it is not flexible
enough to meet new conditions immediately as they arise and demand
attention in the public interest.'' See Regulation ATS Adopting
Release at 70898, n.520 (citing Commission, Report of the Special
Study of the Securities Markets of the Securities and Exchange
Commission, H.R. Doc. No. 95, 88th Cong., 1st Sess. Pt. 1 (1963) at
6 and S. Rep. No. 792, 73rd Cong., 2d Sess. (1934) at 5 (noting that
``exchanges cannot be regulated efficiently under a rigid statutory
program,'' and that ``considerable latitude is allowed for the
exercise of administrative discretion in the regulation of both'')).
\32\ See Regulation ATS Adopting Release, supra note 31, at
70850.
\33\ See id. at 70847.
\34\ See id.
\35\ The Commission adopted Exchange Act Rule 3b-16 under
Section 3(b) of the Exchange Act (power to define terms). 15 U.S.C.
78c(b).
---------------------------------------------------------------------------
In Exchange Act Rule 3b-16(a), the Commission defined these terms,
in light of the markets that existed at that time, to include any
organization, association, or group of persons that: (1) Brings
together the orders for securities of multiple buyers and sellers; and
(2) uses established, non-discretionary methods (whether by providing a
trading facility or by setting rules) under which such orders interact
with each other, and the buyers and sellers entering such orders agree
to the terms of a trade.\36\ Rule 3b-16(b) explicitly excluded certain
systems that the Commission believed were not exchanges.\37\
Accordingly, a system is not included in the Commission's
interpretation of ``exchange'' if: (1) The system fails to meet the
two-part test in paragraph (a) of Rule 3b-16; (2) the system falls
within one of the exclusions in paragraph (b) of Rule 3b-16; or (3) the
Commission otherwise conditionally or unconditionally exempts \38\ the
system from the definition.
---------------------------------------------------------------------------
\36\ See 17 CFR 240.3b-16(a).
\37\ See Regulation ATS Adopting Release, supra note 31, at
70852. Specifically, Rule 3b-16(b) excludes from the definition of
exchange systems that perform only traditional broker-dealer
activities, including: Systems that route orders to a national
securities exchange, a market operated by a national securities
association, a broker-dealer for execution, or systems that allow
persons to enter orders for execution against the bids and offers of
a single dealer if certain additional conditions are met.
\38\ See 17 CFR 240.3b-16(e).
---------------------------------------------------------------------------
When the Commission adopted Exchange Act Rule 3b-16, the Commission
also adopted Exchange Act Rule 3a1-1(a) to exempt ATSs from the
definition of ``exchange'' under Section 3(a)(1) of the Exchange Act.
Exchange Act Rule 3a1-1(a)(2) \39\ exempts from the Exchange Act
Section 3(a)(1) definition of ``exchange'' an organization,
association, or group of persons that complies with Regulation ATS,\40\
which requires, among other things, meeting the definition of an ATS
and registering as a broker-dealer.\41\ Rule 300(a) of Regulation ATS
defines an ATS as any organization, association, person, group of
persons, or system: (1) That constitutes, maintains, or provides a
market place or facilities for bringing together purchasers and sellers
of securities or for otherwise performing with respect to securities
the functions commonly performed by a stock exchange within the meaning
of Rule 3b-16; and (2) that does not: (i) Set rules governing the
conduct of subscribers other than the conduct of such subscribers'
trading on such organization, association, person, group of persons, or
system; or (ii) discipline subscribers other than by exclusion from
trading.\42\ Governing the conduct of or disciplining subscribers are
functions performed by an SRO that the Commission believed should be
regulated as such.\43\ Accordingly, pursuant to Rule 300(a), a trading
system that performs SRO functions or functions common to national
securities exchanges, such as establishing listing standards, is
precluded from the definition of ATS and would be required to register
as a national securities exchange, be operated by a national securities
association, or seek another exemption.\44\
---------------------------------------------------------------------------
\39\ See 17 CFR 240.3a1-1(a)(2).
\40\ See id. Rule 3a1-1 also provides two other exemptions from
the definition of ``exchange'' for any ATS operated by a national
securities association and any ATS not required to comply with
Regulation ATS pursuant to Rule 301(a) of Regulation ATS. See 17 CFR
240.3a1-1(a)(1) and (3).
Rule 3a1-1(b) provides an exception to the Rule 3a1-1(a)
exemptions pursuant to which the Commission may require a trading
system that is a substantial market to register as a national
securities exchange, if the Commission finds doing so is necessary
or appropriate in the public interest or consistent with the
protection of investors. See 17 CFR 240.3a1-1(b). See also
Regulation ATS Adopting Release, supra note 31, at 70857-58.
\41\ See 17 CFR 242.300(a); 17 CFR 242.301(a); and 17 CFR
242.301(b)(1). In addition to the other requirements of Regulation
ATS, to qualify for the Rule 3a1-1(a) exemption, an organization,
association, or group of persons must otherwise meet the definition
of ``exchange.''
\42\ See 17 CFR 242.300(a).
\43\ See Regulation ATS Adopting Release, supra note 31, at
70859.
\44\ See id.
---------------------------------------------------------------------------
As a result of the exemption, an ATS that complies with Regulation
ATS is not required by Section 5 of the Exchange Act to register as a
national securities exchange, is not an SRO, and, therefore, is not
required to comply with regulatory requirements applicable to national
securities exchanges and SROs.\45\ An ATS that fails to comply with the
requirements of Regulation ATS would no longer qualify for the
exemption provided under Rule 3a1-1(a)(2), and thus, risks operating as
an unregistered exchange in violation of Section 5 of the Exchange
Act.\46\
---------------------------------------------------------------------------
\45\ See generally Sections 5, 6, and 19 of the Exchange Act, 15
U.S.C. 78e, 78f, and 78s.
\46\ See 15 U.S.C. 78e.
---------------------------------------------------------------------------
[[Page 15500]]
B. Adopting the Definition of Exchange for Evolving Market Places
1. Orders-Focused Markets Under Current Rule 3b-16
When the Commission adopted Exchange Act Rule 3b-16(a), the
Commission sought to more accurately describe the range of markets that
performed exchange functions as those were understood at that time.\47\
In the Regulation ATS Adopting Release, the Commission observed that
ATSs at that time provided services more akin to exchange functions
than broker-dealer functions, such as matching counterparties' orders,
executing trades, operating limit order books, and facilitating active
price discovery.\48\
---------------------------------------------------------------------------
\47\ See Regulation ATS Adopting Release, supra note 31, at
70900.
\48\ See id. at 70848.
---------------------------------------------------------------------------
In the Regulation ATS Adopting Release, the Commission identified
two elements of Exchange Act Rule 3b-16 that most accurately reflected
the functions and uses of exchange markets at that time. These elements
were the bringing together of orders of multiple buyers and sellers of
securities and that trading takes place according to established, non-
discretionary rules or procedures.\49\ When considering what
constituted an exchange at that time, the Commission focused on the
expectations of the participants regarding how an execution would occur
without the discretion of the operator. Because orders instruct a
trading system to carry out the intention of participants in accordance
with programmed trading procedures, orders, along with established,
non-discretionary methods, contribute to how trading system
participants could understand and expect to receive an execution.\50\
In addition, the Commission stated that ``an essential indication of
the non-discretionary status of rules and procedures is that those
rules and procedures are communicated to the systems users'' and
``[t]hus, participants have an expectation regarding the manner of
execution--that is, if an order is entered, it will be executed in
accordance with those procedures and not at the discretion of a
counterparty or intermediary.'' \51\
---------------------------------------------------------------------------
\49\ See id. at 70900.
\50\ For example, the Commission stated in the Regulation ATS
Adopting Release that ``an alternative trading system that posts
firm orders to buy and sell a security does raise a certain
expectation of execution at those quoted prices'' and that ``[t]he
expectation is based on the life of the outstanding orders in the
system, rather than continuous two sided quotations published by
specialist and market makers.'' See id. at 70899, n.532.
\51\ See id. at 70900.
---------------------------------------------------------------------------
Further, at the time Exchange Act Rule 3b-16(a) was adopted, most
ATSs operating met the criteria of the rule in that they offered the
use of orders and algorithms that matched orders.\52\ ATSs at that time
allowed broker-dealers to place and execute orders on the system and
the systems functioned as limit order books where orders are executed
according to time, price, and size priority.\53\ Accordingly, orders
and established, non-discretionary methods undergirded Exchange Act
Rule 3b-16 to reflect functions of exchange markets at that time. When
discussing orders in the Regulation ATS Adopting Release, however, the
Commission stated that systems that displayed bona fide, non-firm
trading interest \54\ or did not establish rules or operate a trading
facility \55\ would not fall within Rule 3b-16(a).
---------------------------------------------------------------------------
\52\ See id. at 70899-900, n.536.
\53\ See id. at 70899, n.525.
\54\ See id. at 70850. In the Regulation ATS Adopting Release,
the Commission stated, ``[g]enerally, however, a system that
displays bona fide, non-firm indications of interest--including, but
not limited to indications of interest to buy or sell a particular
security without either prices or quantities associated with those
indications--will not be displaying ``orders'' and, therefore, not
fall within Rule 3b-16.'' See id.
\55\ See id. The Commission also stated that ``[u]nless a system
also establishes rules or operates a trading facility under which
subscribers can agree to the terms of their trades, the system will
not be included within Rule 3b-16, even if it brings together
`orders.' '' See id.
---------------------------------------------------------------------------
2. Prevalence of Systems Offering Non-Firm Trading Interest and
Structured Protocols
Advances in technology have facilitated innovations and more
efficient or diverse methods to bring together buyers and sellers of
securities.\56\ In the Commission's experience, Communication Protocol
Systems, which can use various technologies and connectivity, generally
offer the use of non-firm trading interest and establish protocols to
prompt and guide buyers and sellers to communicate, negotiate, and
agree to the terms of the trade without relying solely on the use of
orders. Below is a non-exhaustive list of some Communication Protocol
Systems.
---------------------------------------------------------------------------
\56\ See id. at 70848.
---------------------------------------------------------------------------
One example of a Communication Protocol System is a ``Request-for-
Quote'' (``RFQ'') system. RFQ systems are designed to allow market
participants to obtain quotes for a particular security by sending
messages to one or multiple potential respondents on the system
simultaneously. RFQ systems may be ``disclosed,'' in which case the
participants with established relationships interact only with each
other, or anonymous, in which case the parties may not have established
relationships. The system provider requires a participant to enter
information in a message, which may include the name of the initiator,
Committee on Uniform Securities ldentificalion Procedures (CUSIP)
number, side, and size. The system provider also provides protocols for
participants to communicate with each other and negotiate a price or
size of a trade. For example, participants receiving an RFQ message can
choose to interact with the initiator by responding within a time
period designated by the system provider with a priced quote. These
methods can serve the same function as auctions where the respondents
compete to offer the best price. The initiator can then select among
the quote responses that it wishes to interact with through the system
by either accepting one of multiple responses or rejecting all
responses within a period of time set by the system provider. The match
of the request and response results in an agreement to the terms of the
trade between a buyer and a seller, which then proceeds to post-trade
processing.\57\ An RFQ list protocol (``RFQ List''), which is a form of
RFQ protocol used commonly to trade U.S. Treasury Securities, may
include a collection of RFQ inquiries that are submitted as a group but
priced as individual items.\58\ The RFQ List (defined by each system
provider but generally more than two listed items) may be executed in
its entirety, in pieces, or not at all. A liquidity provider that is
responding to the list request may apply a ``good for'' time that is
associated with the executable prices provided.
---------------------------------------------------------------------------
\57\ Communication Protocol Systems also may offer a workup
functionality or blotter scraping functionality to gather non-firm
trading interest and facilitate the negotiation and execution of
trades. In a workup, a system may have a private phase, where the
two original contra-parties submitting orders can negotiate, and a
public phase where all subscribers can submit orders at the workup
price.
\58\ An RFQ List may be referred to as a Bid Wanted in
Competition (``BWIC'') or Offer Wanted in Competition (``OWIC'') in
the corporate bond market. Both serve a similar purpose to the RFQ
List in allowing the submitter to solicit bids and offers on a
number of securities at one time.
---------------------------------------------------------------------------
A Communication Protocol System could also include a system that
electronically displays continuous firm or non-firm trading interest,
or ``stream axes,'' in a security or type of security to participants
on the system. Axes typically represent an indication of
[[Page 15501]]
interest to sell or buy a bond (but can include firm quotes), and can
either serve as a starting point for negotiation between participants
or be executed immediately. Systems that stream axes take many forms.
Some system providers provide connectivity and protocols for
participants to electronically communicate and negotiate the terms of a
trade. Other system providers offer participants more automated
processes, whereby participants auto-execute against a streamed quote
and agree upon the terms of a trade without negotiation. Typically, the
system is programmed with permission options to allow participants to
decide who can or cannot receive their axes. In such a case, the
trading interest exchanged between the parties is typically firm and
functions as orders.
Conditional order systems may be Communication Protocol Systems
that offer the use of trading interest that may not be executable until
after a user takes subsequent action. For example, a system provider
may require conditional orders to contain a symbol, side, and size and
provide protocols for participants to send and receive invitation
messages to trade. The system would be designed for conditional orders
to match with other trading interest, which can either be a firm order
or another non-firm conditional order.\59\ Upon a match, the system may
send a firm-up invitation messages to both participants. The system
protocols may permit a participant using a conditional order to either
decline the firm-up invite, accept the firm-up invite, or counter the
response to firm up.\60\ During the time that the parties' trading
interest is matched until the invitation to firm-up expires, is
canceled, is executed, or is declined, the system protocols may require
that the non-firm trading interest be committed and the shares cannot
trade elsewhere.\61\ Using the system protocols, the matched parties
can modify the attributes of the non-firm trading interest (i.e.,
price, size) before accepting the firm-up invitation. To the extent
either a seller or buyer changes the attributes, an execution will only
occur if each contra-party's corresponding attributes will still be
met. If both matching parties accept the firm-up invite, the parties
would agree upon the terms of the trade and an execution would occur.
---------------------------------------------------------------------------
\59\ Based on Commission staff experience, some NMS Stock ATSs
disclose protocols to allow conditional orders to interact with the
ATS's limit order book, thereby increasing the interaction among
potential buyers and sellers and access to liquidity.
\60\ An order resting on an ATS limit order book that can
interact with a conditional order does not receive a firm-up invite
and therefore does not send firm-up responses.
\61\ Many conditional order and RFQ systems monitor their
participants' firm-up rates and may limit or deny the use of the
system by a participant if the participant's firm-up rate falls
below a certain percentage. While the system provider typically
monitors these firm-up rates to help ensure that participants do not
abuse the system, such monitoring and actions taken against
participants for not firming-up may incentivize participants to not
back away. Thus, conditional orders or RFQs can be firm in practice
and in this way may meet the definition of order under current
Regulation ATS. See 17 CFR 242.300(e) (``any firm indication of a
willingness to buy or sell a security'').
---------------------------------------------------------------------------
Other systems have developed to bring together buyers and sellers
of securities through the use of bilateral negotiation protocols and
non-firm trading interest. Negotiation systems focus on providing a
forum for buyers and sellers to see displayed non-firm trading
interest, access liquidity, find a counterparty, and negotiate a trade
through the use of their communication technology. The system may allow
participants to select certain pre-approved participants and then
exchange messages for purposes of agreeing to the terms of a trade.
Negotiation systems may have fewer parameters for communicating trading
interest than RFQ protocols; for example, negotiation systems provide
features that are designed to prompt participants to interact with each
other and provide parameters around that interaction, such as time for
responses or requirements on the content of the message. A system may
``scrape'' or obtain the symbol of trading interest that a participant
is seeking from the participant's order management or execution
management system and use that to alert other participants on its
system about potential contra-side interest in seeking to initiate a
negotiation. The market participants using negotiation systems may
complete a transaction outside of the system.
As trading in securities has become more electronic, Communication
Protocol Systems perform the function of a market place and have become
a preferred method for market participants to discover prices, find a
counterparty, and execute a trade, particularly for government
securities and other fixed income markets. One commenter on the 2020
Proposal and Concept Release, for example, stated that multilateral
trading venues using RFQ protocols are some of the most significant
multilateral trading venues operating in fixed income markets regulated
by the Commission, including the U.S. Treasury market.\62\ This
commenter stated that RFQ trading venues dominate the dealer-to-
customer segment of the U.S. Treasury market and in the aggregate
account for approximately 50 percent of total electronic trading volume
on multilateral U.S. Treasury trading venues.\63\ Another large
electronic trading venue for fixed income products estimated that its
average daily volume using an RFQ protocol increased from $223 million
in the second quarter of 2017 to $1.17 billion in the second quarter of
2021.\64\ Systems offering conditional order protocols have increased
over the past several years, particularly for trading NMS stocks.
Today, 26 NMS Stock ATSs have disclosed on their public Form ATS-N that
they send or receive messages indicating trading interest, such as
conditional orders.
---------------------------------------------------------------------------
\62\ See Citadel Letter at 1-2.
\63\ See id. This commenter noted that multilateral RFQ trading
venues are formally registered in other asset classes and
jurisdictions, and that there are ``well-established precedents'' to
delineate the scope of multilateral trading venues subject to
regulation.
\64\ Tradeweb Investor Presentation, July 2021, available at:
https://investors.tradeweb.com/static-files/e63caabf-d71d-46c0-9589-353fb8b93388.
---------------------------------------------------------------------------
Communication Protocol Systems, like registered exchanges and ATSs,
offer their participants several benefits, including reducing
counterparty search costs, bringing together diverse market
participants, and making it efficient and simple to find a counterparty
and agree upon the terms of a trade. These systems improve price
discovery from the voice protocols that were used more widely in the
fixed income market in the past by offering participants systems and
protocols that are specifically designed to allow participants to
contact, and receive responses from, multiple potential counterparties
at one time, as opposed to the more time-consuming process of calling
each potential counterparty individually. RFQ protocols, for example,
allow an initiator to share and attempt to trade its entire trading
interest all at once. In contrast, under a limit order book model, for
example, the seeker of liquidity may find it can only execute its
trading interest in a piecemeal fashion. RFQs also allow initiators to
more easily demonstrate that they attempted to achieve best execution
by showing that the initiator sent requests for quotes to multiple
dealers for a security. In addition, participants may find conditional
orders attractive when seeking to trade at size or to avoid information
leakage.
While Communication Protocol Systems may bring together buyers and
sellers for all types of securities and allow participants to negotiate
a trade,
[[Page 15502]]
they are particularly useful to market participants to trade less
liquid securities, find counterparties for large size trades, and
minimize information leakage and adverse impact of large size trades.
For example, market participants can use Communication Protocol Systems
to post and see non-firm trading interest on several trading venues
simultaneously, thereby increasing their ability to find a counterparty
and reduce search costs. When resting non-firm trading interest on a
trading venue, market participants can use non-firm trading interest as
a tool to avoid the risk of double-execution.\65\ Participants that use
conditional orders, for example, may place the same trading interest at
various trading centers in search of liquidity because it would allow
them to accept or decline responses if they receive more than one.
Participants may find locating a counterparty on a limit order book
system for less liquid securities more difficult and choose instead to
use a Communication Protocol System, such as an RFQ system, because
such system allows the initiating participant to use non-firm trading
interest to solicit quotes from multiple market participants for less
liquid securities and negotiate a size or price for such securities.
---------------------------------------------------------------------------
\65\ For example, a market participant that rests the same non-
firm trading interest on two trading venues has the ability to back
away from one if both are lifted (i.e., preliminarily matched). In
such case, the market participant is able to complete one trade and
cancel or back away from the other.
---------------------------------------------------------------------------
3. Lack of Investor Protections and Disparate Regulation Among Market
Places
Given the changes in methods for bringing buyers and sellers
together over the past couple of decades, the contrast between market
place functions of exchanges that offer the use of orders and trading
facilities and systems that offer the use of trading interest and
protocols has become increasingly blurred. Both types of systems share
the same business objectives and engage in similar market activities;
however, one type of system is subject to the exchange regulatory
framework while the other is not.\66\ Today, Communication Protocol
Systems perform similar market place functions as registered exchanges
and ATSs and have become venues for investors to discover prices, find
a counterparty, and agree upon the terms of a trade. Because
Communication Protocol Systems do not fall within the definition of
``exchange'' and are thus not required to register as national
securities exchanges, they are not required to comply with the same
Federal securities laws and regulations applicable to registered
exchanges \67\ or ATSs.\68\ Market participants use Communication
Protocol Systems for certain advantages that these market places offer
for trading securities; however, when doing so, market participants
cannot avail themselves of the same investor protections, fair and
orderly market principles, and Commission oversight that apply to
today's registered exchanges or ATSs.\69\ This regulatory gap also
creates disparities that affect competitive balances among like market
places for securities.\70\ Consistent with the statutory definition of
``exchange'' in Exchange Act Section 3(a)(1), and as discussed above,
today Communication Protocol Systems provide a ``market place'' for
bringing together purchasers and sellers of securities.\71\ The current
proposal will use the flexibility granted to the Commission by Congress
to update Exchange Act Rule 3b-16 to address these developments in the
markets for securities, the corresponding lack of investor protections,
and disparate regulation among these markets.\72\
---------------------------------------------------------------------------
\66\ See U.S. Securities and Exchange Commission Fixed Income
Market Structure Advisory Committee (``FIMSAC''), Recommendation for
the SEC to Review the Framework for the Oversight of Electronic
Trading Platforms for Corporate and Municipal Bonds (July 16, 2018),
available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-electronic-trading-platforms-recommendation.pdf
(expressing concern about regulatory harmonization among fixed
income trading platforms, recognizing that some firms were regulated
as ATSs, while some were regulated as broker-dealers or not
regulated at all).
\67\ See infra Section II.D.1.
\68\ See infra Section II.D.2.
\69\ See infra Section II.D.
\70\ See infra Section VIII.C.3.a.
\71\ See supra Section II.A.
\72\ The Commission is not proposing to amend Exchange Act Rule
3b-16(b), which excludes from the definition of ``exchange'' systems
that perform only traditional broker-dealer activities, including:
Systems that route orders to a national securities exchange, a
market operated by a national securities association, a broker-
dealer for execution, or systems that allow persons to enter orders
for execution against the bids and offers of a single dealer if
certain additional conditions are met. These systems would continue
to not fall within the definition of ``exchange.'' As discussed
below, and consistent with the Commission's views expressed in the
Regulation ATS Adopting Release, a broker-dealer's exercise of
discretion and judgment over its customers' orders or trading
interest does not make the broker-dealer an exchange. See Regulation
ATS Adopting Release, supra note 31, at 70851. See also infra
Section II.C.3. The Commission is proposing to add an exclusion to
Rule 3b-16(a) for systems that allow issuers to sell their own
securities to investors. See infra Section II.C.2. Further, as
explained below, the Commission is not proposing to include within
the definition of ``exchange'' a system that unilaterally displays
trading interest without offering a trading facility or
communication protocols to bring together buyers and sellers. Also,
systems that provide general connectivity for persons to communicate
without protocols, such as utilities or electronic web chat
providers, would not fall within the definition of exchange. See id.
---------------------------------------------------------------------------
Including Communication Protocol Systems within the definition of
``exchange'' would provide market participants that use these market
places with the investor protections, fair and orderly market
principles, and Commission oversight provided by the exchange
regulatory framework.\73\ A Communication Protocol System that chooses
to register as an exchange would be an SRO and be subject to the
requirements of Section 6 of the Exchange Act, as discussed further
below.\74\ However, the Commission expects that many Communication
Protocol Systems would choose instead to comply with the conditions of
the Regulation ATS exemption, which includes registering as a broker-
dealer.\75\ As discussed further below, Communication Protocol Systems
complying with Regulation ATS would also be subject to the Regulation
ATS investor protection provisions, including the requirement to
establish written safeguards and procedures to protect confidential
subscriber trading information \76\ and operational transparency
requirements of Form ATS-N for ATSs that trade NMS stocks or government
securities or repos.\77\ They would also be subject to fair and orderly
markets provisions under the Fair Access Rule.\78\ Registering as a
broker-dealer would subject a Communication Protocol System to
Commission and Financial Industry Regulatory Authority (``FINRA'')
oversight.\79\ As a FINRA member, the Communication Protocol System
would be subject to FINRA's investor protection and examination and
market surveillance programs and would be required to comply with
FINRA's trade reporting rules.
---------------------------------------------------------------------------
\73\ See infra Section II.D.
\74\ See infra Section II.D.1.
\75\ See infra Section II.D.2.
\76\ See infra note 170 and accompanying text.
\77\ See infra notes 139-142 and accompanying text. A
Communication Protocol System that operates as an ATS but trades
securities other than NMS stocks or government securities would file
Form ATS.
\78\ See infra notes 154-155 and accompanying text.
\79\ See infra notes 131-133 and accompanying text.
---------------------------------------------------------------------------
The proposal to include Communication Protocol Systems within the
definition of exchange would promote competition by reducing cost
disparities and creating a more level competitive landscape.\80\
Several commenters in response to the Concept
[[Page 15503]]
Release expressed concerns regarding the disparity in regulatory
treatment between exchanges, ATSs, and other fixed income
platforms.\81\ In addition, FIMSAC expressed concern about the lack of
regulatory harmonization among fixed income electronic trading
platforms, recognizing that some firms are regulated as ATSs, while
others are regulated as broker-dealers or not at all, and stated that
these distinctions in regulatory oversight complicate efforts to
improve the efficiency and resiliency of the fixed income electronic
trading markets.\82\ In response to the Concept Release, one commenter
stated that the current regulatory framework puts ATSs at a competitive
disadvantage to non-ATS trading platforms, which are not subject to the
same regulatory obligations designed to protect investors and the
integrity of the fixed income markets.\83\ Another commenter stated its
belief that disparate regulatory treatment across trading platforms
impacts market efficiency and competition and introduces potential
resiliency risks.\84\ Another commenter stated that electronic
platforms for bringing together buyers and sellers of fixed income
securities for the purpose of effecting transactions should generally
be regulated the same regardless of how they are structured
internally.\85\ The Commission recognizes that the regulatory costs
associated with registering and operating as a registered exchange are
higher than the regulatory costs associated with registering as a
broker-dealer and complying with Regulation ATS. However, Communication
Protocol Systems operating outside the exchange regulatory framework
are subject to neither national securities exchange nor ATS regulatory
costs and therefore have an advantage when competing against other
markets that also bring together buyers and sellers of securities.\86\
As discussed further in Section VIII, a trading system that performs an
exchange market function but is not subject to the exchange regulatory
regime could receive a competitive advantage because such systems are
not subject to the compliance costs to which regulated exchanges are
subject.
---------------------------------------------------------------------------
\80\ See infra Section VIII.C.3.a.
\81\ See, e.g., ICE Bonds Letter II at 2-4; Citadel Letter at 2;
MFA Letter at 6 (suggesting that to ensure that similarly situated
entities are treated similarly in the trading of government
securities, the Commission should review the appropriateness of
similar regulation on multiple-to-multiple trading venues with
significant volume); MarketAxess Letter at 1 (stating that there
should be a common regulatory framework for all multilateral fixed
income electronic trading platforms that requires minimum standards
of conduct and oversight in areas such as trade reporting,
resiliency, cyber-security, operational reporting, financial
standards, examination, surveillance, and confidentiality).
\82\ See supra note 66. The FIMSAC concerns were highlighted by
the Commission in the Concept Release.
\83\ See ICE Bonds Letter II at 4 (stating that the benefits of
subjecting non-ATS trading platforms to the same regulatory
obligations as current ATSs will be substantial).
\84\ See FIA PTG Letter at 2. See also Citadel Letter at 2
(stating that excluding multilateral RFQ platforms from the current
regulatory framework creates an unlevel regulatory field).
\85\ See letter from Michael Decker, Senior Vice President for
Public Policy, Bond Dealers of America, dated March 1, 2021 (``BDA
Letter'') at 2. See also FINRA Letter at 6-10 (noting inconsistent
regulatory treatment among electronic and hybrid fixed income
trading platforms, as well as potential regulatory gaps, flowing in
part from the definitions and guidance adopted in 1998 in Regulation
ATS). The commenter stated its belief that it would be beneficial
for the Commission to provide guidance that specifically addresses
the characteristics of RFQ trading systems and evaluate whether they
meet the ``exchange'' definition for purposes of Regulation ATS.
\86\ See infra Section VIII.C.3.a.i.
---------------------------------------------------------------------------
Amending Exchange Act Rule 3b-16(a) to include non-firm trading
interest would eliminate the possibility that systems may offer the use
of non-firm trading interest that, in practice, functions as firm
orders, so as to avoid exchange registration or complying with
Regulation ATS. In the Regulation ATS Adopting Release, the Commission
expressed concern that system providers may label trading interest that
is firm in practice as non-firm.\87\ The providers of such systems may
take the position that their systems arguably do not use ``orders'' and
thus do not fall within the criteria of Rule 3b-16. For example,
systems that offer the use of non-firm trading interest may monitor
participants' firm-up rates in response to a quote they received and
may penalize a participant with a low firm-up rate either economically
or by limiting its ability to use features of its system. Such
activities could cause participants on the systems to believe that
trading interest that they submit or receive is effectively firm and
affect their behavior on the system. The difference between what is a
firm order and what is not requires careful scrutiny of the design of
the system, the trading interest offered, and what actually takes place
among buyers and sellers interacting on the systems. The Commission
believes, however, that the use of firm or non-firm trading interest by
a system should no longer be a factor in determining whether a system
performs the function of a market place because both firm and non-firm
trading interest can be used by a system with the same purpose and
effect to bring together buyers and sellers of securities.\88\
---------------------------------------------------------------------------
\87\ See Regulation ATS Adopting Release, supra note 31, at
70850.
\88\ See supra Section II.B.2.
---------------------------------------------------------------------------
Finally, for clarity, Exchange Act Rule 3b-16(a) would continue to
encompass systems that make available for trading any type of security.
The definition of ``exchange'' under Section 3(a)(1) of the Exchange
Act and current Exchange Act Rule 3b-16(a) applies to all securities,
including government securities, corporate bonds, municipal securities,
NMS stocks, equity securities that are not NMS stocks, private
restricted securities, repurchase agreements and reverse repurchase
agreements, foreign sovereign debt, and options, and does not exempt or
exclude any security or type of securities. The Commission believes
that it is important for any system that falls within the criteria of
Rule 3b-16(a) to be subject to the exchange regulatory framework,
notwithstanding how thinly traded or novel a security may be, and
participants on such systems should be able to avail themselves of the
same benefits that participants on registered exchanges or ATSs
receive. Accordingly, the proposed amendments to Rule 3b-16(a) do not
change the Commission's interpretation of the statutory definition of
``exchange''--that is, it applies to all securities.
The Commission received several comments in response to the Concept
Release expressing reservations about revising Exchange Act Rule 3b-16
to include certain fixed income markets within the definition of
exchange. One commenter stated that doing so would insert unnecessary
intermediation between dealers and their customers and threaten to
distort the market structure by creating a one-size-fits-all approach
that is biased against the trading of less-liquid instruments, damaging
liquidity formation.\89\ Another commenter expressed concern about the
Commission creating additional regulatory obligations in the fixed
income space and believed the Commission should undertake a more in-
depth review of fixed income trading, engage in discussion with the
industry, and outline the problems that any proposed regulations are
intended to solve before moving forward with any such regulatory
proposal.\90\ Likewise, another commenter stated its belief that the
Commission should not impose
[[Page 15504]]
Regulation ATS and the current exchange framework on existing and
emerging electronic trading protocols and functionalities that do not
meet the existing definition of an ATS or an exchange \91\ because such
rules are better suited for regulating systems and trading practices in
the equity markets.\92\ In addition, one commenter stated that there
are a variety of trading protocols that have developed within the fixed
income market--such as those that are primarily order-driven (such as
retail-focused order books) and others that are driven by price
requests (such as RFQs)--and that the market continues to innovate.\93\
This commenter stated its belief that the Commission should take into
account these distinctions and apply a lighter regulatory approach in
order to avoid stifling innovation.\94\
---------------------------------------------------------------------------
\89\ See Bloomberg Letter at 17-20. This commenter specifically
cited RFQs as a new protocol that has helped in discovering less
liquid instruments.
\90\ See SIFMA Letter at 11. The commenter stated its belief
that systems that merely act as informational conduits should remain
outside the scope of Regulation ATS.
\91\ See ICI Letter at 2, 7. This commenter stated that, for
example, tools that facilitate trade-related communications between
market participants should not be subject to rules that are better-
suited for order book protocols.
\92\ See id. at 8.
\93\ See MarketAxess Letter at 2-4.
\94\ See id.
---------------------------------------------------------------------------
The Commission notes that these comments focused on the fixed
income market exclusively. However, these comments have aided in the
formulation of this proposal for revising the Commission interpretation
of the definition of ``exchange,'' and the Commission looks forward to
receiving more comments to aid in its deliberations. As a preliminary
response to the comment letters summarized in this section, the
Commission does not believe that the proposed amendments to Exchange
Act Rule 3b-16 would create a one-size-fits-all model, imposing
unnecessary intermediation between dealers and their customers,\95\ or
import concepts from the equity markets onto emerging electronic
trading protocols that would damage the market structure in the fixed
income markets.\96\ Form ATS and Form ATS-N do not impose or favor any
specific market structure or manner of trading, and the Commission is
proposing to amend Form ATS-N to accommodate the operations of
Communication Protocol Systems. Further, the Commission preliminarily
does not believe that regulating fixed income systems, or systems for
other asset classes of securities, under the exchange regulatory
framework, particularly Regulation ATS, would stifle innovation or be
biased against less-liquid instruments using an RFQ protocol.
Regulation ATS is designed to be flexible enough to accommodate the
evolving technology of ATSs and allow for systems to continue to
innovate without the regulatory obligations of registered exchanges,
which are SROs.\97\ In the years since its adoption in 1998, many
systems that chose to operate under the Regulation ATS exemption have
had varied business models, including offering RFQ protocols as part of
their overall ATS services, for trading different types of securities,
including, among others, government securities, corporate bonds,
municipal securities, NMS stocks, equity securities that are not NMS
stocks, private restricted securities, repurchase agreements and
reverse repurchase agreements, foreign sovereign debt, and options.
---------------------------------------------------------------------------
\95\ See Bloomberg Letter at 17-20.
\96\ See ICI Letter at 8.
\97\ See Regulation ATS Adopting Release, supra note 31, at
70846.
---------------------------------------------------------------------------
The Commission seeks public comment on all aspects its proposal to
amend Exchange Act Rule 3b-16(a), the Communication Protocol Systems
that would fall within the definition of ``exchange,'' and the existing
exchange regulatory requirements that would apply to a Communication
Protocol System.
C. Proposed Amendments to Exchange Act Rule 3b-16
Today, Exchange Act Rule 3b-16 provides that an organization,
association, or group of persons meets the definition of ``exchange''
if it doesn't meet one of the exceptions of the rule and it: (1) Brings
together the orders for securities of multiple buyers and sellers; and
(2) uses established, non-discretionary methods (whether by providing a
trading facility or by setting rules) under which such orders interact
with each other, and the buyers and sellers entering such orders agree
to the terms of the trade.
The Commission is proposing to amend Exchange Act Rule 3b-16 to,
among other things, include non-firm indications of a willingness to
buy or sell a security, in addition to orders, within the
interpretation, define ``trading interest,'' add ``communication
protocols'' as an established method that an organization, association,
or group of persons can provide to bring together buyers and sellers of
securities, simplify and align the rule text with the statutory
definition of exchange under Section 3(a)(1) of the Exchange Act, and
add an exclusion under Exchange Act Rule 3b-16(b). Accordingly, the
Commission is proposing to amend Exchange Act Rule 3b-16 to provide
that an organization, association, or group of persons would be
considered to constitute, maintain, or provide an exchange if it is not
subject to an exception under Rule 3b-16(b) and it: (1) Brings together
buyers and sellers of securities using trading interest; and (2) makes
available established, non-discretionary methods (whether by providing
a trading facility or communication protocols, or by setting rules)
under which buyers and sellers can interact and agree to the terms of a
trade.
1. Trading Interest; Brings Together Buyers and Sellers
The Commission is proposing to add a definition of the term
``trading interest'' to Exchange Act Rule 3b-16 and amend the rule to
replace ``orders'' with ``trading interest.'' The definition of trading
interest would allow for clear and consistent application of the
revised functional test for ``exchange'' under Rule 3b-16.
Under the proposal, Exchange Act Rule 3b-16(a) would continue to
apply to systems that use orders, as that term is currently defined and
applied in Rule 3b-16(c), to bring together buyers and sellers because
the term ``orders'' would be included in the definition of ``trading
interest.'' ``Trading interest,'' as proposed, would include
``orders,'' as the term is defined under Rule 3b-16(c), or any non-firm
indication of a willingness to buy or sell a security that identifies
at least the security and either quantity, direction (buy or sell), or
price.\98\ Based on Commission staff experience, generally, trading
systems have offered non-firm trading interest that included the symbol
and one of the following: Quantity, direction, or price. For example, a
message that is sent to system participants for an NMS stock that only
identifies the NMS stock symbol and quantity that the participant seeks
to trade would be considered trading interest. A message sent by a
participant of a corporate bond system to five potential counterparties
that only identifies the CUSIP for a bond and an instruction to buy
would be considered trading interest, as proposed, because it contains
the symbol and direction. If the same initiating participant only
provided the symbol and requested a two-sided quote in response, the
response would constitute trading interest as it would identify the
symbol
[[Page 15505]]
and a price. Indeed, Commission staff has observed that ATSs that offer
a negotiation functionality to bring together buyers and sellers offer
the use of non-firm trading interest that includes the symbol and one
of the following: Quantity, direction, or price. In addition, there are
instances where systems offer the use of non-firm trading interest,
such as an indication of interest, that includes the symbol and
direction but does not explicitly include a quantity or price, which
can be inferred from the facts and circumstances accompanying the
trading interest.\99\ The Commission believes that a system that offers
the use of a message that identifies the security and either the
quantity, direction, or price would provide sufficient information to
bring together buyers and sellers of securities because it allows a
market participant to communicate its intent to trade and a reasonable
person receiving the information to decide whether to trade or engage
in further communications with the sender.\100\
---------------------------------------------------------------------------
\98\ In conjunction with adding the defined term ``trading
interest'' to Rule 3b-16, the Commission is proposing to add the
definition of ``trading interest'' to Rule 300 of Regulation ATS.
See proposed Rule 300(q). In addition, to encompass persons who
transact in trading interest, and not only orders, the Commission is
also proposing to change the definition of ``Subscriber'' in Rule
300(b) to include any person submitting, disseminating, or
displaying ``trading interest.'' See Rule 300(b), as proposed to be
revised.
\99\ See Regulation ATS Adopting Release, supra note 31, at
70850.
\100\ A system that uses trading interest to bring together
buyers and sellers would not meet the definition of ``exchange,''
however, unless it also met all the elements of Rule 3b-16(a),
including the element ``makes available established, non-
discretionary methods (whether by providing a trading facility or
communication protocols, or by setting rules) under which buyers and
sellers can interact and agree to the terms of a trade.''
---------------------------------------------------------------------------
On the other hand, the Commission preliminarily believes that a
message that only indicates the security to be traded without more
information would not be trading interest and a system that only offers
the use of such messages would be unlikely to bring together buyers and
sellers and does not warrant the regulatory oversight accompanying
classification as an exchange. Nevertheless, if a system is designed to
permit an initiating participant to submit a message that only contains
a symbol, yet a responding participant can submit a message that
contains a symbol and either quantity, direction, or price that the
initiator can accept, the message by the responding participant and
acceptance by the initiator would be trading interest because each of
these contain the symbol and at least direction, size, or price. As
proposed, the revised criteria of Exchange Act Rule 3b-16(a) that
include ``trading interest,'' as defined herein, would capture the vast
majority of systems that bring together buyers and sellers to agree to
the terms of a trade despite not including systems where solely the
security is identified. If adopted, however, the Commission would
continue to monitor market developments to ascertain whether such
systems may warrant further regulation in the future.
The Commission is also proposing to amend Rule 3b-16(a)(1) to
change the reference to a system that ``brings together the orders'' to
``brings together buyers and sellers of securities using trading
interest.'' Systems that use non-firm trading interest allow
participants to communicate their trading intentions, either on a
bilateral or multilateral basis, to negotiate a trade. Unlike orders,
non-firm trading interest typically does not interact with other non-
firm trading interest without further action by the potential
counterparties. Rather, the potential counterparties submitting non-
firm trading interest interact with each other through the use of
communication protocols. To provide for the use of both firm order
interaction and participants' interaction through non-firm trading
interest, the Commission is proposing to amend Rule 3b-16(a) to replace
``brings together orders'' with ``brings together buyers and sellers of
securities using trading interest.'' The phrase ``brings together
buyers and sellers of securities using trading interest'' still
captures systems that use orders. The Commission is not proposing to
change the meaning of ``to bring together'' as defined in the
Regulation ATS Adopting Release \101\ nor is the Commission proposing
to exclude from Rule 3b-16(a) systems that use orders to bring together
buyers and sellers of securities--such systems would still be subject
to Rule 3b-16.
---------------------------------------------------------------------------
\101\ See id. at 70849.
---------------------------------------------------------------------------
The Commission is proposing to amend Exchange Act Rule 3b-16(a)(2)
to simplify the rule text and align the rule text with the proposed
changes to Rule 3b-16(a)(1). Specifically, the Commission is proposing
to replace ``under which such orders interact with each other and the
buyers and sellers entering such orders agree to the terms of a trade''
with ``under which buyers and sellers can interact and agree to the
terms of a trade.'' As explained above, because the Commission is
proposing to amend Rule 3b-16(a) to include trading interest, and is no
longer limiting the application of the rule to orders, the focus on
``interaction'' should be between buyers and sellers rather than
orders. For similar reasons, the Commission is proposing to delete from
the rule text the phrase ``the buyers and sellers entering such
orders.'' This proposed change is designed to simplify the rule text
and remove the reference to orders because the proposed amendments to
Rule 3b-16(a) also include non-firm trading interest in addition to
orders.
2. Multiple; Exclusion for Issuer Systems
The Commission is proposing to remove the reference to securities
of ``multiple'' buyers and sellers from Exchange Act Rule 3b-16(a)(1)
and is proposing to codify in Rule 3b-16(b)(3) an example the
Commission provided in the Regulation ATS Adopting Release for systems
that allow issuers to sell their own securities to investors. These
proposed changes are not intended to change the existing scope of Rule
3b-16(a) but only to clarify its application.
The term ``multiple'' was added to Rule 3b-16(a) to help reinforce
that single counterparty systems were not included in the definition of
``exchange.'' \102\ These systems primarily included systems used by
issuers to sell their own securities and systems used by market makers
registered with an SRO, which are currently specifically excluded from
Rule 3b-16(a) under Rule 3b-16(b)(2). The Commission believes that the
term ``multiple'' could be misconstrued to mean that RFQ systems, for
example, do not meet the criteria of Rule 3b-16(a) because a
transaction request typically involves one buyer and multiple sellers
or one seller and multiple buyers.\103\
---------------------------------------------------------------------------
\102\ See id.
\103\ One commenter on the 2020 Proposal and Concept Release
stated its belief that RFQ platforms do not meet the criteria of
Rule 3b-16 because such platforms do not offer ``multiple-to-
multiple'' order interaction among participants and that the RFQ
platforms instead facilitate trading between an individual market
participant (requester) and potential liquidity providers
(responders). See ICI Letter at 2, 7.
---------------------------------------------------------------------------
Under current Rule 3b-16(a), whether a system meets the
``multiple'' prong depends on whether the system, when viewed in its
entirety, includes more than one buyer and more than one seller and is
not determined on a transaction-by-transaction basis. A system, such as
an RFQ system, that is designed to provide the ability of more than one
buyer to request quotes from more than one seller in securities at the
same or different times would meet the ``multiple'' prong of Rule 3b-
16(a) because such systems do not include a single counterparty.\104\
Because RFQ systems have more than one buyer and more than one seller,
such systems do not have a single counterparty and thus
[[Page 15506]]
would meet the standard of ``multiple buyers and sellers'' under Rule
3b-16(a)(1). Nevertheless, removing the term ``multiple'' would
mitigate confusion and the potential to misconstrue the application of
Rule 3b-16(a) to systems with non-firm trading interest, including RFQ
systems, and aligns the rule with the statutory definition of
``exchange.'' \105\
---------------------------------------------------------------------------
\104\ The mere interpositioning of a designated counterparty to
provide for the anonymity of counterparties to a trade or for
settlement purposes after the purchasing and selling counterparties
to a trade have been matched would not, by itself, mean the system
does not have multiple buyers and sellers. See Regulation ATS
Adopting Release, supra note 31, at 70849.
\105\ The use of plural terms in ``buyers and sellers'' in Rule
3b-16(a) and ``purchasers and sellers'' (emphasis added) in the
statutory definition of ``exchange'' makes sufficiently clear that
an exchange need only have more than one buyer and more than one
seller participating on the system to meet this prong.
---------------------------------------------------------------------------
The Commission is proposing to amend Rule 3b-16(b) to add an
exclusion from Rule 3b-16(a) for systems that allow an issuer to sell
its securities to investors. The Commission stated in the Regulation
ATS Adopting Release that systems for issuers to sell their own
securities would not fall within Rule 3b-16(a) because such systems
have a single counterparty that is selling its securities.\106\ The
Commission continues to believe that such systems do not meet the
criteria of Rule 3b-16(a) because the systems do not bring together
multiple buyers and multiple sellers. Given the proposal to remove the
term ``multiple'' from Rule 3b-16(a)(1), adding the exclusion for
issuer systems would clarify that such systems do not fall within the
criteria of Rule 3b-16(a).
---------------------------------------------------------------------------
\106\ See supra note 102 and accompanying text.
---------------------------------------------------------------------------
3. Established Methods; Communication Protocols
The Commission is proposing to amend Rule 3b-16(a)(2) to replace
``uses established, non-discretionary methods'' with the phrase ``makes
available established, non-discretionary methods.'' The proposed change
to use the word ``makes available'' rather than ``uses'' is designed to
capture established, non-discretionary methods that an organization,
association, or group of persons may provide, whether directly or
indirectly, for buyers and sellers to interact and agree upon terms of
a trade. In contrast to the term ``uses,'' the Commission believes the
term ``makes available'' would be applicable to Communication Protocol
Systems because such systems take a more passive role in providing to
their participants the means and protocols to interact, negotiate, and
come to an agreement.
The term ``makes available'' is also intended to make clear that,
in the event that a party other than the organization, association, or
group of persons performs a function of the exchange, the function
performed by that party would still be captured for purposes of
determining the scope of the exchange under Exchange Act Rule 3b-16. In
the Regulation ATS Adopting Release, the Commission stated that it will
attribute the activities of a trading facility to a system if that
facility is offered by the system directly or indirectly (such as where
a system arranges for a third party or parties to offer the trading
facility).\107\ The Commission has further recognized how a system may
consist of various functionalities, mechanisms, or protocols that
operate collectively to bring together the orders for securities of
multiple buyers and sellers using non-discretionary methods under the
criteria of Rule 3b-16(a), and how, in some circumstances, these
various functionalities, mechanisms, or protocols may be offered or
performed by another business unit of the registered broker-dealer or
government securities broker or government securities dealer that
operates the ATS (``broker-dealer operator'') or by a separate
entity.\108\ These principles equally apply to an organization,
association, or group of persons that arranges with another party to
provide, for example, a trading facility or communication protocols, or
parts thereof, to bring together buyers and sellers and perform a
function of a system under Rule 3b-16. Using the term ``makes
available'' will help ensure that the investor protection and fair and
orderly markets provisions of the exchange regulatory framework apply
to all the activities that consist of the system that meets the
criteria of Rule 3b-16(a), notwithstanding whether those activities are
performed by a party other than the organization that is providing the
market place.\109\
---------------------------------------------------------------------------
\107\ See Regulation ATS Adopting Release, supra note 31, at
70852.
\108\ See NMS Stock ATS Adopting Release, supra note 2, at 38844
(citing Regulation ATS Adopting Release, 63 FR 70852).
\109\ Depending on the activities of the persons involved with
the market place, a group of persons, who may each perform a part of
the 3b-16 system, can together provide, constitute, or maintain a
market place or facilities for bringing together purchasers and
sellers of securities and together meet the definition of exchange.
In such a case, the group of persons would have the regulatory
responsibility for the exchange.
---------------------------------------------------------------------------
The Commission is not proposing to delete the term ``non-
discretionary'' from Rule 3b-16(a)(2). The term ``non-discretionary''
was added to Rule 3b-16(a)(2) to modify ``methods'' to distinguish the
activities of an exchange from the activities of a broker-dealer.\110\
As discussed in the Regulation ATS Adopting Release, broker-dealers
exercise control, judgement, or discretion over their customers' orders
or trading interests \111\ while an exchange operates pursuant to
programmed procedures or set rules and does not exercise discretion
over orders or trading interest entered into the system.\112\ The
Commission continues to believe that the distinction between an
exchange and a broker-dealer explained in the Regulation ATS Adopting
Release is appropriate and the Commission is not proposing to amend
Exchange Act Rule 3b-16(a) to include activities of broker-dealers
within the definition of ``exchange.'' \113\
---------------------------------------------------------------------------
\110\ See Regulation ATS Adopting Release, supra note 31, at
70863.
\111\ See id. at 70851.
\112\ See id. at 70850.
\113\ If a system meets the criteria of Exchange Act Rule 3b-
16(a) but includes in that system the ability of the system operator
to apply its discretion for handling trading interest, these
activities employing discretion by the system operator would be
included in the system that meets the criteria of Rule 3b-16(a) and
be subject to Federal securities laws and rules applicable to a
registered exchange or ATS (including, for example, requirements to
provide disclosures about the system operator's activities on Form
ATS or ATS-N and, if the ATS is subject to the Fair Access Rule,
include in its written standards why the activities of the system
operator that result in the different treatment of subscribers are
fair and not unreasonably discriminatory).
---------------------------------------------------------------------------
The term ``non-discretionary'' should not be misconstrued to mean
that a system does not meet the definition of exchange if it permits
buyers or sellers using the system to exercise discretion with regard
to the use of the system. Under current Rule 3b-16(a)(2), the phrase
``uses established, non-discretionary methods'' applies to the
organization, association, or group of persons that provides the
means--the trading facility or rules--under which orders interact.
Thus, an organization that meets the definition of ``exchange'' does
not exercise any discretion in the matching of buyers and sellers or
their orders and buyers and sellers participating on an exchange can
use their own discretion in finding and selecting a counterparty.\114\
The phrase
[[Page 15507]]
``established, non-discretionary methods'' continues to convey that the
system provider is providing the trading facility or communication
protocols or setting rules and is not applying its discretion in
matching counterparties on the system.\115\
---------------------------------------------------------------------------
\114\ One commenter on the 2020 Proposal and Concept Release
stated their belief that ``unlike an ATS on which trading takes
place on a non-discretionary basis, trading discretion is a defining
feature of these protocols; a requesting participant can choose the
number and identity of participants that will receive the RFQ, while
participants who receive an RFQ can choose whether to respond.'' See
ICI Letter at 7. See also Bloomberg Letter at 23 (describing that an
RFQ ``consists of discretionary directed order communication network
messaging'' and stating its belief that such messaging is not an ATS
function because RFQs lack a non-discretionary commitment to trade)
and MarketAxess Letter at n.2 (stating its belief that an RFQ
trading requestor's trading discretion puts the protocol outside the
requirement that the platform use ``established, non-discretionary
methods under which such orders interact with each other''). The
``established, non-discretionary methods'' element of Rule 3b-
16(a)(2) pertains to the discretion applied by the system provider
to bring together buyers and sellers and not discretion that
participants may apply. For example, a system provider that matches
buyers and sellers using its judgement or discretion would not be
using established, non-discretionary methods. As the Commission
stated in the Regulation ATS Adopting Release, where customers of a
broker-dealer exercise control over their own orders in a trading
system operated by the broker-dealer, that broker-dealer is unlikely
to be viewed as using discretionary methods in handling the order.
See Regulation ATS Adopting Release, supra note 31, at 70851.
\115\ See id. (describing that, for example, the Commission does
not believe that block trading desks, which generally retain some
discretion in determining how to execute a customer's order, and
frequently commit capital to satisfy their customers' needs, use
established, non-discretionary methods).
---------------------------------------------------------------------------
The Commission is proposing to amend Rule 3b-16(a)(2) to add
``communication protocols'' as an established method that an
organization, association, or group of persons can provide to bring
together buyers and sellers of securities. Systems that bring together
buyers and sellers of securities may function as exchange market places
of securities without orders or a trading facility for orders to
interact. In the Commission's experience, communication protocols,
which can be applied to various technologies and connectivity,
generally use non-firm trading interest as opposed to orders to prompt
and guide buyers and sellers to communicate, negotiate, and agree to
the terms of the trade. For example, if an entity makes available a
chat feature, which requires certain information to be included in a
chat message (e.g., price, quantity) and sets parameters and structure
designed for participants to communicate about buying or selling
securities, the system would have established communication protocols.
While Communication Protocol Systems may not match counterparties'
trading interest, buyers and sellers using these can be brought
together to interact, either on a bilateral or multilateral basis, and
agree upon the terms of the trade. Protocols that a system offers may
take many forms and could include: Setting minimum criteria for what
messages must contain; setting time periods under which buyers and
sellers must respond to messages; restricting the number of persons a
message can be sent to; limiting the types of securities about which
buyers and sellers can communicate; setting minimums on the size of the
trading interest to be negotiated; or organizing the presentation of
trading interest, whether firm or non-firm, to participants. These
examples are not exhaustive, and the determination of whether the
system meets Rule 3b-16(a)(2) would depend on the particular facts and
circumstances of each system. Nevertheless, as proposed, the Commission
would take an expansive view of what would constitute ``communication
protocols'' under this prong of Rule 3b-16(a).\116\
---------------------------------------------------------------------------
\116\ One commenter suggested a litmus test to assist the
Commission in determining whether a fixed-income trading platform
for corporate bonds and municipal securities meets the criteria that
warrant registration as an exchange or ATS. According to the
commenter, the most relevant criteria were: Whether the system
provides multilateral trading, whether the technology provider has
any influence on picking the counterparties, whether the system
enables any sharing of real-time information across multiple
counterparties, whether the system provider has any access to real-
time information, and whether the transactions happen on the
technology platform. See letter from Vijay Kedia, President and CEO,
FlexTrade Systems, dated March 1, 2021 (``FlexTrade Systems
Letter'') at 2. As discussed above, the Commission believes that
conditions have changed whereby systems that offer the use trading
interest and protocols to bring together buyers and sellers of
securities perform an exchange market place function similar to
systems that offer the use of orders and trading facilities. As
proposed, a Communication Protocol System can still meet the
criteria of Exchange Act Rule 3b-16 even if it has no role in
matching counterparties nor displays trading interest. In addition,
neither the current rule nor the proposed amendments require that,
for a system to be an exchange, an execution occur on the system;
rather, that the buyers and sellers agree to the terms of the trade
on the system is sufficient. See Regulation ATS Adopting Release,
supra note 31, at 70852 (stating ``whether or not the actual
execution of the order takes place on the system is not a
determining factor of whether the system falls under Rule 3b-16'').
Also, applying some of the criteria that the commenter suggested
(whether system provider have any access to real-time information;
whether the transactions happen on the technology platform) could
result in the exclusion of certain RFQ platforms from the definition
of exchange.
---------------------------------------------------------------------------
The Commission preliminarily believes that certain systems would
not fall within the criteria of Exchange Act Rule 3b-16(a), as proposed
to be amended, because the organization, association, or group of
persons would not be considered to be providing a trading facility or
communication protocol and therefore would not be considered to be
making available established, non-discretionary methods under Rule 3b-
16(a)(2).\117\ The Commission continues to believe that systems that
passively display trading interest, such as systems referred to in the
industry as bulletin boards, but do not provide means for buyers and
sellers to contact each other and agree to the terms of the trade on
the system would not be encompassed by Rule 3b-16(a) as proposed to be
amended.\118\ For example, the Commission does not believe that a
system that unilaterally displays trading interest without offering a
trading facility or communication protocols to bring together buyers
and sellers would be considered to be making available established,
non-discretionary methods.\119\ In the Regulation ATS Adopting Release,
the Commission stated that ``[u]nless a system also establishes rules
and operates a trading facility under which subscribers can agree to
the terms of their trades, the system will not be included within Rule
3b-16 even if it brings together `orders.' '' \120\ These systems may
display trading interest to potential buyers and sellers, but the
system provider is not making available established methods for buyers
and sellers to interact and agree upon terms of a trade. If adopted,
however, the Commission would continue to monitor market developments
to ascertain whether such systems may warrant further regulation in the
future.
---------------------------------------------------------------------------
\117\ To the extent that a system is currently operating
consistently with the circumstances described in a staff no-action
letter, a system that falls within the scope of Rule 3b-16(a) and
seeks to rely on the ATS exemption would need to register as a
broker-dealer to comply with the broker-dealer registration
requirement under Regulation ATS, regardless of any prior staff
statement. Upon the adoption of any final rule, some letters and
other staff statements, or portions thereof, may be moot,
superseded, or otherwise inconsistent with the final rule and,
therefore, would be withdrawn or modified.
\118\ See Regulation ATS Adopting Release, supra note 31, at
70850. See also FINRA Letter at 9-10 (requesting the Commission
provide additional guidance on the regulatory classification of
bulletin boards).
\119\ See SIFMA Letter at 11 (stating that systems that merely
act as informational conduits should remain outside the scope of
Regulation ATS); FlexTrade Systems Letter at 2-4 (stating that
software vendors that provide functionality for displaying prices do
not meet the definition of an exchange).
\120\ See Regulation ATS Adopting Release, supra note 31, at
70850.
---------------------------------------------------------------------------
Similarly, a system that displays trading interest and provides
only connectivity among participants without providing a trading
facility to match orders or providing protocols for participants to
communicate and interact would not meet the criteria of Rule 3b-16(a)
because such system would not be considered to be making available
established, non-discretionary methods. For example, systems that only
provide general connectivity for persons to communicate without
protocols, such as utilities or electronic web chat providers, would
not fall within the communication protocols prong of the proposed rule
because such providers are not specifically designed
[[Page 15508]]
to bring together buyers and seller of securities or provide procedures
or parameters for buyers and sellers for securities to interact. To the
extent that such systems are designed for securities and provide
communication protocols for buyers and sellers to interact and agree to
the terms of a trade, such systems would fall within the criteria of
Exchange Act Rule 3b-16(a) as proposed to be revised.
D. Exchange Registration or ATS Exemption for Communication Protocol
Systems Under the Proposed Rules
The proposed amendments to Exchange Act Rule 3b-16(a) would scope
Communication Protocol Systems into the definition of ``exchange,'' in
which case, the systems may decide between registering as a national
securities exchange or registering as a broker-dealer and complying
with Regulation ATS. The Commission believes that many Communication
Protocol Systems would likely choose to be regulated as an ATS because
of the lighter regulatory requirements imposed on them, as compared to
the regulatory requirements of registered exchanges, which are SROs.
Unlike a national securities exchange, an ATS can trade any type of
security and its users are not limited to broker-dealers. In addition,
an ATS is not an SRO, is not subject to Section 6 of the Exchange Act,
and does not require Commission approval for its activities. Complying
with Regulation ATS would therefore allow Communication Protocol
Systems more flexibility in the operation of their business than
registering as an exchange.\121\
---------------------------------------------------------------------------
\121\ ATSs have more flexibility in the operation of their
business than exchanges insofar as ATSs are not subject to Section 6
of the Exchange Act and are not required to comply with the
statutory standards with respect to unfair discrimination, burdens
on competition, and the equitable allocation of reasonable fees.
---------------------------------------------------------------------------
Further, many Communication Protocol Systems make available for
trading fixed income securities that are only traded over-the-counter
and are not typically registered and approved for listing on an
exchange.\122\ Unless a national securities exchange receives an
exemption to trade unregistered debt securities,\123\ it may only list
and trade registered debt securities, whereas Communication Protocol
Systems need not receive such an exemption to trade unregistered debt
securities. Notwithstanding, the Commission discusses the regulatory
requirements for both regulatory alternatives below. The Commission is
not proposing to make changes to the regulatory structure for exchanges
or the requirements for national securities exchanges. The proposed
changes to the regulatory requirements under Regulation ATS are
discussed in more detail below.\124\
---------------------------------------------------------------------------
\122\ Section 12(a) of the Exchange Act makes it unlawful for
any member, broker, or dealer to effect any transaction in any
security (other than an exempted security) on a national securities
exchange unless a registration statement has been filed with the
Commission and is in effect as to such security for such exchange in
accordance with the provisions of the Exchange Act and the rules and
regulations thereunder. 15 U.S.C. 78l(a). Section 12(b) of the
Exchange Act, 15 U.S.C. 78l(b), contains procedures for the
registration of securities on a national securities exchange.
Section 12(a) does not apply to an exchange that the Commission has
exempted from registration as a national securities exchange. See,
e.g., Securities Exchange Act Release No. 28899 (February 20, 1991),
56 FR 8377 (February 29, 1991). See also Regulation ATS Adopting
Release, supra note 31, at 70886.
\123\ See, e.g., Securities Exchange Act Release No. 54767
(November 16, 2006), 71 FR 67680 (November 22, 2006) (SR-NYSE-2004-
69) (issuing exemption permitting NYSE to trade unregistered debt
securities on its bonds platform, now known as NYSE Bonds).
\124\ See infra Section III.B.2 (discussing proposed changes to
Rule 301(b)(1) of Regulation ATS), Section IV (discussing proposed
changes to Rule 304 and Form ATS-N), Section V.A (discussing
proposed changes to Rule 301(b)(5) and 301(b)(6)), and Section V.C
(discussing proposed changes to Rule 301(b)(2)(vii)).
---------------------------------------------------------------------------
1. National Securities Exchange Registration
A Communication Protocol System that chooses to register as a
national securities exchange would be required to do so pursuant to
Sections 5 and 6 of the Exchange Act. A national securities exchange is
an SRO and must set standards of conduct for its members, administer
examinations for compliance with these standards, coordinate with other
SROs with respect to the dissemination of consolidated market data, and
generally take responsibility for enforcing its own rules and the
provisions of the Exchange Act and the rules and regulations
thereunder. Before a national securities exchange may commence
operations, the Commission must approve its application for
registration filed on Form 1.\125\ Section 6(b) of the Exchange Act
requires, among other things, that the national securities exchange be
so organized and have the capacity to carry out the purposes of the
Exchange Act and to comply and enforce compliance by its members, and
persons associated with its members, with the Federal securities laws
and the rules of the exchange.\126\ Pursuant to Section 6 of the
Exchange Act, national securities exchanges must establish rules that
generally: (1) Are designed to prevent fraud and manipulation, promote
just and equitable principles of trade, and protect investors and the
public interest; (2) provide for the equitable allocation of reasonable
fees; (3) do not permit unfair discrimination; (4) do not impose any
unnecessary or inappropriate burden on competition; and (5) with
limited exceptions, allow any broker-dealer to become a member.\127\
---------------------------------------------------------------------------
\125\ See 15 U.S.C. 78f.
\126\ See Section 6(b)(1) of the Exchange Act, 15 U.S.C.
78f(b)(1). The Commission must also find that the national
securities exchange has rules that meet certain criteria. See
generally Exchange Act Section 6(b)(2) through (10), 15 U.S.C.
78f(b)(2) through (10).
\127\ See Section 6(b) of the Exchange Act.
---------------------------------------------------------------------------
After approval of its application for registration, a national
securities exchange must file with the Commission any proposed changes
to its rules.\128\ The initial application on Form 1, amendments
thereto, and filings for proposed rule changes, in combination,
publicly disclose important information about national securities
exchanges, such as trading services and fees. The Commission's order
approving the application is also public. The Commission oversees the
exchanges under the Exchange Act through, among other things, its
examination authority under Section 17, its enforcement authority under
Sections 19(h)(1) and 21C, its authority to approve and disapprove
rules under Section 19(b), and its rulemaking authority under various
Exchange Act provisions. Under the Exchange Act, securities traded on a
national securities exchange must be registered with the Commission and
approved for listing on an exchange. National securities exchanges can
only have broker-dealer members. As an SRO, a national securities
exchange enjoys certain unique benefits, such as limited immunity from
private liability with respect to its regulatory functions and the
ability to receive consolidated revenue under the national market
system plans for equity market data (i.e., Consolidated Tape
Association (CTA)/Consolidated Quotation (CQ) and Unlisted Trading
Privilege (UTP)),\129\ among others.
---------------------------------------------------------------------------
\128\ See generally Section 19(b) of the Exchange Act, 15 U.S.C.
78s(b).
\129\ Details and the history of each plan can be found at
https://www.ctaplan.com/plans; and https://www.utpplan.com.
---------------------------------------------------------------------------
2. Regulation ATS Exemption; Broker-Dealer Registration
A Communication Protocol System may choose to operate as an ATS
pursuant to Regulation ATS, which exempts an ATS from the definition of
``exchange'' on the condition that the ATS is in compliance with the
requirements of Regulation ATS. An ATS that fails to comply with the
requirements of Regulation ATS would
[[Page 15509]]
no longer qualify for the ATS exemption and thus risks operating as an
unregistered exchange in violation of Section 5 of the Exchange Act.
To operate under the exemption, an ATS must register as a broker-
dealer under Exchange Act Section 15 or as a government securities
broker or government securities dealer under Exchange Act Section
15C(a)(1)(A),\130\ and comply with the filing and conduct obligations
associated with being a registered broker-dealer, including membership
in an SRO, such as FINRA,\131\ and compliance with the SRO's
rules.\132\ Requiring Communication Protocol Systems to register as
broker-dealers and be a member of an SRO would ensure that they are
subject to SRO examination and market surveillance, trade reporting
obligations, and certain investor protection rules. Broker-dealer
registration provides important investor protections under the Federal
securities laws and FINRA rules, such as: (1) Various disclosure and
supervision obligations; (2) anti-money laundering obligations
(including suspicious activity reporting); (3) FINRA over-the-counter
(OTC) trade reporting requirements, including requirements to maintain
membership in, or maintain an effective clearing arrangement with a
participant of, a clearing agency registered under the Exchange Act;
and (4) Commission examinations and FINRA examinations and surveillance
of members and markets that its members operate.
---------------------------------------------------------------------------
\130\ The Commission is proposing to amend Rule 301(b)(1) to
allow an ATS to register as a government securities broker or
government securities dealer under Exchange Act Section
15C(a)(1)(A). See infra notes 272-278 and accompanying text.
\131\ See Section 15(b)(8) of the Exchange Act; 15 U.S.C.
78o(b)(8).
\132\ See Regulation ATS Adopting Release, supra note 31, at
70903.
---------------------------------------------------------------------------
In addition, ATSs are subject to certain reporting and disclosure
requirements, as applicable. ATSs other than NMS Stock ATSs or, as
proposed, Government Securities ATSs, would be required, pursuant to
Rule 301(b)(2) of Regulation ATS, to file an initial operation report
with the Commission on Form ATS \133\ at least 20 days before
commencing operations or, in the case of Newly Designated ATSs,\134\ no
later than 30 calendar days after the effective date of any final
rule.\135\ Form ATS provides the Commission with the opportunity to
identify problems that might impact investors before the system begins
to operate.\136\ Unlike a Form 1 filed by a national securities
exchange, a Form ATS is not approved by the Commission.\137\ Also
unlike a Form 1 application, a Form ATS is deemed confidential when
filed.\138\ Requiring Communication Protocol Systems to file Form ATS
and amendments thereto will help the Commission monitor and oversee
such ATSs' operations.
---------------------------------------------------------------------------
\133\ Form ATS and the Form ATS Instructions are available at
https://www.sec.gov/about/forms/formats.pdf. Form ATS would require,
among other things, that the ATS (other than a Government Securities
ATS or NMS Stock ATS) provide information about: Classes of
subscribers and differences in access to the services offered by the
ATS to different groups or classes of subscribers; securities the
ATS expects to trade; any entity other than the ATS involved in its
operations; the manner in which the system operates; how subscribers
access the trading system; procedures governing entry of trading
interest and execution; and trade reporting, clearance and
settlement of trades on the ATS. See infra Section V.B (describing
proposed changes to Form ATS). Regulation ATS provides that a report
on Form ATS or Form ATS-R shall be considered filed upon receipt by
the Division of Trading and Markets, at the Commission's principal
office in Washington, DC (i.e., in paper form), and that information
filed by an ATS on Form ATS is deemed confidential when filed. See
17 CFR 242.301(b)(2)(vii). See also infra Section V.C.
\134\ ``Newly Designated ATSs'' would be defined as ATSs
operating as of the effective date of any final rule that meet the
criteria under Rule 3b-16(a) as of the effective date of any final
rule but did not meet the criteria under Rule 3b-16(a) in effect
prior to the effective date of any final rule. See Rule 300(r).
\135\ See infra note 180 and accompanying text. The Commission
is also proposing changes to Rule 301(b)(2)(i) to clarify that the
requirement to file Form ATS does not apply to Covered ATSs or
Covered Newly Designated ATSs. See proposed Rule 301(b)(2)(i). See
also proposed Rule 300(s) (defining ``Covered Newly Designated
ATS'').
\136\ See Regulation ATS Adopting Release, supra note 31, at
70864.
\137\ Form ATS provides the Commission with notice about an
ATS's operations prior to commencing operations. An ATS is also
required to notify the Commission of any changes in its operations
by filing an amendment to its initial operation report. There are
three types of amendments to an initial operation report. First, if
any material change is made to its operations, the ATS must file an
amendment on Form ATS at least 20 calendar days before implementing
such change. See 17 CFR 242.301(b)(2)(ii). A ``material change,''
includes, but is not limited to, any change to the operating
platform, the types of securities traded, or the types of
subscribers. In addition, the Commission has stated that ATSs
implicitly make materiality decisions in determining when to notify
their subscribers of changes. See Regulation ATS Adopting Release,
supra note 31, at 70864. Second, if any information contained in the
initial operation report becomes inaccurate for any reason and has
not been previously reported to the Commission as an amendment on
Form ATS, the ATS must file an amendment on Form ATS correcting the
information within 30 calendar days after the end of the calendar
quarter in which the system has operated. See 17 CFR
242.301(b)(2)(iii). Third, an ATS must promptly file an amendment on
Form ATS correcting information that it previously reported on Form
ATS after discovery that any information was inaccurate when filed.
See 17 CFR 242.301(b)(2)(iv). An ATS is required to promptly file a
cessation of operations on Form ATS. See 17 CFR 242.301(b)(2)(v).
\138\ See 17 CFR 242.301(b)(2)(vii); Form ATS at 3, General
Instructions A.7.
---------------------------------------------------------------------------
NMS Stock ATSs and, as proposed, Government Securities ATSs, would
be subject to enhanced filing and disclosure requirements under Rule
304 of Regulation ATS. NMS Stock ATSs or Government Securities ATSs
would, in lieu of Form ATS, be required to file public Form ATS-N in
EDGAR, in which they must disclose detailed information about the
manner in which their trading systems operate and the potential for
conflicts of interest and information leakage.\139\ Form ATS-N is
subject to a Commission review and effectiveness process.\140\ An NMS
Stock ATS or Government Securities ATS would not be permitted to
operate pursuant to the Rule 3a1-1(a)(2) exemption until its Form ATS-N
has become effective.\141\ In addition, the ATS would be required to
file amendments on Form ATS-N to provide notice of changes to its
operations and broker-dealer and affiliate relationships.\142\ Form
ATS-N and the Commission review and effectiveness process, which is
described in detail below,\143\ would provide operational transparency
and regulatory oversight of Communication Protocol Systems that are NMS
Stock ATSs or Government Securities ATSs.
---------------------------------------------------------------------------
\139\ See proposed changes to 17 CFR 242.304.
\140\ See infra Section IV.A.
\141\ See Rule 304(a)(1)(i).
\142\ See infra Section IV.A.
\143\ See infra Section IV.
---------------------------------------------------------------------------
In addition, all ATSs are required to periodically, by paper
submission, report certain information about transactions in the ATS
and information about certain activities on Form ATS-R within 30
calendar days after the end of each calendar quarter in which the
market has operated, pursuant to Rule 301(b)(9).\144\ Form ATS-R
requires quarterly volume information for specified categories of
securities, as well as a list of all securities traded in the ATS
during the quarter and a list of all subscribers that were participants
during the quarter,\145\ and for ATSs subject to the Fair Access Rule
to provide certain additional
[[Page 15510]]
information.\146\ Like Form ATS, Rule 301(b)(2)(vii) and the
instructions to Form ATS-R provide that Form ATS-R is deemed
confidential when filed.\147\ The information reported on Form ATS-R by
Communication Protocol Systems would permit the Commission to monitor
the trading on these ATSs for compliance with the Exchange Act and
applicable rules thereunder and enforce the Fair Access Rule.\148\
---------------------------------------------------------------------------
\144\ See 17 CFR 242.301(b)(9)(i). Form ATS-R and the Form ATS-R
Instructions are available at https://www.sec.gov/about/forms/formats-r.pdf. See also Section V.B (describing proposed changes to
Form ATS-R).
\145\ See Form ATS-R at 4, Items 1 and 2 (describing the
requirements for Exhibit A and Exhibit B of Form ATS-R). ATSs must
also complete and file Form ATS-R within 10 calendar days after
ceasing to operate. See 17 CFR 242.301(b)(9)(ii); Form ATS-R at 2,
General Instructions A.2 to Form ATS-R.
\146\ Form ATS-R also requires an ATS that is subject to the
fair access obligations under Rule 301(b)(5) of Regulation ATS to
provide a list of all persons granted, denied, or limited access to
the ATS during the period covered by the ATS-R and designate for
each person each of the following: Whether the person was granted,
denied, or limited access; the date the ATS took such action; the
effective date of such action; and the nature of any denial or
limitation of access. See Form ATS-R at 6, Item 7 (explaining
requirements for Exhibit C).
\147\ See 17 CFR 242.301(b)(2)(vii); Form ATS-R at 2, General
Instruction A.7.
\148\ See Regulation ATS Adopting Release, supra note 31, at
70874 and 70878.
---------------------------------------------------------------------------
NMS Stock ATSs must comply with certain order display and execution
access obligations \149\ under Rule 301(b)(3) if the ATS displays
subscriber orders in an NMS stock to any person (other than an employee
of the ATS) and meets certain volume requirements.\150\ These order
display and execution access obligations were adopted by the Commission
with the expectation they would promote additional market integration
and further discourage two-tier markets when trading in an NMS stock on
an ATS reaches a certain level.\151\ In addition, an NMS Stock ATS must
not charge any fee to broker-dealers that access the ATS through a
national securities exchange or national securities association that is
inconsistent with the equivalent access to the NMS Stock ATS that is
required under Rule 301(b)(3)(iii).\152\ This requirement is designed
to promote equal access to ATSs.
---------------------------------------------------------------------------
\149\ An ATS that displays orders and meets the volume
requirements must provide to a national securities exchange or
national securities association the prices and sizes of the orders
at the highest buy price and the lowest sell price for such NMS
stock, displayed to more than one person in the ATS, for inclusion
in the quotation data made available by the national securities
exchange or national securities association pursuant to Rule 602
under Regulation NMS. See 17 CFR 242.301(b)(3)(ii). With respect to
any such displayed order, the ATS must provide to any broker-dealer
that has access to the national securities exchange or national
securities association to which the ATS provides the prices and
sizes of displayed orders pursuant to Rule 301(b)(3)(ii), the
ability to effect a transaction with such orders that is equivalent
to the ability of such broker-dealer to effect a transaction with
other orders displayed on the exchange or by the association; and at
the price of the highest priced buy order or lowest priced sell
order displayed for the lesser of the cumulative size of such priced
orders entered therein at such price, or the size of the execution
sought by such broker-dealer. See 17 CFR 242.301(b)(3)(iii).
\150\ An ATS that displays subscriber orders in an NMS stock
must comply with Rule 301(b)(3) if, during at least four of the
preceding six calendar months, it had an average daily trading
volume of 5% or more of the aggregate average daily share volume for
that NMS stock, as reported by an effective transaction reporting
plan. See 17 CFR 242.301(b)(3)(i).
\151\ See Regulation ATS Adopting Release, supra note 31, at
70867.
\152\ See 17 CFR 242.301(b)(4). In addition, if the national
securities exchange or national securities association to which an
ATS provides the prices and sizes of orders under Rules
301(b)(3)(ii) and (iii) establishes rules designed to assure
consistency with standards for access to quotations displayed on
such national securities exchange, or the market operated by such
national securities association, the ATS shall not charge any fee to
members that is contrary to, that is not disclosed in the manner
required by, or that is inconsistent with any standard of equivalent
access established by such rules. See id.
---------------------------------------------------------------------------
As discussed in more detail below,\153\ ATSs are required to comply
with the Fair Access Rule \154\ under Rule 301(b)(5) if the ATS meets
volume thresholds in NMS stocks, equity securities that are not NMS
stocks and for which transactions are reported to an SRO, municipal
securities, or corporate debt securities.\155\ The Commission is
proposing to apply the requirements of the Fair Access Rule to trading
of U.S. Treasury Securities and Agency Securities on ATSs.\156\
---------------------------------------------------------------------------
\153\ See infra Section III.B.4 and Section V.A.
\154\ An ATS subject to the Fair Access Rule, as proposed to be
revised, must: Establish and apply reasonable written standards for
granting, limiting, and denying access to the services of the ATS;
make and keep records of all grants of access including, for all
participants, the reasons for granting such access, and all denials
or limitations of access and reasons, for each applicant and
participant, for denying or limiting access; and report on Form ATS-
R a list of persons granted, denied, and limited access to the ATS.
See infra Section V.A.
\155\ See 17 CFR 242.301(b)(5).
\156\ See infra Section III.B.4.
---------------------------------------------------------------------------
Additionally, under Rule 301(b)(6) (``Capacity, Integrity, and
Security Rule''), an ATS that trades only municipal securities or
corporate fixed income debt with 20% or more of the average daily
volume traded in the U.S. during at least four of the preceding six
calendar months would be required to comply with capacity, integrity,
and security standards \157\ with respect to those systems that support
order entry, order routing, order execution, transaction reporting, and
trade comparison.\158\ Information provided under the Capacity,
Integrity, and Security Rule would enable the Commission staff to
better understand the operation of certain Communication Protocol
Systems and to identify potential problems and trends that may require
attention.
---------------------------------------------------------------------------
\157\ An ATS that meets the volume requirements must, with
respect to those systems that support order entry, order routing,
order execution, transaction reporting, and trade comparison,
establish reasonable current and future capacity estimates; conduct
periodic capacity stress tests of critical systems to determine such
system's ability to process transactions in an accurate, timely, and
efficient manner; develop and implement reasonable procedures to
review and keep current its system development and testing
methodology; review the vulnerability of its systems and data center
computer operations to internal and external threats, physical
hazards, and natural disasters; establish adequate contingency and
disaster recovery plans; on an annual basis, perform an independent
review, in accordance with established audit procedures and
standards, of the ATS's controls for ensuring that the above
requirements are met, and conduct a review by senior management of a
report containing the recommendations and conclusions of the
independent review; and promptly notify the Commission and its staff
of material systems outages and significant systems changes. See 17
CFR 242.301(b)(6)(ii).
\158\ See 17 CFR 242.301(b)(6)(i).
---------------------------------------------------------------------------
NMS Stock ATSs, ATSs that trade non-NMS equity securities that are
reported to an SRO, and Government Securities ATSs that meet certain
trading thresholds would be subject to Regulation SCI. Regulation SCI
superseded and replaced Rule 301(b)(6) requirements with regard to ATSs
that trade NMS stocks and non-NMS stocks.\159\ The Commission is
proposing to apply Regulation SCI to Government Securities ATSs, as
discussed below.\160\ Regulation SCI is designed to help address the
technological vulnerabilities, and improve the Commission's oversight
of the core technology of key entities.
---------------------------------------------------------------------------
\159\ Regulation SCI does not apply to ATSs that trade only
municipal securities or corporate debt securities. See infra notes
351-356 and accompanying text. See also Regulation SCI Adopting
Release, supra note 3, at 72262.
\160\ See infra Section III.C.
---------------------------------------------------------------------------
All ATSs, regardless of the volume traded on their systems, are
required, pursuant to Rule 301(b)(7),\161\ to permit the examination
and inspection of their premises, systems, and records, and cooperate
with the examination, inspection, or investigation of subscribers,
whether such examination is being conducted by the Commission or by an
SRO of which such subscriber is a member. Because an ATS subscriber to
whom the Commission's inspection authority may not extend could use the
ATS to manipulate the market in a security, the requirement is designed
to require that ATSs cooperate in all inspections, examinations, and
investigations.
---------------------------------------------------------------------------
\161\ See 17 CFR 242.301(b)(7).
---------------------------------------------------------------------------
ATSs are also required, pursuant to Rule 301(b)(8),\162\ to make
and keep current the records specified in Rule 302 of Regulation ATS
\163\ and preserve
[[Page 15511]]
the records specified in 17 CFR 242.303.\164\ The Commission is
proposing to amend Rule 302 of Regulation ATS to require recordkeeping
related to ``trading interest.'' Rule 302 requires that an ATS shall
make and keep certain records, which the rule enumerates. Communication
Protocol Systems that choose to comply with Regulation ATS would be
required to keep the records enumerated in Rule 302. The Commission is
proposing to revise certain of these enumerated records that relate to
``orders'' to require such records related to ``trading interest,''
which would include both firm orders and non-firm trading
interest.\165\ This would include time-sequenced records of trading
interest information in the ATS.\166\ The recordkeeping requirements
would require Communication Protocol Systems to make and keep certain
records for an audit trail of trading activity that would allow the
Commission to detect and investigate potential market irregularities,
examine whether the ATS is in compliance with Federal securities laws,
and ensure investor protections.\167\
---------------------------------------------------------------------------
\162\ See 17 CFR 242.301(b)(8).
\163\ See 17 CFR 242.302. Rule 302 requires all ATSs to make and
keep current certain records, including: A record of subscribers to
the ATS; daily summaries of trading in the ATS; and time-sequenced
records of order information in the ATS. See 17 CFR 242.302.
\164\ See Rule 303 of Regulation ATS. In the Regulation ATS
Adopting Release, the Commission stated that these requirements to
make, keep, and preserve records are necessary to create a
meaningful audit trail and to permit surveillance and examination to
help ensure fair and orderly markets. See Regulation ATS Adopting
Release, supra note 31, at 70877-78.
\165\ See supra note 98 and accompanying text.
\166\ Specifically, the Commission is proposing to revise Rule
302(c)(1) (date and time (expressed in terms of hours, minutes, and
seconds) that the trading interest was received); (c)(3) (the number
of shares, or principal amount of bonds, to which the trading
interest applies); (c)(5) (the designation of the trading interest
as buy or sell trading interest); (c)(8) (any limit or stop price
prescribed by the trading interest); (c)(9) (the date on which the
trading interest expires and, if the time in force is less than one
day, the time when the trading interest expires); (c)(10) (the time
limit during which the trading interest is in force); (c)(11) (any
instructions to modify or cancel the trading interest); (c)(12) (the
type of account for which the trading interest is submitted);
(c)(13) (date and time that the trading interest was executed);
(c)(14) (price at which the trading interest is executed); and
(c)(15) (size of the trading interest executed).
\167\ See Regulation ATS Adopting Release, supra note 31, at
70878.
---------------------------------------------------------------------------
In addition, ATSs are required to establish adequate written
safeguards and written procedures \168\ to protect confidential trading
information and to separate ATS functions from other broker-dealer
functions, including principal and customer trading pursuant to Rule
301(b)(10).\169\ Furthermore, all ATSs must adopt and implement
adequate written oversight procedures to ensure that the above written
safeguards and procedures are followed.\170\ These requirements are
designed to help prevent the potential for abuse of subscriber
confidential trading information.\171\
---------------------------------------------------------------------------
\168\ These written safeguards and written procedures must
include: Limiting access to the confidential trading information of
subscribers to those employees of the ATS who are operating the
system or responsible for its compliance with these or any other
applicable rules; and implementing standards controlling employees
of the ATS trading for their own accounts.
\169\ See 17 CFR 242.301(b)(10); NMS Stock ATS Adopting Release,
supra note 2, Section VI.
\170\ See 17 CFR 242.301(b)(10)(ii).
\171\ See NMS Stock ATS Adopting Release, supra note 2, at
38864.
---------------------------------------------------------------------------
In addition, an ATS must not use in its name the word ``exchange,''
or any derivation of the word ``exchange'' pursuant to Rule
301(b)(11).\172\ The Commission believes that the use of the word
``exchange'' by an ATS would be deceptive and could lead investors to
believe incorrectly that such ATS is registered as a national
securities exchange.\173\
---------------------------------------------------------------------------
\172\ See 17 CFR 242.301(b)(11); Regulation ATS Adopting
Release, supra note 31, Section II.C.
\173\ See Securities Exchange Act Release No. 39884 (April 17,
1998), 63 FR 23504, 23523 (April 29, 1998) (``Regulation ATS
Proposing Release'').
---------------------------------------------------------------------------
The Commission is proposing amendments to facilitate an orderly
transition for Communication Protocol Systems to comply with the
applicable conditions of the Regulation ATS exemption.\174\ The
Commission understands that some Communication Protocol Systems are not
currently registered as broker-dealers.\175\ To become a registered
broker-dealer, these Communication Protocol Systems would be required
to file Form BD with the Commission and complete FINRA's processes for
new members.\176\ The Commission is proposing to allow Communication
Protocol Systems that are not registered as broker-dealers at the time
the proposed rule would be effective, if adopted, to provisionally
operate pursuant to the Rule 3a1-1(a)(2) exemption while their broker-
dealer registration is pending until the earlier of (1) the date the
ATS registers as a broker-dealer under Section 15 of the Exchange Act
or Section 15C(a)(1)(A) of the Exchange Act and becomes a member of a
national securities association or (2) the date 210 calendar days after
the effective date of any final rule.\177\ The 210 calendar day period
is designed to provide time for a Communication Protocol System to
submit its broker-dealer registration application, or continuing
membership application, as applicable, and for FINRA to conduct its
review of new member application and continuing member application. The
proposed transition period is designed to provide a Communication
Protocol System that is not a registered broker-dealer adequate time to
comply with the necessary broker-dealer registration requirements under
Regulation ATS without disrupting its market or its participants.
---------------------------------------------------------------------------
\174\ For purposes of the rule text, the Commission is proposing
to apply the transitional rules to ``Newly Designated ATSs.''
\175\ A registered broker-dealer that operates a Communication
Protocol System and is currently a FINRA member may, under FINRA
rules, be required to file a Continuing Membership Application with
FINRA noticing material changes to business operations in connection
with its operation of an ATS.
\176\ After receiving a substantially complete application
package, FINRA must review and process it within 180 calendar days.
See ``How to Become a Member--Member Application Time Frames''
available at https://www.finra.org/registration-exams-ce/broker-dealers/how-become-member-membership-application-time-frames. See
also FINRA Rule 1014.
\177\ See proposed revisions to Rule 301(b)(1). This transition
period for the proposed rule, if adopted, would also apply to
Currently Exempted Government Securities ATSs (i.e., Legacy
Government Securities ATSs formerly not required to comply with
Regulation ATS pursuant to the exemption under Sec. 240.3a1-1(a)(3)
prior to effective date of any final rule) not registered as a
broker-dealer. See infra note 283.
---------------------------------------------------------------------------
Proposed Rule 301(b)(2)(i) requires ATSs (other than Covered ATSs)
\178\ to file an initial operation report on Form ATS at least 20 days
before commencing operations; however, Communication Protocol Systems
that seek to operate as ATSs already will be operating when the
proposed rule, if adopted, becomes effective. To avoid disruption of
the services of the ATS, the Commission is proposing to amend Rule
301(b)(2)(i) to require Communication Protocol Systems (other than
those that are Covered ATSs) \179\ to file an initial operation report
on Form ATS no later than 30 calendar days after the effective date of
any final rule.\180\ The Commission is also proposing changes, as
discussed below, to Rule 301(b)(2)(viii) and Rule 304 to facilitate the
transition for Communication Protocol Systems that are Covered ATSs to
file Form ATS-N.\181\ Requiring Communication Protocol Systems to file
a Form ATS with the Commission at the proposed time would provide the
Commission with information about its
[[Page 15512]]
operations and facilitate oversight of the systems.
---------------------------------------------------------------------------
\178\ ``Covered ATS'' is defined infra note 257. The Commission
is proposing changes to Rule 301(b)(2)(i) to clarify that the
requirement to file Form ATS does not apply to ATSs other than
Covered ATSs. See proposed Rule 301(b)(2)(i).
\179\ The rule text uses the term ``Covered Newly Designated
ATS.''
\180\ See proposed changes to Rule 301(b)(2)(i).
\181\ See infra note 300 and Section IV.A.
---------------------------------------------------------------------------
Request for Comment
1. Should the Commission amend Exchange Act Rule 3b-16 as proposed?
Should the Commission adopt a more expansive or limited interpretation
of the definition of ``exchange''? Do commenters agree that, in the
current market, Communication Protocol Systems function as market
places that conduct similar activities as exchanges do? Would any
systems that conduct similar activities as exchanges that should be
included in proposed Rule 3b-16 be excluded? Are there any asset
classes or types of securities that should be excluded from the
definition of exchange? If so, why?
2. What are commenters' views on the potential consequences of
expanding or limiting the definition of ``exchange'' under Exchange Act
Rule 3b-16? What are commenters' views on how changing Rule 3b-16 could
benefit or harm investors and market participants? Are new systems that
meet the definition of exchange likely to choose to operate as ATSs
instead of national securities exchanges?
3. Should the Commission adopt the proposed definition of ``trading
interest'' under Exchange Act Rule 3b-16? Should the definition of
``trading interest'' require attributes to be identified in addition to
at least the security and either quantity, direction (buy or sell), or
price? Alternatively, would only one of the security, quantity,
direction (buy or sell), or price be adequate to indicate trading
interest? Should the definition of ``exchange'' continue to be limited
to systems that use orders? If so, why?
4. Should the Commission revise Exchange Act Rule 3b-16 to focus on
bringing together buyers and sellers, rather than bringing together
orders (or trading interest)? Would the proposed revisions to the rule
appropriately describe systems that use non-firm trading interest to
allow participants to communicate their trading interest?
5. Should the Commission revise Exchange Act Rule 3b-16(a)(2) to
describe a system that ``makes available established, non-discretionary
methods'' under which buyers and sellers interact? Should the
Commission revise the language further to clarify that a system
provider that makes available a trading facility or communication
protocol by way of a third party or affiliate would fall within the
criteria of Rule 3b-16(a)(2)? Should there be any minimum or baseline
to the established methods a system must have to qualify as an
exchange? If so, what are they? Do commenters agree that making
available communication protocols, as discussed herein, is sufficient
to be an established, non-discretionary method under which buyers and
sellers can interact?
6. Should the Commission remove the reference to ``multiple'' in
Rule 3b-16(a)(1))? If so, why? If not, why not?
7. Should Communication Protocol Systems that choose to comply with
Regulation ATS be subject to all of the requirements of Regulation ATS?
Are there certain requirements of Regulation ATS that should or should
not be applicable to Communication Protocol Systems, or certain
Communication Protocol Systems? For example, are the current Regulation
ATS recordkeeping requirements appropriate for Communication Protocol
Systems? Should the Commission require a Communication Protocol System
that chooses to operate as an ATS to create and maintain records that
are not otherwise required by Rule 301(b)(8) of Regulation ATS? Is
there anything that is not currently among the conditions to the
Regulation ATS exemption that a Communication Protocol System and/or an
existing ATS should comply with as part of Regulation ATS? And if so,
why?
8. Should the Commission amend Regulation ATS, Form ATS, Form ATS-
R, or Form ATS-N in any way to be more tailored to Communication
Protocol Systems? If so, how?
9. Are the proposed transition periods for Communication Protocol
Systems appropriate? Should the Commission provide Communication
Protocol Systems more or less time to comply with any of the
requirements of Regulation ATS? Please explain.
10. Is the Commission's proposal that a Newly Designated ATS must
file an initial operation report on Form ATS no later than 30 calendar
days after the effective date of any final rule, if adopted,
appropriate? If not, should the Commission provide more time or less
time for a Newly Designated ATS to file an initial Form ATS?
11. Should the Commission allow a Newly Designated ATS that is not
registered as a broker-dealer to operate pursuant to the Rule 3a1-
1(a)(2) exemption on a provisional basis? Does the proposal to allow
such ATSs a maximum 210 calendar days to comply with the broker-dealer
registration requirement provide an appropriate amount of time to
register as a broker-dealer? If not, what, if any, transition period
would be appropriate and why?
III. Proposed Changes Applicable to Government Securities ATSs
A. ATS Markets for Government Securities
Government securities \182\ play a critical role in the U.S. and
global economies. Among other things, for example, Treasury rates are a
fundamental benchmark for pricing virtually all other financial
assets.\183\ Systems currently operating as ATSs, particularly those
that operate in the secondary interdealer markets for the most-recently
issued (``on-the-run'') U.S. Treasury Securities, have become a
significant location of trading interest for government
securities.\184\ Specifically, most interdealer trading takes place on
electronic platforms provided by interdealer brokers that operate limit
order books, with electronic interdealer trading being
[[Page 15513]]
concentrated in on-the-run Treasury securities.\185\ In July 2021,
average daily trading in government securities totaled $978 billion, or
roughly 95 percent of all fixed income trading volume in the U.S.\186\
---------------------------------------------------------------------------
\182\ Under the Exchange Act, government securities are defined
as, among other things, securities which are direct obligations of,
or obligations guaranteed as to principal or interest by, the United
States. See 15 U.S.C. 78c(42)(A). Government securities include U.S.
Treasury securities, debt securities issued or guaranteed by a U.S.
executive agency, as defined in 5 U.S.C. 105, or government-
sponsored enterprise, as defined in 2 U.S.C. 622(8), and Agency
Mortgage-Backed Securities (``MBSs''). Government securities also
include securities which are issued or guaranteed by the Tennessee
Valley Authority or by corporations in which the United States has a
direct or indirect interest and which are designated by the
Secretary of the Treasury for exemption as necessary or appropriate
in the public interest or for the protection of investors;
securities issued or guaranteed as to principal or interest by any
corporation the securities of which are designated, by statute
specifically naming such corporation, to constitute exempt
securities within the meaning of the laws administered by the
Commission; and any put, call, straddle, option, or privilege on one
of the aforementioned (subject to limited exceptions). 15 U.S.C.
78c(42)(B)-(C).
\183\ See Group of Thirty Working Group on Treasury Market
Liquidity, U.S. Treasury Markets: Steps Toward Increased Resilience.
Group of Thirty at 1 (2021) (``G30 Report''), available at https://group30.org/publications/detail/4950.
\184\ See Recent Disruptions and Potential Reforms in the U.S.
Treasury Market: A Staff Progress Report, at 32, available at
https://home.treasury.gov/system/files/136/IAWG-Treasury-Report.pdf
(``November 2021 IAWG Report''). The November 2021 IAWG Report is a
joint report issued by the Inter-Agency Working Group for Treasury
Market Surveillance (``IAWG''), which consists of staff from the
U.S. Department of the Treasury, the Board of Governors of the
Federal Reserve System, the Federal Reserve Bank of New York, the
Commission, and the Commodity Futures Trading Commission. Among
other things, the November 2021 IAWG report provides an overview of
the current structure of the Treasury market and a detailed analysis
of the recent disruptions to the Treasury market at the onset of the
COVID-19 pandemic in March 2020 as well as other recent disruptions
to the Treasury market. The report also sets forth what the IAWG
believes are the six guiding principles for the Treasury market and
provides an update about the work streams for specific policy
analysis being undertaken by the members of the IAWG.
\185\ See id. at 3.
\186\ See SIFMA Fixed Income Trading Volume, available at
https://www.sifma.org/resources/research/us-fixed-income-trading-volume/. This includes U.S. Treasury Securities, Agency Mortgage-
Backed Securities, and Federal Agency Securities.
---------------------------------------------------------------------------
Legacy Government Securities ATSs now operate with complexity
similar to that of markets that trade NMS stocks in terms of use of
technology and speed of trading, the use of limit order books, order
types, algorithms, connectivity, data feeds, and the active
participation of principal trading firms (``PTFs'').\187\ For example,
based on the Commission's review of Form ATS filings by ATSs that trade
government securities and discussions with market participants, the
Commission believes that Legacy Government Securities ATSs often offer
subscribers a variety of order types to pursue both aggressive and
passive trading strategies and low latency, high-speed connectivity to
the ATS. These ATSs frequently use automated systems to match orders
anonymously on a price/time priority basis. Some Legacy Government
Securities ATSs also segment orders into categories by participants or
allow participants the ability to interact with specific counterparty
groups in the ATS and facilitate order interaction and execution.\188\
Likewise, Communication Protocol Systems are increasingly used as
electronic means to bring together buyers and sellers for government
securities and are particularly prevalent in the dealer-to-customer
market for U.S. Treasury and markets for off-the-run \189\ U.S.
Treasury Securities, Agency Securities,\190\ and repos.
---------------------------------------------------------------------------
\187\ See November 2021 IAWG Report, supra note 184, at 31. See
also NMS Stock ATS Adopting Release, supra note 2, at 38771 for a
discussion about the current operational complexities of NMS Stock
ATSs.
\188\ See also November 2021 IAWG Report, supra note 184, at 31;
Joint Staff Report: The U.S. Treasury Market on October 15, 2014, at
11, 35-36, available at https://www.sec.gov/files/treasury-market-volatility-10-14-2014-joint-report.pdf (``October 15 Staff
Report''); Department of the Treasury Release No. 2015-0013 (January
22, 2016), Notice Seeking Public Comment on the Evolution of the
Treasury Market Structure, 81 FR 3928 (January 22, 2016) (``Treasury
Request for Information''). This evolution in the interdealer
secondary cash markets for U.S. Treasury Securities was also
highlighted in the October 15 Staff Report, the Treasury Request for
Information, and public comment received by the Commission. The
October 15 Staff Report is a joint report about the unusually high
level of volatility and rapid round-trip in prices that occurred in
the U.S. Treasuries market on October 15, 2014. Among other things,
the October 15 Staff Report provides an overview of the market
structure, liquidity, and applicable regulations of the U.S.
Treasury market, as well as the broad changes to the structure of
the U.S. Treasury market that have occurred over the past two
decades.
\189\ See infra note 193 for a description of ``off-the-run''
securities.
\190\ See James Collin Harkrader and Michael Puglia, Fixed
Income Market Structure: Treasuries vs. Agency MBS, Board of
Governors of the Federal Reserve System: FEDS NOTES (August 25,
2020), available at https://www.federalreserve.gov/econres/notes/feds-notes/fixed-income-market-structure-treasuries-vs-agency-mbs-20200825.htm (``August 25th FEDS Notes'') (explaining the recent
evolution of the government securities market structure).
---------------------------------------------------------------------------
The most liquid and commonly traded government securities are U.S.
Treasury Securities, which are direct obligations of the U.S.
Government issued by the U.S. Department of the Treasury (``Treasury
Department''). The Treasury Department issues several different types
of securities, including Treasury bills, nominal coupons notes and
bonds, Floating Rate Notes, and Treasury Inflation Protected
Securities. Treasury nominal coupon notes and bonds, as well as
Treasury Inflation Protected Securities, may also be separated into
principal and interest payments and traded as STRIPS.\191\ For each
security type, the on-the-run securities are generally considered the
most liquid in the secondary market.\192\ Market participants commonly
refer to securities issued prior to ``on-the-run'' securities as ``off-
the-run'' securities.\193\ Market participants use U.S. Treasury
Securities as an investment instrument, hedging vehicle, and to source
orders and trading interest, among other things. U.S. banks commonly
own U.S. Treasury Securities due to their low risk and strong liquidity
characteristics. Additionally, U.S. Treasury Securities are often used
as collateral in lending arrangements or as margin on other financial
transactions.
---------------------------------------------------------------------------
\191\ STRIPS is the acronym for Separate Trading of Registered
Interest and Principal of Securities. STRIPS let investors hold and
trade the individual interest and principal components of eligible
Treasury notes and bonds as separate securities. STRIPS are Treasury
securities that don't make periodic interest payments. Market
participants create STRIPS by separating the interest and principal
parts of a Treasury note or bond. STRIPS can only be bought and sold
through a financial institution, broker, or dealer and held in the
commercial book-entry system. See TreasuryDirect, STRIPS, available
at https://www.treasurydirect.gov/instit/marketables/strips/strips.htm.
\192\ On-the-run U.S. Treasury Securities are the most recently
issued nominal coupon securities. Nominal coupon securities pay a
fixed semi-annual coupon and are currently issued at original
maturities of 2, 3, 5, 7, 10, 20, and 30 years. These standard
maturities are commonly referred to as ``benchmark'' securities
because the yields for these securities are used as references to
price a number of private market transactions.
\193\ Off-the-run or ``seasoned'' U.S. Treasury Securities are
the issues that preceded the current on-the-run securities. The U.S.
Treasury Securities market also comprises futures and options on
U.S. Treasury Securities, and securities financing transactions in
which U.S. Treasury Securities are used as collateral. See Treasury
Request for Information, supra note 188, at 3928. For the purpose of
this proposal, the Commission focuses on the secondary cash market.
---------------------------------------------------------------------------
For U.S. Treasury Securities, the secondary market is bifurcated
between the dealer-to-customer market, in which dealers trade with
their customers (e.g., investment companies, pension funds, insurance
companies, corporations, or retail), and the interdealer market, in
which dealers and specialty firms trade with one another.\194\
Customers, also referred to as ``end users,'' have not traditionally
traded directly with other end users.\195\ Rather, end users primarily
trade with dealers, and dealers use the interdealer market as a source
of liquidity to help facilitate their trading with clients in the
dealer-to-customer market. Trading in the U.S. Treasury Securities
dealer-to-customer market is generally--and has historically been--
conducted bilaterally using voice, and more recently, electronically
through the use of Communication Protocol Systems, most commonly using
an RFQ protocol. Broker-dealers also internalize a portion of their
customer flow, although the extent to which broker-dealers internalize
is unclear.\196\
---------------------------------------------------------------------------
\194\ See id.
\195\ See id.
\196\ See id. For the purposes of this proposal, internalization
refers to a broker filling a customer order either from the firm's
own inventory or by matching the order with other customer order
flow, instead of sending the order to an interdealer market for
execution. See id. at 3928 n.5.
---------------------------------------------------------------------------
In the interdealer market, the majority of trading in on-the-run
U.S. Treasury Securities currently occurs on ATSs using limit order
books supported by advanced electronic trading technology.\197\
Furthermore, interdealer trading for on-the-run U.S. Treasury
Securities is generally concentrated within a very small number of
ATSs, especially when compared to the market for NMS stocks, which is
dispersed among many trading venues.\198\ While
[[Page 15514]]
trading in the most liquid NMS stocks occur on a variety of trading
venues (e.g., exchanges, ATSs, single-dealer broker platforms), the
majority of overall trading in the interdealer secondary market for on-
the-run U.S. Treasury Securities occurs on ATSs.\199\ For example,
during the first nine months of 2021, one ATS accounted for $14.9
trillion in total dollar volume in all government securities, the
majority of which were on-the-run U.S. Treasury Securities.\200\ For
off-the-run U.S. Treasury Securities,\201\ the majority of interdealer
trading occurs via transactions through traditional voice-assisted
interdealer broker platforms and Communication Protocol Systems that
offer various trading protocols to bring together buyers and
sellers,\202\ though some interdealer trading of off-the-run U.S.
Treasury Securities does occur on ATSs.\203\
---------------------------------------------------------------------------
\197\ See October 15 Staff Report, supra note 188, at 11, 35-36.
See also Bloomberg Letter at 5, stating that liquid on-the-run
government securities are mostly traded on limit order books.
\198\ The growth of electronic trading has contributed to a
marked shift in the composition of the interdealer cash market for
U.S. Treasury Securities over time. Traditionally, interdealer
brokers only allowed primary dealers to access their trading venues.
After 1992, however, interdealer brokers expanded access to all
entities that were netting members of the Government Securities
Clearing Corporation (which is now the Fixed Income Clearing
Corporation's Government Securities Division). Thereafter, other
entities gained access to these trading venues through their prime
brokers, who themselves had access, and in recent years the trading
venues granted direct access to an even wider range of participants,
including non-dealers, which account for more than half of the
trading activity in the futures and electronically brokered
interdealer cash markets. See October 15 Staff Report, supra note
188, at 36. See also Treasury Request for Information, supra note
188, at 3928.
\199\ See infra Table VIII.2 and accompanying text.
\200\ For an additional discussion of trading volume in the U.S.
bond market as a whole and U.S. Treasury Securities, see infra
Section VIII.B.2.
\201\ Also, as noted in the October 15 Staff Report issued by
the Treasury Department, Board of Governors of the Federal Reserve
System, Federal Reserve Bank of New York, the Commission, and U.S.
Commodity Futures Trading Commission, trading in off-the-run U.S.
Treasury Securities has always been less active than trading in on-
the-run U.S. Treasury Securities, and price discovery in the cash
markets primarily occurs in on-the-run securities. See October 15
Staff Report, supra note 188 at n.7.
\202\ See November 2021 IAWG Report, supra note 184, at 3. See
also Bloomberg Letter at 5, stating that less liquid off-the-run
government securities are mostly traded using methods other than
limit order books.
\203\ While trading in on-the-run securities likely accounts for
more than half of total daily trading volumes, off-the-run U.S.
Treasury Securities make up over 95 percent of the outstanding
marketable U.S. Treasury Securities. See G30 Report, supra note 183,
at 1, n.2.
---------------------------------------------------------------------------
Another type of government securities is Agency Securities. Agency
Securities include securities issued by or guaranteed by U.S.
Government corporations or U.S. Government sponsored enterprises
(``GSEs'').\204\ Agency Securities, which may not be backed by the full
faith and credit of the U.S. Government, are generally considered to be
very liquid and offer state and local tax advantages to the holder.
Market participants can use ATSs to buy and sell Agency Securities,
although, based on the Commission's review of Form ATS-R filings,
transaction volume of Agency Securities is not as large as that of U.S.
Treasury Securities on ATSs.\205\ Investors, banks, and other market
participants often acquire Agency Securities in the secondary market to
support various investing strategies, such as hedging against other
more risky investments in a given portfolio. Agency Securities also
trade on Communication Protocol Systems where buyers and sellers can
use RFQ protocols, for example, to engage in price discovery, find a
counterparty, and negotiate and execute a transaction.
---------------------------------------------------------------------------
\204\ See U.S. Department of the Treasury Resource Center,
``Fixed Income: Agency Securities,'' available at https://www.treasury.gov/resource-center/faqs/Markets/Pages/fixedfederal.aspx. For example, the Government National Mortgage
Association (``Ginnie Mae'') is a U.S. Government corporation that
issues mortgage-backed securities guaranteed by the full faith and
credit of the U.S. Government. The assets collateralized into the
securities issued by Ginnie Mae are federally insured and guaranteed
mortgage loans. Agency Securities issued by GSEs include those
issued by the Federal Home Loan Banks (``FHLBs''), the Federal
National Mortgage Association (``Fannie Mae''), the Federal Home
Loan Mortgage Corporation (``Freddie Mac''), and the Student Loan
Marketing Association (``Sallie Mae''). Agency Securities issued by
GSEs are not normally backed by the full faith and credit of the
U.S. Government and therefore, may present some default and credit
risk.
\205\ Additionally, repos on government securities are also
traded on some ATSs.
---------------------------------------------------------------------------
Repos provide short-term financing (often overnight) to help fund
the borrower's (usually a broker-dealer) trading or lending activities.
However, the collateral is sold to the lender, and the repo obligates
the borrower to repurchase the collateral. U.S. Treasury Securities are
frequently used as the underlying collateral of a repo. Several ATSs
have provided notice on their Form ATS disclosures that they facilitate
the trading of repos. Much like the markets for U.S. Treasury
Securities and Agency Securities, repo trading has historically been
conducted bi-laterally by voice; however, over the past decade,
electronic trading of repos on Communication Protocol Systems has
increased significantly. Electronic trading of repos is primarily
conducted via RFQ protocols, and many systems for trading in repos now
offer electronic trading options.
With regard to the interdealer secondary markets for on-the-run
U.S. Treasury Securities, the continued growth of electronic trading
has contributed to an increased presence of PTFs in the market
place.\206\ Currently, PTFs account for the majority of trading and
provide top-of-the-book liquidity for on-the-run U.S. Treasury
Securities on electronic interdealer trading venues.\207\ From January
1, 2021 to June 30, 2021, PTFs traded on 13 Government Securities ATSs
accounting for approximately 48.6 percent of total on-the-run
Government Securities ATS trading volume.\208\ PTFs usually have direct
access to electronic interdealer trading venues for U.S. Treasury
Securities, and as is the case with the equity markets, PTFs trading on
the electronic interdealer trading venues for on-the-run U.S. Treasury
Securities often employ automated algorithmic trading strategies that
rely on speed and allow the PTFs to cancel or modify quotes in response
to perceived market events.\209\ Furthermore, most PTFs trading U.S.
Treasury Securities on these trading venues for on-the-run U.S.
Treasury Securities also restrict their activities to principal trading
and do not hold positions long term, while dealers use the interdealer
market as a source of orders and trading interest to help facilitate
their trading with clients in the dealer-to-customer market.\210\ As
explained in the October 15 Staff Report, the increase in trading by
PTFs in the interdealer market may affect the amount of liquidity
available to end users in the dealer-to-customer market.\211\
---------------------------------------------------------------------------
\206\ PTFs are not, however, very active in the electronic
markets for Agency Securities. See August 25th FEDS Notes, supra
note 190 (``Though parts of the agency MBS market have moved from
voice-based to screen-based trading since the early 2000s,
algorithmic high-frequency electronic trading still does not
comprise a meaningful share of average daily volume and the market
remains devoid of PTF participation.'').
\207\ See November 2021 IAWG Report, supra note 184, at 5. See
also October 15 Staff Report, supra note 188, at 36; Remarks of
Deputy Secretary Justin Muzinich at the 2019 U.S. Treasury Market
Structure Conference (September 23, 2019), available at https://home.treasury.gov/news/press-releases/sm782.
\208\ See infra Table VIII.2. (ATS PTF volume/ATS volume) x 100
= PTF share of ATS volume (%).
\209\ See October 15 Staff Report, supra note 188, at 32, 35-36,
39.
\210\ See November 2021 IAWG Report, supra note 184, at 5;
October 15 Staff Report, supra note 188, at 38.
\211\ See October 15 Staff Report, supra note 188, at 37.
---------------------------------------------------------------------------
In response to the 2020 Proposal, the Commission received several
comments that broadly supported expanding the regulatory framework
under Regulation ATS with respect to Government Securities ATSs.\212\
Commenters stated that ATSs have become increasingly important in the
government securities market.\213\ One commenter stated that, given
that Government Securities ATSs closely resemble NMS Stock ATSs, it
would be appropriate to impose similar regulatory oversight, including
regulatory oversight by the Commission
[[Page 15515]]
and FINRA.\214\ Likewise, another commenter stated that many of the
concerns surrounding potential conflicts of interest that arise between
an ATS and the activities of its bank/broker-dealer operator and
affiliates--and the transparency of an ATS's operations--are equally
relevant with respect to ATSs that transact in government securities as
to NMS Stock ATSs.\215\ In addition, one commenter stated that critical
intermediaries in the U.S. Treasury market are ``effectively
unregulated'' as trading venues or dealers, and this hampers
availability of information concerning trading in these critical
markets, and that oversight of the core ``plumbing'' of these critical
markets, which determines their resiliency, is lacking.\216\ This
commenter stated that several ATSs now dominate the trading of U.S.
Treasury Securities and agency mortgage backed securities, and that
ensuring that Regulation ATS and Regulation SCI apply to these entities
will provide for additional data and create more transparency into the
trading around those critical markets.\217\ This commenter also stated
that expanding Regulation ATS with respect to ATSs that trade U.S.
Treasuries has also become important as the role of PTFs has become
more significant in the U.S. Treasury markets and related repo
markets.\218\
---------------------------------------------------------------------------
\212\ See, e.g., BrokerTec Letter, SIFMA Letter, AFREF Letter.
\213\ See FINRA Letter.
\214\ See SIFMA Letter at 2.
\215\ See also MFA Letter at 4.
\216\ See AFREF Letter at 1.
\217\ See id.
\218\ See id. at 2 (stating that the growing role of PTFs means
that much trading activity is not coming from long-term investors
but rather proprietary trading firms who may trade in-and-out of
their positions several times in a day and are likely to react
sharply to market volatility).
---------------------------------------------------------------------------
B. Heightened Regulatory Requirements Under Regulation ATS for
Government Securities ATSs
The vast majority of ATSs that operate today do so pursuant to the
exemption provided by Exchange Act Rule 3a1-1(a)(2), which requires the
ATSs to be in compliance with Regulation ATS, which includes, among
other things, registering as broker-dealers. Currently Exempted
Government Securities ATSs, however, operate pursuant to Exchange Act
Rule 3a1-1(a)(3) \219\ and Rule 301(a)(4)(ii)(A).\220\ These provisions
currently exempt an ATS from compliance with the requirements in Rule
301(b) of Regulation ATS \221\ if, in relevant part, the ATS (1) is
registered as a broker-dealer under Sections 15(b) \222\ or 15C \223\
of the Exchange Act, or is a bank, and (2) limits its securities
activities to government securities (as defined in Section 3(a)(42) of
the Exchange Act), repos, any puts, calls, straddles, options, or
privileges on government securities, other than puts, calls, straddles,
options, or privileges that: (i) Are traded on one or more national
securities exchanges; or (ii) for which quotations are disseminated
through an automated quotation system operated by a registered
securities association, and commercial paper.\224\ Accordingly, such
Currently Exempted Government Securities ATSs are not required to
register as a national securities exchange or comply with Regulation
ATS.\225\ To the Commission's knowledge, most Currently Exempted
Government Securities ATSs operating pursuant to this exemption
register as broker-dealers with the Commission.\226\
---------------------------------------------------------------------------
\219\ 17 CFR 240.3a1-1(a)(3).
\220\ 17 CFR 242.301(a)(4)(ii)(A).
\221\ 17 CFR 242.301(b).
\222\ See 15 U.S.C. 78o(b) (pertaining to the registration and
regulation of brokers and dealers).
\223\ See 15 U.S.C. 78o-5 (pertaining to the registration and
regulation of government securities brokers and dealers).
\224\ See 15 U.S.C. 78c(a)(42). The definition of ``government
securities'' in Section 3(a)(42) of the Exchange Act (and,
therefore, references to ``government securities'' throughout this
proposal) includes certain puts, calls, straddles, options, or
privileges on government securities, other than puts, straddles,
options, or privileges that: Are traded on one or more national
securities exchanges; or for which quotations are disseminated
through an automated quotation system operated by a registered
securities association. See supra note 182.
\225\ See 17 CFR 242.301(a)(4)(i) and (a)(4)(ii)(A). Although
not required to register as a national securities exchange or comply
with Regulation ATS, a Currently Exempted Government Securities ATS
may need to register as a broker-dealer under Section 15(b) or as a
government securities broker or government securities dealer
pursuant to Exchange Act Section 15C, and comply with the associated
regulatory requirements. See, e.g., 17 CFR chapter IV, subchapter
A--Regulations under Section 15C of the Securities Exchange Act of
1934.
\226\ Some ATSs that are eligible for the exemption voluntarily
comply with Regulation ATS, even though ATSs that trade only
government securities are not required to comply with Regulation ATS
at all.
---------------------------------------------------------------------------
ATSs that do not limit their securities activities solely to
government securities or repos, trading for example corporate bonds or
municipal securities, cannot use this exemption. Such ATSs must either
register as an exchange or comply with Regulation ATS pursuant to
Exchange Act Rule 3a1-1(a)(2), which includes, among other things,
registering as a broker-dealer under Section 15 of the Exchange
Act.\227\ Government Securities ATSs that are currently subject to
Regulation ATS must report transactions in U.S. Treasury Securities and
Agency Securities to the Trade Reporting and Compliance Engine
(``TRACE''),\228\ and FINRA publicly disseminates data about these
transactions. Currently, FINRA publishes weekly aggregated transaction
information on U.S. Treasury Securities and disseminates certain
transaction information on Agency Securities immediately upon receipt
of a transaction report.\229\ Today, Legacy Government Securities ATSs
are subject only to certain provisions of Regulation ATS because not
all the provisions are applicable to trading in government
securities.\230\ In particular, government securities are not included
in any category of securities under the Fair Access Rule.\231\ Today,
the categories of securities under the Fair Access Rule only include
NMS stocks, equity securities that are not NMS stocks and for which
transactions are reported to an SRO, municipal securities, and
corporate debt securities.\232\ In addition, Regulation SCI does not
apply to ATSs with respect to their trading in
[[Page 15516]]
government securities.\233\ The Capacity, Integrity, and Security Rule
under Rule 301(b)(6) \234\ also does not apply to the government
securities activities of an ATS.\235\
---------------------------------------------------------------------------
\227\ See supra notes 130-131 and accompanying text.
\228\ See FINRA Rule 6730(a)(1) requires FINRA members to report
transactions in TRACE-Eligible Securities, which FINRA Rule 6710
defines to include U.S. Treasury Securities and Agency Securities.
For each transaction in U.S. Treasury Securities and Agency
Securities, a FINRA member would be required to report the CUSIP
number or similar numeric identifier or FINRA symbol; size (volume)
of the transaction; price of the transaction (or elements necessary
to calculate price); symbol indicating whether transaction is a buy
or sell; date of trade execution (``as/of'' trades only); contra-
party's identifier; capacity (principal or agent); time of
execution; reporting side executing broker as ``give-up'' (if any);
contra side introducing broker (in case of ``give-up'' trade); the
commission (total dollar amount), if applicable; date of settlement;
if the member is reporting a transaction that occurred on an ATS
pursuant to FINRA Rule 6732, the ATS's separate Market Participant
Identifier (``MPID''); and trade modifiers as required. For when-
issued transactions in U.S. Treasury Securities, a FINRA member
would be required to report the yield in lieu of price. See FINRA
Rule 6730(c).
\229\ FINRA Rule 6750(a) requires FINRA to disseminate
information on all transactions on certain securities, including
Agency Securities (but excluding U.S. Treasury Securities),
immediately upon receipt of the transaction report. FINRA is
permitted to publish or distribute weekly aggregated transaction
information and statistics on U.S. Treasury Securities, and has
stated that it intends to publish weekly volume information
aggregated by U.S. Treasury subtype (e.g., Bills, Floating Rate
Notes, Treasury Inflation-Protected Securities, and Nominal
Coupons). See Securities Exchange Release No. 87837 (December 20,
2019), 84 FR 71986 (December 30, 2019) (approving a proposed rule
change to allow FINRA to publish or distribute aggregated
transaction information and statistics on U.S. Treasury Securities).
\230\ See 17 CFR 242.301(b)(1), (2), and (7) through (11). The
order display and execution access provisions under Rule 301(b)(3)
and the related fee restrictions of Rule 301(b)(4) of Regulation ATS
only apply to an ATS's NMS stock activities. See 17 CFR
242.301(b)(3) and (4). See also supra Section II.D.2 (discussing the
requirements for compliance with the Regulation ATS exemption).
\231\ 17 CFR 242.301(b)(5). See also supra notes 153-157 and
accompanying text.
\232\ See 17 CFR 242.301(b)(5).
\233\ See infra Section III.C (describing the types of entities
that are currently subject to the requirements of Regulation SCI).
\234\ 17 CFR 242.301(b)(6).
\235\ See supra notes 157-158 and accompanying text.
---------------------------------------------------------------------------
Finally, Government Securities ATSs are not required to comply with
rules applicable to ATSs that trade NMS stocks, including the
obligation to file a public Form ATS-N pursuant to Rule 304 of
Regulation ATS.\236\ ATSs that transact in government securities or
repos are also not required to comply with the order display and
execution access provisions under Rule 301(b)(3) \237\ and the related
fee restrictions of Rule 301(b)(4),\238\ both of which only apply to an
ATS's NMS stock activities.
---------------------------------------------------------------------------
\236\ 17 CFR 242.304. See also supra notes 139-143 and
accompanying text.
\237\ See supra notes 149-151 and accompanying text.
\238\ See supra note 152 and accompanying text.
---------------------------------------------------------------------------
Despite the critical role of government securities in the U.S. and
global economy, the significant volume in government securities
transacted on ATSs, and these ATSs' growing importance to investors and
overall securities market structure, Currently Exempted Government
Securities ATSs are exempt from exchange registration and are not
required to comply with Regulation ATS. In addition, Communication
Protocol Systems that transact in government securities and/or repos,
but do not currently meet the definition of ``exchange,'' are not
subject to exchange registration requirements and are likewise not
required to comply with Regulation ATS.\239\ Furthermore, ATSs that
trade both government securities and non-government debt securities
(e.g., corporate bonds) are not subject to all the provisions of
Regulation ATS. Market participants today have limited access to
information that permits them to adequately compare and contrast how
they can use a Government Securities ATS or how their trading interest
would be handled by Government Securities ATSs.\240\ In addition,
Government Securities ATSs are not currently subject to the Fair Access
Rule and Regulation SCI, which would help ensure the fair treatment of
subscribers and address technological vulnerabilities, and improve the
Commission's oversight, of the core technology of key entities in the
markets for government securities.\241\ Given these concerns, and
comments received on the 2020 Proposal, the Commission is re-proposing
and revising the amendments described below.
---------------------------------------------------------------------------
\239\ See supra Section II.A.
\240\ See, e.g., 2020 Proposal, supra note 4, at 87125.
\241\ See id. at Section III.B.4 (discussing the Fair Access
Rule) and III.C (discussing Regulation SCI).
---------------------------------------------------------------------------
1. Proposed Definition of Government Securities ATS
The Commission is re-proposing to amend Rule 300 of Regulation ATS
to define ``Government Securities ATS'' to mean an alternative trading
system, as defined in Rule 300(a), that trades government securities,
as defined in section 3(a)(42) of the Exchange Act (15 U.S.C.
78c(a)(42)), or repurchase and reverse repurchase agreements on
government securities.\242\ To meet the definition of a Government
Securities ATS, the organization, association, person, group of
persons, or system must meet the definition of an alternative trading
system under Rule 300(a) of Regulation ATS.\243\ The Commission is also
re-proposing that a Government Securities ATS shall not trade
securities other than government securities or repos \244\ and that
trading of securities other than government securities or repos would
require the separate filing of a Form ATS or a Form ATS-N, depending on
the types of securities traded.\245\ Other than complying with Rule 304
and filing Form ATS-N, this amendment would not, however, impose new
compliance requirements on ATSs that currently trade government
securities in addition to non-government securities.\246\ Under the
proposal, if a broker-dealer operator currently operates an ATS for
government securities and non-government securities (for example,
corporate bonds), the broker-dealer operator would separately be
required to comply with Regulation ATS for: (1) A Government Securities
ATS that would trade government securities, which would be subject to
Rule 304, and file disclosures on Form ATS-N, as proposed to be revised
and (2) a non-Government Securities ATS (that, for example, would trade
corporate bonds), which would not be subject to Rule 304, and file
disclosures on its existing Form ATS, as amended to remove references
to government securities.
---------------------------------------------------------------------------
\242\ See proposed Rule 300(l).
\243\ 17 CFR 242.300(a). See Regulation ATS Adopting Release,
supra note 31, at 70851-52.
\244\ See proposed Rule 300(l).
\245\ An ATS that does not trade NMS stocks or government
securities, as proposed, must file Form ATS. If the broker-dealer
operates an ATS that trades NMS stocks and an ATS that trades
government securities, it would be required to file a separate Form
ATS-N for each of the NMS Stock ATS and Government Securities ATS.
\246\ Broker-dealers that operate Government Securities ATSs
that are currently subject to Regulation ATS already must have
established written safeguards and written procedures to protect
subscribers' confidential trading information, pursuant to Rule
301(b)(10), and already must make and keep records pursuant to Rule
301(b)(8) that are tailored to the types of securities the ATS
trades and the subscribers that trade those securities on the ATS.
The Commission believes the proposal is broadly consistent with the
manner in which broker-dealers that operate NMS Stock ATSs and non-
NMS Stock ATSs currently comply with Regulation ATS. For further
discussion, see infra Section III.B.3.
---------------------------------------------------------------------------
In response to the 2020 Proposal, the Commission received one
comment letter opposing the proposed definition of Government
Securities ATS.\247\ This commenter stated that separating trading
activity in government securities and repos from non-NMS stock trading
activity could impose administrative and operational burdens on both
Government Securities ATSs and subscribers.\248\ The commenter stated
that the Commission did not explain why requiring a Government
Securities ATS to separate its operations from other non-NMS Stock ATS
trading activity would improve Commission oversight or other regulatory
goals.\249\
---------------------------------------------------------------------------
\247\ See ICE Bonds Letter I at 5.
\248\ See id. The commenter stated that the initial set-up of a
new Government Securities ATS would require, among other things, the
development of a matching engine, separate connectivity for
subscribers, new clearing connectivity, additional personnel to
support trading operations of the Government Securities ATS, and
regulatory controls (e.g., Rule 15c3-5). The commenter further
stated that these requirements would ultimately lead to fewer venues
for subscribers to trade and hedge and concentrate trading among a
few large Government Securities ATSs, as smaller Legacy Government
Securities ATSs may determine that this separation requirement is
cost prohibitive. In addition, the commenter stated that if a
subscriber has to execute a corporate bond on one ATS and sell the
treasury on a different ATS, there is an administrative and
operational burden placed on the subscriber, as well as additional
economic and market risk to the subscriber as the price on the other
venue may move by the time the hedge trade is initiated.
\249\ See id.
---------------------------------------------------------------------------
The proposed definition of Government Securities ATS, however,
would not require operational separation by a Government Securities
ATS, and the operational costs that the commenter described would
therefore not apply.\250\ The proposed definition would not, for
example, require the Government Securities ATS to develop a new
matching engine nor require changes with regard to how subscribers
enter trading interest into the ATS. Other than requiring the
Government Securities ATS to separately comply with the requirements of
Regulation ATS (and, as applicable, Regulation SCI), the proposed
definition does not create new compliance requirements on
[[Page 15517]]
Government Securities ATSs.\251\ Under the proposed rule, a broker-
dealer operator for an ATS that currently trades both government
securities and corporate debt securities, for example, would be
required to file a Form ATS-N for the trading of government securities
on a Government Securities ATS and a separate Form ATS for trading of
corporate debt securities on an ATS. In this example, the broker-dealer
operator for a Government Securities ATS and non-Government Securities
ATS may be required to disclose certain information on Form ATS-N about
the non-Government Securities ATS. For example, to the extent that any
persons support both the operation of the Government Securities ATS and
the ATS that trades corporate debt securities and have access to
subscriber confidential trading information for the Government
Securities ATS, the Government Securities ATS would need to disclose
that on Part II, Item 7 of Form ATS-N.\252\ In addition, the Government
Securities ATS would be required to provide under Part III, Item 11
information about interaction with non-government securities markets
(e.g., futures, currencies, swaps, corporate bonds).\253\
---------------------------------------------------------------------------
\250\ See id.
\251\ See supra note 246.
\252\ See infra Section IV.D.4.f.
\253\ See infra Section IV.D.5.k.
---------------------------------------------------------------------------
Further, the Commission believes that by stating that a Government
Securities ATS trades only government securities, the definition of
Government Securities ATS clarifies which regulatory requirements are
applicable for trading activity in government securities and non-
government securities. For example, a Government Securities ATS would
file a Form ATS-N specifically disclosing information regarding its
trading in government securities, which would enable market
participants to understand the ATS's government securities operations
and readily compare the ATS against other Government Securities ATSs.
To provide that the same approach applies to broker-dealers that
operate NMS Stock ATSs and non-NMS Stock ATSs, and to clarify
requirements applicable to NMS Stock ATSs, the Commission is proposing
to amend the definition of ``NMS Stock ATS'' to state that an NMS Stock
ATS shall not trade securities other than NMS stocks.\254\ Today,
securities other than NMS stocks are not traded in any NMS Stock ATS
and the proposed amendment to the definition of NMS Stock ATS would
have no impact on any existing ATS nor on the requirements applicable
to existing NMS Stock ATSs. Broker-dealer operators of NMS Stock ATSs
are currently required to file a Form ATS-N for NMS Stock ATS
operations and a separate Form ATS for any non-NMS Stock ATS
operations.\255\ This would not change under this proposal. In
addition, to facilitate the orderly transition to the heightened
requirements for Government Securities ATSs that are currently
operating, the Commission is defining such ATSs as Legacy Government
Securities ATSs.\256\
---------------------------------------------------------------------------
\254\ See proposed Rule 300(k).
\255\ See current Rule 301(b)(2)(viii).
\256\ See proposed Rule 300(n). See also supra note 5. See infra
notes 433-439 and accompanying text for a description of the filing
and effectiveness rules applicable to Legacy Government Securities
ATSs.
---------------------------------------------------------------------------
To help specify which ATSs are subject to Rule 304 requirements,
the Commission is proposing to define ``Covered ATS'' as an NMS Stock
ATS or Government Securities ATS, as applicable.\257\ The Commission is
also proposing to define ``Covered Newly Designated ATS'' to mean a
Newly Designated ATS that is a Government Securities ATS or NMS Stock
ATS, which the Commission believes would facilitate the transition of
Communication Protocol Systems that are NMS Stock ATSs or Government
Securities ATSs to the regulatory requirements of Regulation ATS.\258\
---------------------------------------------------------------------------
\257\ See proposed Rule 300(m).
\258\ See proposed Rule 300(s).
---------------------------------------------------------------------------
The Commission is also proposing to add definitions of ``U.S.
Treasury Security'' and ``Agency Security'' for purposes of Regulation
ATS.\259\ ``U.S. Treasury Security'' would mean a security issued by
the U.S. Department of the Treasury. ``Agency Security'' would mean a
debt security issued or guaranteed by a U.S. executive agency, as
defined in 5 U.S.C. 105, or government-sponsored enterprise, as defined
in 2 U.S.C. 622(8). The proposed definitions are designed to provide
the scope of securities a Government Securities ATS must include when
calculating whether the fair access requirements set forth in Rule
301(b)(5) are applicable and to facilitate compliance with the Fair
Access Rule.\260\
---------------------------------------------------------------------------
\259\ See proposed Rule 300(o)-(p).
\260\ See infra Section III.B.4. The proposed definitions are
similar to those in FINRA's rules. See FINRA Rules 6710(l) and
6710(p).
---------------------------------------------------------------------------
Request for Comment
12. Should the Commission adopt a more limited or expansive
definition of Government Securities ATS than the definition that is
being proposed? Given that, unlike the 2020 Proposal, the definition of
Government Securities ATS would now include Communication Protocol
Systems that transact in government securities and/or repos, do
commenters believe that the definition of Government Securities ATS
should be limited or expanded?
13. Should the Commission cite to the section 3(a)(42) (15 U.S.C.
78c(a)(42)) definition of government securities for purposes of
defining Government Securities ATS? Should the securities encompassed
by the definition (e.g., certain options on government securities) be
considered ``government securities'' for purposes of this regulation?
14. Should the Commission modify the proposed definitions of U.S.
Treasury Securities and Agency Securities in any way? For example,
should the proposed definitions of U.S. Treasury Securities and Agency
Securities be based on definitions in any other existing rules?
15. The proposed amendments to the definitions of NMS Stock ATS and
Government Securities ATS are not designed to limit a broker-dealer
operator for an NMS Stock ATS or Government Securities ATS with respect
to other types of securities that the broker-dealer operator may make
available for trading in an ATS that is subject to Rule 301(b)(2) of
Regulation ATS or how the broker-dealer operator may structure the
operations of its ATS businesses. Would the proposed amendments to the
definitions of NMS Stock ATS and Government Securities ATS impose any
operational or other burdens on the broker-dealer operator, other than
those related to filing Form ATS, Form ATS-R, or Form ATS-N, as
applicable?
16. Should the Commission require an ATS that currently trades
government securities and non-government securities, such as corporate
bonds, to comply with Rule 304, including filing a Form ATS-N, with
respect to the ATS's corporate bond activities as well as its
government securities activities?
2. Proposed Elimination of the Exemption for ATSs That Limit Securities
Activities to Government Securities and Repos
The Commission is re-proposing amendments to Regulation ATS that
would require a Currently Exempted Government Securities ATS that seeks
to operate pursuant to the exemption from the definition of an
``exchange'' under Exchange Act Rule 3a1-1(a)(2), and thus not be
required to be registered as a national securities exchange, to comply
with Regulation ATS. The Commission is proposing to eliminate the
exemption under Rule 301(a)(4) of
[[Page 15518]]
Regulation ATS, which exempts from the definition of an ``exchange''
under Section 3(a)(1) of the Exchange Act an ATS that is operated by a
registered broker-dealer or a bank that solely trades government
securities or repos.\261\ As a result, Currently Exempted Government
Securities ATSs would either have to register as an exchange or operate
pursuant to an exemption to such registration, such as the exemption
under Regulation ATS.\262\ A Currently Exempted Government Securities
ATS that opts to comply with Regulation ATS would then be subject to
the conditions to the exemption from exchange registration that are
designed to provide its subscribers with investor protections and
enable Commission oversight, including the surveillance and examination
of ATSs, and to help assure fair and orderly markets.\263\ The
Commission is also proposing to subject Currently Exempted Government
Securities ATSs to the enhanced public transparency requirements of
Rule 304 and Form ATS-N.
---------------------------------------------------------------------------
\261\ See 17 CFR 240.3a1-1(a)(3) and 17 CFR 242.301(a)(4).
\262\ The Commission is proposing to delete the text of Rule
301(a)(4)(ii)(A)-(C) and replace each paragraph with the term
``Reserved.'' Based on Commission staff experience, ATSs generally
do not trade commercial paper, and the Commission is not proposing
to eliminate Rule 301(a)(4)(ii)(D), which exempts an ATS from
compliance with Regulation ATS if the ATS limits its securities
activities to commercial paper. Accordingly, the only ATSs that
would continue to be exempt under Rule 301(a)(4) would be ATSs that
are registered broker-dealers or are banks and limit their
securities activities to commercial paper.
\263\ See Regulation ATS Adopting Release, supra note 31, at
70878. See also infra notes 287-297 and accompanying text.
---------------------------------------------------------------------------
In response to the 2020 Proposal, several commenters expressed
support for eliminating the exemption for ATSs that both (1) limit
their securities activities to government securities or repos and (2)
either register as broker-dealers or are banks.\264\ Commenters stated
such requirements would help impose regulatory oversight,\265\ and one
commenter stated that the requirements could promote market
transparency, resiliency, and integrity.\266\ One commenter stated that
requiring Currently Exempted Government Securities ATSs to adopt
written safeguards and procedures to protect subscriber confidential
trading information could help protect the integrity of a subscriber's
confidential trading information that could otherwise be at risk of
unauthorized disclosure and subject to potential misuse.\267\ In
addition, commenters specifically expressed support for the requirement
that all Government Securities ATSs register as broker-dealers, stating
that such requirement would provide regulatory oversight with regard to
risk management and regulatory controls.\268\
---------------------------------------------------------------------------
\264\ See, e.g., SIFMA Letter at 2 (stating that given that
Government Securities ATSs closely resemble ATSs that trade NMS
stocks, it would be appropriate to impose similar regulatory
oversight over such trading venues); FINRA Letter at 2; BrokerTec
Letter at 2; ICE Bonds Letter I at 2.
\265\ See SIFMA Letter at 2; FINRA Letter at 2; MFA Letter at 3;
ICE Bonds Letter I at 2; and AFREF Letter at 2-3 (stating that the
regulatory extension would help to discourage some of the deceptive
and manipulative trading practices that occur in government
securities markets).
\266\ See Citadel Letter.
\267\ See MFA Letter at 3.
\268\ See SIFMA Letter at 2.
---------------------------------------------------------------------------
One commenter suggested the Commission consider subjecting ATSs for
a class of securities to an enhanced regime if the ATSs trading in that
asset class are ``significant''; the commenter suggested that the
Commission may recognize 30 percent as the threshold for
``significant'' threshold, and noted that equity-NMS Stock ATSs were
matching about 30 percent of the total share volume when Regulation ATS
was implemented.\269\ The commenter suggested that the Commission apply
this test when considering removing the exemption for Currently
Exempted Government Securities ATSs and that the Commission make
proposed Form ATS-G public when the ATSs are ``significant'' with
respect to trading volume.\270\ The Commission is not, however,
proposing a specific trading volume test to determine whether to remove
the exemption for Currently Exempted Government Securities ATSs. In
addition to the significant volume in government securities transacted
on ATSs (as well as Communication Protocol Systems),\271\ the
Commission also recognizes that government securities have a critical
role in the U.S. and global economy and ATSs have grown in importance
to investors and overall securities market structure for purposes of
the execution and pricing of government securities.
---------------------------------------------------------------------------
\269\ See Bloomberg Letter at 4.
\270\ See id.
\271\ See, e.g., supra note 197 and accompanying text
(describing that, on the interdealer market, the majority of trading
currently occurs on ATSs). See also infra note 840 and accompanying
text (describing that Communication Protocol Systems account for
approximately 30 to 40 percent of total electronic trading volume on
multilateral U.S. Treasury trading venues).
---------------------------------------------------------------------------
The Commission is also proposing to amend Rule 301(b)(1) of
Regulation ATS, which currently requires an ATS to register as a
broker-dealer under Section 15 of the Exchange Act,\272\ to allow an
ATS to register either as a broker-dealer under Exchange Act Section 15
or a government securities broker or government securities dealer under
Exchange Act Section 15C(a)(1)(A).\273\ Registration pursuant to
Section 15C(a)(1)(A) specifically applies to government securities
brokers and dealers other than registered broker-dealers or financial
institutions.\274\ Registration as a broker-dealer under Section 15 or
government securities broker or government securities dealer under
Section 15C(a)(1)(A) of the Exchange Act is important because, among
other things, it requires membership in an SRO, such as FINRA.\275\
Because ATSs that register as broker-dealers or government securities
brokers or dealers do not have self-regulatory responsibilities, the
Commission believes it is important for these ATSs to be members of an
SRO and thus subject to SRO examination and market surveillance,\276\
trade reporting obligations,\277\ and certain investor protection
rules.\278\ Like ATSs registered as broker-dealers under Section 15, an
ATS registered as a government securities broker or government
securities dealer under Section 15C(a)(1)(A) would be subject to
oversight and market surveillance by an SRO.\279\
---------------------------------------------------------------------------
\272\ 15 U.S.C. 78o.
\273\ See 15 U.S.C. 78o-5. Exchange Act Section 15C(a)(1)(A)
makes it unlawful for a government securities broker or government
securities dealer (other than a registered broker or dealer or a
financial institution) to make use of the mails or any means or
instrumentality of interstate commerce to effect a transaction in
any government securities unless the government securities broker or
government securities dealer is registered with Commission pursuant
to Exchange Act Section 15C(a)(2). See 15 U.S.C. 78o-5(a)(1)(A).
Section 15C(e) in turn generally requires that a government
securities broker or government securities dealer that is registered
or required to be registered under Section 15C(a)(1)(A) must be a
member of a registered national securities exchange or registered
securities association such as FINRA.
\274\ Broker-dealers that limit their activity to government
securities require specialized registration under Section 15C of the
Exchange Act and do not have to register as general-purpose broker-
dealers under Section 15(b). See 15 U.S.C. 78o-5.
\275\ See Regulation ATS Adopting Release, supra note 31, at
70863 (discussing the importance of an ATS being a member of an SRO
because ATSs registered as broker-dealers will not have self-
regulatory responsibilities). As noted above, Section 15C(e)
generally requires SRO membership for a government securities broker
or government securities dealer that is registered or required to be
registered under Section 15C(a)(1)(A). Similarly, Section 15(b)(8)
generally requires a registered broker-dealer to be a member of a
registered securities association such as FINRA.
\276\ See, e.g., FINRA Rule 1000 Series, FINRA Rules 4140, 4510,
4520, 4530, and 8210.
\277\ See, e.g., FINRA Rule 6730.
\278\ See, e.g., FINRA Rules 3110, 4370, 5210, 5220, 5230, 5310,
and 5340.
\279\ See Regulation ATS Adopting Release, supra note 31, at
70863.
---------------------------------------------------------------------------
[[Page 15519]]
In contrast, SRO membership is not required for a bank or other
financial institution that registers as a government securities broker
or dealer.\280\ Accordingly, the amendment to Regulation ATS would not
permit a bank or other financial institution to satisfy the broker-
dealer registration requirement by registering as a government
securities broker or government securities dealer under Section
15C(a)(1)(B) of the Exchange Act.\281\ The Commission believes it is
important for an ATS to be a member of an SRO, and unlike registrants
under Sections 15 and 15C(a)(1)(A), a bank or other financial
institution that registers under Section 15C(a)(1)(B) is not required
to be a member of an SRO.\282\
---------------------------------------------------------------------------
\280\ Unlike registered broker-dealers (Section 15(b)(8)) and
government securities brokers or government securities dealers that
are registered or required to be registered under Section
15C(a)(1)(A) (Section 15C(e)), there is no statutory requirement of
SRO membership for banks. Because banks typically operate in
reliance on exceptions from broker or dealer status, they are not
required to become a member of an SRO, such as FINRA. In this
regard, Exchange Act Section 3(a)(4)(B)(iii)(II) excludes from the
definition of ``broker'' a bank that effects transactions in
``exempted securities'' such as government securities. 15 U.S.C.
78c(a)(4)(B)(iii)(II). See Exchange Act Section 3(a)(12) (defining
``exempted securities'' to include ``government securities'' as
defined in Section 3(a)(42) of the Exchange Act). Exchange Act
Section 3(a)(5)(C)(i)(II) similarly excepts from the definition of
``dealer'' a bank that buys or sells exempted securities. 15 U.S.C.
78c(a)(5)(C)(i)(II).
\281\ Exchange Act Section 15C(a)(1)(B) makes it unlawful for
any government securities broker or government securities dealer
that is a registered broker or dealer or a financial institution to
make use of the mails or any means or instrumentality of interstate
commerce to effect any transaction in, or to induce or attempt to
induce the purchase or sale of, any government security unless such
government securities broker or government securities dealer has
filed with the appropriate regulatory agency written notice that it
is a government securities broker or government securities dealer.
15 U.S.C. 78o-5(a)(1)(B)(i).
\282\ See Exchange Act Sections 3(a)(6) (defining ``bank'') and
3(a)(46) (defining ``financial institution'').
---------------------------------------------------------------------------
As a result, a bank-operated ATS that trades only government
securities or repos would be unable to rely on the exemption provided
by Regulation ATS, as proposed to be amended, and could not otherwise
operate unless registered as a national securities exchange as required
by Section 5 of the Exchange Act. However, this is the case currently
with respect to bank-operated ATSs that trade securities other than
government securities, and it is the Commission's understanding that
these ATSs often are operated by bank affiliates that are themselves
registered broker-dealers, rather than by the banks themselves. The
Commission believes that a bank that operates an ATS that trades only
government securities might adopt a similar registered affiliate
structure for its government securities operations, such as by moving
its ATS operations into a new or existing broker-dealer affiliate of
the bank.
In addition to Rule 301(b)(1) of Regulation ATS, which most
Currently Exempted Government Securities ATSs already satisfy,\283\ a
Currently Exempted Government Securities ATS would be required to
comply with other conditions of the Regulation ATS exemption, as
proposed to be amended. This includes Rule 304, which would require
that Government Securities ATSs file Form ATS-N. Government Securities
ATSs would not, however, be subject to the order display and execution
access provisions under Rule 301(b)(3) or the fees provision of Rule
301(b)(4) that are applicable only to NMS Stock ATSs.\284\ The
Commission is proposing to require Government Securities ATSs that meet
a certain volume threshold to comply with the Fair Access Rule with
respect to trading in U.S. Treasury Securities and Agency
Securities.\285\ Because the Commission is proposing to apply
Regulation SCI to certain Government Securities ATSs that trade U.S.
Treasury Securities and/or Agency Securities, the Capacity, Integrity,
and Security Rule under Rule 301(b)(6) would not apply to the trading
of government securities on ATSs.\286\
---------------------------------------------------------------------------
\283\ See supra text accompanying note 226 (stating that most
Currently Exempted Government Securities ATSs register as broker-
dealers with the Commission). For those Currently Exempted
Government Securities ATSs that are operating as banks and not
registered broker-dealers, the Commission is proposing to amend Rule
301(b)(1) to provide a transition period to allow them to operate
without interruption while their broker-dealer registration is
pending until the earlier of the date the alternative trading system
registers as a broker-dealer under section 15 of the Act or section
15C(a)(1)(A) of the Act and becomes a member of a national
securities association; or the date 210 calendar days after
effective date of any final rule. See supra note 177.
\284\ See 17 CFR 242.301(b)(3)-(4).
\285\ See infra Section III.B.4.
\286\ See infra Section III.C.
---------------------------------------------------------------------------
The Commission believes that it is important that all Government
Securities ATSs, including Currently Exempted Government Securities
ATSs, be subject to the conditions of the Regulation ATS exemption,
which are designed to protect investors and to facilitate Commission
oversight. Accordingly, the Commission is re-proposing that a Currently
Exempted Government Securities ATS must:
Permit the examination and inspection of its premises,
systems, and records, and cooperate with the examination, inspection,
or investigation of subscribers, whether such examination is being
conducted by the Commission or by an SRO of which such subscriber is a
member, pursuant to Rule 301(b)(7).\287\ The Commission believes that
because subscribers to whom the Commission's inspection authority may
not extend could use a Currently Exempted Government Securities ATS to
manipulate the market in a security, it is important that these ATSs
cooperate in all inspections, examinations, and investigations.\288\
---------------------------------------------------------------------------
\287\ See 17 CFR 242.301(b)(7). See also Regulation ATS Adopting
Release, supra note 31, Section IV.A.2.f.
\288\ See Regulation ATS Adopting Release, supra note 31, at
70877.
---------------------------------------------------------------------------
Make and keep certain records specified in Rule 302 \289\
and preserve records specified in Rule 303,\290\ pursuant to Rule
301(b)(8).\291\ The recordkeeping requirements would require the
Currently Exempted Government Securities ATSs to make and keep certain
records for an audit trail of trading activity that would allow the
Commission to examine whether the ATS is in compliance with Federal
securities laws.\292\
---------------------------------------------------------------------------
\289\ See supra note 163.
\290\ See supra notes 164 and 166.
\291\ See 17 CFR 242.301(b)(8). See also Regulation ATS Adopting
Release, supra note 31, Section IV.A.2.g.
\292\ See Regulation ATS Adopting Release, supra note 31, at
70878.
---------------------------------------------------------------------------
Periodically report certain information about transactions
in the ATS and information about certain activities on Form ATS-R
within 30 calendar days after the end of each calendar quarter in which
the market has operated pursuant to Rule 301(b)(9).\293\ The
information reported on Form ATS-R by Currently Exempted Government
Securities ATSs will permit the Commission to monitor the trading on
these ATSs for compliance with the Exchange Act and applicable rules
thereunder and enforce the Fair Access Rule.\294\
---------------------------------------------------------------------------
\293\ See 17 CFR 242.301(b)(9). See also supra notes 144-148 and
infra Section III.B.4.
\294\ See Regulation ATS Adopting Release, supra note 31, at
70874 and 70878.
---------------------------------------------------------------------------
Adopt written safeguards and written procedures to protect
confidential trading information and to separate ATS functions from
other broker-dealer functions, including principal and customer trading
pursuant to Rule 301(b)(10).\295\ The Commission believes that applying
the requirements of Rule 301(b)(10) to Currently Exempted Government
Securities ATSs will help prevent the potential for abuse
[[Page 15520]]
of subscriber confidential trading information.\296\
---------------------------------------------------------------------------
\295\ See 17 CFR 242.301(b)(10); infra note 168; NMS Stock ATS
Adopting Release, supra note 2, Section VI.
\296\ See NMS Stock ATS Adopting Release, supra note 2, at
38864.
---------------------------------------------------------------------------
Not use in its name the word ``exchange,'' or any
derivation of the word ``exchange'' pursuant to Rule 301(b)(11).\297\
The Commission believes that the use of the word ``exchange'' by an
ATS, including a Currently Exempted Government Securities ATS, would be
deceptive and could lead investors to believe incorrectly that such ATS
is registered as a national securities exchange.\298\
---------------------------------------------------------------------------
\297\ See 17 CFR 242.301(b)(11); Regulation ATS Adopting
Release, supra note 31, Section II.C.
\298\ See Regulation ATS Proposing Release, supra note 173.
---------------------------------------------------------------------------
Request for Comment
17. Should the Commission amend Regulation ATS to eliminate the
exemption from compliance with Regulation ATS under Rule
301(a)(4)(ii)(A) for all Currently Exempted Government Securities ATS,
including those operated by banks?
18. Should the proposed elimination of the exemption from
compliance with Regulation ATS only apply to Government Securities ATSs
that trade a certain type of government security (e.g., only U.S.
Treasury Securities or only Agency Securities)? Should the proposed
elimination of the exemption from compliance with Regulation ATS only
apply to Government Securities ATSs that trade government securities
(and not repos)? If so, for which type of Government Securities ATS
should the exemption be eliminated?
19. Should Government Securities ATSs seeking to operate pursuant
to the exemption provided by Regulation ATS have the alternative option
to satisfy broker-dealer registration with the Commission pursuant to
Section 15C(a)(1)(A)?
20. Should the Commission adopt any alternatives to requiring
Government Securities ATSs to register with the Commission as broker-
dealers under Section 15 or Section 15C(a)(1)(A)? For example, should
the Commission amend Rule 301(b)(1) of Regulation ATS to include an
alternative for a bank to register as a government securities broker or
dealer pursuant to Section 15C(a)(1)(B), which would not require the
bank to become a member of an SRO?
21. Should there be a transition period for Currently Exempted
Government Securities ATSs that are currently operated by banks to
comply with the proposed amendments to Rule 301(b)(1), including ATSs
provided and operated by an affiliate of the bank? Should the
Commission allow a Currently Exempted Government Securities ATS that is
not registered as a broker-dealer to operate pursuant to the Rule 3a1-
1(a)(2) exemption on a provisional basis? Does the proposal to allow
such ATSs a maximum 210 calendar days from the effective date to comply
with the broker-dealer registration requirement provide an appropriate
amount of time to register as a broker-dealer? If not, what, if any,
transition period would be appropriate? For Currently Exempted
Securities ATSs that are currently operated by banks, should there be a
different transition period? If so, why?
22. Should there be a transition period for Currently Exempted
Government Securities ATSs or Covered Newly Designated ATSs to comply
with all or some of the requirements of Regulation ATS? If so, which
requirements would require such a transition period, and how long
should such transition period be?
23 Should the Commission amend Regulation ATS to remove the
exemption from Regulation ATS for ATSs that limit their securities
activities to commercial paper? Do market participants use ATSs to
trade commercial paper? If so, how is commercial paper traded on an
ATS? Should the Commission remove any other exemption from Regulation
ATS available under Rule 301?
24. Should the Commission require Currently Exempted Government
Securities ATSs to comply with all of the requirements of Regulation
ATS applicable to all ATSs that are currently required to comply with
Regulation ATS? If not, which requirements should a Currently Exempted
Government Securities ATS not be required to comply with and why?
3. Filing Requirements for Broker-Dealers That Operate ATSs That Trade
Government Securities and Non-Government Securities
The Commission is re-proposing to revise Rule 301(b)(2)(viii) \299\
of Regulation ATS to provide that a Legacy Government Securities ATS
that is operating pursuant to a Form ATS as of the effective date of
any final rule will continue to be subject to the Rule 301(b)(2)
requirements to file a Form ATS. However, once the ATS files a Form
ATS-N, it will no longer be subject to Rule 301(b)(2)(i) through (vii)
and will instead be subject to the reporting requirements under Rule
304, which provides the rules for filing of Form ATS-N. The Commission
is also proposing to provide that as of the effective date of any final
rule, an entity seeking to operate as a Government Securities ATS will
not be subject to the requirements of Rule 301(b)(2)(i) through (vii)
and will instead be required to file reports under Rule 304. In
addition, the Commission is proposing rules to make clear that a
Currently Exempted Government Securities ATS would be subject to Rule
304 and would not be subject to Rule 301(b)(2)(i) through (viii). These
rules are designed to prevent Government Securities ATSs from being
subject to potentially duplicative requirements in Rule 304 and Rule
301(b)(2).
---------------------------------------------------------------------------
\299\ 17 CFR 242.301(b)(2)(viii). Current Rule 301(b)(2)(viii)
provides that NMS Stock ATSs must file with the Commission the
reports and amendments required by Rule 304 and that NMS Stock ATSs
are not subject to Rule 301(b)(2). NMS Stock ATSs or entities
seeking to operate as NMS Stock ATSs would continue to file reports
pursuant to Rule 304. Because the Commission review period for all
Forms ATS-N filed by Legacy NMS Stock ATSs ended in October 2019,
the Commission is proposing to delete references in Rule
301(b)(2)(viii) to Legacy NMS Stock ATSs. The Commission is also
proposing to consolidate the current provisions of Rule
301(b)(2)(viii) applicable to NMS Stock ATSs to state that NMS Stock
ATSs or entities seeking to operate as an NMS Stock ATS shall not be
subject to the requirements of Rule 301(b)(2)(i) through (vii) and
would be subject to Rule 304.
---------------------------------------------------------------------------
The Commission is proposing to amend Rule 301(b)(2)(viii) to make
clear that Covered ATSs are required to file reports pursuant to Sec.
242.304 and ATSs that are not Covered ATSs are subject to Rule
301(b)(2).\300\ Today, there are some broker-dealers that operate
multiple types of ATSs that trade different types of securities (e.g.,
NMS Stock ATS and non-NMS Stock ATS) or operate multiple ATSs that
trade the same type of securities but are separate and distinct from
each other (e.g., a broker-dealer registered for, and operates, two NMS
Stock ATSs, each of which maintains a separate book of orders that is
governed by distinct priority and order interaction rules for one type
of security).\301\ In both instances, each of the ATSs must comply with
Regulation ATS.\302\ The Commission is proposing to add to Rule
301(b)(2)(viii) to provide that each NMS Stock ATS or Government
Securities ATS that is operated by a broker-dealer that is the
[[Page 15521]]
registered broker-dealer for more than one ATS must comply with
Regulation ATS, including the filing requirements of Rule 304. The
Commission believes that the proposed language makes clear that the
proposal would not require compliance with the heightened transparency
requirements of Regulation ATS for ATSs that are not NMS Stock ATSs or
Government Securities ATSs. Under the proposal, a broker-dealer
operator, for example, for an ATS that noticed on its initial operation
report on Form ATS that the ATS trades government securities and
corporate debt securities would be the broker-dealer operator for two
types of ATSs that would be separate from each other with regard to
trading these types of securities and each would comply with Regulation
ATS. These two types of ATSs would be (1) a Government Securities ATS
that would file a Form ATS-N with respect to government securities and
(2) a non-Government Securities ATS that would file a Form ATS with
respect to corporate debt.\303\ In addition, each of the two ATSs would
be required to comply with the conditions to Regulation ATS, including,
among other things, adopting written safeguards and written procedures
to protect subscriber confidential trading information for the ATS
pursuant to Rule 301(b)(10) and making and keeping records for the ATS
pursuant to Rule 301(b)(8).\304\
---------------------------------------------------------------------------
\300\ The Commission is also proposing to amend Rule
301(b)(2)(viii) to state that Covered Newly Designated ATSs will be
subject to Rule 304.
\301\ The Commission is proposing that, for the purposes of
calculating volume thresholds for the Fair Access Rule, the average
trading volume of ATSs that are operated by a common broker-dealer,
or ATSs operated by affiliated broker-dealers, will be aggregated.
See infra Section V.A.2.
\302\ See Rule 3a1-1(a)(2) (providing that an organization,
association, or group of persons shall be exempt from the definition
of ``exchange'' if it is in compliance with Regulation ATS) and Rule
301(a) (providing that an ATS shall comply with the requirements of
Rule 301(b)).
\303\ Under the proposed rules, a broker-dealer operator for an
ATS that currently trades government securities and corporate bonds,
for example, would file a Form ATS-N to disclose its government
securities activities for the Government Securities ATS. The broker-
dealer operator would disclose the corporate bond activities of its
existing ATS by filing with the Commission a material amendment to
its Form ATS pursuant to Rule 301(b)(2)(ii) of Regulation ATS to
remove information regarding government securities activities. See
Regulation ATS Adopting Release, supra note 31, at 70864 (discussing
circumstances under which an ATS would file a material amendment to
Form ATS pursuant to Rule 301(b)(2), which, among other things,
includes changes to the operating platform, the types of securities
traded, or types of subscribers).
\304\ See supra note 246 and accompanying text.
---------------------------------------------------------------------------
The Commission also is proposing to amend Rule 301(b)(9) of
Regulation ATS.\305\ This rule requires an ATS to report transaction
volume in various types of securities, including government securities
and repos, on Form ATS-R on a quarterly basis and within 10 calendar
days after it ceases operation.\306\ As discussed above, the Commission
is proposing to define ``Government Securities ATS'' and to clarify the
definition of ``NMS Stock ATS'' to make clear that a Government
Securities ATS cannot trade securities other than government securities
or repos and that an NMS Stock ATS cannot trade securities other than
NMS stocks.\307\ For example, a Government Securities ATS operated by a
broker-dealer that is also the registered broker-dealer for a non-
Government Securities ATS would be required to file a Form ATS-R for
the Government Securities ATS and a separate Form ATS-R for the non-
Government Securities ATS. The Commission is proposing to amend Rule
301(b)(9) by removing language stating that an ATS must ``separately
file'' a Form ATS-R for transactions in NMS stocks and for transactions
in securities other than NMS stocks to simplify the text and convey
that each ATS, even if operated by a broker-dealer that operates other
ATSs, must file a Form ATS-R. This is consistent with the current Form
ATS-R filing process for a broker-dealer that operates an NMS Stock ATS
and non-NMS Stock ATS.\308\
---------------------------------------------------------------------------
\305\ See 17 CFR 242.301(b)(9).
\306\ The information filed on Form ATS-R permits the Commission
to monitor trading on an ATS. See Regulation ATS Adopting Release,
supra note 31, at 70878.
\307\ See supra notes 244 and 254 and accompanying text.
\308\ See NMS Stock ATS Adopting Release, supra note 2, Section
III.B.5.
---------------------------------------------------------------------------
Request for Comment
25. Should an NMS Stock ATS or Government Securities ATS that is
operated by a broker-dealer that is a registered broker-dealer for more
than one ATS be subject to Rule 304 independent of any other ATS
operated by its broker-dealer?
26. Should a broker-dealer that is the registered broker-dealer for
more than one ATS be required to file separate Forms ATS-R for each of
the ATSs it operates?
27. Should a broker-dealer that is the registered broker-dealer for
an ATS that trades government securities or repos and an ATS that
trades NMS stocks be required to file separate Forms ATS-N for each of
the ATSs it operates?
28. Should the Commission allow a broker-dealer operator of an NMS
Stock ATS or a Government Securities ATS to disclose on its Form ATS-N
its non-government securities or non-NMS stock activities, in addition
to its government securities or NMS stock activities, on a voluntary
basis?
29. Do commenters believe that additional changes or requirements
to the ATS framework are needed? For example, should the Commission
propose amendments to Regulation ATS to require ATSs that trade equity
securities other than NMS stocks, corporate debt securities, municipal
securities, or any other category of securities to comply with Rule
304, including filing with the Commission public Form ATS-N and
requiring their Forms ATS-N to be subject to Commission review and
effectiveness processes?
4. Application of Fair Access to Government Securities ATSs
The Fair Access Rule, as proposed to be amended and as described in
detail below,\309\ requires an ATS to, among other things, establish
and apply reasonable written standards for granting access on its
system. Today, the Fair Access Rule only applies if an ATS's trading
volume for certain securities or a certain type of securities exceeds
an average daily volume threshold during a period time set forth in the
rule. Currently, the Fair Access Rule only applies to the trading of
NMS stocks, equity securities that are not NMS stocks and for which
transactions are reported to an SRO, municipal securities, and
corporate debt securities, but not to trading in government
securities.\310\
---------------------------------------------------------------------------
\309\ See infra Section V.A. See also proposed Rule
301(b)(5)(iii).
\310\ See 17 CFR 242.301(b)(5)(i).
---------------------------------------------------------------------------
The Fair Access Rule was designed to ensure that qualified market
participants have fair access to the significant sources of liquidity
in the U.S. securities markets. When Regulation ATS was adopted, the
Commission explained that the fair treatment by ATSs of potential and
current subscribers is particularly important when an ATS captures a
large percentage of trading volume in a security, because viable
alternatives to trading on such a system are limited.\311\ The
Commission further explained that if an ATS has a significantly large
percentage of the volume of trading in a security or type of security,
unfairly discriminatory actions can hurt investors lacking access to
that ATS.\312\ Currently, however, Regulation ATS does not provide a
mechanism to prevent unfair denials or limitations of access by ATSs
that trade U.S. Treasury Securities or Agency Securities or regulatory
oversight of such denials or limitations of access. Today, the
principles undergirding the Fair Access Rule are equally relevant to a
Government Securities ATS, and amending the Fair Access Rule to include
the trading of U.S. Treasury Securities and Agency Securities would
help ensure the fair treatment of potential and current subscribers to
ATSs that consist of a large percentage
[[Page 15522]]
of trading volume in these two types of securities.\313\
---------------------------------------------------------------------------
\311\ See Regulation ATS Adopting Release, supra note 31, at
70872.
\312\ See id.
\313\ Under the proposal, the Fair Access Rule would not apply
to trading of repos, including repos on U.S. Treasury Securities and
Agency Securities. The Commission notes FINRA does not require ATSs
to report transactions for repos. The Commission is requesting
comment on its preliminary assessment and on whether the Commission
should amend Regulation ATS to require Government Securities ATSs
that meet certain volume thresholds for the trading of repos,
including repos on U.S. Treasury Securities and Agency Securities,
to be subject to the requirements of the Fair Access Rule.
---------------------------------------------------------------------------
In the 2020 Proposal, the Commission proposed that a Government
Securities ATS would be subject to the Fair Access Rule if during at
least four of the preceding six calendar months, the Government
Securities ATS had: (1) With respect to U.S. Treasury Securities, five
percent or more of the average weekly dollar volume traded in the
United States as provided by the SRO to which such transactions are
reported; or (2) with respect to Agency Securities, five percent or
more of the average daily dollar volume traded in the United States as
provided by the SRO to which such transactions are reported.
In response to the 2020 Proposal, commenters generally supported
amending Regulation ATS to apply the Fair Access Rule for Government
Securities ATSs that meet certain trading thresholds.\314\ Some
commenters stated that the proposed amendments would ensure that market
participants are not unreasonably denied access from important sources
of liquidity for a particular security,\315\ and prevent discriminatory
actions that could hurt investors, and potentially result in higher
trading costs and a reduction in trading efficiency.\316\ One commenter
stated that the Commission should, as was proposed in the 2020
Proposal, apply the thresholds to all types of U.S. Treasury Securities
and Agency Securities, each on an aggregate basis.\317\ One commenter,
however, suggested that the Commission may apply the fair access
thresholds to on-the-run securities that are ``likely'' to trade on an
ATS as off-the-run securities are less liquid and tend to trade using
other methods.\318\
---------------------------------------------------------------------------
\314\ See, e.g., SIFMA Letter; MFA Letter; ICE Bonds Letter I;
and Healthy Markets Letter.
\315\ See SIFMA Letter at 4. See also ICI Letter at 4 (stating
that funds generally are not able to directly access liquidity on
most of these platforms, and that applying the fair access
requirements would enhance the ability of funds to onboard and
participate on these platforms directly and would generally enhance
market structure for U.S. Treasury Securities and benefit fund
shareholders); FIA PTG Letter at 2 (stating that the requirements
will ensure qualified market participants have access to the
government securities market).
\316\ See MFA Letter at 4. See also ICI Letter at 4 (stating
that the fair access requirements would enable the Commission to
evaluate ATS standards and determine whether they are being applied
in an unfair or discriminatory manner).
\317\ See Tradeweb Letter at 3 (stating that the Commission
should not, for example, distinguish between on-the-run and off-the-
run U.S. Treasury Securities, and that a broader measure of market
significance is preferable in order to provide for more stable
application of the Fair Access Rule); ICE Bonds Letter I at 5.
\318\ See Bloomberg Letter at 5 (noting that FINRA's aggregated
weekly data report currently segments the data into on-the-run/off-
the-run and dealer-to-dealer and dealer-to-customer transactions).
---------------------------------------------------------------------------
The Commission is re-proposing to apply the Fair Access Rule to the
trading of government securities on an ATS with certain revisions.
After considering comments received, proposed changes to Exchange Act
Rule 3b-16, and further analysis of the U.S. Treasury Securities
markets, as explained further below, the Commission is proposing to
revise the average weekly trading volume percentage for ATSs trading
U.S. Treasury Securities from the threshold proposed in the 2020
Proposal. Accordingly, the Commission is proposing that a Government
Securities ATS will be subject to the Fair Access Rule if, during at
least four of the preceding six calendar months: (1) It had three
percent or more of the U.S. Treasury Securities average weekly dollar
volume traded in the United States as provided by the SRO to which such
transactions are reported; or (2) it had five percent or more of the
Agency Securities average daily dollar volume traded in the United
States as provided by the SRO to which such transactions are reported.
First, the Commission is re-proposing that the thresholds include
only securities for which transactions are reported to an SRO, and the
volume thresholds are based on how the SRO subsequently reports that
volume to the public. FINRA publishes weekly aggregate data on U.S.
Treasury Securities based on the mandatory transaction reports of its
members to TRACE, and disseminates transaction data about Agency
Securities immediately upon receipt of a transaction report.\319\
Currently, FINRA neither provides individual trade reports nor
aggregates daily volume data for U.S. Treasury Securities transactions
to TRACE subscribers (or to the public). FINRA, however, provides
individual trade reports for all Agency Securities transactions to
TRACE subscribers.\320\ Accordingly, because weekly dollar volume data
about transactions in U.S. Treasury Securities and daily dollar volume
data about transactions in Agency Securities are publicly available via
TRACE, Government Securities ATSs will be able to readily calculate
whether they meet the applicable thresholds.\321\
---------------------------------------------------------------------------
\319\ See supra note 229.
\320\ The Commission believes that the vast majority--and
likely, all--broker-dealer operators of Legacy Government Securities
ATSs that trade Agency Securities currently subscribe to TRACE.
Communication Protocol Systems that are not currently FINRA members,
however, are not required to report to TRACE. The Commission is
requesting public comment on the extent to which Government
Securities ATSs (which may include Legacy Government Securities ATSs
and Communication Protocol Systems) have access to TRACE trade
reports for Agency Securities.
\321\ In response to the 2020 Proposal, one commenter stated
that the proposal would need to be based on ``weekly par value
traded'' because FINRA publishes volume data on a weekly basis. See
Bloomberg Letter at 6. The Commission believes that data to
calculate the proposed threshold, which is based on dollar volume
published by FINRA on a weekly basis, would be readily available.
---------------------------------------------------------------------------
Second, the Commission continues to believe that separate volume
thresholds for U.S. Treasury Securities and Agency Securities would
best advance the investor protection goals of the Fair Access
Rule.\322\ The proposed volume thresholds would help ensure that the
Fair Access Rule is appropriately tailored so that it only applies to
the category of security for which an ATS has significant trading
volume.\323\ The Commission believes that it would be unnecessary and
overly burdensome to require a Government Securities ATS to comply with
the Fair Access Rule for a category of government security for which
that ATS does not have significant volume. Furthermore, the Commission
now proposes different trading volume thresholds for U.S. Treasury
Securities and Agency Securities. As such, the Commission believes it
would be impractical for the Fair Access Rule to combine trading volume
in these two types of securities to determine whether a Government
Securities ATS has triggered its requirements.
---------------------------------------------------------------------------
\322\ In response to the 2020 Proposal, one commenter stated
that it supports applying the Fair Access Rule to all types of U.S.
Treasury Securities and all types of Agency Securities, each on an
aggregate basis. See Tradeweb Letter at 3.
\323\ For example, suppose a Government Securities ATS has
significant trading volume in U.S. Treasury Securities but not
Agency Securities. In this example, the proposed rule would help
ensure that investors receive fair access to the ATS's services with
respect to U.S. Treasury Securities, but it would not require the
ATS to provide fair access for its Agency Securities services.
---------------------------------------------------------------------------
Third, the Commission believes that it is appropriate to determine
these volume thresholds on a category basis.\324\ Given that U.S.
Treasury
[[Page 15523]]
Securities and Agency Securities are types of debt securities, doing so
would be consistent with the Fair Access Rule's application to other
categories of fixed income securities (i.e., corporate bonds and
municipal securities). The Fair Access Rule applies on a security-by-
security basis for NMS stocks and equity securities that are not NMS
stocks, and on a category basis for corporate bonds and municipal
securities.
---------------------------------------------------------------------------
\324\ In response to the 2020 Proposal, some commenters stated
that they support applying the thresholds on an aggregate basis. See
ICE Bonds Letter at 6 and Tradeweb Letter at 3. One commenter stated
that Commission should not, for example, distinguish between on-the-
run and off-the-run Treasuries in applying the Fair Access Rule
because a broader measure of market significance is preferable in
order to provide for a more stable application of the Fair Access
Rule. See Tradeweb Letter at 3.
---------------------------------------------------------------------------
Fourth, the Commission is proposing that a Government Securities
ATS would be required to comply with the Fair Access Rule only if it
has met at least one of the applicable volume thresholds during at
least four of the preceding six calendar months.\325\ For ATSs that
trade Agency Securities, this is the same time period for evaluating
the applicability of the Fair Access Rule that is currently applied to
ATSs that trade NMS stocks, equity securities that are not NMS stocks
and for which transactions are reported to an SRO, municipal
securities, and corporate debt securities.
---------------------------------------------------------------------------
\325\ However, if, for example, during the six month period from
January to June, the Government Securities ATS met the threshold for
U.S. Treasury Securities only during January and April and met the
threshold for Agency Securities only during February and May, the
Government Securities ATS would not be subject to the Fair Access
Rule in July because the ATS would not have met the threshold for
either type of security during at least four of the preceding six
months in either U.S. Treasury Securities or Agency Securities.
---------------------------------------------------------------------------
Fifth, the Commission is proposing a three percent threshold to
apply the Fair Access Rule for Government Securities ATSs that trade
U.S. Treasury Securities. The Commission received several comments on
the threshold proposed in the 2020 Proposal, which expressed differing
opinions. One commenter stated that it would support a threshold of
three percent of daily market volume, observing that such a threshold
would apply the Fair Access Rule to only four ATSs for U.S. Treasury
Securities and one for Agency Securities, and stating that these ATSs
are ``leading exchanges'' whose customers deserve fair access.\326\ On
the other hand, one commenter stated that an ATS should be subject to
the Fair Access Rule only if it is a ``significant'' source of
liquidity and that it believed that most market participants view 10
percent of the par value traded in the asset class as the market share
threshold where an ATS's liquidity is significant.\327\ Another
commenter supported the previously-proposed five percent
thresholds.\328\
---------------------------------------------------------------------------
\326\ See AFREF Letter at 3.
\327\ See Bloomberg Letter at 6.
\328\ See SIFMA Letter at 5.
---------------------------------------------------------------------------
While public comment on what constitutes a significant market
center for U.S. Treasury Securities is split, the Commission believes
that a three percent average weekly trading volume threshold would
encompass the significant markets for and advance the policy goals of
the Fair Access Rule. The Commission believes that the policy goals
behind the Fair Access Rule are of particular importance in the U.S.
Treasury Securities market. Market participants must have reasonable
access to significant sources of liquidity in the secondary markets for
U.S. Treasury Securities because, among other things, U.S. Treasury
Securities play a vital and irreplaceable role in both the U.S. and
global economies. In addition, ATSs that operate in the secondary
interdealer markets for on-the-run U.S. Treasury Securities have become
a significant source of trading interest for government securities.
Also, under this proposal, RFQ systems will now be subject to
Regulation ATS. Given that RFQ systems make up over half of secondary
trading in the U.S. Treasury market,\329\ the Fair Access Rule's policy
goals would be advanced by requiring RFQs that facilitate a significant
percentage of U.S. Treasury trading to provide fair access to market
participants. Additionally, when compared to the application of the
Fair Access Rule to NMS Stock ATSs, denying fair access to services of
an ATS for U.S. Treasury Securities under this proposal would be
particularly impactful. The Fair Access Rule would be applied
categorically for government securities rather than on a security-by-
security basis like in the NMS equities market. Thus, a market
participant being denied access to a significant U.S. Treasury
Securities ATS could be denied access to the system's entire portfolio
of U.S. Treasury Securities operations.
---------------------------------------------------------------------------
\329\ See Treasury Market Practices Group (TMPG), White Paper on
Clearing and Settlement in the Secondary Market for U.S. Treasury
Securities (July 2019), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS_FinalPaper_071119.pdf.
---------------------------------------------------------------------------
Based on the current market, a three percent volume threshold would
help ensure appropriate access for market participants, particularly
retail and other non-broker-dealer investors who rely on liquidity in
the government securities markets. Specifically, under the proposed
three percent threshold, based on volume currently required to be
reported to TRACE, the Commission estimates that seven Legacy
Government Securities ATSs that trade U.S. Treasury Securities
(including four Legacy Government Securities ATSs with greater than
three percent market share and three affiliated ATSs with which their
volume would be aggregated under the proposed changes to the Fair
Access Rule) \330\ would be subject to the Fair Access Rule.\331\ Under
the previously proposed five percent threshold, an estimated three ATSs
trading U.S. Treasury Securities (including two Legacy Government
Securities ATSs with greater than five percent market share and one
affiliated ATS) would be subject to the Fair Access Rule.\332\ As such,
a three percent threshold would result in market participants having
fair access to an estimated nearly eight percent more of the U.S.
Treasury Securities market than they would under a five percent
threshold, based on volume currently reported to TRACE.\333\
---------------------------------------------------------------------------
\330\ See infra Section V.A. See also infra Table VIII.1. For
purposes of estimating the number of unique affiliated ATSs that
would meet the proposed three percent threshold, the data in Table
VIII.1 (stating a total of nine ``grouped-affiliated ATSs'' would be
affected) has been adjusted based on the Commission's knowledge of
current ATS operations.
\331\ Based on Coalition Greenwich's Greenwich MarketView data
from April 2021 through September 2021, approximately two currently
operating Communication Protocol Systems would be subject to the
Fair Access Rule using a three percent threshold in U.S. Treasury
Securities. This would remain unchanged if the Commission used the
previously-proposed five percent threshold.
\332\ See infra Table VIII.1. For purposes of estimating the
number of unique affiliated ATSs that would meet a five percent
threshold, the data in Table VIII.1 (stating a total of five
``grouped-affiliated ATSs'' would be affected) has been adjusted
based on the Commission's knowledge of current ATS operations.
\333\ See id.
---------------------------------------------------------------------------
Furthermore, applying the Fair Access Rule to ATSs that meet a
three percent threshold in U.S. Treasury Securities would result in the
Fair Access Rule applying to Legacy Government Securities ATSs
transacting in approximately 32 percent of market volume currently
reported to FINRA in U.S. Treasury Securities. ATSs that trade U.S.
Treasury Securities that would be subject to the Fair Access Rule under
the proposed three percent threshold would comprise approximately 94
percent of U.S. Treasury Securities volume traded on ATSs.\334\
Accordingly, the Commission believes that the three percent threshold
would provide investors with access to
[[Page 15524]]
markets that are important venues for trading in U.S. Treasury
Securities.
---------------------------------------------------------------------------
\334\ Data is based on the regulatory version of TRACE for U.S.
Treasury Securities from April 1, 2021 through September 30, 2021.
---------------------------------------------------------------------------
Sixth, the five percent threshold set forth in the 2020 Proposal
for Agency Securities is being re-proposed unchanged. Because the U.S.
Treasury Securities market is one of the deepest and most liquid in the
world, and because of the vital role that U.S. Treasury Securities play
in the U.S. and global economies, it is particularly important to
ensure that investors have access to ATSs with significant volume in
U.S. Treasury Securities. The Agency Securities market, however, does
not share the unique qualities of the U.S. Treasury Securities market,
and accordingly, the Commission is re-proposing for Agency Securities a
five percent threshold that is consistent with the current volume
threshold applicable to corporate bonds and municipal securities.\335\
Furthermore, based on volume currently reported to TRACE, the estimated
one Legacy Government Securities ATS that would exceed the proposed
five percent threshold for Agency Securities accounts for nearly 12
percent of volume reported in TRACE in Agency Securities.\336\
---------------------------------------------------------------------------
\335\ See Rule 301(b)(5)(i)(A)-(D).
\336\ This ATS would also meet the proposed threshold for
trading in U.S. Treasury Securities.
---------------------------------------------------------------------------
The Commission is proposing a compliance period for Communication
Protocol Systems, which seek to operate as ATSs, and Legacy Government
Securities ATSs that become subject to the Fair Access Rule. Under the
proposal, a Communication Protocol System or a Legacy Government
Securities ATS that becomes subject to the Fair Access Rule would be
required to comply with the Fair Access Rule one month from the date
that the Communication Protocol System or the Legacy Government
Securities ATS initially triggers any of the fair access
thresholds.\337\ The Commission believes that it is appropriate to
provide the one-month compliance period to allow the Communication
Protocol System or the Legacy Government Securities ATS to establish
and apply reasonable written standards for granting, limiting, and
denying access to the ATS services, as proposed, and, for those that
would be NMS Stock ATSs and Government Securities ATSs, to prepare
responses to Item 24 of Form ATS-N.\338\ The additional compliance
period is designed to provide the Communication Protocol Systems and
the Legacy Government Securities ATSs sufficient time to transition
into the new ATS regulatory regime and prevent any disruptions to the
operation of these systems and their participants.
---------------------------------------------------------------------------
\337\ See proposed Rule 301(b)(5)(i)(G). The rule text uses the
term ``Newly Designated ATS'' to refer to a Communication Protocol
System. See supra note 134. Under this proposal, an ATS that
triggers the fair access threshold for a security (for NMS stocks or
equity securities that are not NMS stocks) or a category of security
(for municipal securities, corporate debt securities, U.S. Treasury
Securities, or Agency Securities) would not be able to avail itself
to the one-month compliance period for triggering the fair access
threshold for another security or another category of securities.
\338\ See infra Section V.A.3.
---------------------------------------------------------------------------
Request for Comment
30. Should any other type of government securities be included as a
category of securities under Rule 301(b)(5)? Should the Commission
apply Rule 301(b)(5) to all Government Securities ATSs? What would be
the costs and benefits associated with such a requirement?
31. Should the proposed three percent fair access threshold for
U.S. Treasury Securities be applied to all types of U.S. Treasury
Securities or to subset categories of U.S. Treasury Securities? For
example, should the three percent fair access threshold be applied to
transaction volume in only on-the-run U.S. Treasury Securities? Should
the five percent fair access threshold be applied to all Agency
Securities or to subset categories? If so, why or why not?
32. Should the proposed three percent fair access threshold for
U.S. Treasury Securities be set higher or lower than three percent?
Should the proposed five percent fair access threshold for Agency
Securities be set higher or lower than five percent? If so, what should
the percentage thresholds be? Should there be no thresholds so that the
Fair Access Rule would apply to all Government Securities ATSs that
trade U.S. Treasury Securities or Agency Securities regardless of
volume transacted on the ATS? Please support your views. Are the five
percent and three percent thresholds appropriate thresholds to capture
ATSs that are significant markets for trading in U.S. Treasury
Securities and Agency Securities, respectively? Would the proposed
thresholds capture ATSs that are not significant markets for U.S.
Treasury Securities and Agency Securities? If there should be a percent
threshold for a category finer than all U.S. Treasury Securities, for
example on-the-run U.S. Treasury Securities or off-the-run U.S.
Treasury Securities, what should that threshold should be?
33. Should the fair access threshold be based on average weekly
dollar volume traded in the United States for U.S. Treasury Securities
and daily dollar volume traded in the United States for Agency
Securities?
34. Would the proposed four out of six month period be an
appropriate period to measure the volume thresholds for U.S. Treasury
Securities and Agency Securities? With respect to calculating the
appropriate thresholds, would Government Securities ATSs have available
appropriate data with which to determine whether the proposed
thresholds have been met? Would ATSs that trade U.S. Treasury
Securities be able to readily calculate whether they meet the volume
thresholds in at least four out of the preceding six months, given that
U.S. Treasury Securities are disseminated on a weekly, rather than
daily basis? Would it be appropriate for the Commission to change the
proposed four out of six month period to a time period measured in
weeks (e.g., at least 16 out of the preceding 24 weeks) with respect to
U.S. Treasury Securities? What effect would any such change have on the
likelihood that ATSs trading U.S. Treasury Securities would meet the
volume thresholds?
35. If the average weekly dollar volumes were to include
transactions for U.S Treasury Securities by non-FINRA members, which
currently are not reported to, or collected by, the SRO that makes
public average weekly dollar volume statistics, should the fair access
threshold change? If so, what should be the appropriate threshold?
36. Would it be appropriate to use five percent of average daily
dollar volume traded in the United States as a fair access threshold
for Agency Securities? Do ATSs that trade Agency Securities currently
subscribe to TRACE and, therefore, receive TRACE trade reports for
Agency Securities? If not, what percentage of these ATSs do not
currently subscribe to TRACE?
37. Should the requirements under the Fair Access Rule be amended
specifically for Government Securities ATS? If so, how?
38. Are there any unique challenges for ATSs that would be required
to comply with the requirements under the Fair Access Rule for the
first time? If so, please explain.
39. Do commenters believe that it is appropriate to provide to
Communication Protocol Systems and Legacy Government Securities ATSs a
one-month compliance period to comply with the Fair Access Rule? Should
the proposed compliance period be longer or shorter? Should the
eligibility for the compliance period be expanded to ATSs that are
currently operating or limited in any way? Please explain.
[[Page 15525]]
C. Application of Regulation SCI to Government Securities ATS
The Commission is re-proposing to amend Regulation SCI to expand
the definition of ``SCI alternative trading system'' to include
Government Securities ATSs that meet a specified volume threshold. A
Government Securities ATS that meets the proposed amended definition of
``SCI alternative trading system'' would fall within the definition of
``SCI entity'' and, as a result, would be subject to the requirements
of Regulation SCI.
Because the proposed amendments to Exchange Act Rule 3b-16(a) would
cause Communication Protocol Systems to fall within the definition of
``exchange,'' \339\ Communication Protocol Systems that transact in
U.S. Treasuries or Agency Securities that choose to register as a
broker-dealer and comply with Regulation ATS would, if they meet the
proposed volume threshold, also meet the proposed amended definition of
``SCI alternative trading system'' and become subject to the
requirements of Regulation SCI. The proposed amendments to Exchange
Rule 3b-16(a) likewise would cause Communication Protocol Systems that
transact in NMS stocks and equity securities that are not NMS stocks to
fall within the current definition of SCI alternative trading system if
they reached the current volume thresholds within the definition, and
become subject to the requirements of Regulation SCI.\340\ As discussed
in detail below, the Commission believes that extending the
requirements of Regulation SCI to Government Securities ATSs that trade
a significant volume in U.S. Treasury Securities or Agency Securities
would help to address any technological vulnerabilities, and improve
the Commission's oversight, of the core technology of key entities in
the markets for government securities.
---------------------------------------------------------------------------
\339\ See supra Section II.
\340\ A Communication Protocol System that chooses to register
as a national securities exchange would also be subject to
Regulation SCI under the definition of ``SCI entity'' which includes
SROs such as national securities exchanges. As discussed above,
Communication Protocol Systems, such as RFQ systems, that use
trading interest and protocols to bring together buyers and sellers
perform an exchange market place function similar to systems that
offer the use of orders and trading facilities. These systems allow
market participants to use non-firm trading interest to seek and
negotiate a trade. Accordingly, the Commission preliminarily
believes that such systems, whether they are systems of a registered
national securities exchange or an ATS that is an SCI entity, would
be covered by the definition of ``SCI systems'' under Regulation SCI
because they directly support trading. See 17 CFR 242.1000 and infra
note 348 and accompanying text. As detailed further below, the
Commission is requesting comment on whether Communication Protocol
Systems of SCI entities would meet the definition of ``SCI systems''
under Regulation SCI.
---------------------------------------------------------------------------
The Commission adopted Regulation SCI in November 2014 to
strengthen the technology infrastructure of the U.S. securities
markets.\341\ As discussed in the Regulation SCI Adopting Release, a
number of factors contributed to the Commission's proposal and adoption
of Regulation SCI. These factors included: The evolution of the markets
becoming significantly more dependent upon sophisticated, complex, and
interconnected technology; the successes and limitations of the
Automation Review Policy (``ARP'') Inspection Program; a significant
number of, and lessons learned from, systems issues at exchanges and
other trading venues; \342\ and increased concerns over the potential
for ``single points of failure'' in the securities markets.\343\
Regulation SCI is designed to strengthen the infrastructure of the U.S.
securities markets, reduce the occurrence of systems issues in those
markets, improve their resiliency when technological issues arise, and
implement an updated and formalized regulatory framework, thereby
helping to ensure more effective Commission oversight of such
systems.\344\
---------------------------------------------------------------------------
\341\ See Regulation SCI Adopting Release, supra note 3, at
72252-56 for a discussion of the background of Regulation SCI.
\342\ See id. at 72253-56.
\343\ See id. at 72277-79.
\344\ Id. at 72253, 72256.
---------------------------------------------------------------------------
The key market participants that are currently subject to
Regulation SCI are called ``SCI entities'' and include certain SROs
(including stock and options exchanges, registered clearing agencies,
FINRA and the MSRB) (``SCI SROs''), alternative trading systems that
trade NMS and non-NMS stocks exceeding specified volume thresholds
(``SCI ATSs''), the exclusive SIPs (``plan processors''), certain
exempt clearing agencies, and SCI competing consolidators.\345\ ATSs
trading NMS or non-NMS stocks that are currently subject to Regulation
SCI are heavily reliant on trading technology and represent a
significant pool of liquidity for NMS and non-NMS stocks. As discussed
in further detail below, Regulation SCI requires these SCI entities to,
among other things, establish, maintain, and enforce written policies
and procedures reasonably designed to ensure that their key automated
systems have levels of capacity, integrity, resiliency, availability,
and security adequate to maintain their operational capability and
promote the maintenance of fair and orderly markets, and that such
systems operate in accordance with the Exchange Act and the rules and
regulations thereunder and the entities' rules and governing documents,
as applicable.\346\ Broadly speaking, Regulation SCI also requires SCI
entities to take appropriate corrective action when systems issues
occur, provide certain notifications and reports to the Commission
regarding systems problems and systems changes, inform members and
participants about systems issues, conduct business continuity and
disaster recovery testing, conduct annual reviews of their automated
systems, including penetration testing, and make and keep certain books
and records.\347\
---------------------------------------------------------------------------
\345\ See 17 CFR 242.1000.
\346\ See 17 CFR 242.1001; infra notes 397-398.
\347\ See 17 CFR 242.1002-1007; infra notes 400-411.
---------------------------------------------------------------------------
Regulation SCI applies primarily to the systems of SCI entities,
whether operated by SCI entities or on their behalf, that directly
support any one of six key securities market functions--trading,
clearance and settlement, order routing, market data, market
regulation, and market surveillance (``SCI systems'').\348\ With
respect to security, Regulation SCI also applies to systems that, if
breached, would be reasonably likely to pose a security threat to SCI
systems (``indirect SCI systems'').\349\ In addition, certain systems
whose functions are critical to the operation of the markets, including
those that represent single points of failure (defined as ``critical
SCI systems''), are subject to certain heightened requirements.\350\
---------------------------------------------------------------------------
\348\ See 17 CFR 242.1000.
\349\ Id.
\350\ Id. See also Regulation SCI Adopting Release, supra note
3, at 72277. Paragraph (1) of the definition of ``critical SCI
systems'' in Rule 1000 of Regulation SCI specifically enumerates
certain systems to be within its scope, including those that
directly support functionality relating to: Clearance and settlement
systems of clearing agencies; openings, reopenings, and closings on
the primary listing market; trading halts; initial public offerings;
the provision of consolidated market data; or exclusively-listed
securities. The second prong of the definition provides a broader
catch-all for systems that ``[p]rovide functionality to the
securities markets for which the availability of alternatives is
significantly limited or nonexistent and without which there would
be a material impact on fair and orderly markets.'' 17 CFR 242.1000
(definition of ``critical SCI system'').
---------------------------------------------------------------------------
When the Commission adopted Regulation SCI, the Commission departed
from its proposal to apply Regulation SCI to fixed income ATSs that
trade municipal and corporate debt.\351\ Explaining this departure, the
Commission differentiated ATSs trading
[[Page 15526]]
municipal and corporate debt securities from those trading equity
securities, stating generally that fixed income markets rely much less
on automation and electronic trading than markets that trade NMS stocks
or non-NMS stocks.\352\ The Commission also stated that the municipal
and corporate debt markets tend to be less liquid than the equity
markets, with slower execution times and less complex routing
strategies.\353\ At the same time, the Commission stated that it would
``monitor and evaluate the implementation of Regulation SCI, the risks
posed by the systems of other market participants, and the continued
evolution of the securities markets, such that it may consider, in the
future, extending the types of requirements in Regulation SCI to
additional categories of market participants.'' \354\
---------------------------------------------------------------------------
\351\ See Regulation SCI Proposing Release, Securities Exchange
Act Release No. 69077 (Mar. 8, 2013), 78 FR 18084, 18093-95 (Mar.
25, 2013).
\352\ See Regulation SCI Adopting Release, supra note 3, at
72270.
\353\ See id.
\354\ See id.
---------------------------------------------------------------------------
In the 2020 Proposal, where the Commission was addressing
Government Securities ATSs specifically, the Commission stated that, in
light of the increasing automation of the government securities market
and the operational similarities between many Government Securities
ATSs and NMS Stock ATSs, it believed that it was appropriate to propose
to apply the requirements of Regulation SCI to Government Securities
ATSs that meet certain volume thresholds, and noted again that while
technological developments provide many benefits to the U.S. securities
markets, they also have increased the risk of operational problems that
have the potential to cause a widespread impact on the securities
market and its participants.\355\ Therefore, the Commission stated in
the 2020 Proposal that application of Regulation SCI to Government
Securities ATSs that trade a significant volume of U.S. Treasury
Securities or Agency Securities would further help to address those
technological vulnerabilities, and improve the Commission's oversight,
of the core technology used by key U.S. securities markets
participants.\356\
---------------------------------------------------------------------------
\355\ See 2020 Proposal, supra note 4, at 87152. See also supra
Section II.B; Regulation SCI Adopting Release, supra note 3, at
72253.
\356\ See 2020 Proposal, supra note 4, at 87152.
---------------------------------------------------------------------------
A number of commenters on the 2020 Proposal supported applying the
requirements of Regulation SCI to Government Securities ATSs above a
specified volume threshold.\357\ These commenters stated that such
requirements could promote the integrity and resiliency of the key
automated systems of Government Securities ATSs and ensure Commission
oversight.\358\ One commenter added that extending Regulation SCI to
Government Securities ATSs could reduce the potential for systems
issues, as well as reduce the frequency, severity, and duration of any
systems issues that may occur.\359\ As support for the 2020 Proposal,
some commenters cited the increased automation in the government
securities markets and/or operational similarities with NMS stock
ATSs,\360\ with one commenter stating that the distinctions that the
Commission made between stock market ATSs and fixed income ATSs in its
adoption of Regulation SCI have not ``stood up well against the rapid
evolution of the markets.'' \361\ One commenter asserted that the
government securities markets are more systemically significant than
the equity markets, to which Regulation SCI already applies.\362\
---------------------------------------------------------------------------
\357\ See SIFMA Letter at 5; MFA Letter at 5; AFREF Letter at 2,
4; Healthy Markets Letter at 9-11; and ICE Bonds Letter II at 5
(stating that it would support application of Regulation SCI to
fixed income ATSs if the threshold was set at the 20% volume
threshold test currently used under Rule 301(b)(6)). Commenters on
the 2020 Proposal that generally supported the application of
Regulation SCI expressed varying views as to the appropriate
threshold level that the Commission should adopt. See discussion
infra regarding comments pertaining to threshold levels.
\358\ See SIFMA Letter at 5; MFA Letter at 5; AFREF Letter at 2,
4; and Healthy Markets Letter at 10-11.
\359\ See MFA Letter at n.13.
\360\ See MFA Letter at 5; and Healthy Markets Letter at 9.
\361\ See Healthy Markets Letter at 10. See also infra note 367
and accompanying text (discussing MarketAxess's comment with respect
to stock market ATSs and fixed income ATSs).
\362\ See AFREF Letter at 2.
---------------------------------------------------------------------------
Other commenters on the 2020 Proposal opposed requiring Government
Securities ATSs above a volume threshold to comply with Regulation
SCI.\363\ These commenters advocated for applying the narrower
technology and resiliency requirements of Rule 301(b)(6), rather than
Regulation SCI.\364\ Some of these commenters expressed concerns
regarding the costs and burdens of complying with Regulation SCI.\365\
One commenter distinguished the equities markets from the market for
government securities, asserting that the government securities markets
do not have the same type of linkages among trading venues that
increase the risk of a systems issue in one market spreading to another
and causing significant market impact.\366\ As such, this commenter
argued that applying Regulation SCI would only increase costs without
materially increasing the integrity or security of the government
securities markets. Another commenter, while focusing its comments on
the corporate and municipal bond markets, argued that, when the
Commission adopted Regulation SCI, it did not include fixed-income ATSs
within the scope of the regulation out of a concern that it could
discourage greater automation in the fixed-income markets and that this
concern still exists today.\367\
---------------------------------------------------------------------------
\363\ See Tradeweb Letter at 3, 11; BrokerTec Letter at 5-9; and
MarketAxess Letter at 11. The Commission notes that MarketAxess
focused its comments specifically on corporate and municipal bonds,
rather than government securities, but we have included such
comments here for completeness.
\364\ See Tradeweb Letter at 11; BrokerTec Letter at 5-9; and
MarketAxess Letter at 11.
\365\ See Tradeweb Letter at 3, 11; and BrokerTec Letter at 8-9.
\366\ See Tradeweb Letter at 3, 11.
\367\ See MarketAxess Letter at 11.
---------------------------------------------------------------------------
Acknowledging comment letters on the 2020 Proposal, the Commission
continues to believe that the inclusion of Government Securities ATSs
meeting specified volume thresholds in Regulation SCI would be
appropriate because such Government Securities ATSs (inclusive of
Communication Protocol Systems, as proposed), are heavily reliant on
technology and represent significant pools of liquidity, as the
Commission has determined to be the case for current SCI ATSs.\368\ The
Commission believes that, particularly in light of the evolution of the
government securities markets, it is important to impose the
requirements of Regulation SCI to help ensure that the technology
systems of such Government Securities ATSs are reliable and
resilient.\369\
---------------------------------------------------------------------------
\368\ Some commenters on the 2020 Proposal also provided views
on whether the Commission should extend application of Regulation
SCI to additional entities beyond Government Securities ATSs. See,
e.g., Healthy Markets Letter at 9 (stating that the Commission
should expand the scope of Regulation SCI to include not just
government securities ATSs, but other essential market participants
in equities, futures, and fixed income markets); and SIFMA Letter at
5 (arguing that the Commission should not extend Regulation SCI to
broker-dealers more generally at this time). As the Commission
stated in the Regulation SCI Adopting Release, the Commission will
continue to monitor and evaluate the risks posed by the systems of
other market participants and the continued evolution of the
securities markets to determine whether it would be appropriate to
extend the requirements of Regulation SCI to additional categories
of entities in the future. See Regulation SCI Adopting Release,
supra note 3, at 72259.
\369\ As discussed in detail above and as commenters have
stated, the structure of the U.S. Treasury market has evolved in
recent years and electronic trading has become an increasingly
important feature of the interdealer market for U.S. Treasury
Securities. See supra Section II.B and notes 62-63, 187 and
accompanying text.
---------------------------------------------------------------------------
The focus of the Commission's discussion in the Regulation SCI
[[Page 15527]]
Adopting Release regarding the fixed income markets was on the
corporate and municipal bond markets, not the government securities
markets.\370\ As discussed in detail below, given the evolution of the
government securities markets, the Commission now believes that there
are Government Securities ATSs that operate with similar complexity as
SCI ATSs that are currently subject to Regulation SCI, and that
Government Securities ATSs with significant trading volume play an
important role in the government securities markets and face similar
technological vulnerabilities as existing SCI entities. Several
commenters on the 2020 Proposal stated that \371\ the application of
Regulation SCI would help the Commission improve its oversight of the
market for government securities, thereby continuing its efforts to
address technological vulnerabilities of the core technology systems of
key U.S. securities markets entities.
---------------------------------------------------------------------------
\370\ See Regulation SCI Adopting Release, supra note 3, at
72270.
\371\ See generally SIFMA Letter at 5, MFA Letter at 5, and
AFREF Letter at 2.
---------------------------------------------------------------------------
The Commission explained in the Regulation SCI Adopting Release
that it adopted Regulation SCI to expand upon, update, and modernize
the requirements of Rule 301(b)(6) for those ATSs trading NMS stocks
and non-NMS stocks that it had identified as playing a significant role
in the securities markets.\372\ As stated above, because Government
Securities ATSs with significant trading volume play an important role
in the government securities markets and present similar risks to the
market as SCI ATSs, the re-proposal of the broader set of requirements
and safeguards of Regulation SCI is more appropriate for such entities
than proposing to amend the older and more limited requirements of Rule
301(b)(6).\373\
---------------------------------------------------------------------------
\372\ See Regulation SCI Adopting Release, supra note 3, at
72264.
\373\ See 17 CFR 242.301(b)(6). At the same time, as specified
below, the Commission continues to request comment on whether
Government Securities ATSs that meet the proposed volume thresholds
for SCI ATSs should be governed by Rule 301(b)(6) instead of being
defined as SCI entities. The requirements of Rule 301(b)(6) are less
rigorous than the requirements of Regulation SCI. Among other
things, Rule 301(b)(6) requires an ATS to notify the Commission
staff of material systems outages and significant systems changes
and that the ATS establish adequate contingency and disaster
recovery plans. See id. Regulation SCI expanded upon these
requirements, by, for example, expanding the requirements to a
broader set of systems, imposing new requirements for information
dissemination regarding SCI events, and requiring Commission
notification for additional types of events, among others. Rule
301(b)(6) currently applies to an ATS that trades only municipal
securities or corporate debt securities with 20 percent or more of
the average daily volume traded in the United States during at least
four of the preceding six calendar months. Currently, there are no
ATSs that are subject to requirements of Rule 301(b)(6) of
Regulation ATS.
---------------------------------------------------------------------------
In discussing the costs and burdens of Regulation SCI, one
commenter on the 2020 Proposal characterized the requirements of
Regulation SCI as being prescriptive and ``one size fits all.'' \374\
This commenter argued that many Government Securities ATSs already
align with industry standards that are more flexible and achieve many
of the same goals of Regulation SCI without additional compliance
costs. Regulation SCI specifically incorporates, and provides that SCI
entities can look to, industry standards to comply with the policies
and procedures requirement under Regulation SCI.\375\ As the Commission
emphasized at the time of adoption, Regulation SCI is not intended to
be a ``one-size-fits-all'' regulation, but rather takes a risk-based
approach pursuant to which an SCI entity's policies and procedures
could be tailored to a particular system's criticality and risk, and
includes other rules and definitions that similarly incorporated risk-
based considerations.\376\
---------------------------------------------------------------------------
\374\ See BrokerTec Letter at 6.
\375\ Specifically, 17 CFR 242.1001(a)(4) (Rule 1001(a)(4))
provides that the policies and procedures required under Rule
1001(a) shall be deemed to be reasonably designed if they are
consistent with current SCI industry standards. See Rule 1001(a)(4)
of Regulation SCI. ``SCI industry standards'' are those standards
comprising information technology practices that are widely
available to information technology professionals in the financial
sector and issued by an authoritative body that is a U.S.
governmental entity or agency, association of U.S. governmental
entities or agencies, or widely recognized organization.
\376\ See Regulation SCI Adopting Release, supra note 3, at
72259-60, 72290-91.
---------------------------------------------------------------------------
Accordingly, the Commission is re-proposing to expand the
definition of ``SCI ATSs'' to include Government Securities ATSs that
meet certain volume thresholds with respect to U.S. Treasury Securities
and/or Agency Securities.\377\ Specifically, the definition of ``SCI
ATS'' would be revised to include those ATSs which, during at least
four of the preceding six calendar months, had, with respect to U.S.
Treasury Securities, five percent or more of the average weekly dollar
volume traded in the United States as provided by the SRO to which such
transactions are reported; or had, with respect to Agency Securities,
five percent or more of the average daily dollar volume traded in the
United States as provided by the SRO to which such transactions are
reported.
---------------------------------------------------------------------------
\377\ See paragraphs (3) and (4) of the definition of ``SCI
ATS'' under Rule 1000 of Regulation SCI.
---------------------------------------------------------------------------
Several commenters on the 2020 Proposal discussed the specific
proposed volume thresholds for Government Securities ATSs to become
subject to Regulation SCI. One commenter stated that the five percent
threshold level represents a reasonable level for the systemic
integrity issues targeted by Regulation SCI,\378\ while other
commenters expressed support for the application of Regulation SCI as
proposed without specifically commenting on the threshold level.
---------------------------------------------------------------------------
\378\ See AFREF Letter at 2 and 4.
---------------------------------------------------------------------------
Other commenters offered alternative standards for determining
which Government Securities ATSs should be included within the scope of
Regulation SCI. For example, one commenter recommended that the
Commission adopt a lower (i.e., more stringent) threshold level and
incorporate a threshold based on a dollar amount.\379\
---------------------------------------------------------------------------
\379\ Specifically, this commenter stated that Regulation SCI
should apply to any family of related trading venues for government
or agency securities with combined notional average daily values
over the lesser of one percent of the overall market share on an
appropriate dollar threshold, e.g., $25 billion. See Healthy Markets
Letter at 10-11. In contrast, two commenters advocated for the
application of Rule 301(b)(6) rather than Regulation SCI to
Government Securities ATSs, but stated that the current 20 percent
threshold in Rule 301(b)(6) is too high. See MarketAxess Letter at
10 (noting that 20 percent is not an appropriate threshold to
capture ATSs with a significant percentage of trading volume in
corporate or municipal debt); and BrokerTec Letter at 8
(recommending that Rule 301(b)(6) should apply to all Government
Trading Securities regardless of trading volume).
---------------------------------------------------------------------------
Other commenters on the 2020 Proposal suggested adoption of a
higher threshold level for the application of Regulation SCI to
Government Securities ATSs. For example, one commenter stated that it
would support the application of Regulation SCI instead of Rule
301(b)(6) to fixed income ATSs if the Commission adopted the 20 percent
volume threshold test currently used under Rule 301(b)(6).\380\ One
commenter who generally opposed the 2020 Proposal also urged the
Commission to adopt a higher threshold if it, in fact, extended
application of Regulation SCI to Government Securities ATSs.\381\
Another commenter suggested that application of Regulation SCI should
depend on whether the ATS itself is a ``significant'' source of
liquidity, recommending that this determination could, for example, be
based on whether the ATS's par value traded in the asset class, for
four months over the prior six months, averaged at least 10 percent of
par value traded in the asset class.\382\
---------------------------------------------------------------------------
\380\ See ICE Bonds Letter II at 5.
\381\ See Tradeweb Letter at 3, 11. This commenter stated that
the threshold should be raised to a ``more material percentage''
such as 25 percent.
\382\ See Bloomberg Letter at 5.
---------------------------------------------------------------------------
[[Page 15528]]
The Commission is re-proposing the five percent thresholds for
Government Securities ATSs, consistent with the 2020 Proposal. Although
some commenters provided suggestions for different thresholds or
recommended applying Rule 301(b)(6) instead, the Commission believes
that the proposed five percent thresholds for applying Regulation SCI
to Government Securities ATSs (inclusive of Communication Protocol
Systems, as now proposed) would be appropriate measures to identify
those ATSs that have the potential to significantly impact investors
and the market should a systems issue occur and thus warrant the
protections and requirements of Regulation SCI.\383\ At the same time,
as detailed further below, the Commission is requesting additional
comment on whether these proposed volume thresholds should be set
higher or lower for ATSs trading government securities.
---------------------------------------------------------------------------
\383\ Regulation SCI would not apply to Government Securities
ATSs that trade repos, including repos on U.S. Treasury Securities
and Agency Securities. The Commission notes FINRA does not require
ATSs to report transactions for repos. See supra note 313. Based on
information available to the Commission, the Commission does not
believe that ATSs today capture a significant market share for
trading repos nor do they rely on the same use of technology as ATSs
that trade U.S. Treasury Securities or Agency Securities, but below
requests comment on whether Government Securities ATSs that trade
repos, including repos on U.S. Treasury Securities and Agency
Securities should be subject to Regulation SCI.
---------------------------------------------------------------------------
The Commission has analyzed the number of entities it believes are
likely to be covered by the thresholds it is proposing and believes
that, currently, approximately two Legacy Government Securities ATSs
trading U.S. Treasury Securities would be subject to Regulation SCI
under the five percent volume thresholds, one of which would also meet
the volume thresholds for trading Agency Securities.\384\ In addition,
the Commission believes that approximately two currently operating
Communication Protocol Systems would likely be subject to Regulation
SCI under the proposed five percent threshold in U.S. Treasury
Securities.
---------------------------------------------------------------------------
\384\ See supra Section II.D and infra Section X.B.1a. As
discussed above with regard to the Fair Access Rule, the ATS with
the largest market volume in U.S. Treasury Securities has
approximately 14 percent of market volume, while the second largest
has approximately six percent of market share, and the third and
fourth largest both have a little less than four percent market
share. The one Legacy Government Securities ATS that would also
exceed the threshold for Agency Securities accounts for roughly 11
percent of volume in Agency Securities. See infra Table VIII.1. If
the proposed volume thresholds were ten percent, only one Legacy
Government Securities ATS would be subject to Regulation SCI,
meeting the threshold levels for both U.S. Treasury Securities and
Agency Securities. However, the Commission believes that there would
still be approximately two currently operating Communication
Protocol Systems subject to Regulation SCI using a ten percent
threshold in U.S. Treasury Securities. See id.
---------------------------------------------------------------------------
The Commission believes that the proposed volume thresholds to
apply Regulation SCI to a Government Securities ATS that trades U.S.
Treasury Securities and Agency Securities are reasonable compared to
volume thresholds that would subject an ATS to Rule 301(b)(6) under
Regulation ATS for the ATS's trading of corporate bonds and municipal
securities. Currently, an ATS that trades corporate bonds or municipal
securities is subject to Rule 301(b)(6) if its trading volume reaches
20 percent or more of the average daily volume traded in the United
States for either corporate bonds or municipal securities. As discussed
in detail above, when the Commission adopted Regulation SCI, it decided
not to apply Regulation SCI and its lower volume thresholds to the
fixed income markets, concluding that a systems issue in fixed income
markets would not have had as significant or widespread an impact as in
the equities market.\385\ Among other things, the Commission reasoned
that the fixed income markets at the time relied much less on
electronic trading than the equities markets, and that the municipal
securities and corporate bond fixed income markets tended to be less
liquid than the equity markets, with slower execution times and less
complex routing strategies.\386\ As explained above, however, ATSs for
government securities now operate with complexity similar to that of
markets that trade NMS stocks in terms of use of technology and speed
of trading, the use of limit order books, order types, algorithms,
connectivity, data feeds, and the active participation of PTFs, and
Communication Protocol Systems are increasingly used as electronic
means to bring together buyers and sellers using non-firm trading
interest for government securities, being particularly prevalent in the
dealer-to-customer market for off-the-run U.S. Treasury securities,
Agency Securities, and repos.\387\ Given the critical role government
securities play in the U.S. and global economies,\388\ the Commission
believes that, due to their increased reliance on electronic trading
and the important role played by Government Securities ATSs in today's
markets, an ATS whose government securities volume falls between five
percent and 20 percent of trading volume could significantly impact
investors and the market should a systems issue occur. By proposing to
apply Regulation SCI to Government Securities ATSs with a threshold of
five percent, the Commission seeks to impose the protections of
Regulation SCI to these ATSs because of their importance and potential
technological risks to the U.S. securities markets.\389\
---------------------------------------------------------------------------
\385\ See Regulation SCI Adopting Release, supra note 3, at
72270.
\386\ See id.
\387\ See supra notes 187-190 and accompanying text.
\388\ See supra notes 182-186 and accompanying text. One
commenter, while arguing that Government Securities ATSs should be
subject to Rule 301(b)(6) in lieu of expanding Regulation SCI, in
fact similarly emphasized the fundamental importance of the U.S.
Treasury market and the need to take appropriate steps to enhance
the resilience of the market, arguing that all Government Securities
ATSs should be subject to technology and resiliency requirements
regardless of volume. See BrokerTec Letter at 8.
\389\ The Commission also recognizes that ATSs for corporate
bonds and municipal securities are becoming increasingly electronic
and as part of the 2020 Proposal, the Commission requested comment
on, among other things, whether the 20 percent volume threshold
under Rule 301(b)(6) of Regulation ATS should be amended to capture
ATSs that might be critical markets for those securities.
---------------------------------------------------------------------------
While the Commission acknowledges that, as one commenter on the
2020 Proposal suggested,\390\ the government securities markets may not
have the same type of linkages between trading venues as exists in the
equities markets today, as described above, Government Securities ATSs
with significant trading volume have the potential to significantly
impact investors, the overall market, and the trading of individual
securities should an SCI event occur, similar to SCI ATSs currently
subject to Regulation SCI. In addition, a system outage at a
significant Government Securities ATS could disrupt trading at another
significant Government Securities ATS even if these Government
Securities ATSs are not connected. For example, if a significant
Government Securities ATS is experiencing a system outage, there could
be a sudden surge in message traffic (e.g., quoting activities) and
trading at another significant Government Securities ATS, which could
exceed the system capacity of such Government Securities ATS and
potentially result in a systems issue and/or a disruption of trading on
that ATS as well. Further, the Commission did not base its
determination regarding which entities played a significant role in the
market and should be included within the scope of the regulation on the
linkages that exist in the equities markets. In adopting Regulation
SCI, the Commission acknowledged that a temporary outage at an ATS
might not lead to a widespread systemic disruption and stated that
``Regulation SCI is not designed to solely address
[[Page 15529]]
systems issues that cause widespread systemic disruption, but also to
address more limited systems malfunctions that can harm market
participants.'' \391\ The Commission believes that, without appropriate
safeguards in place for these Government Securities ATSs, technological
vulnerabilities could lead to the potential for failures, disruptions,
delays, and intrusions, which could place government securities market
participants at risk and interfere with the maintenance of fair and
orderly markets.
---------------------------------------------------------------------------
\390\ See Tradeweb Letter at 3, 11.
\391\ See Regulation SCI Adopting Release, supra note 3, at
72263.
---------------------------------------------------------------------------
The Commission believes that the proposed volume thresholds to
apply Regulation SCI to a Government Securities ATS that trades U.S.
Treasury Securities and Agency Securities are reasonable as compared to
the volume thresholds for applying Regulation SCI to ATSs that trade
NMS stocks and ATSs that trade equities that are not NMS stocks. First,
an ATS that trades NMS stocks is subject to Regulation SCI if its
trading volume reaches: (i) Five percent or more in any single NMS
stock and one-quarter percent or more in all NMS stocks of the average
daily dollar volume reported by applicable transaction reporting plans;
or (ii) one percent or more in all NMS stocks of the average daily
dollar volume reported by applicable transaction reporting plans. With
respect to non-NMS equity securities, an ATS is subject to Regulation
SCI if its trading volume is five percent or more of the average daily
dollar volume (across all non-NMS equity securities) as calculated by
the SRO to which such transactions are reported. These thresholds
reflect the Commission's determination as to what constitutes a
material pool of liquidity traded by ATSs in the respective asset
classes: One percent for NMS stocks and five percent for non-NMS equity
securities. The proposed five percent SCI volume thresholds for
Government Securities ATSs would be similar to those for ATSs that
trade non-NMS equity securities. Basing the thresholds on volume as
provided to the SRO to which such transactions are reported is
reasonable given that there is no transaction reporting plan for
government securities and thus, the trading figures are based on dollar
volume traded in the United States as provided by the SRO to which such
transactions are reported.
With regard to one commenter's suggestion that the threshold should
be based on combined notional average daily values of any family of
related trading venues, the Commission requests comment, as set forth
below, on whether it would be appropriate to aggregate the volumes of
ATSs that trade the same security or category of securities and are
operated by a common broker-dealer, or operated by affiliated broker-
dealers, and treat the ATSs market places as a single ATS for purposes
of determining whether the ATSs meet the threshold levels in the
definition of SCI ATS.\392\
---------------------------------------------------------------------------
\392\ See supra note 379.
---------------------------------------------------------------------------
One commenter on the 2020 Proposal urged the Commission to apply
the deferred compliance period in the current definition of ``SCI ATS''
to Government Securities ATSs and asked for clarification as to whether
this provision would be applicable.\393\ Specifically, the definition
of SCI ATS currently provides that an SCI ATS shall not be required to
comply with the requirements of Regulation SCI until six months after
satisfying the thresholds for NMS or non-NMS stocks for the first time.
The Commission believes that it is appropriate to provide Government
Securities ATS that meet the volume threshold in the definition of
``SCI ATS'' for the first time a period of time before they are
required to comply with the requirements of Regulation SCI. Thus, the
Commission is providing clarification that the deferred compliance
period would be applicable to Government Securities ATSs.\394\
Accordingly, Rule 1000 would provide that, like ATSs trading NMS stocks
and non-NMS stocks, a Government Securities ATS would not be required
to comply with the requirements of Regulation SCI until six months
after satisfying the U.S. Treasury Securities or Agency Securities
thresholds in the definition for the first time.\395\ The Commission
believes that this six-month additional compliance period is
appropriate to allow a Government Securities ATS the time needed to
take steps to meet the requirements of the rules, rather than requiring
compliance immediately upon meeting the threshold level.
---------------------------------------------------------------------------
\393\ See BrokerTec Letter at 9-10.
\394\ As in the 2020 Proposal, the Commission is proposing to
amend the last paragraph in the definition of ``SCI alternative
trading system or SCI ATS'' (newly redesignated paragraph (5)),
which provides for the 6-month deferred compliance period, to apply
it to Government Securities ATSs.
\395\ See Rule 1000 of Regulation SCI.
---------------------------------------------------------------------------
Government Securities ATSs trading U.S. Treasury Securities and/or
Agency Securities that meet the volume thresholds under the proposed
revised definition of SCI ATS would be subject to the requirements of
Regulation SCI, as broadly described below.\396\ The provision at 17
CFR 242.1001(a) requires SCI entities to establish, maintain, enforce
and periodically update policies and procedures reasonably designed to
ensure that their SCI systems and, for purposes of security standards,
indirect SCI systems, have levels of capacity, integrity, resiliency,
availability, and security adequate to maintain their operational
capability and promote the maintenance of fair and orderly markets, and
includes certain minimum requirements for those policies and procedures
relating to capacity planning, stress tests, systems development and
testing methodology, the identification of vulnerabilities, business
continuity and disaster recovery plans (including geographic diversity
and resumption goals), market data, and monitoring.\397\
---------------------------------------------------------------------------
\396\ In the 2020 Proposal, the Commission requested comment on
whether all of the obligations in Regulation SCI should apply to
Government Securities ATSs that would be SCI ATSs, or whether only
certain requirements should be imposed, such as those requiring
written policies and procedures, notification of systems problems,
business continuity and disaster recovery testing (including testing
with subscribers of ATSs), and penetration testing. While, as
discussed above, some commenters argue that Rule 301(b)(6) would be
more appropriate framework for Government Securities ATSs (see supra
note 364), no commenters advocate for applying only a subset of the
requirements of Regulation SCI to Government Securities ATSs.
\397\ 17 CFR 242.1001(a) (Rule 1001(a) of Regulation SCI).
---------------------------------------------------------------------------
Rule 1001(b) of Regulation SCI requires that each SCI entity
establish, maintain, enforce and periodically update written policies
and procedures reasonably designed to ensure that its SCI systems
operate in a manner that complies with the Exchange Act and the rules
and regulations thereunder and the entity's rules and governing
documents, as applicable, and specifies certain minimum requirements
for such policies and procedures.\398\
---------------------------------------------------------------------------
\398\ 17 CFR 242.1001(b)(1)-(2).
---------------------------------------------------------------------------
Rule 1001(c) of Regulation SCI requires SCI entities to establish,
maintain, enforce periodically update reasonably designed written
policies and procedures that include the criteria for identifying
responsible SCI personnel, the designation and documentation of
responsible SCI personnel, and escalation procedures to quickly inform
``responsible SCI personnel'' of potential SCI events.\399\
---------------------------------------------------------------------------
\399\ 17 CFR 242.1001(c).
---------------------------------------------------------------------------
Under 17 CFR 242.1002, SCI entities have certain obligations
related to SCI events. Specifically, when any responsible SCI personnel
has a reasonable basis to conclude that an SCI event has occurred, the
SCI entity must
[[Page 15530]]
begin to take appropriate corrective action which must include, at a
minimum, mitigating potential harm to investors and market integrity
resulting from the SCI event and devoting adequate resources to remedy
the SCI event as soon as reasonably practicable.\400\ Rule 1002(b)
provides the framework for notifying the Commission of SCI events
including, among other things, to: Immediately notify the Commission of
the event; provide a written notification within 24 hours that includes
a description of the SCI event and the system(s) affected, with other
information required to the extent available at the time; provide
regular updates regarding the SCI event until the event is resolved;
and submit a final detailed written report regarding the SCI
event.\401\ Rule 1002(c) of Regulation SCI also requires that SCI
entities disseminate information to their members or participants
regarding SCI events.\402\ These information dissemination requirements
are scaled based on the nature and severity of an event. \403\
---------------------------------------------------------------------------
\400\ See 17 CFR 242.1002(a) (Rule 1002(a) of Regulation SCI).
\401\ See 17 CFR 242.1002(b). For any SCI event that ``has had,
or the SCI entity reasonably estimates would have, no or a de
minimis impact on the SCI entity's operations or on market
participants,'' Rule 1002(b)(5) provides an exception to the general
Commission notification requirements under Rule 1002(b). Instead, an
SCI entity must make, keep, and preserve records relating to all
such SCI events, and submit a quarterly report to the Commission
regarding any such events that are systems disruptions or systems
intrusions.
\402\ See 17 CFR 242.1002(c).
\403\ See id.
---------------------------------------------------------------------------
The provison at 17 CFR 242.1003(a) requires SCI entities to provide
quarterly reports to the Commission relating to system changes.\404\
Rule 1003(b) of Regulation SCI also requires that an SCI entity conduct
an ``SCI review'' not less than once each calendar year.\405\ ``SCI
review'' is defined in Rule 1000 of Regulation SCI to mean a review,
following established procedures and standards, that is performed by
objective personnel having appropriate experience to conduct reviews of
SCI systems and indirect SCI systems, and which review contains: A risk
assessment with respect to such systems of an SCI entity; and an
assessment of internal control design and effectiveness of its SCI
systems and indirect SCI systems to include logical and physical
security controls, development processes, and information technology
governance, consistent with industry standards.\406\ Under Rule
1003(b)(2)-(3), SCI entities are also required to submit a report of
the SCI review to their senior management, and must also submit the
report and any response by senior management to the report, to their
board of directors as well as to the Commission.\407\
---------------------------------------------------------------------------
\404\ See 17 CFR 242.1003(a) (Rule 1003(a) of Regulation SCI).
\405\ See 17 CFR 242.1003(b).
\406\ See 17 CFR 242.1000. Rule 1003(b)(1) of Regulation SCI
also states that penetration test reviews of an SCI entity's
network, firewalls, and production systems must be conducted at a
frequency of not less than once every three years, and assessments
of SCI systems directly supporting market regulation or market
surveillance must be conducted at a frequency based upon the risk
assessment conducted as part of the SCI review, but in no case less
than once every three years. See 17 CFR 242.1003(b)(1)(i)-(ii).
\407\ See 17 CFR 242.1003(b)(2)-(3).
---------------------------------------------------------------------------
The provision at 17 CFR 242.1004 sets forth the requirements for
testing an SCI entity's business continuity and disaster recovery plans
with its members or participants.\408\
---------------------------------------------------------------------------
\408\ See 17 CFR 242.1004 (Rule 1004 of Regulation SCI).
---------------------------------------------------------------------------
SCI entities are required by 17 CFR 242.1005 to make, keep, and
preserve certain records related to their compliance with Regulation
SCI \409\ and by 17 CFR 242.1006 to make required filings
electronically, on Form SCI.\410\ Finally, 17 CFR 242.1007 contains
requirements relating to a written undertaking when records required to
be filed or kept by an SCI entity under Regulation SCI are prepared or
maintained by a service bureau or other recordkeeping service on behalf
of the SCI entity.\411\
---------------------------------------------------------------------------
\409\ See 17 CFR 242.1005 (Rule 1005 of Regulation SCI). Rule
1005(a) of Regulation SCI relates to recordkeeping provisions for
SCI SROs, whereas Rule 1005(b) relates to the recordkeeping
provision for SCI entities other than SCI SROs.
\410\ See 17 CFR 242.1006 (Rule 1006 of Regulation SCI).
\411\ See 17 CFR 242.1007 (Rule 1007 of Regulation SCI).
---------------------------------------------------------------------------
Request for Comment
40. Should Regulation SCI apply to Government Securities ATSs that
meet the proposed definition of SCI ATS? If so, are the proposed
revisions to the definition of SCI ATS appropriate? If not, please
specifically explain how the policy goals of Regulation SCI would be
achieved for such systems without application of the regulation.
41. What are the risks associated with systems issues at a
significant Government Securities ATS? What impact would a systems
issue have on the trading of government securities and the maintenance
of fair and orderly markets? Do the government securities markets have
the same types of linkages between trading venues as the equities
markets? If not, what kind of linkages between trading venues exist in
the government securities markets? How does this impact the risk of an
SCI event at a Government Securities ATS on the market and/or market
participants? Should all of the requirements set forth in Regulation
SCI apply to Government Securities ATSs that meet the proposed
definition of SCI ATS?
42. Should Government Securities ATSs that meet the proposed volume
thresholds for SCI ATSs be governed by the Capacity, Integrity, and
Security Rule instead of being defined as SCI entities? Are there
Government Securities ATSs that play a significant role in the
secondary market for U.S. Treasury Securities but do not meet the
proposed volume thresholds for SCI ATSs for which a different threshold
should be established to mandate compliance with the Capacity,
Integrity, and Security Rule? If yes, what additional regulatory
requirements, if any, should be imposed on such ATSs? What would be the
costs and benefits associated with applying Rule 301(b)(6) to
Government Securities ATSs that are not SCI ATSs?
43. Should the Commission amend Regulation ATS to require
Government Securities ATSs to comply with Rule 301(b)(6) but adopt a
threshold that is lower or higher than 20 percent? For example, should
the Commission amend Rule 301(b)(6) to subject Government Securities
ATSs, or certain Government Securities ATSs, to the requirements of the
rule if the Government Securities ATS reaches a 5 percent, 7.5 percent,
10 percent, or 15 percent volume threshold?
44. Should the volume threshold to meet the definition of SCI ATS
include trading in U.S. Treasury Securities and Agency Securities?
Should Regulation SCI be applied to ATSs for any other type of
government securities? Should Regulation SCI be applied to ATSs that
trade repos or reverse repos on government securities, including repos
or reverse repos on U.S. Treasury Securities, Agency Securities, or
both?
45. Should the proposed five percent threshold test for U.S.
Treasury Securities be applied to all types of U.S. Treasury Securities
or to a subset of U.S. Treasury Securities? For example, should the
five percent volume test only be applied to transaction volume in on-
the-run U.S. Treasury Securities? Should the five percent threshold be
applied to transaction volume in all Agency Securities or to a subset
of Agency Securities? If so, why or why not?
46. Is the proposed five percent threshold an appropriate threshold
to apply Regulation SCI to Government Securities ATSs (inclusive of
[[Page 15531]]
Communication Protocol Systems, as proposed), as significant markets
for trading in U.S. Treasury Securities or Agency Securities? If
commenters believe that there should be a percent threshold for a
subset of U.S. Treasury Securities, such as on-the-run U.S. Treasury
Securities or off-the-run U.S. Treasury Securities, what should that
threshold be?
47. Should the Commission adopt a percent volume threshold that is
lower than five percent for U.S. Treasury Securities, Agency
Securities, or both? If so, what percent threshold should the
Commission adopt for U.S. Treasury Securities and Agency Securities?
For example, should the Commission adopt a threshold that is four
percent, three percent, two percent, or one percent for U.S. Treasury
Securities? Should the Commission adopt a threshold that is four
percent, three percent, two percent, or one percent for Agency
Securities? Should there be no threshold for U.S. Treasury Securities?
Should there be no threshold for Agency Securities? Please support your
views.
48. Should the Commission adopt a percent volume threshold that is
higher than five percent for U.S. Treasury Securities, Agency
Securities, or both? For example, should the Commission adopt a
threshold that is 7.5 percent, 10 percent, 15 percent, or 20 percent
for U.S. Treasury Securities? Should the Commission adopt a threshold
that is 7.5 percent, 10 percent, 15 percent, or 20 percent for Agency
Securities?
49. Is it appropriate to use five percent of average weekly dollar
volume traded in the United States as a threshold for application of
Regulation SCI requirements to U.S. Treasury Securities? If the average
weekly dollar volumes were to include transactions in the secondary
cash market for U.S Treasury Securities by non-FINRA members, which
currently are not reported to, or collected by, the SRO that makes
public average weekly dollar volume statistics, should the Regulation
SCI threshold change? If so, what should be the appropriate threshold?
Please support your views.
50. Is it appropriate to use five percent of average daily dollar
volume traded in the United States as a threshold for the application
of Regulation SCI requirements to Agency Securities?
51. Would the proposed four out of six month period be an
appropriate period to measure the volume thresholds for U.S. Treasury
Securities and Agency Securities for purposes of Regulation SCI? With
respect to calculating the appropriate thresholds, would Government
Securities ATSs have available appropriate data with which to determine
whether the proposed thresholds have been met? Would ATSs that trade
U.S. Treasury Securities be able to readily calculate whether they meet
the volume thresholds in at least four out of the preceding six months,
given that U.S. Treasury Securities are disseminated on a weekly,
rather than daily basis? If not, what data or information is missing?
Would it be appropriate for the Commission to change the proposed four
out of six month period to a time period measured in weeks (e.g., at
least 16 out of the preceding 24 weeks) with respect to U.S. Treasury
Securities? What effect would any such change have on the likelihood
that ATSs trading U.S. Treasury Securities would meet the volume
thresholds?
52. Should the proposed Regulation SCI volume threshold measurement
for Government Securities ATSs take into account whether Government
Securities ATSs are operated by a common broker-dealer, or operated by
affiliated broker-dealers? \412\ For example, should the Commission
aggregate the Treasury volume of two Government Securities ATSs that
are each operated by a common broker-dealer, or operated by affiliated
broker-dealers, for purposes of determining whether the threshold test
has been satisfied and, if it has, apply Regulation SCI to each ATS?
Why or why not?
---------------------------------------------------------------------------
\412\ See Section V.A.2, infra, discussing the proposed
aggregation of volume of affiliated ATSs for purposes of application
of the Fair Access Rule.
---------------------------------------------------------------------------
53. Should only certain provisions of Regulation SCI apply to
Government Securities ATSs that meet the proposed definition of SCI
ATS? For example, should they only be subject to certain aspects of
Regulation SCI? If so, which provisions should apply? Do commenters
believe that different or unique requirements should apply to the
systems of such Government Securities ATSs? What should they be and
why?
54. In what instances, if at all, should the systems of Government
Securities ATSs that meet the proposed definition of SCI ATS be defined
as ``critical SCI systems''? Please describe.
55. Which subscribers or types of subscribers should Government
Securities ATSs that meet the proposed definition of SCI ATS consider
as ``designated members or participants'' that should be required to
participate in the annual mandatory business continuity and disaster
recovery testing? Please describe.
56. Should Government Securities ATSs that meet the proposed
definition of SCI ATS not be defined as SCI entities but instead be
required to comply with provisions comparable to provisions of
Regulation SCI?
57. What are the current practices of Government Securities ATSs
with respect to the subject matter covered by Regulation SCI? To what
extent do Government Securities ATSs have practices that are consistent
or inconsistent with the requirements under Regulation SCI? Please
describe and be specific. Would the application of Regulation SCI or
the Capacity, Integrity, and Security Rule weaken ATSs' existing
capacity, integrity, and security programs?
58. Are there characteristics specific to the government securities
market that would make applying Regulation SCI broadly or any specific
provision of Regulation SCI to Government Securities ATSs unduly
burdensome or inappropriate?
59. As commenters think about whether and how to apply Regulation
SCI to Government Securities ATSs, are there any lessons commenters can
draw from the market stress during Spring 2020, including, for example,
lessons learned regarding business continuity or capacity planning?
60. Are there characteristics specific to Communication Protocol
Systems that would make applying Regulation SCI broadly or any specific
provision of Regulation SCI to such systems unduly burdensome or
inappropriate? For these entities, do commenters believe that
Communication Protocol Systems would have systems that meet the
definition of ``SCI systems''? Why or why not? Are there certain types
of Communication Protocol Systems that would have systems that meet the
definition while others would not, for example, RFQ, BWIC, or
conditional order systems? Please describe. Are there certain features
or systems functionalities of Communication Protocol Systems that would
not meet the definition of SCI systems, but that should be subject to
Regulation SCI as SCI systems? Please describe. Should only certain
provisions of Regulation SCI apply to Communication Protocol Systems?
If so, which provisions should apply? Do commenters believe that
different or unique requirements should apply to Communication Protocol
Systems? What should they be and why?
[[Page 15532]]
IV. Revised Form ATS-N: Changes Applicable to Government Securities
ATSs and NMS Stock ATSs
A. Proposed Filing and Effectiveness Requirements for Government
Securities ATSs and NMS Stock ATSs
The Commission is re-proposing to amend Rule 304(a) to require that
a Covered ATS, which would include a Government Securities ATS, must
comply with Rules 300 through 304 of Regulation ATS, as applicable, to
be exempt from the definition of ``exchange'' pursuant to Rule 3a1-
1(a)(2).\413\ Rule 304, as proposed to be amended, would require all
Government Securities ATSs to file Form ATS-N, as revised. In addition,
Communication Protocol Systems that choose to comply with Regulation
ATS would be required to meet all applicable requirements of Regulation
ATS, including filing a Form ATS-N if they trade NMS stocks, government
securities, or repos. The Commission is proposing to make changes to
current Form ATS-N, including by adding questions about interaction
with related markets, liquidity providers, and surveillance and
monitoring, and by making organizational and other changes that would
make the form more relevant for Government Securities ATSs inclusive of
Communication Protocol Systems, as proposed.\414\ These changes would
be applicable to both Government Securities ATSs and NMS Stock ATSs and
would require NMS Stock ATSs to file amendments to their existing
form.\415\
---------------------------------------------------------------------------
\413\ As proposed, references to ``NMS Stock ATSs'' throughout
Rule 304 would be changed to refer to ``Covered ATSs,'' which would
encompass Government Securities ATSs. See supra Section III.B.
\414\ See infra Section IV.D.
\415\ See infra Section IV.D.1.
---------------------------------------------------------------------------
Each Form ATS-N would be subject to an effectiveness process, which
would allow the Commission to review disclosures on Form ATS-N and
declare the Form ATS-N ineffective if the Commission finds, after
notice and opportunity for hearing, that such action is necessary and
appropriate in the public interest and the protection of investors. The
effectiveness process is not merit-based, but is designed to facilitate
the Commission's oversight of Covered ATSs, and address, for example,
material deficiencies with respect to the accuracy, currency, and
completeness of disclosures on Form ATS-N.\416\ The Commission is
proposing to apply the same filing and effectiveness process to
Government Securities ATSs that is applicable to NMS Stock ATSs filing
Form ATS-N. However, the Commission is proposing changes, as described
below, to the processes that would apply to both NMS Stock ATSs and
Government Securities ATSs, including with regard to extensions of the
Commission review period for initial Form ATS-N and Form ATS-N
amendments and the filing of amendments related to fees.
---------------------------------------------------------------------------
\416\ In the NMS Stock ATS Adopting Release, the Commission
stated that, while it will review Form ATS-N filings, its review
``is not designed to verify the accuracy of the disclosures nor
designed as an independent investigation of whether all aspects of
the NMS Stock ATS operations or the ATS-related activities of the
broker-dealer operator are disclosed on Form ATS-N.'' See NMS Stock
ATS Adopting Release, supra note 2, at 38851. This would equally
apply to the Commission's review of Forms ATS-N filed by Government
Securities ATSs, as proposed.
---------------------------------------------------------------------------
Commenters on the 2020 Proposal generally supported the requirement
that Government Securities ATSs file Form ATS-G.\417\ Although one
commenter stated that the requirement to file Form ATS-G is
unnecessarily burdensome for Government Securities ATSs with limited
volume,\418\ another commenter stated it does not support requiring
different levels of public disclosure by Government Securities ATSs
depending on their trading volume, as it could result in a complex and
confusing system of disclosure for market participants.\419\ The
Commission is proposing the requirement to file a public Form ATS-N, as
revised, for all Government Securities ATSs, regardless of their
volume, as this requirement is designed to allow market participants to
compare Government Securities ATSs, and excluding low volume Government
Securities ATSs from this requirement would undermine the goal of
transparency and the ability of market participants to use Form ATS-N
to assess Government Securities ATSs to select the most appropriate
trading venue for their needs.
---------------------------------------------------------------------------
\417\ See, e.g., MFA Letter at 5; AFREF Letter, at 3; BrokerTec
Letter at 2. One commenter, which expressed general support for the
enhanced filing requirements and urged the Commission to move
forward with finalization and implementation of the proposal, stated
that applying Regulation ATS to Government Securities ATSs that meet
certain volume thresholds would increase public operational
transparency. See FIA PTG Letter at 2.
\418\ See ICE Bonds Letter I at 4-5.
\419\ See MFA Letter at 5.
---------------------------------------------------------------------------
The Commission is proposing to apply to Government Securities ATSs
the existing provisions of current Rule 304(a) for the filing and
Commission review of an initial Form ATS-N with a modification to the
circumstances under which the Commission can extend the review period
for an initial Form ATS-N.\420\ The Commission believes that the review
process is appropriate for the same reasons stated in the NMS Stock ATS
Adopting Release,\421\ will facilitate the Commission's oversight of
Government Securities ATSs, and will help ensure that information is
disclosed in a complete and comprehensible manner. The differences
between Form ATS-N filed by Government Securities ATSs and Form ATS-N
filed by NMS Stock ATSs should not warrant a different review and
effectiveness process and hence the Commission is proposing to apply
the same provisions that are applicable to NMS Stock ATSs to Government
Securities ATSs, which include the following:
---------------------------------------------------------------------------
\420\ See infra notes 430-432 and accompanying text. The
proposed amendment to Rule 304(a) would also apply to the review of
initial Form ATS-N filed by NMS Stock ATSs.
\421\ See NMS Stock ATS Adopting Release, supra note 2, at
38782.
---------------------------------------------------------------------------
No exemption is available to a Government Securities ATS
pursuant to Exchange Act Rule 3a1-1(a)(2) unless the Government
Securities ATS files with the Commission an initial Form ATS-N,\422\
and the initial Form ATS-N is effective.\423\
---------------------------------------------------------------------------
\422\ The Commission staff may reject a Form ATS-N filing that
is defective because, for example, it is missing sections or missing
responses to any sub-questions, or does not comply with the
electronic filing requirements. This is a separate process from the
determination to declare a Form ATS-N ineffective. See NMS Stock ATS
Adopting Release, supra note 2, at 38791.
\423\ See Rule 304(a)(1)(i).
---------------------------------------------------------------------------
The Commission will, by order, declare ineffective an
initial Form ATS-N no later than 120 calendar days from the date of
filing with the Commission, or, if applicable, the end of the extended
Commission review period.\424\ During the Commission review period, the
Government Securities ATS shall amend its initial Form ATS-N by filing
updating amendments, correcting amendments, and fee amendments \425\ as
applicable.\426\
---------------------------------------------------------------------------
\424\ See proposed Rule 304(a)(1)(ii). See also infra note 430.
\425\ See infra note 451.
\426\ As proposed, to make material changes to its initial Form
ATS-N during the Commission review period, the Government Securities
ATS shall withdraw its filed initial Form ATS-N and may refile an
initial Form ATS-N pursuant to Rule 304(a)(1). See Rule
304(a)(1)(ii)(B).
---------------------------------------------------------------------------
An initial Form ATS-N will become effective, unless
declared ineffective, upon the earlier of: (1) The completion of review
by the Commission and publication pursuant to Rule 304(b)(2)(i); or (2)
the expiration of the Commission review period, or, if applicable, the
end of the extended review period.\427\
---------------------------------------------------------------------------
\427\ See proposed Rule 304(a)(1)(iii)(A).
---------------------------------------------------------------------------
The Commission will, by order, declare an initial Form
ATS-N
[[Page 15533]]
ineffective if it finds, after notice and opportunity for hearing, that
such action is necessary or appropriate in the public interest, and is
consistent with the protection of investors.\428\ If the Commission
declares an initial Form ATS-N ineffective, the Government Securities
ATS shall be prohibited from operating as a Government Securities ATS
pursuant to Exchange Act Rule 3a1-1(a)(2). An initial Form ATS-N
declared ineffective does not prevent the Government Securities ATS
from subsequently filing a new Form ATS-N.\429\
---------------------------------------------------------------------------
\428\ Like the review process for Form ATS-N for NMS Stock ATSs,
the Commission's review of Form ATS-N for Government Securities ATSs
would not be merit-based; instead it would focus on the completeness
and comprehensibility of the disclosures. See NMS Stock ATS Adopting
Release, supra note 2, at 38790. In the NMS Stock ATS Adopting
Release, the Commission discussed the circumstances under which the
Commission would declare a Form ATS-N amendment ineffective. Such
circumstances would also apply to the Commission's review of an
amendment to Form ATS-N filed by a Government Securities ATS. For
example, the Commission believes it would be necessary or
appropriate in the public interest, and consistent with the
protection of investors, to declare ineffective a Form ATS-N if, for
example, the Commission finds, after notice and opportunity for a
hearing, the Form ATS-N was filed by an entity that does not meet
the definition of a Government Securities ATS; one or more
disclosures reveal non-compliance with Federal securities laws, or
the rules or regulations thereunder, including Regulation ATS; or
one or more disclosures on Form ATS-N are materially deficient with
respect to their completeness or comprehensibility. For further
discussion, see infra Section IV.B.2.
\429\ See Rule 304(a)(1)(iii)(B).
---------------------------------------------------------------------------
The Commission is re-proposing to amend Rule 304(a)(1)(ii)(A)(1),
which currently provides that the Commission may extend the initial
Form ATS-N review period for an additional 90 calendar days if the Form
ATS-N is unusually lengthy or raises novel or complex issues that
require additional time for review, to provide that the Commission may
extend the review period if it finds that an extension is
appropriate.\430\ The proposed standard is the same standard for
extending the Commission review period for SRO rule filings under
Section 19 of the Exchange Act.\431\ This would apply to Form ATS-N
filed by Government Securities ATSs as well as NMS Stock ATSs. The
Commission believes that extending the Commission review period for
Form ATS-N if it finds that an extension is appropriate would
facilitate an effective review process.\432\ For example, if an ATS's
disclosures on an initial Form ATS-N are difficult to understand or
appear to be incomplete, the Commission may need additional time to
discuss the disclosures with the ATS to ascertain whether to declare
the Form ATS-N ineffective, even if the form is not unusually lengthy
or does not raise novel or complex issues. Rather than moving to
declare an initial Form ATS-N ineffective because of material
deficiencies with respect to completeness and comprehensibility, the
Commission could extend the review period to allow the filer to resolve
the deficiencies. As under current Rule 304(a)(1)(ii)(A)(1), in such
case, the Commission will notify the Covered ATS in writing within the
initial 120-calendar day review period and will briefly describe the
reason for the determination for which additional time for review is
required.
---------------------------------------------------------------------------
\430\ See Rule 304(a)(1)(ii)(A)(1). The rule provides that the
Commission extends the review period, it will notify the Government
Securities ATS in writing within the initial 120-calendar day review
period and will briefly describe the reason for the determination
for which additional time for review is required. The Commission may
also extend the initial Form ATS-N review period for any extended
review period to which a duly authorized representative of the Form
ATS-N agrees in writing. See Rule 304(a)(1)(ii)(A)(2).
\431\ See 15 U.S.C. 78s(b)(2)(A)(ii).
\432\ In the Commission staff's experience reviewing Form ATS-N
filed by NMS Stock ATSs, the Commission review period was extended
(either by the Commission or by the agreement of a duly authorized
representative of the ATS) for 33 of the 43 Forms ATS-N that the
Commission has reviewed and published. In its review of each Form
ATS-N, the Commission staff engaged in extensive conversations with
the NMS Stock ATS with regard to the NMS Stock ATS's disclosures on
its initial Form ATS-N.
---------------------------------------------------------------------------
The Commission is also re-proposing a process for Legacy Government
Securities ATSs that have a Form ATS on file with the Commission as of
the effective date of any final rule to continue to operate during the
Commission's review period.\433\ In addition, to allow a Currently
Exempted Government Securities ATS or Covered Newly Designated ATS to
continue to operate without disruption while its initial Form ATS-N is
under Commission review, the Commission is proposing to amend Rule
304(a)(1)(i) to provide that a Currently Exempted Government Securities
ATS or Covered Newly Designated ATS may continue to operate pursuant to
Regulation ATS until its initial Form ATS-N becomes effective. The
Commission believes that all Legacy Government Securities ATSs--whether
they are operating pursuant to a Form ATS or whether they have operated
as a Currently Exempted Government Securities ATS--should be permitted
to continue to operate during the Commission review period. The
Commission further believes Covered Newly Designated ATSs should be
permitted to operate without disruption to their participants and the
market. A Government Securities ATS or Covered Newly Designated ATS
would file with the Commission an initial Form ATS-N no later than the
date 90 calendar days after the effective date of any final rule. An
initial Form ATS-N filed by a Legacy Government Securities ATS would
supersede and replace a previously filed Form ATS of the Legacy
Government Securities ATS. A Legacy Government Securities ATS that
fails to comply with the requirements of Regulation ATS by filing Form
ATS-N by the 90th calendar day from the effective date of any final
rule and continues operating as a Government Securities ATS would no
longer qualify for the exemption provided under Rule 3a1-1(a)(2), and
thus, risks operating as an unregistered exchange in violation of
Section 5 of the Exchange Act. If a Legacy Government Securities ATS
that has a Form ATS on file with the Commission seeks to trade, for
example, government securities and corporate bonds fails to file a Form
ATS-N by the 90th calendar day, the ATS must either file a cessation of
operations report on Form ATS or file a material amendment on Form ATS
to remove information related to government securities. A Legacy
Government Securities ATS or Newly Designated Covered ATS would be
permitted to operate, on a provisional basis, pursuant to the filed
initial Form ATS-N, and any amendments thereto, while the Commission
reviews the initial Form ATS-N.
---------------------------------------------------------------------------
\433\ See proposed Rule 304(a)(1)(iv). Other than the
differences discussed below, the proposed process is similar to the
process currently provided under Rule 304(a)(1)(iv) for Legacy NMS
Stock ATSs. ``Legacy NMS Stock ATSs'' are NMS Stock ATSs that were
operating pursuant to an initial operation report on Form ATS on
file with the Commission as of January 7, 2019. The Commission is
proposing to delete references to Legacy NMS Stock ATSs throughout
the rule text, as the transition period for such ATSs has ended.
---------------------------------------------------------------------------
The Commission is proposing the initial Commission review period
(not including any extension) for an initial Form ATS-N filed by a
Legacy Government Securities ATS or Newly Designated Covered ATS to be
180 calendar days. Based on Commission staff experience reviewing
initial Form ATS-N filings during the transition period for Form ATS-N,
the Commission believes it would be appropriate to provide a 180
calendar day review period rather than the 120 calendar day review
period that was applicable to initial filings by Legacy NMS Stock ATSs
and that would be applicable to a new Covered ATSs under Rule
304(a)(1)(ii)(A).\434\ The 180 calendar day review period is designed
to provide Commission staff with adequate time to review filings,
discuss
[[Page 15534]]
disclosures with Covered ATSs, and address any deficiencies.
---------------------------------------------------------------------------
\434\ See supra note 424 and accompanying text.
---------------------------------------------------------------------------
For the same reasons discussed above,\435\ the Commission is
proposing to amend Rule 304(a)(1)(iv)(B) to provide that the Commission
can extend the initial Form ATS-N review period for Legacy Government
Securities ATSs by an additional 120 calendar days \436\ if it
determines that a longer period is appropriate.
---------------------------------------------------------------------------
\435\ See supra notes 430-432 and accompanying text.
\436\ Consistent with the process for Legacy NMS Stock ATSs
today, Rule 304(a)(1)(iv) would permit the Commission to extend the
initial Form ATS-N review period for Legacy Government Securities
ATSs for an additional 120-calendar days. See infra note 437.
---------------------------------------------------------------------------
Other than the proposed changes to the circumstances under which
the Commission may extend the Commission review period, the Commission
is also proposing that the process for the Commission to review and
declare ineffective, if necessary, an initial Form ATS-N filed by a
Legacy Government Securities ATS would be the same as the process for
an initial Form ATS-N filed by a Legacy NMS Stock ATS.\437\ Given the
proposed intended uses of Form ATS-N to allow the Commission to monitor
developments and carry out its oversight functions over Government
Securities ATSs and to enable market participants to make more informed
decisions about how their trading interest will be handled by the ATSs,
the Commission believes that it is important for a Government
Securities ATS to maintain an accurate, current, and complete Form ATS-
N.\438\ Providing the Commission with the opportunity to review Form
ATS-N disclosures helps ensure that information is disclosed in a
complete and comprehensible manner.\439\
---------------------------------------------------------------------------
\437\ See Rule 301(b)(2)(viii). Rule 304(a)(1)(iv)(B), as
proposed, would provide that the Commission may, by order, as
provided in Rule 304(a)(1)(iii), declare an initial Form ATS-N filed
by a Legacy Government Securities ATS or Covered Newly Designated
ATS ineffective no later than 180 calendar days from the date of
filing with the Commission, or, if applicable, the end of the
extended review period. As proposed, the Commission may extend the
initial Form ATS-N review period for a Legacy Government Securities
ATS or Covered Newly Designated ATS for: An additional 120 calendar
days if the Commission determines that a longer period is
appropriate, in which case the Commission will notify the Legacy
Government Securities ATS or Covered Newly Designated ATS in writing
within the initial 180-calendar day review period and will briefly
describe the reason for the determination for which additional time
for review is required; or any extended review period to which a
duly-authorized representative of the Legacy Government Securities
ATS agrees in writing.
\438\ See NMS Stock ATS Proposing Release, supra note 29
(discussing the proposed process for amendments to, and Commission
review of, Form ATS-N filed by NMS Stock ATSs).
\439\ See NMS Stock ATS Adopting Release, supra note 2, Section
IV.A.3.
---------------------------------------------------------------------------
As the intended uses of Form ATS-N filed by Government Securities
ATS and Form ATS-N disclosures filed by NMS Stock ATSs are similar, the
Commission is proposing the same filing requirements that are currently
applicable to Form ATS-N amendments filed by NMS Stock ATSs to Form
ATS-N amendments filed by Government Securities ATSs. Like an NMS Stock
ATS, a Government Securities ATS would be required to amend Form ATS-N:
At least 30 calendar days, or the length of any extended
review period, prior to the date of implementation of a material change
to the operations of the Government Securities ATS or to the activities
of the broker-dealer operator or its affiliates that are subject to
disclosure on the Form ATS-N, other than changes related to order
display or fair access, which will be contingent amendments reported
pursuant to Rule 304(a)(2)(i)(D), or fees, which will be fee amendments
reported pursuant to Rule 304(a)(2)(E) (``material amendment'').\440\
---------------------------------------------------------------------------
\440\ See Rule 304(a)(2)(i)(A). The Commission is proposing
revisions to Rule 304(a)(2)(i)(A) to reference fee amendments and to
clarify the language of the provision. See also infra note 451.
---------------------------------------------------------------------------
No later than 30 calendar days after the end of each
calendar quarter to correct information that has become inaccurate or
incomplete for any reason and was not required to be reported to the
Commission as a material amendment, correcting amendment, contingent
amendment, or fee amendment (``updating amendment'').\441\
---------------------------------------------------------------------------
\441\ See Rule 304(a)(2)(i)(B). See also infra note 451.
---------------------------------------------------------------------------
Promptly to correct information in any previous disclosure
on the Form ATS-N, after discovery that any information previously
filed on a Form ATS-N was materially inaccurate or incomplete when
filed (``correcting amendment'').\442\
---------------------------------------------------------------------------
\442\ See Rule 304(a)(2)(i)(C). For a discussion of when an ATS
should file a correcting amendment, see NMS Stock ATS Adopting
Release, supra note 2, at 38806.
---------------------------------------------------------------------------
No later than the date that information required to be
disclosed in Part III, Item 23 on Form ATS-N, which addresses fair
access, has become inaccurate or incomplete (``contingent amendment'').
Because the order display and execution access rule under Rule
301(b)(3) does not apply to Government Securities ATSs, Government
Securities ATSs would not be required to disclose information
pertaining to order display and execution access. Accordingly, for
Government Securities ATSs, Rule 304(a)(2)(i)(D) would only apply to
the fair access disclosure on Form ATS-N.\443\
---------------------------------------------------------------------------
\443\ The Commission is re-proposing to revise Rule 304 to
replace references to ``Order Display and Fair Access Amendments''
with ``Contingent Amendments.'' The term ``Contingent Amendment''
would apply to amendments related to Form ATS-N disclosures
regarding order display and fair access, as applicable, under Rule
304(a)(2)(i)(D) to Form ATS-N filed by both NMS Stock ATSs and
Government Securities ATSs.
---------------------------------------------------------------------------
No later than after the date that information required to
be disclosed in Part III, Item 18 on Form ATS-N has become inaccurate
or incomplete (``fee amendment'').
In the NMS Stock ATS Adopting Release, the Commission provided
examples of scenarios that are particularly likely to implicate a
material change.\444\ In consideration of Commission staff's experience
with Form ATS-N, the proposed change to include Communication Protocol
Systems in the definition of ``exchange,'' and the proposed changes to
Form ATS-N, the Commission is reiterating and adding to the list of
scenarios particularly likely to implicate a material change, which
would include, but are not limited to: (1) A broker-dealer operator or
its affiliates beginning to trade on the Covered ATS; (2) a change to
the broker-dealer operator's policies and procedures governing the
written safeguards and written procedures to protect the confidential
trading information of subscribers pursuant to Rule 301(b)(10)(i) of
Regulation ATS, including types of persons that have access to
confidential trading information; \445\ (3) a change to the types of
participants on the Covered ATS or the eligibility to participate in
the ATS; (4) the introduction or removal of, or change to, an order
type or type of message that subscribers can receive or send; (5) the
introduction of, or change to, requirements, conditions, or
restrictions to send, receive, or view trading interest; (6) a change
to the interaction of trading interest (including, for example,
procedures related to how participants send, receive, respond to,
counter, and firm-up trading interest) and priority
[[Page 15535]]
procedures; (7) any change to ATS functionalities or procedures that
affect pricing of trading interest; (8) a change that would impact a
subscriber's ability to send or interact with trading interest,
including a change to the segmentation of orders and participants; (9)
a change to the manner in which the Covered ATS displays or makes known
trading interest, including to limit or expand the trading interest
that subscribers can view or interact with; (10) a change of a service
provider to the operations of the Covered ATS that has access to
subscribers' confidential trading information; and (11) a change to
introduce or stop routing or sending away trading interest. A Covered
ATS that notifies subscribers, or certain subscribers, about potential
changes to ATS operations or ATS activities of the broker-dealer
operator or its affiliates in advance of filing a Form ATS-N amendment
demonstrates that the ATS determines such information to be important
to subscribers and may likely be material. In addition, from the
Commission staff's experience, if a Covered ATS removes an important
functionality or no longer makes a functionality available to
subscribers or certain groups of subscribers, the removal of such
functionality could be a material change.
---------------------------------------------------------------------------
\444\ See NMS Stock ATS Adopting Release, supra note 2, at
38803.
\445\ In the Commission's experience, a change in ownership of
the broker-dealer operator that does not result in the change in the
registered entity nevertheless may be likely to implicate a material
change, in that, among other things, it may result in a change to
the persons who have access to confidential trading information. A
change in the broker-dealer operator, however, would require the
Covered ATS to cease operations and file a new Form ATS-N. See infra
notes 527-528 and accompanying text.
---------------------------------------------------------------------------
This list is not intended to be exhaustive, and does not mean to
imply that other changes to the operations of a Covered ATS or the
activities of the broker-dealer operator or its affiliates would not
constitute material changes. Further, the Covered ATS should generally
consider whether the cumulative effect of a series of changes to the
operations of the Covered ATS or the activities of the broker-dealer
operator or its affiliates with regard to the Covered ATS is material.
In addition, in determining whether a change is material, an ATS
generally should consider whether such change would affect: (1) The
competitive dynamics among ATS subscribers; (2) the execution quality
or performance of the orders of any subscriber or category of
subscribers; (3) the nature or composition of counterparties with which
any subscriber or category of subscribers interact; and (4) the
relative speed of access or execution of any subscriber or group of
subscribers.\446\
---------------------------------------------------------------------------
\446\ For further discussion, see NMS Stock ATS Adopting
Release, supra note 2, Section IV.B.1.a. In the NMS Stock ATS
Adopting Release, the Commission stated that in determining whether
a change is material, an ATS should generally consider whether such
change would affect ``the fees that any subscriber or category of
subscribers would pay to access and/or use the ATS.'' See id. at
38803. As discussed below, the Commission is proposing a new
amendment type for fee amendments, and as a result, changes to
information in the fee disclosure in Part III, Item 18 would not be
material changes for purposes of Rule 304(a)(2).
---------------------------------------------------------------------------
The Commission is proposing a new amendment type--fee amendments--
that is not currently provided for under Rule 304(a)(2), but would be
filed by both NMS Stock ATSs and Government Securities ATSs. The
Covered ATS would be required to file a fee amendment no later than the
date it makes a change that makes information reported on Part III,
Item 18, inaccurate or incomplete.\447\ Part III, Item 18 of Form ATS-N
would require disclosure of fee-related information, including, among
other things, a description of the types of fees, structure of fees,
variables that impact fees, differentiation among fees among types of
subscribers, the range of fees, and rebates or discounts, for use of
ATS services or services that are bundled with the subscriber's use of
non-ATS services or products offered by the broker-dealer operator or
its affiliates.\448\ Changes that would trigger a fee amendment would
include, among other things, a change to the range of fees, a change to
the factors that affect the fees that the ATS charges, or any other
change to the fee disclosure in Part III, Item 18. In the Commission
staff's experience reviewing Form ATS-N amendments, NMS Stock ATSs have
taken varied approaches to the reporting of fees. In some cases, NMS
Stock ATSs have treated fee changes as material changes, and filed
amendments on Form ATS-N at least 30 calendar days before implementing
the changes. In other cases, NMS Stock ATSs have filed updating
amendments no later than 30 days from the end of the calendar quarter
in which the ATS implemented the fee change. The Commission believes
that fee changes should be transparent and that both potential and
current subscribers and customers of subscribers, generally, should be
timely informed of a change to a Covered ATS's fees, as required to be
reported on Form ATS-N. The Commission notes that today, pursuant to
Section 19(b) of the Exchange Act,\449\ national securities exchanges
file proposed rule changes with the Commission that may take effect
upon filing with the Commission if the rule change is ``establishing or
changing a due, fee, or other charge applicable only to a member,'' no
matter the materiality of the rule change.\450\ NMS Stock ATSs, which
compete with national securities exchanges, are not subject to this
provision to the Exchange Act, and are required to file a material
amendment to Form ATS-N, and thus wait 30 calendar days before
implementing a fee change, if the fee change is material. Given this
difference between national securities exchanges and NMS Stock ATSs,
the Commission believes that requiring Covered ATSs to file a fee
amendment no later than the date it makes a change to a fee or fee
disclosure would provide the public with sufficient notice about a fee
change while allowing the ATS to act nimbly to make fee changes to
respond to, for example, competitive pressures from other trading
venues. The Commission is also making conforming changes in Rule 304
that would, among other things, allow Covered ATSs to file fee
amendments to initial Form ATS-N while the initial Form ATS-N is under
Commission review.\451\
---------------------------------------------------------------------------
\447\ If the Covered ATS files a fee amendment in advance to
notice a change of a fee, for example, the Covered ATS should
provide the effective date for the fee so that subscribers can
understand when the fee will be effective and thus impact them. The
Covered ATS must subsequently file an updating amendment on Form
ATS-N to remove the outdated effective date and any fees no longer
in effect to ensure that the disclosures on Form ATS-N are current
and accurate.
\448\ See infra Section IV.D.5.r.
\449\ 15 U.S.C. 78s(b).
\450\ 17 CFR 240.19b-4(f)(2).
\451\ See proposed changes to Rule 304(a)(1)(ii)(B) and Rule
304(a)(1)(iv)(C). In addition, the Commission is proposing to revise
the definition of ``Material Amendment'' to state that it would not
include a fee amendment required to be filed pursuant to Rule
304(a)(2)(i)(E) and to reorder the language in Rule 304(a)(1)(ii)(A)
to improve the readability of the provision. See Rule
304(a)(2)(i)(A). The Commission is also proposing to revise the
definition of ``Updating Amendment'' to state that it would not
include a fee amendment. See Rule 304(a)(2)(i)(B).
---------------------------------------------------------------------------
Like Form ATS-N filed by NMS Stock ATSs, the Commission would, by
order, declare ineffective any Form ATS-N amendment filed by Government
Securities ATSs pursuant to Rule 304(a)(2)(i)(A) through (E) if it
finds that such action is necessary or appropriate in the public
interest and is consistent with the protection of investors.\452\
However, the Commission is proposing to amend Rule 304(a)(2)(ii), which
currently provides that the Commission would declare any Form ATS-N
amendment ineffective no later than 30 calendar days from filing with
the Commission, to permit the Commission to extend the Form ATS-N
amendment review period by an additional 30 calendar days if the
Commission finds that a longer period is appropriate. The ability to
extend the review period for amendments to Form ATS-N by an additional
30 calendar days would allow the Commission additional time to review
and discuss the amendment with the filer, and, if necessary, declare
the Form ATS-N amendment
[[Page 15536]]
ineffective. Based on the Commission staff's experience reviewing Form
ATS-N amendments, amendments on Form ATS-N vary in length, complexity,
as well as comprehensibility and clarity. The Commission staff
frequently engages in extensive discussions with NMS Stock ATSs about
their disclosures in an amendment, and as a result of these
discussions, ATSs often amend a filed amendment to address deficiencies
within the Commission review period. To date, NMS Stock ATSs have
resolved such deficiencies within the Commission review period, and the
Commission has not declared a Form ATS-N amendment ineffective.
However, in several circumstances, NMS Stock ATSs have submitted draft
amendments to the Commission staff, which has provided the staff and
NMS Stock ATSs with additional time to resolve potential deficiencies.
NMS Stock ATSs, however, have no obligation to provide such a draft to
the Commission, nor does the Commission staff have any obligation to
review such a draft.
---------------------------------------------------------------------------
\452\ See Rule 304(a)(2)(ii).
---------------------------------------------------------------------------
In the event a Covered ATS is unable to address deficiencies within
the initial 30-day review period, the Commission believes that, rather
than moving to declare a Form ATS-N amendment ineffective, it would be
appropriate to extend the review period and allow the filer more time
to address such deficiencies. The Commission believes that 30
additional calendar days will give the Covered ATS sufficient time to
address any such concerns. If the Covered ATS is unable to resolve the
deficiencies within the extended review period, the Commission will
declare the Form ATS-N amendment ineffective if it finds that such
action is necessary or appropriate in the public interest, and is
consistent with the protection of investors. The Commission is
therefore proposing that the Commission may extend the Form ATS-N
amendment review period by an additional 30 calendar days if the
Commission finds that a longer period is appropriate, or to any
extended review period to which a duly-authorized representative of the
ATS agrees in writing. The Commission is also proposing to amend Rule
304(a)(2)(i)(A) to provide that a Covered ATS may not implement a
material change before the end of the 30 calendar day review period or
the length of any extended review period under proposed Rule
301(a)(2)(ii)(A).\453\ Today, an NMS Stock ATS may not implement a
material change until the expiration of the 30-calendar day Commission
review period. Likewise, as a result of the proposed change, in the
event of an extension of the Commission review period, the Covered ATS
would therefore not implement the material change until the review
period has expired. As discussed below, the Commission would
disseminate the material amendment following the expiration of the
review period or any extended review period.\454\
---------------------------------------------------------------------------
\453\ See proposed Rule 304(a)(2)(i)(A) (stating that a Covered
ATS shall amend a Form ATS-N at least 30 calendar days, or the
length of any extended review period pursuant to Rule
304(a)(2)(ii)(A), prior to the date of implementation of a material
change (other than a correcting amendment) to the operations of the
Covered ATS or to the activities of the broker-dealer operator or
its affiliates that are subject to disclosure on the Form ATS-N).
\454\ See infra note 463 and accompanying text.
---------------------------------------------------------------------------
The Commission is also re-proposing to apply current Rule 304(a)(3)
to require a Government Securities ATS to notice its cessation of
operations on a Form ATS-N at least 10 business days prior to the date
it will cease to operate as a Government Securities ATS.\455\ Filing
such a notice would cause the Form ATS-N to become ineffective on the
date designated by the Government Securities ATS. In addition, the
Commission is re-proposing to apply Rule 304(a)(4) to Government
Securities ATSs, which would allow the Commission to order to suspend
(for a period not exceeding twelve months),\456\ limit, or revoke a
Covered ATS's exemption pursuant to Rule 3a1-1(a)(2) if the Commission
finds, after notice and opportunity for hearing, that such action is
necessary or appropriate in the public interest.\457\ Rule
304(a)(4)(ii) would provide that if the exemption for a Government
Securities ATS is suspended or revoked pursuant to Rule 304(a)(4)(i),
the Government Securities ATS would be prohibited from operating
pursuant to the Rule 3a1-1(a)(2) exemption.\458\ If the exemption for a
Government Securities ATS is limited pursuant to Rule 304(a)(4)(i), the
Government Securities ATS shall be prohibited from operating in a
manner otherwise inconsistent with the terms and conditions of the
Commission order.
---------------------------------------------------------------------------
\455\ See Rule 304(a)(3).
\456\ The proposed limitation on the time frame for suspension
is consistent with Federal securities law provisions pursuant to
which the Commission may suspend the activities or registration of a
regulated entity. See, e.g., Exchange Act Section 15(b)(4) (15
U.S.C. 78o(b)(4)) and 15B(c)(2) (15 U.S.C. 78o-4(c)(2)). See NMS
Stock ATS Proposing Release, supra note 29, at 81031 n.322.
\457\ See proposed Rule 304(a)(4)(i).
\458\ See Rule 304(a)(4). In making a determination as to
whether suspension, limitation, or revocation of a Government
Securities ATS's exemption is necessary or appropriate in the public
interest, and is consistent with the protection of investors, the
Commission would, for example, take into account whether the entity
no longer meets the definition of Government Securities ATS under
Rule 300(l), does not comply with the conditions to the exemption
(in that it fails to comply with any part of Regulation ATS,
including Rule 304), or otherwise violates any provision of Federal
securities laws. For further discussion of such examples as applied
to NMS Stock ATSs, see NMS Stock ATS Proposing Release, supra note
29, at 81032.
---------------------------------------------------------------------------
In addition, Rule 304(a)(4) would provide that prior to issuing an
order suspending, limiting, or revoking a Government Securities ATS's
exemption pursuant to Rule 304(a)(4)(i), the Commission will provide
notice and opportunity for hearing to the Government Securities ATS,
and make the findings specified in Rule 304(a)(4)(i) described above,
that, in the Commission's opinion, the suspension, limitation, or
revocation is necessary or appropriate in the public interest and is
consistent with the protection of investors.\459\
---------------------------------------------------------------------------
\459\ Pursuant to the Commission's current information sharing
practices with the Department of the Treasury, the Commission
expects to provide the Department of the Treasury with prompt notice
in certain cases, such as when the Commission is declaring a Form
ATS-N ineffective under Rule 304(a)(1)(iii)(b), or suspending,
limiting, or revoking the exemption of a Government Securities ATS
under Rule 304(a)(4).
---------------------------------------------------------------------------
Request for Comment
61. Should Government Securities ATSs be required to file Form ATS-
N, as revised, instead of Form ATS? Should Government Securities ATSs
be required to file a form different from Form ATS-N?
62. As an alternative to requiring Government Securities ATSs to
file Form ATS-N, should Form ATS, or parts thereof, for Government
Securities ATSs be made available to the public? If made available to
the public, is current Form ATS sufficient to provide information to
the public about the operations of Government Securities ATSs?
63. Do commenters believe that broker-dealers operators of ATS that
trade only government securities or repos might choose to modify their
business models so that they would not be required to comply with
enhanced regulatory or operational transparency requirements for
Government Securities ATSs?
64. Should Government Securities ATSs be subject to Rule 304(a), in
whole or in part?
65. Should Rule 304(a) be amended to provide that an initial Form
ATS-N be made effective by Commission order or any other means instead
of upon publication by the Commission?
66. Should Rule 304(a) only apply to Government Securities ATSs
that trade a certain type of government security
[[Page 15537]]
(e.g., U.S. Treasury Securities, Agency Securities)? If so, to which
type of Government Securities ATS should Rule 304 apply (e.g.,
Government Securities ATSs that trade U.S. Treasury Securities or
Government Securities ATSs that trade Agency Securities)?
67. Should the Commission require a Currently Exempted Government
Securities ATS to file Form ATS-N and comply with the requirements of
Rule 304 to qualify for the exemption from the definition of exchange?
68. Would the proposal to require a Currently Exempted Government
Securities ATS or Covered Newly Designated ATS to file Form ATS-N by
the date 90 calendar days after the effective date of any final rule
provide the ATS sufficient time to transition to compliance with
Regulation ATS and the proposed requirements under Rule 304? If the
Commission were to provide more time for a Covered Newly Designated ATS
and/or Currently Exempted Government Securities ATS to file Form ATS-N,
should the Commission require the Covered Newly Designated ATS and/or
Currently Exempted Government Securities ATS to file an initial
operation report on Form ATS to provide notice of its operations to the
Commission before it is required to file a Form ATS-N? Would the
proposal to require a Current Government Securities ATS to file a Form
ATS-N by the date 90 calendar days after the effective date of any
final rule provide the ATS sufficient time to transition to compliance
with Rule 304?
69. Should the Commission be permitted to extend the initial Form
ATS-N review period if it finds that it is appropriate to extend such
review period?
70. Should a Legacy Government Securities ATS or Covered Newly
Designated ATS be allowed to continue operations during the
Commission's review of its initial Form ATS-N?
71. Should the Commission require amendments to Part III, Item 18
of Form ATS-N to be filed no later than the date that the information
on such item becomes inaccurate or incomplete? Or should the Commission
require amendments to Part III, Item 18, or any specific required
disclosure on such Item to be required in advance of implementation of
the change? And if so, how far in advance of implementation and why?
Alternatively, should the Commission allow Covered ATSs more or less
time to file a fee amendment?
72. Should the rule provide that the Commission may extend the Form
ATS-N amendment review period by an additional 30 calendar days if the
Commission finds that a longer period is appropriate? Should such
extended review period be longer or shorter? Should the Commission only
extend such review period under certain circumstances? If so, under
what circumstances should the Commission extend the review period for a
Form ATS-N amendment?
73. Are there any aspects of Rule 304(a)(2) relating to the filing
and review of amendments that should be modified specifically for Form
ATS-N amendments filed by Government Securities ATSs?
74. What changes or types of changes to a Covered ATS's operations
or the activities of the broker-dealer operator or its affiliates do
commenters believe are particularly likely to be material so as to
require a material amendment to Form ATS-N?
75. Should the Commission consider any other factors in determining
whether a Form ATS-N filed by a Government Securities ATS should become
effective or ineffective? If so, what are they and why?
76. Should the Commission adopt the current process for the
Commission to suspend, limit, or revoke an NMS Stock ATS's exemption
from the definition of ``exchange'' for Government Securities ATSs?
B. Public Disclosure of Form ATS-N for Government Securities ATSs and
Related Commission Orders
The Commission would make public certain Form ATS-N reports filed
by Government Securities ATSs pursuant to Rule 304(b).\460\ Commission
orders related to the effectiveness of revised Form ATS-N would also be
publicly posted on the Commission's website. The Commission would apply
to Government Securities ATSs the same rules regarding public
disclosure that are currently applicable to NMS Stock ATSs. Applying
existing Rule 304(b) to Government Securities ATSs would mandate
greater public disclosure of the operations of these ATSs through the
publication of Form ATS-N and related filings available on the
Commission's website. Accordingly, the Commission is proposing that
Form ATS-N filed by Government Securities ATSs would be subject to the
following:
---------------------------------------------------------------------------
\460\ See Rule 304(b)(1) (providing that every Form ATS-N filed
pursuant to Rule 304 shall constitute a ``report'' within the
meaning of Sections 11A, 17(a), 18(a), and 32(a) and any other
applicable provisions of the Exchange Act).
---------------------------------------------------------------------------
Every Form ATS-N filed pursuant to Rule 304 shall
constitute a ``report'' within the meaning of Sections 11A, 17(a),
18(a), and 32(a) and any other applicable provisions of the Exchange
Act.\461\
---------------------------------------------------------------------------
\461\ See Rule 304(b)(1).
---------------------------------------------------------------------------
The Commission will make public via posting on the
Commission's website, each: (1) Effective initial Form ATS-N, as
amended; (2) order of ineffective initial Form ATS-N; (3) Form ATS-N
amendment to an effective Form ATS-N; (4) order of ineffective Form
ATS-N amendment; (5) notice of cessation; and (6) order suspending,
limiting, or revoking the exemption for a Government Securities ATS
from the definition of an ``exchange'' pursuant to Exchange Act Rule
3a1-1(a)(2).\462\
---------------------------------------------------------------------------
\462\ See Rule 304(b)(2).
---------------------------------------------------------------------------
The Commission is proposing to make amendments to current Rule
304(b), which would apply to all Covered ATSs. As the Commission is
proposing to amend Rule 304(a)(2)(i)(A) to allow extensions of the
Commission review period, the Commission is proposing to amend Rule
304(b)(2)(iii) to state that material amendments would be made public
following the expiration of the review period ``or any extended review
period.'' \463\ As a result, the entire Form ATS-N amendment would not
be made public until the review period has expired, at which time the
ATS may implement the change described in the amendment. The Commission
is also proposing to amend Rule 304(b)(2)(iii)(B) to provide that fee
amendments would be made public by the Commission upon filing,
consistent with the treatment of updating, correcting, and contingent
amendments, all of which are intended to describe the ATS as it
currently operates.
---------------------------------------------------------------------------
\463\ See proposed Rule 304(b)(2)(iii).
---------------------------------------------------------------------------
The Commission received several comments on the 2020 Proposal
supporting public disclosure of Form ATS-G and amendments thereto.\464\
For example, one commenter stated that public disclosure could improve
investors' ability to select trading venues and as a result, lower
trading costs and increase execution quality.\465\ Another commenter,
however, stated that Government Securities ATSs should not be required
to make public commercially sensitive information on Form ATS-G, and
that similar investor protection benefits can be achieved without
negative impact by requiring a
[[Page 15538]]
Government Securities ATS to make such information available upon
request to subscribers, potential subscribers, and the Commission.\466\
The Commission believes that the vast majority of information
responsive to Form ATS-N would not be proprietary or commercially
sensitive for ATSs to disclose.\467\
---------------------------------------------------------------------------
\464\ See, e.g., SIFMA Letter at 3-4; BrokerTec Letter at 2;
AFREF Letter at 3; Bloomberg Letter at 7; Healthy Markets
Association Letter at 7; MFA Letter at 5 (stating that any
alternative that would limit disclosure requirements would be
detrimental to achieving the Commission's transparency goals and
that requiring different levels of disclosure among Government
Securities ATSs based on their trading volume could result in a
complex and confusing system of disclosure).
\465\ See FINRA Letter at 2.
\466\ See Tradeweb Letter at 11.
\467\ In the Commission staff's experience reviewing disclosures
on current Form ATS-N for NMS Stock ATSs and discussing ATS
operations and the requirements of the form with NMS Stock ATSs, the
Commission staff has observed that the information responsive to the
form is not proprietary or commercially sensitive. In the NMS Stock
ATS Adopting Release, the Commission stated that it designed Form
ATS-N to not seek disclosure of certain information that could be
proprietary or commercially sensitive. See NMS Stock ATS Adopting
Release, supra note 2, at 38812. In response to commenter concerns
regarding disclosure of proprietary or commercially sensitive
information, the Commission revised the wording of relevant requests
in originally proposed Form ATS-N to mitigate such concerns or
provided guidance regarding the scope of certain disclosure requests
and to require ``summary'' information. See id. at 38825. The
Commission stated that, in a vast majority of cases, the level of
detail required by Form ATS-N should not require the public
disclosure of commercially sensitive information. See id. at 38825.
See also, e.g., infra Section IV.D.4.d (describing that Form ATS-N
requires a ``summary'' narrative of products and services to avoid
disclosure of commercially sensitive information).
---------------------------------------------------------------------------
The Commission is re-proposing to make Form ATS-N publicly
available for all Government Securities ATSs, regardless of their
volume. The Commission believes that most market participants have
limited access to information to adequately assess ATSs that trade
government securities and understand how different ATSs operate. Today,
Government Securities ATSs that are currently subject to Regulation ATS
file a Form ATS that is deemed confidential when filed under Rule
301(b)(2)(vii) of Regulation ATS,\468\ and Currently Exempted
Government Securities ATSs are not subject to Regulation ATS and not
required to file a Form ATS. The only information the Commission
currently makes publicly available regarding Government Securities ATSs
that are currently subject to Regulation ATS is a monthly list of the
names and locations of ATSs with a Form ATS on file with the
Commission.\469\ In the case Government Securities ATSs make
information about their operations voluntarily available, such
information is limited, and the lack of uniformity or standardization
makes it difficult to compare disclosures across ATSs. Accordingly,
through Form ATS-N, the Commission is proposing disclosures that will
provide information that market participants can use to evaluate an ATS
as a potential trading venue. Requiring public disclosure, rather than
Government Securities ATSs responding to individual disclosure requests
from subscribers or potential subscribers, will help to ensure
uniformity and standardization of the information Government Securities
ATSs make available.
---------------------------------------------------------------------------
\468\ See 17 CFR 240.301(b)(2)(vii).
\469\ See Alternative Trading System List, https://www.sec.gov/foia/docs/atslist.htm.
---------------------------------------------------------------------------
As proposed, Government Securities ATSs would also be subject to
Rule 304(b)(3), which would require each Government Securities ATS that
has a website to post a direct URL hyperlink to the Commission's
website that contains the documents enumerated in Rule 304(b)(2), which
would include the Government Securities ATS's Form ATS-N filings.\470\
---------------------------------------------------------------------------
\470\ Unlike the 2020 Proposal, the Commission is not proposing
to amend Rule 304(b)(3) to require each Covered ATS to post on its
website the most recently disseminated Form ATS-N within one
business day after publication on the Commission's website.
---------------------------------------------------------------------------
Request for Comment
77. Should the requirements of Rule 304(b) apply to Form ATS-N
reports filed by Government Securities ATSs, in whole or in part?
Should the Commission modify Rule 304(b) in any way for all Covered
ATSs?
78. Should Rule 304(b) only apply to Government Securities ATSs
that trade a type of government securities (e.g., U.S. Treasury
Securities, Agency Securities)? If so, to which type of Government
Securities ATS should Rule 304 apply?
79. Are there any other requirements that should apply to making
public a Form ATS-N report filed by a Government Securities ATS? Please
support your arguments, and if so, please list and explain such
procedures in detail.
80. Should Rule 304(b) apply to Form ATS-N reports filed by a
Currently Exempted Government Securities ATS? If not, which aspects of
Rule 304(b) should not apply and why?
C. Form ATS-N Requirements
The Commission is not re-proposing the use of Form ATS-G for
Government Securities ATSs but is proposing that all Covered ATSs file
Form ATS-N as revised. The Commission believes that, instead of
proposing Form ATS-G for Government Securities ATSs, given the
significant overlap between proposed Form ATS-G and existing Form ATS-
N, it is appropriate to require all Covered ATSs to file Form ATS-N,
and thus limit the number of unique forms and simplify filing
requirements. Accordingly, the Commission is proposing to apply
existing Rule 304(c) to Government Securities ATSs, which would require
Government Securities ATSs to file a Form ATS-N, as revised, in
accordance with the form's instructions. The Commission is proposing to
revise the current Form ATS-N instructions by including references to
Government Securities ATSs or Covered ATSs, as applicable, replacing
references to order display and fair access amendments with references
to contingent amendments, revising the relevant compliance dates,
adding instructions related to fee amendments, and revising the
instructions regarding describing the applicability of amendments. The
instructions require, among other things, that a Covered ATS provide
all the information required by Form ATS-N, including responses to each
Item, as applicable, and the Exhibits, and disclose information that is
accurate, current, and complete.\471\ Given that the Commission expects
market participants to use Form ATS-N to decide which trading venue is
best for them, it is important that Form ATS-N filings comply with the
instructions and that the information provided on Form ATS-N is
accurate, current, and complete. As it is today, Form ATS-N \472\ would
be required to be filed electronically through EDGAR.
---------------------------------------------------------------------------
\471\ See Item A.3 of the Instructions to Form ATS-N (as
revised).
\472\ See NMS Stock ATS Adopting Release, supra note 2, Section
VII.
---------------------------------------------------------------------------
The Commission is proposing to apply Rule 304(c)(2) to Government
Securities ATSs, which provides that any report required under Rule 304
shall be filed on a Form ATS-N, and include all information as
prescribed in the Form ATS-N and the instructions to Form ATS-N. Rule
304(c)(2) would provide that a Form ATS-N be executed at, or prior to,
the time the Form ATS-N is filed and shall be retained by the
Government Securities ATS in accordance with Rules 302 and 303, and the
instructions in Form ATS-N. In the Regulation ATS Adopting Release, the
Commission stated that the requirements to make and preserve records
set forth in Regulation ATS are necessary to make and keep certain
records for an audit trail of trading activity and permit surveillance
and examination to help ensure fair and orderly markets.\473\ Expanding
Rule 304(c) to encompass Government Securities ATSs would further these
goals.
---------------------------------------------------------------------------
\473\ See Regulation ATS Adopting Release, supra note 31, at
70877-78.
---------------------------------------------------------------------------
[[Page 15539]]
Request for Comment
81. Should Rule 304(c) be applied, in whole or in part, to
Government Securities ATSs?
82. Should Rule 304(c) only apply to Government Securities ATSs
that trade a certain type of government security (e.g., U.S. Treasury
Securities, Agency Securities)? If so, to which type of Government
Securities ATS should it apply and why?
D. Form ATS-N Disclosures
Form ATS-N is a public report that provides detailed information
about the ATS-related activities of the broker-dealer operator and its
affiliates and the manner of operations of the ATS. Because the
Commission is proposing to require Government Securities ATSs to file a
Form ATS-N instead of previously proposed Form ATS-G,\474\ the
Commission is proposing amendments to Form ATS-N to solicit disclosures
that may be most relevant to market participants that trade government
securities on these markets. In addition, because the Commission is
amending Exchange Act Rule 3b-16 to include Communication Protocol
Systems, the Commission is proposing to amend Form ATS-N to solicit
disclosures about unique operational aspects to those systems. The
Commission believes that it is important to revise Form ATS-N to
provide investors with important information about the operations of
all ATSs that trade NMS stocks and, as proposed, government securities.
---------------------------------------------------------------------------
\474\ See 2020 Proposal, supra note 4.
---------------------------------------------------------------------------
The Commission is proposing that the amendments to Form ATS-N be
applicable to both NMS Stock ATSs and Government Securities ATSs, and
any differences between how the form requirements would apply to these
ATSs are noted below. Given the similar level of complexity/
sophistication between NMS Stock ATSs and Government Securities ATSs,
the Commission believes that requiring both types of ATSs to file Form
ATS-N is appropriate; however, as described below, certain requests
have been tailored for the differences between NMS Stock ATSs and
Government Securities ATSs. The Commission is proposing to revise Form
ATS-N to include information it previously proposed on Form ATS-G,
including a question requiring information about interaction with
related markets.\475\ The Commission is also proposing to reorganize
certain questions on Form ATS-N and to require disclosure about any
surveillance and monitoring that is conducted with respect to the
ATS.\476\ In response to the 2020 Proposal, one commenter stated that
the proposed Form ATS-G disclosures were similar to those on Form ATS-
N, in that they would be categorized in a more standardized manner than
Form ATS, which would allow for better comparisons between ATSs, and
enhance the Commission's and SRO's regulatory oversight of Government
Securities ATSs.\477\ The proposed revisions to Form ATS-N would
continue to allow such comparisons, and applying Form ATS-N to
Government Securities ATSs would better help enable market participants
to compare Government Securities ATSs.
---------------------------------------------------------------------------
\475\ See infra Section IV.D.5.k.
\476\ See infra Section IV.D.5.i.
\477\ See FINRA Letter at 4.
---------------------------------------------------------------------------
The Commission is proposing certain amendments to Form ATS-N that
would apply globally to Form ATS-N unless otherwise noted below. First,
as Form ATS-N would be applicable to both Government Securities ATSs
and NMS Stock ATSs, the Commission is proposing to replace references
to ``NMS Stock ATSs'' throughout the form to ``Covered ATSs'' or
``ATSs.'' \478\ Second, the Commission is proposing to replace
references to ``orders'' throughout Form ATS-N to reference ``trading
interest,'' which would encompass non-firm trading interest.\479\
Third, Form ATS-N would include an instruction at the beginning of Part
III to require that the Covered ATS identify and explain any
differences among and between subscribers, persons whose trading
interest is entered into the ATS by a subscriber or the broker-dealer
operator, the broker-dealer operator, and any affiliates of the broker-
dealer.\480\ Because this disclosure would be integrated in each Item,
the Commission is proposing to delete the separate sub-questions in
Part III that ask about whether services and functionalities and
conditions or requirements related to such services and functionalities
are the same for all subscribers and the broker-dealer operator.\481\
Fourth, the Commission is proposing to change references to ``Trading
Centers'' to ``trading venues,'' which would include trading centers,
but also include venues relevant to the trading of government
securities and repos and Communication Protocol Systems.\482\ The term
``trading venue'' encompasses a broader group of entities that could,
for example, result in an execution or affect the handling of a
subscriber's trading interest. The Commission explains below each
requirement of Form ATS-N and why the Commission is proposing to apply
that requirement to Government Securities ATSs. To the extent that the
Commission is proposing a change to the requirement of Form ATS-N that
would affect the reporting obligation of an NMS Stock ATS, the
Commission identifies that change and the information the NMS Stock ATS
would be required to disclose. In addition, to use consistent
terminology throughout Form ATS-N, the Commission is proposing to
change certain references to activity ``in'' the ATS to activity ``on''
the ATS.\483\
---------------------------------------------------------------------------
\478\ The Form ATS-N Cover Page (Type of Covered ATS), Part I,
Item 8.a, and Part III, Items 23, 24(a), and 24(d)(i) will refer to
``NMS Stock ATSs'' because such requests are applicable only to NMS
Stock ATSs.
\479\ See infra note 496 and accompanying text. See proposed
revisions to Form ATS-N, Part II, Items 1(a), 1(c), 2(a), 2(c),
3(a), 3(b), 4(a), 5(a), and 5(c); Part III, Items 4, 5(a), 5(b),
10(a), 12, 13(a), 13(c), 13(d), 14(a), 15, 16(a), 16(b), 17, and 22.
\480\ See supra notes 563-564 and accompanying text.
\481\ See infra note 565.
\482\ See infra note 497 and accompanying text. See proposed
revisions to Form ATS-N Part II, Item 4 and Part III, Item 7.
\483\ See proposed changes to Part II, Items 1 and 2 and Part
III, Items 4(a), Item 22(a), Item 24(d)(ii).
---------------------------------------------------------------------------
The Commission believes that Form ATS-N's public disclosures would
provide important information to market participants that would help
them better understand these operational facets of Covered ATSs and
select the best trading venue based on their needs. The Commission
believes that the vast majority of responsive information in Form ATS-
N, as proposed to be revised, would not be proprietary or commercially
sensitive.\484\
---------------------------------------------------------------------------
\484\ See infra Section IV. See also supra note 467.
---------------------------------------------------------------------------
1. Amendments to Form ATS-N for NMS Stock ATSs
If the revisions to Form ATS-N were adopted and become effective,
an NMS Stock ATS with an effective Form ATS-N or a Form ATS-N that is
under Commission review would be required to file an amendment to its
Form ATS-N so that its disclosures, as amended, meet all the
requirements of Form ATS-N, as revised. If the proposed revisions to
Form ATS-N become effective, a NMS Stock ATS would be required, in
accordance with the instructions of the form, to amend its Form ATS-N
so that it is complete.\485\ An NMS Stock ATS is required, pursuant to
Rule 304(a)(2)(B), to file an updating amendment no later than 30 days
after the end of each calendar quarter to correct information that has
become inaccurate or incomplete for any reason. Specifically,
[[Page 15540]]
an NMS Stock ATS with an effective Form ATS-N, or an NMS Stock ATS
whose Form ATS-N is under Commission review, would be required to,
among other things, amend its Form ATS-N to disclose new identifying
information and types of securities traded required by Part I, and to
provide information responsive to new requests regarding new categories
of types of subscribers (Part III, Item 1), monitoring and surveillance
(proposed Part III, Item 9), interaction with related markets (proposed
Part III, Item 11), the identity of liquidity providers (Part III, Item
12), and post-trade processing (proposed Part III, Item 21).
---------------------------------------------------------------------------
\485\ See Instruction A.3 of Form ATS-N (requiring that a Form
ATS-N filing is accurate, current, and complete).
---------------------------------------------------------------------------
In addition, the NMS Stock ATS would be required to amend its Form
ATS-N to reorganize responses, including, among others, to move
disclosures related to the activities of employees of the broker-dealer
operator or its affiliates that service the operations of the ATS and
another business unit of the broker-dealer operator or affiliate to
proposed Part II, Item 7(a), and move discussion of after-hours use of
orders from current Part III, Item 18 to proposed Part III, Item 4(b)-
(c). In addition, the NMS Stock ATS would be required to separately
discuss information relevant to trading facilities or rules for
bringing together orders of buyers and sellers in proposed Part III,
Item 7 and information related to use of non-firm trading interest in
proposed Part III, Item 8. The NMS Stock ATS would also be required to
amend its responses to disclose any differences in treatment among
subscribers, persons whose trading interest is entered into the ATS by
a subscriber or the broker-dealer operator, the broker-dealer operator,
and any affiliates of the broker-dealer operator as relevant throughout
the responses to Part III rather than disclosing differences in
treatment between any subscribers and the broker-dealer in specific
sub-parts of Part III, as required by current Form ATS-N.
2. Definitions
The Commission is proposing to amend certain definitions in the
instructions to Form ATS-N. The Commission is re-proposing to replace
the current definition of ``person'' in Form ATS-N, which is provided
by the Investment Advisers Act of 1940 (``Advisers Act'') \486\ with
the different definition of ``person'' as defined under the Exchange
Act.\487\ Because Regulation ATS is a Commission regulation under the
Exchange Act, the Commission believes that it is more appropriate to
apply the definition of ``person'' under the Exchange Act than the
Advisers Act, which is not applicable to ATSs. Although the definitions
are not identical, the Commission believes the differences between the
definitions are unlikely to result in differences to the disclosures
required by Form ATS-N.\488\ To the extent ATSs might have found
ambiguous the Commission's use of the Advisers Act definition in the
context of an Exchange Act rule, the Commission believes that this
proposed change will mitigate any such concerns.
---------------------------------------------------------------------------
\486\ 15 U.S.C. 80a-2(a)(28) (defining ``person'' as ``a natural
person or a company'').
\487\ 15 U.S.C. 78c(a)(9) (defining the term ``person'' as a
natural person, company, government, or political subdivision,
agency, or instrumentality of a government).
\488\ The Exchange Act's inclusion of a ``government, or
political subdivision, agency or instrumentality of a government''
under the definition of ``person'' is unlikely to result in any
changes to the disclosures required by the items in Form ATS-N that
use the word ``Person'' as, in the Commission's experience, these
entities are generally not involved in the operations of ATSs as
subscribers or otherwise.
---------------------------------------------------------------------------
The Commission is also proposing to change the definition of ``NMS
Stock ATS'' in the instructions to the form to conform to the proposed
changes to the definition in Rule 300 and state that NMS Stock ATSs
shall not trade securities other than NMS stocks.\489\ The Commission
is also proposing to add definitions of ``Agency Security,'' \490\
``Government Security,'' \491\ ``Government Securities ATS,'' \492\
``Legacy Government Securities ATS,'' \493\ and ``Trading Interest''
\494\ and conform the definition of ``Broker-Dealer Operator'' to the
proposed revisions in Rule 301(b)(1).\495\ As proposed, the term
``Trading Interest'' would be the same definition provided in proposed
Rule 300(q) and Rule 3b-16(e), which would include both orders as
defined under Rule 3b-16(c) and non-firm trading interest.\496\ In
addition, the Commission is proposing to replace the term ``Trading
Center'' with ``trading venue.'' A ``trading venue'' would mean a
national securities exchange or national securities association that
operates an SRO trading facility, an ATS, an exchange market maker, an
OTC market maker, a futures or options market, or any other broker- or
dealer-operated platform for executing trading interest internally by
trading as principal or crossing orders as agent.\497\ The proposed
definition of ``trading venue'' would encompass ``trading centers'' as
defined under 17 CFR 242.600(b)(78) (Rule 600(b)(78) of Regulation
NMS), futures and options markets, which the Commission believes may be
relevant to the trading of government securities and repos, and also
would encompass broker- or dealer-operated platforms for executing
trading interest by trading as a principal or crossing orders as an
agent.\498\
---------------------------------------------------------------------------
\489\ See supra note 254 and accompanying text.
\490\ See supra note 242 and accompanying text.
\491\ See supra note 259 and accompanying text.
\492\ See id.
\493\ See supra note 256 and accompanying text.
\494\ See supra Section II.C.1.
\495\ See supra note 273 and accompanying text.
\496\ See proposed Rule 3b-16(e) and Rule 300(q).
\497\ See revised Form ATS-N, Explanation of Terms.
\498\ This is broader than the definition of ``trading center''
under Rule 600(b)(78), which includes ``any other broker or dealer
than executes orders internally by trading as principal orders as
agent.''
---------------------------------------------------------------------------
3. Cover Page and Part I; Information About the Broker-Dealer Operator
To make clear that the Commission would not be conducting a merit-
based review of Form ATS-N disclosures filed with the Commission, the
Form ATS-N cover page states that the Commission has not passed upon
the merits or accuracy of the disclosures in the filing. On the cover
page of Form ATS-N, the Covered ATS would be required to identify
whether it is an NMS Stock ATS or a Government Securities ATS. To
indicate whether the ATS is subject to the transitional rules for
Legacy Government Securities ATSs and Newly Designated ATSs,\499\ the
ATS would be required to disclose whether it is a Legacy Government
Securities ATS or Newly Designated ATS.\500\ In addition, the Covered
ATS would indicate the type of filing by marking the appropriate
checkbox.\501\
---------------------------------------------------------------------------
\499\ See Rule 304(a)(1)(iv), as proposed to be revised.
\500\ The Commission is proposing to delete the checkbox on the
cover page of Form ATS-N that requires an NMS Stock ATS to select
whether the NMS Stock ATS currently operates pursuant to a Form ATS.
Rules 304 and 301(b)(2)(viii) required an NMS Stock ATS to file a
Form ATS-N no later than January 7, 2019. After January 7, 2019,
this checkbox became obsolete.
\501\ The proposed cover page for Form ATS-N would provide that
a filing may be an initial Form ATS-N, or a Form ATS-N material
amendment, updating amendment, correcting amendment, contingent
amendment, or fee amendment. The Commission is proposing to rename
``order display and fair access amendments'' to ``contingent
amendments'' throughout the form. In addition, the Commission is
proposing a new fee amendment type. See supra Section IV.A.
---------------------------------------------------------------------------
If the Covered ATS is filing an amendment, the ATS would be
required to indicate the Part and Item number of the Form ATS-N that is
the subject of the change(s), provide a brief summary of the substance
of the change(s), and state whether or not the change(s) applies to (1)
all subscribers and the
[[Page 15541]]
broker-dealer operator; (2) only the broker-dealer operator; (3) only
subscribers; (4) only certain subscribers, subsets of subscribers, or
customers of subscribers and the broker-dealer operator; or (5) only
certain subscribers, subsets of subscribers, or customers of
subscribers.\502\ In addition, the Covered ATS would be required to
provide the EDGAR accession number for the Form ATS-N filing to be
amended so that market participants can identify the filing that is
being amended. Pursuant to Rule 304(b)(2)(iii), the Commission would
make public the cover page of a filed Form ATS-N material amendment
upon filing and then make public the entirety of the material amendment
following the expiration of the review period pursuant to Rule
304(a)(2)(ii). For updating, correcting, contingent, and fee
amendments, which would be made public upon filing, the Commission
believes that the information in the narrative could assist market
participants in understanding the general nature of the change that the
Covered ATS is implementing.
---------------------------------------------------------------------------
\502\ See Instruction A.7.h of Form ATS-N. If a change subject
to the amendment would equally apply to all subscribers and the
broker-dealer operator, the Covered ATS would indicate that the
change applies to all subscribers and the broker-dealer operator
equally. If a change would apply differently among subscribers or
types of subscribers, between subscribers and the broker-dealer
operator, or between the broker-dealer operator and its affiliates
(which may be subscribers to the ATS), the Covered ATS would state
so and describe the differences in treatment. This is the same as
how NMS Stock ATSs currently describe in Form ATS-N and would be
required to describe in Form ATS-N whether or not a change applies
to all subscribers and the broker-dealer operator in amendments on
Form ATS-N. As required by the instruction, a filer must provide a
brief summary of all changes to the form. Such summary should enable
market participants to understand the nature of the changes being
made. For example, if the ATS is adding a new order type, the ATS
should state that it is adding a new order type and provide a brief
description of unique aspects of the order type. The Commission is
proposing to clarify in Instruction A.7.h that changes made in Part
IV of Form ATS-N should not be described, as Part IV is non-public.
See infra Section IV.D.6.
---------------------------------------------------------------------------
If the filing is a cessation of operations, the cover page of Form
ATS-N would require the Covered ATS to provide the date that the ATS
will cease to operate. The cover page includes a checkbox where the ATS
could indicate whether it wishes to withdraw a previously-filed Form
ATS-N filing and provide the EDGAR accession number for the filing to
be withdrawn. The instructions to Form ATS-N state that an ATS may
withdraw an initial Form ATS-N or an amendment before the end of the
applicable Commission review period. In addition, a Covered ATS could
withdraw a notice of cessation of operations at any time before the
date that the ATS indicated it intended to cease operating.\503\
---------------------------------------------------------------------------
\503\ See Instruction A.9 of Form ATS-N.
---------------------------------------------------------------------------
Part I of revised Form ATS-N would be substantively the same as
that for current Form ATS-N with certain exceptions, as described
below. Form ATS-N would require a Covered ATS to identify the
registered broker-dealer that operates the ATS and state whether the
filer is a broker-dealer registered with the Commission. The Commission
is proposing new Part I, Item 1(b) of Form ATS-N to require the Covered
ATS to indicate whether the registered broker-dealer is authorized by a
national securities association to operate an ATS under the rules of
the national securities association. Proposed Part I, Item 1(b) would
facilitate compliance with and Commission oversight of the requirement
that an ATS must register as a broker-dealer and become a member of an
SRO.\504\ The Commission is also proposing that the Covered ATS provide
the name of the registered broker-dealer or government securities
broker or government securities dealer for the ATS (i.e., the broker-
dealer operator), as it is stated on Form BD, in Part I, Item 2 of Form
ATS-N.\505\
---------------------------------------------------------------------------
\504\ See 15 U.S.C. 78o(b)(8). See also NMS Stock ATS Adopting
Release, supra note 2, at 38773.
\505\ As discussed above, Rule 301(b)(1) currently requires that
the ATS register as a broker-dealer under Section 15 of the Exchange
Act. As proposed, Rule 301(b)(1) would require an ATS to register as
a broker-dealer under Exchange Act Section 15 or a government
securities broker or government securities dealer under Exchange Act
Section 15C(a)(1)(A). See supra note 273 and accompanying text.
---------------------------------------------------------------------------
To the extent that a commercial or ``DBA'' (doing business as) name
or names are used to identify the Covered ATS to the public, the
Commission, or its SRO, or if a registered broker-dealer operates
multiple Covered ATSs, Form ATS-N would require the full name(s) of the
Covered ATS under which business is conducted, if different, in Part I,
Item 3 of Form ATS-N. Part I, Item 4 of Form ATS-N would require the
Covered ATS to provide the broker-dealer operator's SEC File Number and
Central Registration Depository (``CRD'') Number.
In addition, the Commission is proposing to require Covered ATSs to
provide the broker-dealer operator's Legal Entity Identifier (``LEI'')
in Part I, Item 4, if the broker-dealer operator has an LEI.\506\ If a
broker-dealer operator of the ATS has an LEI, the information may be
useful to market participants as a globally standardized identifier.
The Commission, however, is not proposing to require broker-dealer
operators that do not have an LEI to obtain such an identifier. In
addition, the Commission is proposing to add a question to Part I, Item
4(d) that would require the ATS to provide the MPID of its broker-
dealer operator. Although Part I, Item 5(c) of Form ATS-N requires the
ATS to disclose the MPID of the ATS, the Commission is also requiring
the ATS to provide the MPID of the broker-dealer operator because a
broker-dealer operator may have a unique MPID. Because the broker-
dealer operator could potentially use such a unique MPID to conduct
trading and routing activity that affects the ATS, it would be useful
to market participants and regulators to require the ATS to state the
broker-dealer operator's MPID as it will help them identify the broker-
dealer operator and better understand the scope of activities of the
broker-dealer operator.\507\
---------------------------------------------------------------------------
\506\ Current Form ATS-N does not include this Item, and as
proposed, NMS Stock ATSs would also be subject to this proposed
requirement. An LEI is a 20-character reference code that uniquely
identifies legally distinct entities that engage in financial
transactions and is used by numerous domestic and international
regulatory regimes. See Securities Act Release No. 10425, 82 FR
50988, 51005 (November 2, 2017) (stating that LEIs are intended to
improve market transparency by providing clear identification of
participants). Although several existing ATS broker-dealer operators
currently have an LEI, not all broker-dealer operators have an LEI.
In the 2020 Proposal, the Commission asked commenters whether they
believe a Government Securities ATS should be required to disclose
the broker-dealer operator's LEI. One commenter supported requiring
disclosure of the LEI on Form ATS, Form ATS-R, Form ATS-N, and
previously proposed Form ATS-G, stating, among other things, that it
is a global standard for legal entity identification and that it
enables publicly accessible information about an entity's ownership
structure. This commenter stated that LEI should not replace the
CRD, which serves a purpose in identifying broker-dealers and their
affiliates, but should serve as a complimentary identifier. See
letter from Stephan Wolf, CEO, Global Legal Entity Identifier
Foundation, dated March 1, 2021 (``GLEIF Letter''). Another
commenter stated that the utility of asking brokers to obtain
another identification number is unclear if the LEI does not replace
FINRA assigned identification numbers. See Bloomberg Letter at 7.
\507\ The Commission understands that, in certain instances, a
broker-dealer operator for an ATS may use the ATS MPID in connection
with its routing activities when the routing functionality is within
the ATS. See FINRA Trade Reporting Guidance, Example 7, available at
https://www.finra.org/sites/default/files/ATS%20OATS%20and%20Trade%20Reporting%20Guidance%209-2-14_0_0_0_0.pdf. To the extent that the
broker-dealer uses the ATS MPID in connection with its routing
activities, or its routing functionality is inside the ATS, such
activities and functionality would be subject to Regulation ATS,
including the disclosure requirements of Form ATS-N.
---------------------------------------------------------------------------
Part I, Item 5 of Form ATS-N would require the Covered ATS to
provide the full name of the national securities association of which
the broker-dealer operator is a member, the effective date of the
broker-dealer operator's membership with the national securities
[[Page 15542]]
association, and the MPID of the ATS. Pursuant to FINRA rules, each ATS
is required to use a unique MPID in its reporting to FINRA, such that
its volume reporting is distinguishable from other transaction volume
reported by the broker-dealer operator of the ATS, including volume
reported for other ATSs or trading desks operated by the broker-dealer
operator.\508\ The broker-dealer operator would provide the unique MPID
for the Covered ATS and assess the functionalities related to trading
under that MPID and describe them, as applicable, in response to the
information requests on Form ATS-N. Providing the name of the Covered
ATS or DBAs and its MPID would identify the ATS to the public and the
Commission. The name, identity of the broker-dealer operator, any
``DBA'' name, and the ATS's MPID are basic information critical to
market participants for identifying the ATS and should be disclosed.
---------------------------------------------------------------------------
\508\ See FINRA Rules 6160, 6170, 6480, and 6720.
---------------------------------------------------------------------------
Proposed Part I, Item 6 of Form ATS-N would require the Covered ATS
to provide a URL address for the website of the ATS. Proposed Part I,
Item 7 of Form ATS-N would require the ATS to provide the primary
physical street address of the ATS matching system and indicate whether
the ATS has a secondary matching system that may be used in the event
that the primary matching system is not available. If yes, the ATS
would be required to provide the secondary address of the matching
system.
To inform market participants about the types of securities that a
Covered ATS makes available for trading, the Commission is proposing to
require a Covered ATS to disclose in Part I, Item 8 of Form ATS-N the
types of securities it trades. Part I, Item 8(a) would require an NMS
Stock ATS, but not a Government Securities ATS, to indicate whether the
ATS makes available for trading all NMS stocks.\509\ If not, the ATS
would identify the securities or types of securities that it does not
make available for trading.\510\ Part I, Item 8(b) would require a
Government Securities ATS, but not an NMS Stock ATS, to select the
categorical types of government securities the ATS trades (i.e., U.S.
Treasury Securities, Agency Securities, repos, or other).\511\ If the
Government Securities ATS trades U.S. Treasury Securities, it would be
required to select whether it trades bills,\512\ notes,\513\
bonds,\514\ TIPS,\515\ STRIPS,\516\ and/or floating rate notes \517\
and indicate whether each type of security traded is on-the-run, off-
the-run, and/or when-issued.\518\ If the Government Securities ATS
trades Agency Securities, it would be required to indicate whether it
trades Agency Mortgage-Backed Securities \519\ and/or Federal Agency
Securities.\520\ In addition, if the Government Securities ATS trades
repos, the ATS would indicate whether it trades triparty \521\ and/or
bilateral repos,\522\ and whether such securities are repurchase
agreements or reverse repurchase agreements and are centrally cleared
\523\ or non-centrally cleared.\524\ If the Government Securities ATS
trades any other government securities, it would be required to mark
``other'' via checkbox and identify the types of government securities
that the ATS makes available for trading. Requiring a Covered ATS to
publicly disclose the types of securities that it trades would identify
to potential subscribers and regulators the securities that the ATS
offers for trading and help potential subscribers decide whether they
would want to engage the ATS.
---------------------------------------------------------------------------
\509\ If the NMS Stock ATS suspends trading in securities under
certain circumstances, the ATS should indicate so under Part III,
Item 19. See infra Section IV.D.5.r.
\510\ The Commission notes that most, if not all, NMS Stock ATSs
currently disclose whether they trade all NMS stocks in Part III,
Item 11(a) of Form ATS-N.
\511\ The types of securities traded would be limited to
government securities (15 U.S.C. 78c(a)(42)) and repos. See proposed
Rule 300(l).
\512\ Treasury bills are short-term securities that mature in
one year or less from their issue date. Bills are purchased for a
price less than or equal to their par (face) value, and when they
mature, Treasury Department pays their par value. See
TreasuryDirect, The Basics of Treasury Securities, available at
https://www.treasurydirect.gov/instit/research/faqs/faqs_basics.htm#tbills (last visited September 15, 2021).
\513\ Treasury notes are securities that pay a fixed rate of
interest every six months until the security matures, which is when
Treasury Department pays the par value. Treasury notes mature in
more than a year, but not more than 10 years from their issue date.
See id.
\514\ Treasury bonds are securities that pay a fixed rate of
interest every six months until the security matures, which is when
Treasury Department pays the par value. Bonds mature in more than 10
years from their issue date. See id.
\515\ Treasury Inflation-Protected Securities (``TIPS'') pay
interest every six months and the principal value of TIPS is
adjusted to reflect inflation or deflation as measured by the
Consumer Price Index. The semi-annual interest payments and maturity
payment are calculated based on the inflation-adjusted principal
value of the security. See id.
\516\ See supra 191.
\517\ A floating rate note security that has an interest payment
that can change over time. As interest rates rise, the security's
interest payments will increase. Similarly, as interest rates fall,
the security's interest payments will decrease. This security makes
use of an index (or reference) rate (in this case, tied to the most
recent 13-week bill rate, prior to the lockout period) and spread
(determined at auction) to calculate an interest rate. The index
rate changes periodically, in this instance every week, causing the
interest rate to change or ``float.'' The notes may be of varying
original maturities. See TreasuryDirect, Frequently Asked Questions,
available at https://www.treasurydirect.gov/indiv/help/TDHelp/faq.htm.
\518\ A ``when-issued'' transaction is a transaction in a U.S.
Treasury Security that is executed before the issuance of the
security.
\519\ Agency Mortgage-Backed Securities include (i) a type of
securitized product issued in conformity with a program of a U.S.
executive agency, as defined in 5 U.S.C. 105 or a government-
sponsored enterprise, as defined in 2 U.S.C. 622(8), for which the
timely payment of principal and interest is guaranteed by the
executive agency or GSE, representing ownership interest in a pool
(or pools) of mortgage loans structured to ``pass through'' the
principal and interest payments to the holders of the security on a
pro rata basis; and (ii) a type of securitized product backed by a
securitized product described in (i). See also FINRA Rules 6710(m),
6710(v), 6710(dd).
\520\ Federal Agency Securities include all Agency Securities
except Agency Mortgage-Backed Securities. See supra note 519.
\521\ A triparty repo involves a third party, which is a
clearing bank that provides support to both parties in the trade by
settling the repo on its books and ensuring that the details of the
repo agreement are met. See Viktoria Baklanova, Adam Copeland &
Rebecca McCaughrin, Federal Reserve Bank of New York Staff Reports,
Reference Guide to U.S. Repo and Securities Lending Markets
(September 2015) at 5-6, 8-10, available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr740.pdf (``New York Fed Staff Report'').
\522\ A bilateral repo involves two parties agreeing on the
terms of trade, including the principal amount of the repo, the
interest rate paid by the collateral provider, the type of
securities delivered, the haircut to be applied for the collateral
pledged, and the maturity of the repo, and each counterparty's
custodian bank clears and settles the trade. See New York Fed Staff
Report, supra note 521, at 5-7.
\523\ Centrally cleared would mean any transaction that uses a
central counterparty, as defined in 17 CFR 240.17Ad-22(a)(2) (Rule
17Ad-22(a)(2) under the Exchange Act).
\524\ Non-centrally cleared would mean any transaction that does
not use a central counterparty, as defined in Rule 17Ad-22(a)(2)
under the Exchange Act. See id.
---------------------------------------------------------------------------
Proposed Part I, Items 9 and 10 \525\ would require a Covered ATS
to attach the most recently filed or amended Schedule A of the broker-
dealer operator's Form BD disclosing information related to direct
owners and executive officers, and the most recently filed or amended
Schedule B of the broker-dealer operator's Form BD disclosing
information related to indirect owners as Exhibits 1 and 2,
respectively. In lieu of attaching those schedules, the Covered ATS can
indicate, via a checkbox, that the information under those schedules is
available on its website and is accurate as of the date of the filing
of the Form
[[Page 15543]]
ATS-N.\526\ The Commission is proposing to include in Part I, Items 9
and 10 that, if the ATS selects to make the information available on
its website in lieu of attaching it to its filing, the ATS will
maintain its website in accordance with the rules for amending Form
ATS-N pursuant to Rule 304(a)(2)(i) to reflect any changes to Schedule
A or Schedule B, as applicable, to the Form BD of the broker-dealer
operator. This would require an ATS checking the box to update its
website as if it were Form ATS-N, and therefore, to update the
information no later than 30 calendar days after the end of any
calendar quarter in which its broker-dealer operator's Schedule A or
Schedule B of Form BD becomes inaccurate or incomplete.
---------------------------------------------------------------------------
\525\ These items are numbered as Part I, Items 8 and 9 in
current Form ATS-N, but would be renumbered as Items 9 and 10.
\526\ Part I, Items 9 and 10 and Part III, Item 25 (see infra
Section IV.D.5.y) are the only requests for information that would
allow a Covered ATS to cross-reference to information on the ATS's
website instead of providing it in the form disclosures. Form ATS-N
disclosures would be the vehicle for disseminating to the public
information about the operations of the ATS and the ATS-related
activities of the broker-dealer operator and its affiliates under
Rule 304, which are required to be kept current, accurate, and
complete by the ATS. Accordingly, ATSs would be required to provide
information required by the form in the Form ATS-N disclosures and
not cross-reference to other sources.
---------------------------------------------------------------------------
When an ATS is purchased by another entity and operated by a
broker-dealer that is not the ATS's current broker-dealer operator, the
new broker-dealer typically commences operating the ATS using its
personnel, processes, and procedures. To avoid disruptions to
operations of the ATS or its subscribers, the existing Covered ATS
would file a Notice of Cessation at least 10 business days prior to the
official change of broker-dealer operator (e.g., the date of closing
for an acquisition) pursuant to Rule 304(a)(3) \527\ and the new
broker-dealer operator would file an initial Form ATS-N in advance of
the Notice of Cessation, which must become effective before it may
operate the Covered ATS pursuant to Rule 304(a)(1)(i).\528\
---------------------------------------------------------------------------
\527\ See supra note 455 and accompanying text.
\528\ See supra Section IV.A. To facilitate the review of the
initial Form ATS-N for the new Covered ATS, the broker-dealer
operator for the new ATS may provide a draft initial Form ATS-N to
the staff for consideration.
---------------------------------------------------------------------------
In addition, Part I, Item 11 of Form ATS-N would require the
Covered ATS, for filings made pursuant to Rule 304(a)(2)(i) (i.e., Form
ATS-N amendments), to attach as Exhibit 3 a marked document to indicate
changes to ``yes'' or ``no'' answers and additions or deletions from
any Item in Part I, Part II, and Part III, as applicable.\529\ The
Commission is proposing to revise Part I, Item 11 to state that the ATS
must include in such marked document any changes to Exhibits 1, 2, and
5. The requirement for the ATS to provide a marked document or
``redline'' showing changes helps market participants and regulators
easily review changes the ATS is making in an amendment. The Commission
is not proposing Form ATS-N to require a marked document showing
changes to Exhibit 4, which includes aggregate platform-wide order flow
and execution statistics of the ATS, because such statistics may
frequently change, and showing such changes could be burdensome for
ATSs and would not be particularly useful for market participants or
regulators. However, the ATS should be required to provide a marked
document to show changes to the list and explanation of categories or
metrics for such aggregate platform-wide order flow and execution
statistics on Exhibit 5, as highlighting such changes would be useful
for market participants in understanding any aggregate platform-wide
order flow and execution statistics the ATS provides. In addition, to
ensure the changes in the marked document are clear and readily
identifiable, the Commission is proposing to clarify that the ATS must
indicate the Part and Item number for all Items that are changing.
---------------------------------------------------------------------------
\529\ This Item is currently numbered as Part I, Item 10, but
would be renumbered as Item 11. The Commission proposes to make a
minor change to this Item to clarify that ``II'' refers to Part II.
---------------------------------------------------------------------------
Request for Comment
83. Should Covered ATSs be required to provide any additional
identifying information on Part I of Form ATS-N? Are the proposed
information requests on Part I of Form ATS-N necessary, or are certain
information requests not necessary and why?
84. Should the Commission require Covered ATSs to provide types of
securities that they trade (or do not trade) in Part I, Item 8 of Form
ATS-N? Would the proposed categories and classifications of government
securities in Part III, Item 8(b) be helpful to market participants?
What, if any, additional or alternative categories or classifications
would commenters suggest? Is there any other information about types of
securities an ATS trades that should be required by Form ATS-N?
4. Part II: Broker-Dealer Operator and Its Affiliates Activities
The Commission believes that the disclosures on Form ATS-N about
the conflicts of interest that might arise from the business structures
of the Covered ATS and the ATS-related activities of the broker-dealer
operator and its affiliates are designed to help participants protect
their interests when using the services of the ATS.\530\ As the
Commission has previously stated, the broker-dealer operator controls
all aspects of the ATS's operations and the broker-dealer operator's
non-ATS and ATS functions may overlap.\531\ Currently, market
participants have limited information about conflicts of interest that
might arise from the non-ATS activities of the broker-dealer operator
of a Government Securities ATS or a Communication Protocol System, and
different classes of participants may have different levels of
information about the operations of the ATS or the Communication
Protocol System.\532\ Because of potential overlap between a broker-
dealer's ATS operations and its other operations, there is a risk of
information leakage of subscribers' confidential trading information to
other business units of the broker-dealer operator or its affiliates.
The Commission believes that some market participants would want to
consider the trading activity of the broker-dealer operator, or its
affiliates, when evaluating potential conflicts of interest on a
Covered ATS and may also want to be aware of the range of services and
products that the broker-dealer operator or its affiliates offer for
use in the ATS because such services or products may have an impact on
access to, or trading on, the ATS. In addition, disclosures on Form
ATS-N would better inform the Commission and other regulators about the
activities of Covered ATSs and their role in the government securities
and NMS stock markets, which would facilitate better oversight of these
ATSs to the benefit of investors.
---------------------------------------------------------------------------
\530\ See infra Section IV.D.4.
\531\ See NMS Stock ATS Proposing Release, supra note 29, at
81010, 81041.
\532\ See id. at 81010.
---------------------------------------------------------------------------
The Commission continues to believe that the interests of the
broker-dealer operator or its affiliates can sometimes compete against
the interests of those that use the Covered ATS's services. These
competing interests, at times, may give rise to conflicts of interest
for the broker-dealer operator and its affiliates or the potential for
information leakage of subscribers' confidential trading information.
For example, trading by the broker-dealer operator or its affiliates on
a Covered ATS controlled and operated by the broker-dealer operator
presents a conflict of interest whereby the broker-dealer operator has
the opportunity to place its interest ahead of participants
[[Page 15544]]
trading in the ATS that the broker-dealer controls and operates. Part
II of Form ATS-N is designed to provide market participants with
information about these competing interests, and inform them about: (1)
The operation of the Covered ATS--regardless of the corporate structure
of the ATS--and of its broker-dealer operator, or any arrangements the
broker-dealer operator may have made, whether contractual or otherwise,
pertaining to the operation of its ATS; and (2) ATS-related activities
of the broker-dealer operator and its affiliates that may give rise to
conflicts of interest for the broker-dealer operator and its affiliates
or the potential for information leakage of subscribers' confidential
trading information. The public disclosure about potential conflicts of
interest on Covered ATSs would advance the same policy and investor
protection objectives.
Furthermore, Part II of Form ATS-N does not require public
disclosure of activities or affiliate relationships of the broker-
dealer operator that do not relate to the Covered ATS. Many broker-
dealer operators of NMS Stock ATSs, and, to a lesser extent, Government
Securities ATSs, engage in broker-dealer or other activities that are
unrelated to their operations of the ATS. The Commission believes that
Form ATS-N should exclude requests that would solicit information about
a broker-dealer operator's activities unrelated to its ATS operations.
The Commission is proposing to use the same definitions of
``affiliate'' and ``control'' in revised Form ATS-N as are used in
current Form ATS-N.\533\ These terms are intended to encompass all
relevant affiliate relationships between the broker-dealer operator and
other entities that the Commission believes would help market
participants' evaluation of potential conflicts of interest.\534\
---------------------------------------------------------------------------
\533\ Form ATS-N would define ``affiliate'' as, with respect to
a specified person, any person that, directly or indirectly,
controls, is under common control with, or is controlled by, the
specified person. ``Control'' would be defined to mean the power,
directly or indirectly, to direct the management or policies of the
broker-dealer operator of an alternative trading system, whether
through ownership of securities, by contract, or otherwise. In this
proposal, the Commission is proposing to update the definition of
``person'' for the purposes of Form ATS-N. A ``person'' is presumed
to control the broker-dealer operator of an alternative trading
system if that person: Is a director, general partner, or officer
exercising executive responsibility (or having similar status or
performing similar functions); directly or indirectly has the right
to vote 25 percent or more of a class of voting securities or has
the power to sell or direct the sale of 25 percent or more of a
class of voting securities of the broker-dealer operator of the
alternative trading system; or in the case of a partnership, has
contributed, or has the right to receive upon dissolution, 25
percent or more of the capital of the broker-dealer operator of the
alternative trading system. See infra Section V.D.
\534\ See NMS Stock ATS Adopting Release, supra note 2, at
38818-19.
---------------------------------------------------------------------------
a. Items 1 and 2: Broker-Dealer Operator and Its Affiliate Trading
Activities in the Covered ATS
Part II, Items 1(a) and 2(a) of Form ATS-N are designed to disclose
information about whether business units of the broker-dealer operator
or its affiliates,\535\ respectively, are permitted to enter or direct
the entry of trading interest into the Covered ATS. If the person that
operates and controls a Covered ATS is also able to trade on that ATS,
there may be an incentive to design the operations of the ATS to favor
the trading activity of the operator of the ATS or affiliates of the
operator. An operator of a Covered ATS that also trades in the ATS it
operates would likely have informational advantages over others trading
in the ATS, such as a better understanding of the manner in which the
system operates or who is trading in the ATS. In the most egregious
case, the operator of the ATS might use the confidential trading
information of other traders to advantage its own trading on or off of
the ATS.\536\
---------------------------------------------------------------------------
\535\ In Part II, Item 1(a), the Commission is proposing to
delete examples of trading interest--quotes, conditional orders, and
indications of interest--as the proposed definition of trading
interest would encompass these examples.
\536\ For a further discussion about how a conflict of interest
related to trading by the broker-dealer operator on its own ATS
could be harmful to other subscribers, see NMS Stock ATS Adopting
Release, supra note 2, at 38771, 38824-29.
---------------------------------------------------------------------------
If a Covered ATS permits the broker-dealer operator or its
affiliates to enter trading interest in the ATS, whether on an agency,
principal, or riskless principal basis, the ATS would be required to
only list the business units or affiliates that actually enter or
direct the entry of trading interest into the ATS. Part II, Items 1(a)
and 2(a) of Form ATS-N would require the ATS to list the business unit
or affiliate if, for example, a trading desk of the broker-dealer
operator or an affiliate uses a direct connection to the ATS or
algorithm to submit trading interest into the ATS. Likewise, if an
affiliated asset manager of the broker-dealer operator uses the
services of a third-party broker-dealer to direct trading interest to
the ATS (i.e., the asset manager instructs the third-party broker-
dealer to send its trading interest to the ATS), the ATS would be
required to list that affiliated asset manager under Item 2(a).
However, if that affiliated asset manager submits trading interest to a
third-party broker-dealer, and that third-party broker-dealer, using
its own discretion, directs the trading interest of the asset manager
into the affiliated ATS, the ATS would not be required to list the
affiliated asset manager under Item 2(a); under such circumstances, the
affiliate would not be ``directing'' trading interest to the ATS
because the third-party broker-dealer is using its discretion to direct
the affiliate's trading interest.
Currently, Part II, Items 1(a) and 2(a) only require an NMS Stock
ATS to list business units or affiliates, respectively, that enter or
direct the entry of orders and trading interest into the ATS.\537\
Based on the Commission staff's experience, some NMS Stock ATSs have
opted to list all of the internal business units and affiliates that
could trade in the ATS and not only the internal business units and
affiliates that actively enter orders and trading interest into the
ATS. This additional information can also help market participants
evaluate the types of potential conflicts of interest on an NMS Stock
ATS by providing the entire universe of potential contra-side trading
interest that users of the ATS might view as a conflict of interest.
Accordingly, while not required to do so, a Covered ATS would meet the
respective requirements of Part II, Items 1(a) and 2(a) by listing all
of the internal business units and affiliates that could trade in the
ATS.
---------------------------------------------------------------------------
\537\ As explained above, Form ATS-N will remove references to
``orders,'' and its disclosures will focus on ``trading interest.''
---------------------------------------------------------------------------
The Commission is proposing that Form ATS-N specify the types of
information that a Covered ATS must provide with regard to business
units or affiliates of the broker-dealer operator. Specifically, Item
1(a) would require the ATS to name and describe each type of business
unit of the broker-dealer operator that enters or directs the entry of
trading interest into the ATS (e.g., another Covered ATS, type of
trading desks, market maker, sales or client desk) and, for each
business unit, to provide the applicable MPID and list the capacity of
its trading interest (e.g., principal, agency, riskless principal).
Item 2(a) would require the Covered ATS to name and describe each type
of affiliate that enters or directs the entry of trading interest into
the ATS (e.g., broker-dealers, another Covered ATS, investment
companies, hedge funds, market makers, PTFs) and, for each of those
affiliates, provide the applicable MPID and list the capacity of its
trading interest (e.g., principal, agency, riskless principal). The
disclosures in Items 1(a) and 2(a) would help market participants
understand both the types of broker-
[[Page 15545]]
dealer operator business units and affiliates that can trade in a
Covered ATS, and their trading activities.\538\
---------------------------------------------------------------------------
\538\ Although the narrative responses to Items 1(a) and 2(a)
could typically be kept up-to-date via updating amendments to Form
ATS-N, the Commission also notes that in most cases, if the ``yes''
or ``no'' response to Items 1(a) or 2(a) changes (e.g., the Covered
ATS changes its operations to allow affiliates to trade whereas they
could not do so prior, or vice versa), the ATS would be required to
file a material amendment. See NMS Stock ATS Adopting Release, supra
note 2, at 38826.
---------------------------------------------------------------------------
In addition to what is required under current Form ATS-N, the
Commission proposes to add an additional disclosure request to Part II,
Items 1(a) and 2(a) of Form ATS-N that would require a Covered ATS to
explain any circumstance when the broker-dealer operator or an
affiliate, respectively, would be a counterparty to an ATS trade. Based
on Commission experience, the broker-dealer operator may act as a
counterparty to both sides of a trade to maintain the anonymity of each
counterparty or to facilitate clearance and settlement of the trade. To
the extent the broker-dealer operator or affiliate of the broker-dealer
operator of a Covered ATS intermediates between two counterparties, the
ATS should publicly disclose to its subscribers when and how it does so
and the capacity of the broker-dealer operator or its affiliates.\539\
---------------------------------------------------------------------------
\539\ Depending on how the Covered ATS operates, it is possible
that disclosures about the broker-dealer operator's (or its
affiliate's) role as an intermediary between two other
counterparties would be required disclosures elsewhere on the Form
ATS-N (e.g., Part III, Item 7 (Order Types and Sizes; Trading
Facilities), Part III, Item 21 (Post-Trade Processing, Clearance,
and Settlement)). Accordingly, the Commission is proposing that this
information would be required to be publicly disclosed in Part II.
However, to decrease redundancy in the form, the ATS could note in
Part II, Item 1(a) and/or 2(a) disclosures that the broker-dealer
operator or its affiliates could be counterparties to a trade, state
the capacity in which broker-dealer operator or its affiliate is a
counterparty to the trade, and provide a more detailed responses to
other requests for information as required in the form.
---------------------------------------------------------------------------
Part II, Items 1(b) and 2(b) of Form ATS-N would require a Covered
ATS to disclose whether the services that the ATS offers and provides
to the business units or affiliates required to be identified in Item
1(a) and 2(a), respectively, are the same for all subscribers and
persons whose trading interest is entered into the ATS by a
subscriber.\540\ This request would be in the form of a ``yes'' or
``no'' question, and if the ATS answers ``no,'' it would be required to
explain any differences in response to the applicable Item number(s) in
Part III of Form ATS-N and list the applicable Item number(s). If there
are differences that are not applicable to Part III of Form ATS-N, the
ATS must explain those differences in detail under Part II, Items 1 and
2.
---------------------------------------------------------------------------
\540\ The Commission is proposing to revise Part II, Items 1(b)
and 2(b) to specifically ask about treatment of persons whose
trading interest is entered into the ATS by a subscriber or the
broker-dealer operator. In the Commission's experience, ATS services
could vary among not only subscribers, but also non-subscriber
participants to the ATS. The Commission is therefore proposing to
broaden the scope of these questions to apply to differing treatment
among non-subscriber participants whose trading interest is entered
into the ATS by a subscriber or the broker-dealer operator.
---------------------------------------------------------------------------
Part II, Items 1(c) and 2(c) would require a Covered ATS to
disclose the broker-dealer operator's or any of its affiliates' role as
a liquidity provider in the ATS, if applicable. These Items would
require the ATS to disclose--in the form of a ``yes'' or ``no''
response--whether there are any formal or informal arrangements with
any of the sources of trading interest of the broker-dealer operator or
affiliates identified in Item 1(a) and Item 2(a), respectively, to
provide trading interest to the ATS (e.g., undertaking to buy or sell
continuously, or to meet specified thresholds of trading or quoting
activity). If the ATS answers ``yes,'' it must identify the business
unit(s) or affiliate(s) and respond to the Item with information about
liquidity providers in the ATS.\541\ Based on the Commission staff's
experience with Form ATS-N filed by NMS Stock ATSs, highlighting
whether the broker-dealer operator or affiliate acts as a liquidity
provider on a Covered ATS would help market participants evaluate the
potential for conflicts of interest or information leakage on the
trading platform.
---------------------------------------------------------------------------
\541\ This request is contained in Part III, Item 12. See infra
Section V.D.5.l.
---------------------------------------------------------------------------
Finally, the Commission proposes to relocate the Part II, Items
1(d) and 2(d) disclosure requests to proposed Part III, Item 16(c).
Currently, these request an NMS Stock ATS to disclose information about
sending orders and trading interest to a trading center operated or
controlled by the broker-dealer operator or any of its affiliates,
respectively in the form of a ``yes'' or ``no'' question. The related
narrative is currently required to be provided in Part III, Item 16,
which requires disclosures about external routing from the NMS Stock
ATS. The Commission continues to believe that this disclosure is
important when evaluating potential conflicts of interest and how
trading interest may be handled in the ATS. The Commission originally
included subpart (d) in Part II, Items 1 and 2 to highlight conflicts
of interest related to routing. The Commission believes that it would
be more efficient for market participants and filers to consolidate
this disclosure with the responses to the request soliciting
information about the routing or sending of trading interest from the
ATS. As such, the Commission is proposing to delete Items 1(d) and 2(d)
from Part II, and relocate the disclosure requirements therein to Part
III, Item 16(c).
Request for Comment
85. What information about trading by the broker-dealer operator
and its affiliates related to Government Securities ATSs is important
to market participants? Are there any additional relevant points of
information about NMS Stock ATSs that Form ATS-N does not solicit and
should be asked?
86. Are there potential conflicts of interest for broker-dealer
operators of Government Securities ATSs or their affiliates that may
justify greater operational transparency for Government Securities ATSs
than for NMS Stock ATSs, or vice versa?
87. Should the Commission require separate disclosures for
different types of trading by the broker-dealer operator on the Covered
ATS, such as trading by the broker-dealer operator for the purpose of
correcting error trades executed in the ATS, as compared to other types
of principal trading? If so, what types of principal trading should be
addressed separately and why? What disclosures should the Commission
require about principal trading and why?
88. Should the Commission limit or expand in any way the proposed
disclosure requirements to require disclosure of arrangements regarding
access by the broker-dealer operator or its affiliates to both other
trading venues and affiliates of those other trading venues?
89. Should the Commission require ATSs to provide information about
when the broker-dealer or affiliate of the broker-dealer would be a
counterparty to an ATS trade? What type of information about such
arrangements would be useful to market participants?
90. Form ATS-N currently requires that an NMS Stock ATS name the
affiliate(s) of the broker-dealer operator permitted to enter or direct
the entry of trading interest into the ATS. A Government Securities ATS
would also be required to describe the type of affiliates on Form ATS-
N. Should the Commission continue to require NMS Stock ATSs, but not
Government Securities ATSs, to disclose the name(s) of affiliate(s) in
Form ATS-N?
91. Should the Commission require Covered ATSs to disclose the
percentage of trading in the ATS attributable to
[[Page 15546]]
each or all of the broker-dealer operator's business units, affiliates
or both? Should Form ATS-N require a Covered ATS to disclose specific
trade volume data for its trading with business units of the broker-
dealer operator or its affiliates? If so, how should that volume be
measured (e.g., executed trades, dollar volume)?
92. Would the disclosure of information about trading by the
broker-dealer operator and its affiliates in the Covered ATS be
sufficient to address potential conflicts of interest? If disclosure
alone is insufficient, are there other measures the Commission could
take to mitigate potential conflicts of interest regarding trading?
Should the Commission prohibit some or all trading by the broker-dealer
operator and its affiliates in the ATS to address potential conflicts
of interest?
b. Item 3: Interaction of Trading Interest With Broker-Dealer Operator;
Affiliates
Proposed Part II, Item 3 of Form ATS-N is designed to solicit
information about the interaction of trading interest between
unaffiliated subscribers to a Covered ATS and trading interest of the
broker-dealer operator and its affiliates in the ATS. As proposed, Part
II, Item 3(a) of Form ATS-N would require a Covered ATS to disclose
whether a subscriber can opt out of interacting with trading interest
of the broker-dealer operator in the ATS, and Part II, Item 3(b) would
require the ATS to disclose whether a subscriber can opt out of
interacting with the trading interest of an affiliate of the broker-
dealer operator in the ATS.\542\ Part II, Item 3(c) of Form ATS-N would
require the ATS to disclose whether the requirements \543\ of the opt-
out processes for the broker-dealer operator and affiliates required to
be identified in Items 3(a) and (b) are the same for all subscribers.
Proposed Part II, Item 3 would be important to unaffiliated market
participants trading on an ATS because, given the potential for
informational advantages by the broker-dealer operator or its
affiliates,\544\ some unaffiliated subscribers may not wish to interact
with the order flow of the broker-dealer operator or its affiliates.
This disclosure could also help subscribers understand whether and how
they may avoid trading with the broker-dealer operator and its
affiliates should they elect to use the services of the Covered ATS.
---------------------------------------------------------------------------
\542\ For example, if a broker-dealer operator uses algorithms
to submit subscriber orders into the Covered ATS, any steps that
either the broker-dealer operator or the subscriber needs to take so
that the ATS prevents those orders from trading with the broker-
dealer operator or its affiliates would be required disclosures
under Items 3(a) and 3(b), respectively.
\543\ The Commission is proposing to replace the phrase ``terms
and conditions'' with ``requirements.'' In the Commission staff's
experience reviewing Form ATS-N and discussing the requirements of
the form with NMS Stock ATSs, the Commission has observed that some
NMS Stock ATSs have read ``terms and conditions'' to mean all legal
or contractual terms, rather than terms relevant to the scope of the
question (i.e., what is required for a subscriber to opt out). Using
the term ``requirements'' will clarify that the Item is soliciting
information specifically related to requirements related to the opt-
out process. Substantively, the Commission does not believe that the
proposed change would change information that is being solicited in
this Item.
\544\ See supra Section IV.D.3.a.
---------------------------------------------------------------------------
Request for Comment
93. Should Form ATS-N request more or less information about how a
market participant can limit its interaction on a Covered ATS with the
broker-dealer operator or its affiliates? If commenters believe Form
ATS-N should request more information, please provide specific
information that would be useful along with an explanation of its
utility.
c. Item 4: Arrangements With Other Trading Venues
Part II, Item 4 of Form ATS-N is designed to disclose information
about formal or informal arrangements (e.g., mutual, reciprocal, or
preferential access arrangements) \545\ between the broker-dealer
operator or an affiliate of the broker-dealer operator and a trading
venue (e.g., ATS, broker-dealer, exchange, OTC market maker, futures or
options market) to access the ATS services (e.g., arrangements to
effect transactions or to submit, disseminate, or display orders and
trading interest in the ATS).
---------------------------------------------------------------------------
\545\ See NMS Stock ATS Adopting Release, supra note 2, at 38831
nn.769-70 and accompanying text. As the Commission discussed in the
NMS Stock ATS Adopting Release, the disclosures required by Part II,
Item 4 of revised Form ATS-N are not so broad as to require the
Covered ATS to list each unaffiliated subscriber that accesses its
system. See id. at 38831.
---------------------------------------------------------------------------
Part II, Item 4 would require a Covered ATS to disclose an
arrangement between the broker-dealer operator for the ATS or affiliate
of the broker-dealer operator and a broker-dealer operator of an
unaffiliated ATS under which the broker-dealer operator would send
trading interest to the unaffiliated ATS for possible execution before
sending it to any other destination. Item 4 would also require
disclosure of the inverse arrangement pursuant to which any subscriber
trading interest sent out of the unaffiliated Covered ATS would be sent
first to the ATS before any other trading venue. In addition, Item 4
would require a summary of the terms and conditions of the arrangement
such as, for example, whether the broker-dealer operator of the Covered
ATS is providing monetary compensation or some other brokerage service
to the unaffiliated ATS.\546\ If a broker-dealer operator has an
arrangement with another trading venue operated by the broker-dealer
operator or an affiliate, or an unaffiliated trading venue, market
participants are likely to consider information about such arrangements
relevant to their evaluation of an ATS as a potential trading venue and
such an arrangement may raise concerns about conflicts of interest or
information leakage. The Commission is therefore proposing disclosure
of such arrangements in Part II, Item 4 of Form ATS-N.\547\
---------------------------------------------------------------------------
\546\ In addition, in Part II, Item 4(b) of Form ATS-N, the
Commission is proposing to delete the phrase ``if yes to Item
4(a).'' This phrase was included in Form ATS-N in error. The NMS
Stock ATS would be required to respond to Part II, Item 4(b)
regardless of its response to Part II, Item 4(a).
\547\ In the NMS Stock ATS Adopting Release, the Commission
provided examples of when potential conflicts of interest and
information leakage could occur as a result of preferential routing
arrangements (e.g., an affiliate is contractually obligated to route
all unexecuted orders to ATS) or routing arrangements with
affiliates (e.g., all orders routed by the NMS Stock ATS must first
be routed to an the affiliate(s)). Specifically, the former might
result in information leakage should the arrangement provide that
all orders not executed by the affiliate are to be sent to the NMS
Stock ATS and the latter could provide incentive for the NMS Stock
ATS to route orders to an affiliate instead of trying to execute the
order in the ATS. These issues could arise in the government
securities markets, as well, so those examples are also applicable
to both NMS Stock ATSs and Government Securities ATSs. See id. at
38831 n.771.
---------------------------------------------------------------------------
Request for Comment
94. What type of arrangements might a broker-dealer operator of a
Covered ATS have with a trading venue for government securities or
repos? Please explain and describe what information, if any, market
participants may wish to know about such an arrangement.
d. Item 5: Other Products and Services
Part II, Item 5(a) is designed to disclose whether the broker-
dealer operator offers any products or services for the purpose of
effecting transactions or submitting, disseminating, or displaying
trading interest in the Covered ATS (e.g., algorithmic trading products
that send orders to the ATS, order management or order execution
systems, data feeds regarding orders and trading interest in, or
executions occurring on, the ATS, order hedging or aggregation
functionality, post-trade processing),\548\ and if applicable, to
[[Page 15547]]
indicate whether the requirements of use \549\ for these services or
products required to be identified in Part II, Item 5(a) are the same
for all subscribers, persons whose trading interest is entered into the
ATS by a subscriber or the broker-dealer operator, and the broker-
dealer operator.\550\
---------------------------------------------------------------------------
\548\ In Part II, Item 5, the Commission is proposing to add
``order hedging or aggregation functionality'' and ``post-trade
processing'' as examples of products or services for the purpose of
effecting transactions or submitting, disseminating, or displaying
trading interest in a Covered ATS, and which could be particularly
relevant to Government Securities ATSs. ``Order hedging or
aggregation functionality'' would include any aggregation
functionality that, for example, could be used by subscribers to
interface with the ATS to send or receive orders and trading
interest to and from other markets, including U.S. Treasury
Securities markets, over-the-counter spot markets, or futures
markets. ``Post-trade processing'' would include any functionality
that could be used by subscribers in connection with post-trade
processing to manage routing, enrichment, allocations, matching,
confirmation, affirmation, or notification of ATS trades.
\549\ The Commission is proposing to replace the phrase ``terms
and conditions'' with the phrase ``requirements'' throughout this
Item. See note 543 and accompanying text. The Commission is also
proposing to require the Covered ATS to disclose any differences in
treatment as they apply to persons whose trading interest is entered
into the ATS by a subscriber or the broker-dealer operator. In the
Commission staff's experience, broker-dealer operators and their
affiliates may, for example, disclose products and services offered
to customers of subscribers. See proposed revisions to Part II,
Items 5(b) and 5(d).
\550\ For example, if a broker-dealer operator offers
subscribers alternative algorithms to handle orders, including
sending such orders to the Covered ATS, and there is a difference in
the latency in which each of the alternatives transmits information,
such differences in latency would need to be disclosed in Part II,
Item 5 of revised Form ATS-N.
---------------------------------------------------------------------------
Customers of a broker-dealer operator could be both subscribers to
its ATS and customers of the broker-dealer operator and the broker-
dealer operator may offer its customers trading products and services
in addition to its ATS services. In certain cases, the product or
service offered might be used by the customer in conjunction with the
customer's use of the ATS. Broker-dealer operators may, directly or
indirectly through an affiliate, offer products or services for the
purpose of, for example, submitting trading interest, or receiving
information about displayed interest, in the ATS.\551\ The Commission
is proposing to delete the term ``Subscribers'' from Items 5(a) and
5(c) so that all products and services that the broker-dealer operator
or affiliate of the broker-dealer operator offers for the purpose of
effecting transactions or submitting, disseminating, or displaying
trading interest in the ATS, would be required to be disclosed on Form
ATS-N, regardless of whether they are offered to subscribers or non-
subscribers (e.g., customers of ATS subscribers). For example, a
Government Securities ATS would be required to disclose any aggregation
functionality that the broker-dealer operator or its affiliate(s)
offers, which, for example, could be used by subscribers to interface
with the ATS to send or receive trading interest to and from other
markets, including U.S. Treasury Securities markets, over-the-counter
spot markets, or futures markets. The Commission believes that
participants would be interested in understanding the use of an
aggregation functionality with the ATS and how it can help achieve
their trading strategies. If the broker-dealer operator or its
affiliate offered a product for effecting transactions or submitting,
disseminating, or displaying trading interest in the Government
Securities ATS using related financial markets for non-government
securities (e.g., futures, currencies, swaps, corporate bonds), the ATS
could summarize the requirements for use of such a product in this Item
and explain the product's use under proposed Part III, Item 11.\552\
---------------------------------------------------------------------------
\551\ See NMS Stock ATS Proposing Release, supra note 29, at
81048. See also NMS Stock ATS Adopting Release, supra note 2, at
38832 n.779. For example, order hedging functionalities could
encompass a product or service offered by the broker-dealer operator
to a customer that the customer may use as a subscriber to the
broker-dealer operator's ATS to hedge exposures of trading interest
in or outside the ATS. A broker-dealer operator that offers such a
functionality for use with the ATS would describe the requirements
for a subscriber to use the functionality in Part II, Item 5 and
explain its use with regard to the ATS in Part III of Form ATS-N.
For example, if the order hedging functionality affects order
interaction in the ATS, the ATS would explain the functionality in
proposed Part III, Item 7. If the order hedging functionality
involves futures and trading interest in the ATS, the ATS would
explain the related procedures under proposed Part III, Item 11.
\552\ See infra Section IV.D.5.l.
---------------------------------------------------------------------------
The Commission believes the information required by Part II, Item 5
of revised Form ATS-N is important because participants want to know
the products or services that the broker-dealer operator or its
affiliates may offer for the purpose of effecting transactions, or
submitting, disseminating, or displaying trading interest in the ATS
because such products or services may impact the participants' access
to, or trading on, the ATS.\553\ In some cases, if subscribers also use
other products or services that the broker-dealer operator offers, they
could receive more favorable terms from the broker-dealer operator with
respect to their use of the ATS. For example, if a participant
purchases a service offered by the broker-dealer operator of a Covered
ATS, the broker-dealer operator might also provide that subscriber more
favorable terms for its use of the ATS than other participants who do
not purchase the service. Such favorable terms could include fee
discounts or access to a faster connection line to the ATS.
Additionally, a broker-dealer operator of a Covered ATS may offer
certain products and services only to certain participants or may offer
products and services on different terms to different categories of
participants. The Commission believes that participants would want to
know, when assessing a Covered ATS as a potential trading venue, the
range of services or products that the broker-dealer operator or its
affiliates offers participants of the ATS, and any differences in
treatment among participants, because such services or products may
impact the participants' access to, or trading on, the ATS.
---------------------------------------------------------------------------
\553\ Services for the purpose of effecting transactions, or
submitting, disseminating, or displaying trading interest in the ATS
that are offered by a person other than the broker-dealer operator
would also be responsive to this Item.
---------------------------------------------------------------------------
To the extent that a participant on a Covered ATS is offered use of
products and services by the broker-dealer operator or its affiliate
for the purpose of effecting transactions or submitting, disseminating,
or displaying trading interest in the ATS, Part II, Item 5 of Form ATS-
N would require disclosures about those products or services. For
example, if a broker-dealer operator offers its customers an order
management system that can also be used by participants to the ATS to
manage orders in the ATS (e.g., adjust the pricing or size of trading
interest in relation to trading interest resting in or outside the ATS,
or modify order instructions to execute or cancel at a specified time
or under certain market conditions), the ATS would be required to
identify the order management system, provide a summary of the
requirements for its use, and identify the Part and Item number in Form
ATS-N where the order management system is explained. In addition, any
services offered by the broker-dealer operator for subscribers to
mitigate risk, such as limits on gross or net notional exposures by a
subscriber, identification of duplicative orders in the ATS, or other
checks offered related to order entry or authorizations to trade in the
ATS, would be identified in this Item and explained further in proposed
Part III, Items 7(b) and 8(b), as applicable. However, the requests in
Part II, Item 5 would not encompass trading products or services
offered by the broker-dealer operator to customers that are not for the
purpose of effecting transactions or submitting, disseminating, or
displaying trading interest in the ATS.
To alleviate any concerns regarding the potential disclosure of
commercially sensitive information in this disclosure request, the
proposed disclosure request
[[Page 15548]]
would require only a summary of the requirements for the products and
services disclosed and an explanation of how the product or service is
used with the ATS in the applicable Item number in Part III of Form
ATS-N. The Commission believes that requiring only a summary narrative
would normally not require the broker-dealer operator to disclose
commercially sensitive information.
Request for Comment
95. What types of products and services do broker-dealer operators
of Covered ATSs or affiliates of broker-dealer operators offer to
subscribers and how are such products and services used in connection
with the ATSs?
96. What information about the products and services offered by
broker-dealer operators would be helpful to market participants?
97. Should the Commission expand Part II, Item 5 of Form ATS-N to
require disclosure of products or services offered by the broker-dealer
operator or its affiliates to subscribers, but not necessarily offered
in connection with transacting on the Covered ATS?
98. Would the information required by Part II, Item 5 require
disclosure of commercially sensitive information? If so, how could the
Commission revise the information request to limit the disclosure of
commercially sensitive information?
e. Item 6: Activities of Service Providers
Part II, Item 6(a) of Form ATS-N is designed to provide disclosures
relating to any entity, other than the broker-dealer operator, that
supports the services or functionalities of the Covered ATS.\554\
Information about the roles and responsibilities of service providers
to the ATS is important because it could inform market participants
about the potential for information leakage on the ATS.\555\ The
Commission is not proposing that the third-party service provider
requests encompass purely administrative items, such as human resources
support, or basic overhead items, such as phone services and other
utilities. As it is with Part II, Item 6(b) in current Form ATS-N, the
information solicited in this disclosure is meant to provide
information about the extent to which a third party may be able to
influence or control the operations of the ATS through involvement with
its operations (such as operating the ATS's proprietary data feeds sent
to subscribers) and allow the Commission to monitor the third party's
role and operations in the ATS.\556\ For example, any service provider
for clearance and settlement of transactions in the ATS, consulting
relating to the trading systems or functionality, regulatory
compliance, and recordkeeping for the ATS would be responsive to this
request.\557\
---------------------------------------------------------------------------
\554\ As explained further below, the Commission is relocating
the disclosure request about shared employees in Part II, Item 6(a)
of current Form ATS-N to Part II, Item 7(a) of revised Form ATS-N.
Accordingly, Part II, Item 6(a) of revised Form ATS-N corresponds to
Part II, Item 6(b) of current Form ATS-N.
\555\ Legacy Government Securities ATSs that operate pursuant to
a Form ATS on file with the Commission are currently subject to the
disclosure requirement of Exhibit E of Form ATS, which requires ATSs
to disclose the name of any entity other than the ATS that will be
involved in the operation of the ATS, including the execution,
trading, clearing, and settling of transactions on behalf of the
ATS; and to provide a description of the role and responsibilities
of each entity. See Item 7 of Form ATS (describing the requirements
for Exhibit E of Form ATS). Proposed Part II, Item 6(b) would expand
upon this requirement.
\556\ See Bloomberg Letter at 8 (stating, in response to the
2020 Proposal, that disclosure of outsourced technology provider
relationships is appropriate for the Commission and FINRA to
determine that the regulated entity, the broker-dealer operator, is
monitoring its third-party service provider(s)).
\557\ If a summary of the role and responsibilities of the
service provider is disclosed in response to Part III of Form ATS-N,
the ATS need only list the applicable Item number in response to
this Item. If there are services or functionalities that are not
applicable to Part III, the ATS would identify the service provider,
the services and functionalities, and also provide a summary of the
role and responsibilities of the service provider in proposed Part
II, Item 6(a).
---------------------------------------------------------------------------
The Commission recognizes that an ATS may engage an entity other
than the broker-dealer operator to perform an operation or function of
the ATS or a subscriber may be directed to use an entity to access a
service of the ATS, such as order entry, disseminating market data, or
display, for example. In such instances, the ATS must ensure that the
entity performing the ATS function complies with Regulation ATS with
respect to the ATS activities performed. For example, with respect to
an ATS that is subject to the Fair Access Rule, if participants are
required to enter orders in the ATS through an order entry firm or to
access displayed orders from another entity, the ATS must ensure that
its written fair access standards address these entities' activities
because of the affect these entities' activities can have on
participants' ability to access the ATS services.\558\ Likewise, to the
extent an entity, such as a service provider, performs a function of
the ATS, and as a result has access to subscriber confidential trading
information, the ATS's written safeguards and procedures to protect its
subscribers' confidential trading information would also include the
service provider's safeguards and procedures to protect the ATS's
subscriber confidential trading information that is accessible to the
service provider.\559\ In addition, as part of the ATS's oversight
procedures, the ATS must ensure that the service provider, for example,
follows the service provider's safeguards and procedures to protect the
ATS's subscriber confidential trading information.
---------------------------------------------------------------------------
\558\ See Regulation ATS Adopting Release, supra note 31, 63 FR
70873 n.252. See also infra Section V.A.
\559\ In such a case, a description of the written safeguards
and procedures to protect subscribers' confidential trading
information of the ATS and service provider would be required to be
disclosed in Part II, Item 7 of Form ATS-N. See infra Section
IV.D.4.f.
---------------------------------------------------------------------------
Disclosures about the activities of service providers, for example,
would inform the Commission about the scope of the ATS's operations and
therefore the extent to which the ATS's Regulation ATS obligations
would apply to the service provider's activities. In addition, as
discussed above, the Commission will consider as part of its review of
the Form ATS-N whether the entity filing Form ATS-N, or entities
involved in the operations of the ATS, meets the definition of a
Covered ATS, including whether the Covered ATS meets the criteria of
Exchange Act Rule 3b-16.\560\ The information provided on Form ATS-N
about the role of service providers with regard to the ATS's operations
would help inform the Commission's review.
---------------------------------------------------------------------------
\560\ See supra note 109.
---------------------------------------------------------------------------
Furthermore, the requests under Part II, Items 6(b) through (c)
would require disclosure about whether any service providers or their
affiliates use the services of the ATS. If they do, the Covered ATS
would be required to identify the service providers, the service(s)
used, and whether there is any disparate treatment between those
service providers and other subscribers. Thus, for example, a Covered
ATS would only be required to obtain and disclose information about
third-party vendors and their affiliates that actively use the services
of the ATS; the ATS should be aware of all parties that use its
services under its current recordkeeping obligations. The Commission
believes that market participants, when analyzing potential conflicts
of interest or information leakage, would find it very useful to
understand whether potential counterparties with whom they are trading,
and who also service the operation of the ATS, have access to different
or unique ATS-related services. Part II, Item 6(c) of Form ATS-N would
require the Covered ATS to
[[Page 15549]]
identify and explain any differences in ATS services to a service
provider and all other subscribers and persons whose trading interest
is entered into the ATS by a subscriber or the broker-dealer
operator.\561\ Additionally, depending on the role and responsibilities
of the service provider, market participants may wish to consider
evaluating the robustness of the ATS's safeguards and procedures to
protect confidential subscriber information.
---------------------------------------------------------------------------
\561\ The Commission is also proposing to require the Covered
ATS to disclose any differences in services as they apply to persons
whose trading interest is entered into the ATS by a subscriber or
the broker-dealer operator (e.g., customers of subscribers). See
proposed revisions to Part II, Item 6(c).
---------------------------------------------------------------------------
This request for summary information is designed to provide market
participants with a general understanding of the types of technology or
hardware provided by the service provider as part of its
responsibilities, and how that hardware or technology is used by the
ATS. The purpose of this disclosure is to provide information that
subscribers can use to better understand whether the service provider
might be able to access subscriber confidential trading information, so
ATSs should draft their disclosure with the goal of conveying such
information. Simply stating that a third party provides technology or
hardware to the ATS would not be responsive to the required summary of
the service provider's role, but, on the other hand, the ATS would not
have to provide information about the manufacturer of its hardware
components.
Request for Comment
99. Are there any critical services or functionalities (e.g.,
matching engine, market data) that, if provided by a third party,
should be required to be described in a higher level of detail than the
proposed ``summary'' level? If so, which services and functionalities?
f. Item 7: Protection of Confidential Trading Information
Part II, Item 7(a) of Form ATS-N is designed to provide information
about a Covered ATS's written safeguards and written procedures to
protect the confidential trading information of subscribers to the ATS,
including, (1) a summary of the roles and responsibilities of any
persons that have access to confidential trading information, the
confidential trading information that is accessible by them, the basis
for the access, and whether any shared employees (defined below) have
access to confidential trading information; (2) written standards
controlling employees of the ATS that trade for employees' accounts;
and (3) written oversight procedures to ensure that the safeguards and
procedures described above are implemented and followed.
The protection of confidential trading information is an important
component of the regulation of ATSs and is essential to ensuring the
integrity of ATSs as execution venues. The Commission believes that
disclosures about any employee of the ATS's broker-dealer operator or
employee of its affiliate that provides services for both the
operations of the ATS and any other business unit or any affiliate of
the broker-dealer operator (``shared employee'') with access to
subscriber confidential trading information would help market
participants evaluate circumstances when there is the potential for
information leakage. For example, the Commission believes that market
participants would likely want to know if an employee of the broker-
dealer operator (or employee of an affiliate of the broker-dealer
operator) that is responsible for the operations of a system containing
subscriber confidential trading information from the ATS is also
responsible for supporting, for instance, the principal trading
activity of the broker-dealer operator, or another trading venue
operated by the broker-dealer, or a trading venue that is an affiliate
of the broker-dealer operator. In addition, if confidential trading
information is not protected, many of the advantages or purposes for
which a subscriber may choose to send its trading interest to an ATS
(e.g., to trade anonymously and/or to mitigate the impact of trading in
large positions) are eliminated. In cases where the confidential
trading information of a subscriber is impermissibly shared with the
personnel of the broker-dealer operator or any of its affiliates, such
an abuse is also compounded by the conflicting interests of the broker-
dealer operator. That is, in such a case, the broker-dealer operator
has invited subscribers to trade on its ATS and may have abused that
relationship to provide itself or its affiliates with a direct
competitive advantage over that subscriber. Accordingly, the Commission
believes that disclosures informing market participants about broker-
dealer operators' written safeguards and written procedures to protect
confidential trading information are necessary so market participants
can independently evaluate the robustness of the safeguards and
procedures and decide for themselves whether they wish to do business
with a particular Covered ATS.
Part II, Item 7(a) of revised Form ATS-N contains, in part, the
same disclosure requests as Part II, Item 7(a) of current Form ATS-N.
The Commission is proposing to amend Part II, Item 7(a) of Form ATS-N
by adding the disclosure requests in Part II, Items 6(a) and 7(d) of
current Form ATS-N. Item 6(a) of current Form ATS-N solicits
information about ``shared employees.'' Part II, Item 7(d) of current
Form ATS-N requires an ATS to provide a summary of the roles and
responsibilities of any persons that have access to confidential
trading information, the confidential trading information that is
accessible by them, and the basis for the access.
The Commission is relocating and consolidating these disclosure
requests based on its experience with Form ATS-N filings by NMS Stock
ATSs. In the Commission staff's experience, the disclosures in Part II,
Items 6(a), 7(a), and 7(d) in current Form ATS-N solicit similar
information and thus, the structure of Form ATS-N often resulted in
redundant disclosures within these Items. For example, in responding to
Part II, Item 7(d) of current Form ATS-N, the ATS initially needs to
describe what it considers to be confidential trading information, such
as whether only pre-trade order information would be considered
confidential trading information, or whether post-trade information
would also be treated as confidential trading information, and for what
period of time. To explain the basis for the access, the ATS currently
needs to explain why the person would have access to the confidential
trading information in Part II, Item 7(d). Similarly, Part II, Item
6(a) of current Form ATS-N requires the ATS to disclose whether and how
shared employees can access confidential trading information. The
Commission believes that consolidating these information requests into
a single Item request in Part II, Item 7(a) on Form ATS-N would make
the form easier to use because the reader will be able to find all the
information previously spread across three items in a single item.
Part II, Items 7(b) and (c) of Form ATS-N are designed to disclose
information about whether a subscriber can consent and withdraw
consent, respectively, to the disclosure of its confidential trading
information to any person (not including those employees of the ATS who
are operating the system or responsible for its compliance with
applicable rules). Subscribers should be
[[Page 15550]]
able to give consent if they so choose to share their confidential
trading information.\562\ Covered ATSs vary in terms of the types of
orders, indications of interest (IOIs), or other forms of trading
interest that are confidential on their systems and what information
about such trading interest may be shared. For example, an ATS might
provide that no IOIs submitted by subscribers will be considered
confidential, but may provide subscribers with the option to restrict
the information in the IOI message to just the symbol and side (i.e.,
buy or sell). For this example, Part II, Items 7(b) and 7(c) of Form
ATS-N would require the Covered ATS to describe the means by which a
subscriber could control some of the information contained in the IOI
message by providing consent or withdrawing such consent for the
sharing of its confidential trading information.\563\ For example, a
subscriber can consent to its open trading interest being displayed to
certain subscribers that the subscriber believes are less likely to
misuse or exploit such information, or that have open trading interest
on the contra side in the same symbol. If the Covered ATS allows
subscribers to consent in this manner, the ATS would mark ``yes'' to
Part II, Item 7(b). Continuing the example, if the subscriber can
subsequently withdraw its consent to this display of its open trading
interest, the Covered ATS would mark ``yes'' to Part II, Item 7(c).
---------------------------------------------------------------------------
\562\ See Regulation ATS Adopting Release, supra note 31, at
70879.
\563\ See id. The Commission believes that there may be some
Covered ATSs that might not offer any means by which a subscriber
could consent to the dissemination of its confidential trading
information. A Covered ATS would be required to disclose this fact
pursuant to Item 7(a). See id. at 70891 n.437.
---------------------------------------------------------------------------
Request for Comment--Part II
100. Should the Commission expand the proposed disclosures in
proposed Part II, Item 7(a)(i) to other employees, personnel, or
independent contractors of the broker-dealer operator? If so, which
employees, personnel, or independent contractors should be included and
what information about such persons should be solicited?
101. Should the Commission require Covered ATSs to disclose the
information in Part II of Form ATS-N? If so, what level of detail
should be disclosed?
102. Would Part II of Form ATS-N capture the information that is
most relevant to understanding the Covered ATS and its relationship
with the broker-dealer operator and the broker-dealer operator's
affiliates? Please support your arguments.
103. Would the proposed disclosures in Part II require broker-
dealer operators of Covered ATSs to reveal too much (or not enough)
information about their structure and operations?
104. Is there other information about the activities of the broker-
dealer operator and its affiliates that market participants might find
relevant or useful in their assessment or use of the Covered ATS? If
so, describe such information and explain whether or not such
information should be required to be provided on Form ATS-N.
105. Should Covered ATSs not be required to provide the proposed
disclosures in Part II on Form ATS-N due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? If so, what information and why?
106. Are there ways to obtain the same information as would be
required from Covered ATSs by Part II other than through disclosure on
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the disclosures in Part
II?
107. Should Covered ATSs be required to publicly disclose in their
entirety on Form ATS-N their written safeguards and written procedures
to protect the confidential trading information of subscribers? Should
the Commission require less information be disclosed about the written
safeguards and procedures?
108. Would the information about written safeguards and written
procedures to protect the confidential trading information of
subscribers described in Form ATS-N be sufficient for subscribers to
independently evaluate such safeguards and procedures and thus evaluate
the ATS as a destination for their orders? Should the Commission
prohibit the disclosure of confidential subscriber information in some
circumstances? If so, please describe.
5. Part III: Manner of Operations
Part III of Form ATS-N is designed to provide public disclosures to
help market participants understand, among other things, how they may
use a Covered ATS to buy and sell securities and find a counterparty to
a trade. The Commission is proposing amendments to Part III that would
apply to both NMS Stock ATSs and Government Securities ATSs. Government
Securities ATSs would be required to respond to Part III of Form ATS-N
in the same manner as NMS Stock ATSs, and the below description
summarizes the types of disclosures Form ATS-N would solicit for both
NMS Stock ATSs and Government Securities ATSs.
As proposed, Form ATS-N would include an instruction at the
beginning of Part III to require that the Covered ATS identify and
explain any differences among and between subscribers, persons whose
trading interest is entered into the ATS by a subscriber or the broker-
dealer operator, the broker-dealer operator, and any affiliates of the
broker-dealer.\564\ Current Form ATS-N is structured to include
separate questions throughout the Items that require the ATS to
identify and explain any differences in the treatment of subscribers
and the broker-dealer operator. Based on its experience reviewing Form
ATS-N filed by NMS Stock ATSs, the Commission believes that discussion
of these differences is integral to the responses to each of the Items,
and that requiring the discussion to be included in the response to
each Item, rather than requiring separate, potentially disjointed
disclosures, would improve the readability of the disclosures. By
requiring Covered ATSs to disclose differences in treatment of persons
whose trading interest is entered into the ATS by a subscriber or the
broker-dealer operator, which would include, for example, sponsored
access clients of subscribers, and affiliates of the broker-dealer
operator, market participants will be able to discern any benefit or
disadvantage they may receive in comparison to a broader, more
comprehensive group of potential users of the ATS.\565\ The disclosure
about differences in treatment of subscribers, other persons whose
trading interest is entered into the ATS by a subscriber or the broker-
dealer operator, the broker-dealer operator, and the broker-dealer
operator's affiliates is important to market participants and would
better allow them to decide whether submitting trading interest to the
Covered ATS aligns with their trading objectives. Accordingly, the
Commission is proposing to restructure Part III to delete separate
questions regarding whether subscribers and the
[[Page 15551]]
broker-dealer operator are treated the same, and instead, proposing to
include the instruction for the Covered ATS to disclose any differences
in treatment in the applicable responses to Part III. To be clear, this
proposed change would not relieve Covered ATSs from their obligation to
disclose any differences in treatment that were required to be
disclosed in current Form ATS-N.
---------------------------------------------------------------------------
\564\ For example, in Part III, Item 5, if a Covered ATS
designed its operations to allow only certain types of subscribers
to enter trading interest into the ATS through direct means (e.g.,
Financial Information eXchange (FIX) protocol) and other types of
subscribers to enter trading interest into the ATS through indirect
means (e.g., SOR or algorithm), the ATS would describe these
differences in means of entry in Part III, Item 5(a).
\565\ See current Form ATS-N Part III, Items 2(c), 3(b), 4(b),
5(b), 5(d), 6(b), 6(d), 6(f), 7(b), 8(b), 8(d), 8(f), 9(b), 10(b),
10(d), 11(b), 11(d), 13(b), 13(e), 14(b), 15(c), 17(b), 18(c),
19(b), 21(b), 22(b), and 23(b). The Commission is proposing to
delete these Items for Form ATS-N and re-number Items throughout
Part III.
---------------------------------------------------------------------------
a. Item 1: Types of ATS Subscribers
Part III, Item 1 of Form ATS-N is designed to provide information
on the type(s) of subscribers that can use the Covered ATS services.
The Item would provide market participants with information about the
type of trading interest in the Covered ATS based on the types of
subscribers that use it. Covered ATSs may design their system for
trading by retail investors, institutional investors, dealers, or any
other type of market participant.
The Commission is proposing to revise the list of types of market
participants in Part III, Item 1 of Form ATS-N that, in the Commission
staff's experience, are commonly used for Government Securities ATSs
and NMS Stock ATSs.\566\ The list would include: Retail investors,
issuers, asset managers, brokers, dealers, investment companies, hedge
funds, market makers, PTFs, insurance companies, pension funds,
corporations, and banks. The list is non-exhaustive and a Covered ATS
would be required to list any type of subscriber that can use the ATS's
services.\567\ In addition to disclosing its subscribers, a Covered ATS
may use Part III, Item 1 to disclose any types of participants whose
trading interest may reach the ATS. For example, for an ATS that only
allows brokers or dealers as subscribers, the ATS could identify the
types of customers from which the brokers or dealers send trading
interest to the ATS.
---------------------------------------------------------------------------
\566\ In Part III, Item 1 of Form ATS-N, the Commission is
modifying the checkboxes listing types of subscribers to add
insurance companies, pension funds, and corporations. The Commission
believes that adding these checkboxes will provide more granular
information on the types of subscribers participating on an ATS in
an easier-to-read format. The Commission is also proposing to remove
the checkbox ``NMS Stock ATS'' under the list of types of subscriber
in Form ATS-N. A broker-dealer operator of an NMS Stock ATS seeking
to access another NMS Stock ATS would involve the broker-dealer
operator for the NMS Stock ATS becoming a subscriber to the ATS, not
the ATS that the broker-dealer operates. In this scenario, an NMS
Stock ATS that accepts a broker-dealer operator for another NMS
Stock ATS would mark the checkbox for broker and/or dealer in Part
III, Item 1 on Form ATS-N as appropriate.
\567\ See NMS Stock ATS Adopting Release, supra note 2, at
38820-21 (discussing the definition of ``subscriber'' and the
persons encompassed thereunder).
---------------------------------------------------------------------------
Request for Comment
109. Should Form ATS-N require a Covered ATS to include information
about the types of subscribers to the ATS? Based on Commission staff
experience, some ATSs only accept broker-dealers as subscribers to the
ATS and various types of market participants send trading interest into
the ATS through the broker-dealer subscriber. Should the Commission
require the identification of the types of market participants whose
trading interest may be sent to the ATS, whether directly or
indirectly, by a broker-dealer subscriber to a Covered ATS? Would this
information be useful to understanding the type of trading interest in
the ATS?
110. Should the Commission add any other categories of subscribers
commonly applicable to Government Securities ATSs or NMS Stock ATSs, or
both, to Form ATS-N?
b. Item 2: Eligibility for ATS Services
Part III, Item 2 of Form ATS-N is designed to provide market
participants with information about whether the Covered ATS requires
subscribers to be registered broker-dealers or enter a written
agreement to use the ATS services, and whether there are any conditions
that the ATS requires a person to satisfy before accessing the ATS
services.\568\ This Item would require disclosure of the conditions a
person must satisfy ``before accessing the ATS services'' (emphasis
added). On the other hand, Part III, Item 3 of Form ATS-N (discussed
infra), would require disclosures about any conditions that would
exclude a subscriber, in whole or in part, from using the Covered ATS
as a result of subscriber behavior while already actively participating
in the ATS.\569\
---------------------------------------------------------------------------
\568\ In Part III, Item 2(b), the Commission is proposing to
delete the word ``other'' and ask whether there any conditions,
rather than any ``other'' conditions, that the ATS requires a person
to satisfy before accessing the ATS services. The Commission
believes it would be accurate to use the phrase ``any conditions''
rather than ``any other conditions'' in circumstances where a
Covered ATS indicates that the ATS does not require subscribers to
be registered broker-dealers in Part III, Item 2(a).
\569\ For example, if a Covered ATS has a practice of excluding
subscribers that do not meet certain percentage thresholds for
submitting firm-up orders in response to receiving an IOI,
conditional order, or RFQ sent to them by the ATS, then this
practice would be subject to disclosure under Part III, Item 3 of
Form ATS-N (``Exclusion from ATS Services'') and not Part III, Item
2 (``Eligibility for ATS Services'').
---------------------------------------------------------------------------
The disclosures required by Part III, Item 2 would allow market
participants to understand the conditions that they would need to
satisfy to participate on the Covered ATS. If the Covered ATS indicates
that it does have conditions that a person must satisfy before
accessing the ATS services, the request would require the ATS to list
and provide a ``summary'' of those conditions. Some Covered ATSs may
only have the eligibility requirement that a person be a client of the
broker-dealer operator. In that case, any eligibility requirements to
become a client of the broker-dealer operator would be responsive to
this Item. For example, if a subscriber must be a customer of the
broker-dealer operator, the Covered ATS would provide a summary of
conditions the subscriber, as a customer, would need to satisfy (e.g.,
know your customer) before its trading interest can be entered into the
ATS. If the Covered ATS requires subscribers to contract with or become
a member of a third party, for example, for purposes of clearance and
settlement, such as, for Government Securities ATSs, the Fixed Income
Clearing Corporation's Government Securities Division, such information
would be responsive.
Request for Comment
111. What eligibility requirements to access a Covered ATS are
important to a potential subscriber or participant to the ATS and why?
Are there any eligibility requirements that are particularly relevant
to Government Securities ATSs (inclusive of Communication Protocol
Systems, as proposed) or Communication Protocol Systems that trade NMS
stock that should also be required to be disclosed on Form ATS-N?
c. Item 3: Exclusion From ATS Services
Based on Commission staff's experience, ATSs often disclose rules
governing subscribers' participation in the ATS, and if a subscriber
fails to comply with these rules, the ATS may limit or deny access to
the ATS.\570\ Part III, Item 3 of Form ATS-N would require information
about whether a Covered ATS can exclude, in whole or in part, any
subscriber from the ATS services, and if so, to list and provide a
summary of the conditions for excluding (or limiting) a subscriber from
using the ATS. The disclosures are designed to provide information
about when the Covered ATS can exclude, in whole or in part, a
subscriber from the services of the ATSs and help subscribers
reasonably anticipate the
[[Page 15552]]
types of activities that may cause them to be excluded (or limited)
from using the services of the ATS. The question, which allows Covered
ATSs to provide a ``summary'' of conditions for excluding (or limiting)
a subscriber, is designed to solicit information to alert subscribers
about the types of activities that may cause them to be excluded (or
limited) from using the services of the ATS while protecting sensitive
information to allow the ATS to reasonably control the activities and
quality of flow on its platform and prevent subscribers from using the
disclosures to potentially misuse or game the system. To the extent
that the ATS monitors and surveils trading activity on the ATS that
could result in excluding subscribers from ATS services, to avoid
duplicative disclosures, the response to this Item could reference the
monitoring and surveillance practices described in response to Part
III, Item 9.\571\
---------------------------------------------------------------------------
\570\ These limitations can result in some subscribers having
different levels of functionality or more favorable terms of access
than others. For example, in the Commission staff's experience, some
ATSs exclude subscribers that frequently fail to respond with a
firm-up order after receiving an IOI or request for quote.
\571\ See infra Section IV.D.5.i.
---------------------------------------------------------------------------
Request for Comment
112. Is there any subscriber behavior for which Covered ATSs,
particularly Government Securities ATSs (inclusive of Communication
Protocol Systems, as proposed) or Communication Protocol Systems that
trade NMS stock, commonly exclude a subscriber in whole or in part?
What is that behavior(s) and what form of exclusion is commonly
employed (e.g., disqualification from ATS, limitation of services)?
d. Item 4: Hours of Operations and Trading Outside of Regular Trading
Hours
Part III, Item 4 is intended to provide market participants with
information about the days and hours of operation of the Covered ATS,
including the times when trading interest can be entered in the ATS,
and ATS services available outside of the ATS's regular trading hours.
Part III, Item 4(a) would require a Covered ATS to provide the hours
when it is operating, which would include functions such as accepting
trading interest or allowing participants to use communication
protocols to message other participants.\572\ The disclosure required
is not limited to only those hours when the ATS matches trading
interest or allows participants to submit trading interest.
---------------------------------------------------------------------------
\572\ The Commission is proposing to make minor changes to this
Item in Form ATS-N to replace ``operation'' with ``operations'' and
to clarify that ``regular trading hours'' refers to the ATS's
regular trading hours.
---------------------------------------------------------------------------
The Commission is proposing to revise Part III, Item 4 to include
as Part III, Item 4(b) a question about whether the ATS services are
available outside of the ATS's regular trading hours (e.g., after-hours
trading) and with respect to services available outside of the ATS's
regular trading hours, whether there are any differences between the
services during the ATS's regular trading hours and outside of the
ATS's regular hours. Part III, Item 4(a) of current Form ATS-N asks
about hours of operations outside of regular trading hours, and Part
III, Item 18 of current Form ATS-N asks about whether the ATS conducts
trading outside of regular trading hours, and whether there are any
differences between trading outside regular trading hours and trading
during regular trading hours. The Commission is proposing to streamline
and combine the current questions, and, recognizing that ATSs,
including Communication Protocol Systems, may provide other services
beyond ``conduct[ing] trading,'' to ask about ATS services available
outside of the ATS's regular trading hours. The Commission believes
that it is important for market participants and the Commission to
understand when a Covered ATS operates, when trading interest can be
entered, including when the ATS will accept trading interest outside of
its regular trading hours, and whether any other ATS services are
available outside the ATS's regular hours of operations.
To the extent that there are differences with respect to any
services the Covered ATS provides during and outside of its regular
trading hours, the Covered ATS must describe those differences. Similar
to Item 17 (requesting differences between any closing session(s) and
regular trading hours), a Covered ATS would be required to disclose
differences between trading outside of its regular trading hours and
during regular trading hours with respect to the relevant information
disclosed in Part III Items, including, among others, order types and
sizes, and trading facilities (Item 7), use of non-firm trading
interest, and communication protocols and negotiation functionality
(Item 8), segmentation and notice (Item 13), and display and visibility
of trading interest (Item 15). Many of the disclosures discussed
elsewhere in Form ATS-N will relate to the ATS's regular trading hours
so the ATS can simply discuss any differences between trading during
its regular hours and trading outside its regular trading hours in Part
III, Item 4(c), if applicable.
e. Item 5: Means of Entry
Part III, Item 5 of Form ATS-N is intended to disclose the means
that can be used to directly enter trading interest into the Covered
ATS and any other means of entering trading interest into the ATS
(e.g., smart order router, algorithm, order management system, sales
desk, direct market access, web-enabled system, or aggregation
functionality). The Commission is proposing to revise Part III, Item 5
of Form ATS-N to include examples of means of entry that it believes
may be relevant to Government Securities ATSs, as well as Communication
Protocol Systems. These examples, which are not exhaustive, would
include direct market access, web-enabled systems, and aggregation
functionalities. Part III, Item 5 of Form ATS-N would require the
Covered ATS to identify and explain means of entering trading interest,
including whether the means are provided through the broker-dealer
operator itself, through a third-party contracting with the broker-
dealer operator, or through an affiliate of the broker-dealer
operator,\573\ and list and provide a summary of the requirements \574\
for entering trading interest into the ATS through these means.
---------------------------------------------------------------------------
\573\ In Part III, Item 5(b), the Commission is proposing to
make a minor revision to this Item and change the word ``indicate''
to ``including,'' so the Covered ATSs would identify and explain the
means for entering trading interest, ``including'' who provides the
means, rather than identify and explain the means for entering
trading interest and ``indicate'' who provides the means. The
Commission believes identifying and explaining the means for
entering trading interest encompasses describing who is providing
the means of entry, and for that reason, this revision would clarify
what information this Item is requesting. The Commission is also
proposing to add clarifying text to Part III, Item 5(b) of Form ATS-
N (renumbered from Part III, Item 5(c) of current Form ATS-N) to
more clearly contrast such question from Part III, Item 5(a). The
question would read whether there are ``means of entering trading
interest into the ATS not otherwise disclosed in Part III, Item
5(a)'' rather than asking whether there are any ``other means for
entering orders and trading interest into the NMS Stock ATS.''
\574\ Current Form ATS-N requires a summary of the ``terms and
conditions'' for entering orders or trading interest into the ATS
through these means. The Commission is proposing to revise the
question to require a summary of the ``requirements'' for entering
trading interest in the ATS. See supra note 543 and accompanying
text.
---------------------------------------------------------------------------
Based on Commission staff experience, trading interest may be
submitted into the Covered ATS both directly and indirectly. A direct
method of sending trading interest to an ATS, for example, may include
the use of a direct market access platform or FIX protocol connection,
which allows subscribers to enter trading interest into the ATS without
an intermediary. An example of an indirect method of submitting trading
interest to an ATS could include the use of a smart order
[[Page 15553]]
router (``SOR''), algorithm or similar functionality, website,
graphical user interface (``GUI''), aggregation interface, or front-end
system. The means of entry into an ATS (e.g., direct or indirect) could
impact the speed with which a subscriber's trading interest is handled
and potentially executed and could increase the risk of information
leakage. Today, the government securities markets are not
interconnected markets like those for NMS stocks and therefore SOR
technology may not be applied in the same manner by broker-dealer
operators of Government Securities ATSs as it may for broker-dealer
operators of NMS Stock ATSs. The Commission believes, however, that
similar functionality may be used to send or receive trading interest
to and from a Government Securities ATS to reduce latency or send
trading interest to markets with better prices for certain government
securities, and to the extent it does, the ATS should be required to
provide information about that functionality as required.
The Commission believes that the disclosures regarding the direct
or indirect means of trading interest entry would inform market
participants about the functionalities that their trading interest pass
through on their way to the ATS and help them assess any potential
advantages that trading interest sent through the broker-dealer
operator may have as opposed to other methods used by other
subscribers. A Covered ATS would be required to identify the
functionality that directly connects to the ATS (e.g., algorithm, GUI,
aggregation interface) and, if present, any intermediate functionality
that trading interest passes through on its way to the functionality
that directly connects to the ATS.\575\ Conversely, if ATS trading
interest submitted through an algorithm is sent to another intermediate
functionality, and then submitted to the ATS by that functionality,
such information would need to be disclosed pursuant to this Item.\576\
---------------------------------------------------------------------------
\575\ If an intermediate application or functionality has access
to information related to a subscriber's trading interest, the
Covered ATS must take appropriate measures to protect the
confidentiality of such information pursuant to Rule 301(b)(10) of
Regulation ATS. If the ATS arranges for an intermediate application
to be provided by another party, the Covered ATS's obligations under
Rule 301(b)(10) would apply to the activities that that party is
performing for the ATS and the ATS's written safeguards and
procedures should be designed to protect subscriber confidential
trading information with regard to that party.
\576\ If a broker-dealer operator permits subscribers to send
trading interest to the ATS by excluding all other trading venues
from where such trading interest could be sent, this procedure in
effect allows a subscriber to direct an order to the ATS and would
be responsive to Part III, Item 5.
---------------------------------------------------------------------------
The proposed disclosure requirements would only require the Covered
ATS to ``list and provide a summary of the requirements for entering
trading interest into the ATS'' through these sources. Therefore, the
Covered ATS would not need to provide a detailed description of the
programming of the indirect means for entering trading interest that
could put the ATS at a competitive disadvantage with competitors.
However, if, for example, an ATS ``throttled'' the number of messages
allowed for a given type of connection, that information would be
responsive to this Item.
Although the Commission is proposing to delete Part III, Items 5(b)
and 5(d) of current Form ATS-N, which asks the Covered ATS to disclose
whether the protocols required to be identified in Part III, Item 5 and
the requirements for any means of entry are the same for all
subscribers and the broker-dealer operator, a Covered ATS would be
required to disclose such differences in Part III, Item 5 pursuant to
the proposed instruction in Part III in Form ATS-N.\577\ For example, a
Covered ATS would be required to disclose any differences in the
latency of the alternative means for entering trading interest into the
ATS. The Commission understands that there might be different latencies
associated with each alternative. For instance, in some cases, a direct
connection to the ATS may have reduced latencies as compared to
indirect means where trading interest passes through an intermediate
functionality. A broker-dealer operator could also, for example,
configure the ATS to provide reduced latencies for certain means of
entry used by itself or its affiliates.\578\
---------------------------------------------------------------------------
\577\ See supra note 564 and accompanying text.
\578\ Covered ATSs would not be required to calculate and
disclose precise latencies for each means of entry for purposes of
Form ATS-N.
---------------------------------------------------------------------------
The Commission also believes that it is important for subscribers
to understand if a means of entry is provided by an affiliate, even if
it does not provide an advantage to a particular entity.
Disclosures about a broker-dealer operator's use of its or an
affiliate's direct or indirect functionality to enter trading interest
into the Covered ATS are important to market participants to allow them
to assess the potential for information leakage. The indirect means of
access (e.g., SOR or algorithm) may obtain information about subscriber
trading interest that is sent to the ATS (and may now be resting in the
ATS) and subscriber trading interest that is sent out of the ATS. The
potential that an indirect means of accessing the Covered ATS could
lead to leakage of subscribers' confidential trading information
necessitates disclosure of certain information about the use of such
indirect means to send subscriber trading interest in or out of the
ATS. In addition, there may be instances where an ATS uses an
intermediate functionality or entity as the means to bring together
buyers and sellers or provide established methods (such as providing
means to enter, display, communicate, or execute trading interest) and
that intermediate functionality or entity would be considered part of
the ATS for purposes of Regulation ATS and Form ATS-N.\579\ For
example, if the broker-dealer operator arranges for trading interest to
be entered into the ATS by another party, the activities of that party
with respect to the ATS would be subject to the disclosure requirements
of Form ATS-N. Likewise, if an ATS is subject to the Fair Access Rule
under Regulation ATS and its participants must use an entity other than
the broker-dealer operator to enter or receive information about
trading interest in the ATS, the ATS must establish reasonable written
standards governing the granting, denial, or limitation of access to
ensure that those participants are not treated in an unfair and
unreasonably discriminatory manner by the entity.\580\
---------------------------------------------------------------------------
\579\ See NMS Stock ATS Adopting Release, supra note 2, at 38832
and 38844. Depending on the activities of the persons involved with
the market place, a group of persons can together provide,
constitute, or maintain a market place or facilities for bringing
together purchasers and sellers of securities and together meet the
definition of exchange. In such a case, the group of persons would
have the regulatory responsibility for the exchange.
\580\ See Regulation ATS Adopting Release, supra note 31, at
70873. See infra Section V.A.3.a.
---------------------------------------------------------------------------
Request for Comment
113. Are there any means of entering trading interest into the
Covered ATS where more or should be required to explain their
operation? Are there any aspects of those means of entry that are
particularly important?
f. Item 6: Connectivity and Co-Location
Part III, Item 6(a) of Form ATS-N would request information about
whether the Covered ATS offers co-location and related services, and if
so, would require a summary of the requirements for use of such
services, including the speed and connection (e.g., fiber, copper)
options offered. Part
[[Page 15554]]
III, Item 6(b) of Form ATS-N \581\ would require a Covered ATS to
indicate whether it provides any other means besides co-location and
related services described in the Item 6(a) to increase the speed of
communication with the ATS, and if so, to explain the means and provide
a summary of the requirements for its use. Part III, Item 6(c) would
require the Covered ATS to indicate whether it offers any means to
reduce the speed of communication with the ATS and if so, to provide a
summary of the requirements for its use.\582\
---------------------------------------------------------------------------
\581\ The Commission is proposing to re-number Part III, Item
6(c) of current Form ATS-N to Item 6(b) and Part III, Item 6(e) of
current Form ATS-N to Part III, Item 6(c).
\582\ To clarify that the Commission is soliciting information
about any requirements the ATS imposes on subscribers or persons
that submit trading interest to use co-location, related services,
and other means to increase or reduce the speed of communication
with the ATS, rather than the legal or contractual terms of such
services, the Commission is proposing to replace the current
requirement for a summary of the ``terms and conditions'' with
``requirements for use'' for such services in Part III, Items 6(a),
6(b), and 6(c). See supra note 543.
---------------------------------------------------------------------------
Latency is an important feature of trading in certain government
securities and NMS stocks, and market participants are interested in
understanding the functionalities employed by Covered ATSs to influence
it.\583\ The Item would require a summary of the requirements where a
trading venue employs mechanisms to increase the latency or the length
of time for trading interest or other information to travel from a user
to the system. Users of co-location services can experience faster or
slower connection speeds to a Covered ATS depending on factors such as
the distance of the customer servers from the matching engine, or the
use or non-use of ``coiling'' to its matching engine to equalize
connection speeds among subscribers, among others. Such differences in
connection speed or latency would be required to be disclosed under
Part III, Item 6. If, for example, the ATS offers means that would
allow certain subscribers a competitive advantage, then the ATS should
disclose such means on the Form ATS-N. The Commission believes that the
information disclosed in Item 6 would help market participants
understand their connectivity options to the ATS and expedite the order
entry process for subscribers.
---------------------------------------------------------------------------
\583\ See October 15 Staff Report, supra note 188, at 36-37;
Treasury Request for Information, supra note 193, at 3928. See also
Letter from Dan Cleaves, Chief Executive Officer, BrokerTec
Americas, and Jerald Irving, President, ICAP Securities USA LLC, to
David R. Pearl, Office of the Executive Secretary, Treasury
Department, dated April 22, 2016 (``BrokerTec/ICAP Letter''), at 3-
4, available at https://www.treasurydirect.gov/instit/statreg/gsareg/ICAPTreasuryRFILetter.pdf; Letter from C. Thomas Richardson,
Managing Director, Head of Electronic Trading Service, Wells Fargo
Securities, and Cronin McTigue, Managing Director, Head of Liquid
Products, Wells Fargo Securities, to Treasury Department, dated
April 21, 2016, at 6-7, available at https://www.treasurydirect.gov/instit/statreg/gsareg/RFIcommentWellsFargo.pdf.
---------------------------------------------------------------------------
Request for Comment
114. Are there any aspects of the means for increasing or reducing
the speed of communication with Covered ATSs that the Commission should
specifically require under this Item?
g. Item 7: Order Types and Sizes; Trading Facilities
Part III, Item 7 of Form ATS-N is designed to disclose whether the
Covered ATS provides trading facilities or sets rules for bringing
together orders of buyers and sellers (e.g., crossing system, auction
market, limit order matching book, click-to-trade functionality). The
request is intended to capture Covered ATSs that offer the use of firm
trading interest and a trading facility or rules for buyers and sellers
to interact and agree upon the terms of a trade. The Commission
believes that systems that typically offer the use of orders and
trading facilities and systems that offer the use of non-firm trading
interest and communication protocols operate distinctively. Systems
that offer the use of orders and trading facilities typically match
orders of buyers and sellers pursuant to pre-determined rules
programmed into an algorithm, while systems that offer the use of
trading interest and communication protocols allow buyers and sellers
to interact directly to find a counterparty and negotiate a trade. To
facilitate market participants' understanding of these systems and
their unique aspects, the Commission is proposing that Covered ATSs
disclose information about the use of orders and trading facilities or
rules in Part III, Item 7 and disclose the use of trading interest and
communication protocols in Part III, Item 8. These questions would
apply to both NMS Stock ATSs and Government Securities ATSs. If a
Covered ATS provides both a trading facility and communication protocol
(e.g., provides both a limit order book and RFQ protocol), the Covered
ATS would respond affirmatively to and explain the protocols separately
under Items 7 and 8. To the extent the trading facility and
Communication Protocol Systems interact in any way, the Covered ATS
would explain that interaction in response to each question.
A Covered ATS that answers affirmatively to Part III, Item 7 of
revised Form ATS-N would be required to explain the trading facilities
and rules for bringing together the orders of buyers and sellers in the
ATS. In this response, the ATS would be expected to disclose the
information responsive to Part III, Items 7 (Order Types and
Attributes), 8 (Order Sizes), and 11 (Trading Services, Facilities, and
Rules) of current Form ATS-N. Based on Commission staff experience
reviewing Form ATS-N filings, and particularly disclosures related to
order types, order size, and the ATSs' rules, procedures, and
facilities to bring buyers and sellers together, ATS are linked and
intertwined. Allowing the Covered ATS to provide a narrative of these
topics together in Part III, Item 7 of Form ATS-N would provide for
more streamlined disclosures for market participants to understand and
reduce redundancy. This proposed change would result in clearer, more
readable narrative disclosures, and potentially reduce the burden to
Covered ATSs of drafting repetitive disclosures in multiple responses
in the form.
Part III, Item 7 of Form ATS-N would require that ATSs provide a
description of each order type offered by the Covered ATS, and provide
a list of items that the ATS should include in its description. To
provide transparency to market participants, the Item would require a
complete and detailed description of the order types available on the
Covered ATS, their characteristics, operations, and how they are
handled.\584\ All market participants should have full information
about the operations of order types available on a Covered ATS to
comprehensively understand how their orders will be handled and
executed in the ATS. Order types are a primary means by which users of
a Covered ATS communicate their instructions to trade on an ATS. Given
the importance, diversity, and complexity of order types, the
Commission is proposing to require Covered ATSs to disclose the
information called for by Part III, Item 7 on Form ATS-N.
---------------------------------------------------------------------------
\584\ In the instruction to Part III, Item 7 of Form ATS-N, the
Commission is proposing to make certain changes and clarify the
examples provided in this Item regarding order types. Particularly,
the Commission proposes to clarify the example provided regarding
``how price conditions affect the rank and price at which it can be
executed'' by replacing ``it'' with ``the order type.'' In addition,
the Commission is proposing to add ``store orders'' as an example of
order types designed not to remove liquidity. The Commission
recognizes that ``store orders'' may be more relevant to Government
Securities ATSs than to NMS Stock ATSs.
---------------------------------------------------------------------------
Market participants should have sufficient information about all
aspects of the operations of order types
[[Page 15555]]
available on a Covered ATS to understand how to use order types to
achieve their trading objectives, as well as to understand how order
types used by other market participants could affect their trading
interest. A detailed description of order type characteristics would
assist subscribers in better understanding how their orders would
interact with other trading interest in the ATS. It also would allow
market participants to see what order types could be used by other
market participants, which could affect the probability, timing, and
quality of their own executions. For example, if the time priority of a
pegged order changes in response to changes in the reference price,
that would affect the likelihood of execution for such an order. The
Commission is also proposing to require that Covered ATSs disclose any
order size requirements (e.g., minimum or maximum size, odd-lot, mixed-
lot, trading increments) and related handling procedures (e.g.,
handling of residual trading interest) in Part III, Item 7 of Form ATS-
N. This incorporates the requirements of Part III, Item 8 of current
Form ATS-N, with modifications.\585\ This information would inform
subscribers about the permissible size of orders and trading interest
that a subscriber could enter in the ATS. For example, if a Covered ATS
has minimum or maximum order sizes, or a minimum increment size
requirement for order modifications, those requirements and related
handling procedures would be responsive to the Item. The Commission is
also proposing to add the example of how residual or unexecuted orders
are handled to the types of related handling procedures that a Covered
ATS would be required to include in Part III, Item 7. Broker-dealer
operators employ market access and risk management controls and
procedures that prevent the entry of erroneous orders and orders that
are above a subscriber's predetermined threshold. If order size
requirements are imposed on subscribers as part of a risk management
procedure, an explanation of those procedures as they relate to the ATS
would be responsive to this Item. An explanation of how a Covered ATS's
requirements and conditions related to the size of trading interest
differ among subscribers and persons would also provide a market
participant with information regarding how its trading interest would
be handled in relation to other market participants.
---------------------------------------------------------------------------
\585\ As discussed above, to streamline the format of responses,
the Commission is proposing to consolidate current Form ATS-N Part
III, Items 8(a) through (f) in Part III, Item 7 of revised Form ATS-
N. The Commission believes that the information requested is the
same, and the information requests covered by these sub-items (odd-
lot orders and mixed-lot orders) would be covered in Part III, Item
7 of revised Form ATS-N.
---------------------------------------------------------------------------
Covered ATSs may offer the use of various types of trading
facilities to bring together the orders of buyers and sellers and for
such orders to interact. These types of systems would be disclosed in
Part III, Item 7 of Form ATS-N. For example, many Covered ATSs bring
together multiple buyers and sellers using limit order matching
systems. Other Covered ATSs offer the use of crossing mechanisms that
allow participants to enter unpriced orders to buy and sell securities,
with the ATS's system crossing orders at specified times at a price
derived from another market.\586\ Some Covered ATSs offer the use an
auction mechanism that matches multiple buyers and sellers by first
pausing execution in a certain security for a set amount of time,
during which the ATS's system seeks out and/or concentrates liquidity
for the auction; after the trading pause, orders will execute at either
a single auction price or according to the priority rules for the
auction's execution. Certain Covered ATSs may use a voice system to
bring together orders as well, or a combination of voice and electronic
systems. Part III, Item 7, would require Covered ATSs to provide
disclosure of how these facilities operate.
---------------------------------------------------------------------------
\586\ See Regulation ATS Adopting Release, supra note 31, at
70849 n.37.
---------------------------------------------------------------------------
In addition, Part III, Item 7 would require a Covered ATS to
disclose its rules and procedures under which orders interact and
buyers and sellers agree upon the terms of a trade.\587\ Form ATS-N
sets forth a non-exhaustive list of such rules and procedures, which
includes order interaction, priority,\588\ pricing methodologies,
allocation, matching, and execution of orders and other procedures for
trading, such as price improvement functionality, price protection
mechanisms, short sales, functionality to adjust or hedge orders,
locked-crossed markets, the handling of execution errors, the time-
stamping of messages and executions, and any conditions or processes
for terminating a counterparty match.\589\
---------------------------------------------------------------------------
\587\ The Commission is proposing to add examples of
functionalities used in the government securities market for which a
Government Securities ATS would be required to explain the ATS's
rules and procedures, if applicable.
\588\ The Commission is making a non-substantive change to Part
III, Item 7 of Form ATS-N to state that a Covered ATS would be
required to disclose the order type's priority ``in relation to''
(rather than ``vis-[agrave]-vis'') other orders on the book due to
changes in the NBBO or other reference price.
\589\ This non-exhaustive list is the same as what is in current
Form ATS-N, Part III, Item 11.
---------------------------------------------------------------------------
The Commission is also proposing that a Covered ATS disclose
pricing methodologies used for each type of security traded by the ATS
under Part III, Item 7.\590\ For example, orders may be priced using
spreads off a benchmark price, or spreads between two different
maturities of a security. A Covered ATS may also restrict the allowable
deviation from a benchmark price, or allow for indicative pricing of
certain securities. If a transaction has more than one leg, the ATS may
price both legs according to a price derived from one of the securities
traded. In response to this request, a Covered ATS would be required to
describe the ATS's procedures for determining all pricing methodologies
and to the extent the pricing methodologies differ among subscribers
and the broker-dealer operator, the ATS must disclose those
differences.
---------------------------------------------------------------------------
\590\ Part III, Item 7 would require Government Securities ATSs
and, to the extent applicable, NMS Stock ATSs, to describe any
functionality to adjust or hedge orders.
---------------------------------------------------------------------------
In addition, Item 7 would require Covered ATSs to disclose how
orders may interact with non-firm trading interest or separate trading
functionalities within the ATS or offered by the broker-dealer
operator. Item 7 would also require Covered ATSs to disclose the
various procedures under which orders interact and match. Some Covered
ATSs may offer price-time priority to determine how to match orders
(potentially with various exceptions), while others may offer midpoint-
only matching with time priority. Some Covered ATSs might also take
into account other factors to determine priority. For example, a
Covered ATS may assign either a lower or higher priority to an order
entered by a subscriber in a certain class (e.g., orders of principal
traders or retail investors) or sent from a particular source (e.g.,
orders sent by an algorithm or similar functionality) when compared to
an equally priced order entered by a different subscriber or via a
different source. Also, if applicable, the Item would require an
explanation of which party to a trade would receive any price
improvement depending on the priority, order type, and prices of the
matched orders and the percentage of price improvement the party would
receive. A broker-dealer operator could also act as the counterparty
for each side of a transaction that matches on its ATS.
Pursuant to the proposed instruction at the beginning of Part III,
Covered ATSs would be required to disclose any differences in treatment
among subscribers, the broker-dealer, and other participants in the ATS
as they relate to
[[Page 15556]]
the means and facilities for bringing together the orders of buyers and
sellers.
Request for Comment
115. What are the most prevalent order types on Government
Securities ATSs? Are there more important means than order types for
subscribers to communicate the handling of their trading interest on
Government Securities ATSs? Does Form ATS-N capture all of the means
for subscribers of Government Securities ATSs to communicate the
handling of their orders? Are there any aspects of order types on
Government Securities ATSs that should be specifically addressed in the
Item? If yes, please explain.
116. Are there any operations or procedures, either of an ATS or a
broker-dealer operator, which could limit the entry, or size of, a
subscriber's orders submitted to the ATS? If so, please describe these
operations or procedures and explain why they are important to
subscribers.
117. Are there any specific means or facilities used to bring
together multiple buyers and sellers on Covered ATSs that should be
specifically included as an example in this Item? Are there any rules
and procedures that govern trading of government securities and repos
that should be specifically included as examples in this Item?
h. Item 8: Use of Non-Firm Trading Interest; Communication Protocols
and Negotiation Functionality
As discussed above, the proposed definition of ``exchange'' would
include systems that make available the use of non-firm trading
interest and communication protocols to bring together buyers and
sellers of securities. Form ATS-N currently includes questions about
NMS Stock ATSs' use of conditional order functionality and indications
of interest,\591\ which can be forms of communication protocols.
Current Form ATS-N, however, does not contain comprehensive disclosure
requests about systems that solely offer the use of non-firm trading
interest and communication protocols because, as discussed above, such
systems typically do not fall within the criteria of current Exchange
Act Rule 3b-16(a) and, therefore, do not operate pursuant to the ATS
exemption. The Commission is proposing to revise Part III, Item 8 to
request information about the operations of these systems and the
requests would be applicable to both NMS Stock ATSs and Government
Securities ATSs. With respect to conditional orders and indications of
interest, Part III, Item 8 of revised Form ATS-N incorporates and
expands on the current disclosure requirements of Part III, Item 9
(Conditional Orders and Indications of Interest) and Part III, Items 7
(Order Types) and 8 (Order Sizes) of current Form ATS-N as they relate
to conditional orders and indications of interest in the ATS.
---------------------------------------------------------------------------
\591\ Part III, Item 9 of current Form ATS-N asks about
conditional orders and indications of interest. Part III, Item 8 of
current Form ATS-N asks about order sizes. The Commission is
proposing to incorporate the requirements of Part III, Item 8 into
Part III, Items 7 and 8. In addition, the Commission is proposing to
incorporate the requirements in Part III, Item 9 of current Form
ATS-N in Part III, Item 8 of revised Form ATS-N.
---------------------------------------------------------------------------
Proposed Part III, Item 8 of revised Form ATS-N would require
Covered ATSs to disclose whether they make available communication
protocols for buyers and sellers to communicate non-firm trading
interest, solicit interest to buy or sell a security, discover prices,
find a counterparty, or negotiate a trade. Such systems could offer,
for example, RFQ or workup protocols, stream axes, or conditional order
functionalities.\592\
---------------------------------------------------------------------------
\592\ See supra Section II.B.2.
---------------------------------------------------------------------------
If the Covered ATS provides communication protocols and negotiation
functionalities, it would be required to identify and explain the
protocols and functionalities in the response to Part III, Item 8. The
Commission believes that identifying and explaining these
functionalities would provide transparency regarding how buyers and
sellers can interact with each other on the system. This would require
the Covered ATS to provide a narrative description of how participants
in the ATS send and receive messages, how such messages interact, and
the rules, procedures, and protocols governing the use of non-firm
trading interest in the Covered ATS. To facilitate this disclosure, the
Commission is proposing to include in Form ATS-N a description of the
types of information that should be explained in this Item. The
Commission recognizes, however, that each system operates differently
and may offer unique protocols, and has designed Part III, Item 8 to
allow ATSs the flexibility to provide a narrative response that will
help market participants understand the protocols governing their
systems.
First, the Covered ATS would be required to explain the use of
messages in the ATS. Messaging is a primary tool by which Communication
Protocol Systems bring together buyers and sellers. Use of messaging is
critical to how buyers and sellers can use the system to find one
another and negotiate a transaction. The Commission believes that ATSs
offer diverse types of messaging that facilitate communication and
negotiation, including non-firm trading interest that subscribers
expose to other subscribers, communications that subscribers send to
other subscribers to negotiate transactions, messages that subscribers
use to communicate to the ATS how they want their trading interest to
be handled, as well as messages the ATS sends to subscribers to
communicate the presence of trading interest. The Commission believes
that this information will help market participants understand how they
can use messages in the ATS to interact with potential counterparties
and to communicate how they want their trading interest to be handled
by the ATS.
The Commission is proposing to provide a non-exhaustive list of
what this explanation would include, as applicable to the Covered ATS's
protocols and functionalities. The Covered ATS would be required to
describe and explain each type of message the ATS permits participants
to send and receive and the types of persons that can send and receive
each type of messages (e.g., the ATS, types of subscribers, specific
subscribers, customers of subscribers, trading venues). The ATS would
also be required to disclose the information contained in messages
(e.g., symbol, price, direction (i.e., buy or sell), or size minimums)
and any other information that a participant may choose to include in a
message. If terms in messages can vary based on potential recipients
(e.g., different subscribers may receive varying priced messages for
the same security), the Covered ATS would be required to disclose that.
The Commission is proposing that the Covered ATS disclose whether
messages are attributed to their sender or anonymous, and whether a
subscriber may elect to disclose its identity to other participants,
and if so, what is disclosed and how, when, and to whom. The Commission
understands that some Communication Protocol Systems allow participants
to negotiate trades on an attributed basis so that certain
counterparties may know the identity of other counterparties pre-trade.
In some cases, subscribers on the ATS have established relationships
and may choose to share their identity with a pre-selected list of
potential counterparties or potential counterparties that meet certain
criteria. Even while the subscriber discloses its identity to others,
the identity of potential counterparties may be either known or
anonymous. The Covered ATS would be required to describe when, and
under what conditions, the subscriber or the
[[Page 15557]]
ATS discloses subscribers' identities and how and when messages are
transmitted (e.g., order management system, router, or FIX).
The Covered ATS would be required to describe the processes to
respond to a message and any parameters around such responses. In the
Commission's experience, on negotiation systems, a subscriber or the
Covered ATS makes known the existence of trading interest or an
interest in negotiation, and potential counterparties have the
opportunity to respond. For example, a Covered ATS would be required to
explain how the sender of a message would ``firm-up'' a conditional or
other non-firm message to execute a trade. The ATS would also be
required to describe the processes to respond to a request to
negotiate, and for subscribers who initiate an RFQ to respond to any
responses. In addition, if the ATS permits the initiating party or
respondents a final opportunity prior to execution to accept or reject
the price after the negotiating parties agree to a trading price (i.e.,
a ``last look''), the ATS must describe such processes.
Part III, Item 8 would require the Covered ATS to describe any time
parameters that the ATS sets or permits subscribers to set regarding
sending and receiving messages. This would include time-in-force
restrictions that a subscriber may place on trading interest in a
message (e.g., fill-or-kill, day, good-til-cancel). This would also
include time parameters for updating prices or responding to trading
interest or requests for negotiation applicable during any negotiation
process. In the case of an RFQ, subscribers may provide a specific
price with a ``wire time'' during which such price is actionable. Any
parameters around such wire times would be required to be disclosed by
the Covered ATS. Additionally, if the Covered ATS requires that a
subscriber firm-up its conditional orders within, for example, three
seconds of receiving a response, the Covered ATS would be required to
state so. Any time parameters within which an initiator of a message
would have to respond to responses to its messages would also be
disclosed under Part III, Item 8.
The Covered ATS would also be required to provide information
regarding the contra-party trading interest made available or known on
the system, including whether a subscriber may elect whether to display
only part of its trading interest. The instruction in Part III, Item 8
would state that, if trading interest is made known on the system, the
ATS would be required to describe it in Part III, Item 15. Part III,
Item 8 of Form ATS-N would also require a description of the
circumstances under which messages may be modified, replaced, canceled,
rejected, or removed from the Covered ATS. The Covered ATS would also
be required to describe any restrictions or conditions under which the
message might result in the match of two counterparties, require a
response, or result in an execution in the Covered ATS (e.g.,
interaction, matching, selection, automatic execution) and any price
conditions (e.g., how price conditions affect the rank and price at
which the message can result in an execution).
The Covered ATS would also be required to describe the limits or
requirements for multiple messages sent at the same time. For example,
if the Covered ATS prohibits a subscriber from entering non-firm
trading interest to buy and sell the same bond or security at the same
time, entering the same price for a buy and sell order in the same bond
(i.e., a locked market), or entering a lower-priced sell order than the
buy order (i.e., inverted market), it should disclose these. In
addition, the ATS would be required to state whether a message
containing trading interest is eligible to be sent to destinations
outside the Covered ATS, and if so, describe it in Part III, Item 16.
The Covered ATS would also be required to disclose information about
the availability of message types across all forms of connectivity to
the ATS. To the extent there are differences in the availability of
message types across forms of connectivity, the ATS would need to
describe those differences.
A Covered ATS would also be required to disclose, with respect to
non-firm trading interest, any requirements relating to the size of
trading interest (e.g., minimum or maximum size, odd-lot, mixed-lot,
trading increments, message controls or throttling). This would include
the requirements of Part III, Item 8 of current Form ATS-N, and also
include examples of limitations, such as message controls or
throttling, that the Commission understands a negotiation system, for
example, may use to limit the number of messages sent by a subscriber.
The Covered ATS would also be required to disclose any related handling
procedures, such as, for example, the handling of residual trading
interest after an execution on the ATS (e.g., whether it is canceled or
remains in the system).
In addition, in its response to Part III, Item 8, the Covered ATS
would also be required to disclose in its response the procedures
governing communication protocols. These requirements are currently
incorporated in Part III, Item 11 of current Form ATS-N. Requiring
information about such procedures would provide transparency into how
buyers and sellers may interact, and how non-firm trading interest may
interact with other trading interest in the ATS. The Commission is
proposing to require disclosure of how Covered ATSs prioritize and
permit their subscribers to prioritize trading interest, to provide
information that market participants can use to choose an appropriate
venue at which they can interact with other subscribers or send trading
interest. As applicable, the Covered ATS would be required to provide
in Part III, Item 8, a description of priority applied to a message
upon entry and any subsequent change to priority (if applicable,
whether and when the message can receive a new time stamp, the
message's priority in relation to other messages in the Covered ATS due
to a change to any reference price, and any instance in which a message
could lose execution priority to a later arriving message at the same
price); whether the Covered ATS permits or provides for subscribers to
vary pricing based on the identity of other subscribers (e.g.,
preferred pricing feeds or tiered pricing); and whether subscribers can
select counterparties based on their identity or other factors. If a
Covered ATS allows subscribers complete discretion to, for example,
select which counterparty to interact with when the prices such
counterparties offer are the same, the Covered ATS would be required to
disclose that.
In addition, Part III, Item 8 would require a Covered ATS to
disclose its rules and procedures under which buyers and sellers
interact and agree upon the terms of a trade. Based on Commission staff
experience, ATSs disclose various methods, rules, and conditions under
which subscribers may interact using trading interest. Form ATS-N would
provide a non-exhaustive list of such rules and procedures, which
includes those for participant interaction, pricing methodologies,
allocation, matching, and execution. This question is designed to
provide transparency to those diverse methods, rules, and conditions so
that market participants better understand how the ATS will handle non-
firm trading interest and how subscribers may interact with others in
the ATS. If the Covered ATS auto-executes non-firm trading interest,
the ATS would also be required to disclose the functionality or
protocols governing such auto-execution. The
[[Page 15558]]
Covered ATS would be required to disclose, for example, how the ATS or
a subscriber can designate trading interest as automatically
executable. Any limitations that subscribers may impose on auto-
execution would be responsive to such request.
The Covered ATS would also be required to discuss in Part III, Item
8 how non-firm trading interest may interact with orders or separate
trading functionalities in the ATS or functionality offered by the
broker-dealer operator. For example, if an IOI can interact with a firm
order on the Covered ATS's order book, it should disclose this and any
policies and procedures for such interaction. To the extent that the
Covered ATS has disclosed this in Part III, Item 7 in its discussion of
how firm orders can interact with non-firm trading interest, the ATS
should describe how the non-firm trading interest may interact with
firm trading interest and may cross-reference the disclosure in Part
III, Item 7.
In the Commission's experience, ATSs have adopted other trading
procedures governing interaction and execution. The Commission is
proposing to include examples of such procedures governing
communication protocols that would be required to be disclosed. This
would include functionality or protocols that permit the selection of
displayed non-firm trading interest to trade against. In the
Commission's experience, negotiation systems may allow subscribers to
choose the trading interest they interact with; any procedures
governing such selection should be disclosed in Part III, Item 8. In
addition, the Commission believes that market participants would
benefit from transparency regarding procedures that could re-price
trading interest or prevent it from interacting with other trading
interest under certain conditions. Accordingly, the Form ATS-N would
provide a non-exhaustive list of procedures that includes price
improvement, price protection mechanisms, procedures related to short
sales, functionality to adjust or hedge trading interest, locked-
crossed markets, the handling of execution errors, platform and trade
controls (e.g., fat finger checks, whether the ATS can employ a global
kill switch), the time-stamping of trading interest messages and
executions, and any conditions or processes for terminating a
counterparty match.
In addition, the Covered ATS would be required to disclose what
information is available to subscribers from the ATS about interaction
history, counterparty matching, or executions (e.g., pre- and post-
trade data, best execution analysis, transaction cost analysis), when
such information is made available, the source(s) of such information,
and the process for subscribers to access this information. The
Commission believes that requiring such information would allow market
participants to better assess the information that Covered ATSs
provide, including allowing them to analyze or evaluate their
performance, resolve potential disputes, and/or understand how their
trading interest has historically interacted and been treated in the
ATS, among other things.
Request for Comment
118. Are there any aspects of how Covered ATSs permit non-firm
trading interest to be sent and/or received that are not covered by
this Item? Are there any aspects of how subscribers interact with each
other on Covered ATSs by using non-firm trading interest that are not
covered by this Item? What information about non-firm trading interest
and the process for transmitting non-firm trading interest would be
useful to market participants?
i. Item 9: Monitoring and Surveillance of the ATS Market
The Commission is proposing that Part III, Item 9(a) of Form ATS-N
require a Covered ATS to disclose information about the activities the
ATS undertakes to supervise the trading activity that occurs on or
through the ATS (e.g., supervisory systems and procedures to detect,
deter, or limit potentially disruptive, manipulative, or non-bona fide
quoting and trading activities that occur on or through its system and
to ensure that they are reasonably designed to achieve compliance with
applicable SRO rules and the Federal securities laws) and to provide a
summary of any supervision activities that occur on or through the ATS,
the sources of data the ATS uses to supervise trading activity (e.g.,
internal or external sources), and the activities that the ATS intends
to detect, deter, or limit.
As a registered broker-dealer, an ATS must comply with the filing
and conduct obligations associated with being a registered broker-
dealer, including becoming a member of an SRO, such as FINRA, and
compliance with SRO rules.\593\ Accordingly, ATSs must comply with SRO
rules which, among other things, require each member to maintain a
reasonably designed supervisory system.\594\ For example, FINRA states
it expects an ATS's supervisory system to be reasonably designed to
identify ``red flags,'' including potentially manipulative or non-bona
fide trading that occurs on or through its systems, and that ATSs must
regularly assess and evaluate their supervisory systems and procedures
to ensure that they are reasonably defined to achieve compliance with
applicable FINRA rules and the Federal securities laws.\595\ The
Commission believes that the information disclosed in response to this
request would help market participants understand the scope of
supervision activities that an ATS performs to mitigate potentially
manipulative and non-bona fide trading that occurs on or through its
system. This information could also help regulators, including the
Commission and FINRA, to assess the extent to which an ATS's
supervision procedures are designed to facilitate investor protection
over activities occurring in the ATS and comply with the applicable
rules, including the Exchange Act and FINRA rules.
---------------------------------------------------------------------------
\593\ Section 15(b)(8) of the Exchange Act requires a broker or
dealer to become a member of a registered national securities
association, unless it effects transactions in securities solely on
an exchange of which it is a member. 15 U.S.C. 78o(b)(8).
\594\ See Regulatory Notice 18-25, ATS Supervision Obligations,
August 13, 2018, available at https://www.finra.org/sites/default/files/Regulatory-Notice-18-25.pdf (``FINRA Regulatory Notice'') at
3. In addition, FINRA Rule 3310 requires FINRA members to, among
other things: Establish and maintain a system to supervise the
activities of each associated person that is reasonably designed to
achieve compliance with applicable securities laws, regulations, and
FINRA rules; establish, maintain, and enforce written procedures to
supervise the types of business in which it engages and the
activities of associated persons that are reasonably designed to
achieve compliance with applicable securities laws, regulations, and
FINRA rules; conduct a review, at least annually of the businesses
in which it engages reasonably designed to assist the member in
detecting and preventing violations of, and achieving compliance
with, applicable securities laws, regulations, and FINRA rules and
retain a written record of the date upon which each review and
inspection is conducted; and include in its supervisory procedures a
process for the review of securities transactions that are
reasonably designed to identify trades that may violate the
provisions of the Exchange Act, the rules thereunder, or FINRA rules
prohibiting insider trading and manipulative and deceptive devices
that are effected for certain accounts. See FINRA Rule 3310.
\595\ See FINRA Regulatory Notice, supra note 594, at 3.
---------------------------------------------------------------------------
The Commission is proposing Part III, Item 9(b) of Form ATS-N to
request disclosures about whether the ATS monitors for certain types of
trading behaviors or activities that may be detrimental to the ATS
market place or trading (e.g., anti-gaming technology) and, if so, to
provide a summary of the ATS's monitoring activities and the trading
behaviors and explain the
[[Page 15559]]
activities that the ATS intends to detect, deter, or limit. In the NMS
Stock ATS Adopting Release, the Commission described that, in response
to the proposal of Form ATS-N, commenters requested that information
about the monitoring activities the ATS performs be included in Form
ATS-N.\596\ One commenter suggested that disclosure of certain
additional trading services should be required, specifically whether
the ATS employs technology designed to detect and deter price
manipulation and other disruptive trading practices (i.e., anti-gaming
technology), and, if so, the ATSs should include a description of this
technology in the form.\597\ This commenter stated that existence of
such technology can increase market confidence, particularly for market
participants that transact in large volumes, such as funds, because it
shows that a trading venue is committed to providing a fair and
competitive market.\598\ This commenter further stated that funds
currently have no mechanism to receive standardized information
regarding anti-gaming technology or to compare anti-gaming technology
across different ATSs.\599\ Another commenter stated that anti-gaming
technology and other subscriber-related safeguards are among the core
attributes of ATSs that are of particular importance to buy-side
institutions.\600\
---------------------------------------------------------------------------
\596\ See NMS Stock ATS Adopting Release, supra note 2, at
38850.
\597\ See Letter from David W. Blass, General Counsel,
Investment Company Institute, dated February 25, 2016, at 9-10.
\598\ See id.
\599\ See id.
\600\ See Letter from Phillip S. Gillespie, Executive Vice
President, General Counsel, State Street Global Advisors, dated
February 26, 2016 at 2-3. See also Memorandum from the Office of
Commissioner Kara Stein regarding a July 26, 2016 meeting with
representatives of Morgan Stanley (including in a presentation that
whether an ATS has anti-gaming controls is among the frequently
asked questions by clients).
---------------------------------------------------------------------------
The Commission, however, declined to adopt a request related to
anti-gaming technology and subscriber-related safeguards at that time
because such descriptions made in a publicly available document could
serve to undermine those safeguards by disclosing information that
makes evading those safeguards easier.\601\ However, the Commission is
now proposing this requirement because it believes that market
participants would want to know how the ATS may monitor for certain
trading behaviors or activities that may be detrimental to the ATS
market place or to the participants that use the ATS's services. In
addition, the information would help market participants determine
which ATSs provide better market quality that the market participants
would be more inclined to effect transactions on. In the Commission
staff's experience reviewing Forms ATS-N filed by NMS Stock ATSs, some
NMS Stock ATSs have described information about their surveillance
procedures and other safeguards, which allow market participants to
understand their practices, while avoiding the level of detail that
would help enable market participants to evade them. Accordingly, the
Commission believes that the requests for information proposed would
not serve to undermine the ATS's surveillance and monitoring activities
because the Commission is requesting summary level information, which
would strike the right balance in requiring these important disclosures
and avoiding the risk that market participants could use the
disclosures on Form ATS-N to evade such tools and controls.
---------------------------------------------------------------------------
\601\ See NMS Stock ATS Adopting Release, supra note 2, 83 FR
38850.
---------------------------------------------------------------------------
Request for Comment
119. Would requiring summary disclosure regarding the Covered ATS's
anti-gaming technology and similar safeguards benefit market
participants? What other information regarding monitoring and
surveillance of activity in the ATS would be beneficial? Does the
proposed summary disclosure strike the right balance in providing
disclosure and avoiding the risk that market participants could use the
disclosures to evade the ATS's tools and controls?
j. Item 10: Opening and Reopening
Part III, Item 10 of Form ATS-N is designed to provide information
about the use of any special processes and procedures related to
matching trading interest at the opening, or to set a single opening or
reopening price to, for example, maximize liquidity and accurately
reflect market conditions at the opening or reopening of trading. The
Commission believes that this disclosure requirement is important
because market participants would likely want to know about any special
opening or reopening processes, including which types of trading
interest can participate in the opening or reopening processes or
whether there are any protocols at the open for buyers and sellers to
send messages and negotiate a trade. To capture processes related to
sending, receiving, and viewing trading interest for communication
protocols and negotiation systems, the Commission is proposing to
specify in Part III, Item 10 that the ATS should disclose when and how
trading interest may be sent, received, and viewed at opening, how
unexecuted trading interest is handled at the time the ATS begins its
regular trading hours or following a stoppage of trading in a security
during its regular trading hours, and whether there are any protocols
at the open for buyers and sellers to send messages and negotiate a
trade.
Based on Commission staff experience with Form ATS-N filings, the
Commission is proposing to amend Form ATS-N to incorporate the
requirements of Part III, Item 10(c) of current Form ATS-N with the
requirements of Part III, Item 10(a). In its experience, the Commission
observed significant overlap in the responses to Part III, Item 10(a),
which asks about how the ATS opens or re-opens after stoppage, and Part
III, Item 10(c), which asks how unexecuted trading interest is handled
at the start of regular trading hours or following a stoppage, as the
treatment of unexecuted trading interest is an integral part of an
ATS's opening and re-opening procedures. Because of this overlap, some
NMS Stock ATSs repeat the disclosures in both current Form ATS-N Part
III, Items 10(a) and (c). To streamline the disclosure and reduce
redundancy, the Commission is proposing to specify in Part III, Item
10(a) of revised Form ATS-N that the Covered ATS describe how
unexecuted trading interest is handled at the time the ATS begins its
regular trading hours or following a stoppage of trading in a security
during its regular trading hours, and to delete the separate disclosure
requirements of Part III, Item 10(c) of current Form ATS-N.
Information about when the Covered ATS will price and prioritize
trading interest during the opening or reopening of the ATS would
provide market participants with the information they need to plan and
execute their trading strategies during these periods. The Item would
also, for example, require disclosure of any processes or procedures to
match trading interest to set a single opening or reopening price to
maximize liquidity and accurately reflect market conditions at the
opening or reopening of trading. For trading interest allowed to be
submitted before an ATS opens for trading, the Item 10(b) would require
an explanation of what priority rules would apply to that trading
interest.\602\ The Commission believes most participants consider
important the procedures for the pricing and priority of trading
interest, and the
[[Page 15560]]
types of trading interest allowed because these rules and procedures
can directly impact their execution price. The disclosures are also
designed to provide information to subscribers about when they may use
the systems to send or receive messages or view trading interest at the
open or reopen, and the status of any messages or orders that may be
pending before the ATS opens or reopens.
---------------------------------------------------------------------------
\602\ The Commission is renumbering Part III, Item 10(e) of
current Form ATS-N as Part III, Item 10(b) in revised Form ATS-N.
The Commission also proposes to clarify in Item 10 that ``regular
trading hours'' refer to the ATS's regular trading hours.
---------------------------------------------------------------------------
Request for Comment
120. Do Government Securities ATSs have any special opening and
reopening processes and procedures around Treasury auctions? If so, do
commenters believe there any aspects of the opening and reopening
processes for Treasury auctions that should be specifically addressed
in this Item?
k. Item 11: Interaction With Related Markets
Proposed Part III, Item 11 of Form ATS-N is designed to provide
information about any functionality, procedure or protocol used to
facilitate trading or communication on, or source pricing for, the
Covered ATS that is offered by the broker-dealer operator or its
affiliates \603\ using markets for financial instruments related to the
securities it trades (``Related Markets''). In the 2020 Proposal, the
Commission proposed to add a similar question to Form ATS-G; the
Commission is now proposing to add this question to Form ATS-N and to
make it applicable to both Government Securities ATSs and NMS Stock
ATSs. Markets for financial instruments related to government
securities could include those non-government securities markets that
trade futures, currencies, fixed income, and swaps, for example.
Markets for financial instruments related to NMS stocks could include,
for example, non-NMS stock markets that trade futures, options, and
swaps. If applicable, the Covered ATS would: (1) Identify the
functionality, procedures, protocols, and source of pricing and the
Related Market; (2) state whether the functionality, procedures,
protocols, and source of pricing is provided or operated by the broker-
dealer operator or its affiliate, and whether the Related Market is
provided or operated by the broker-dealer operator or its affiliate;
(3) explain the use of the functionality, procedures, protocols, and
source of pricing with regard to the Related Market and the ATS,
including how and when the functionality, procedures, protocols, and
source of pricing can be used, by whom, and with what markets.
---------------------------------------------------------------------------
\603\ Among other things, services to facilitate trading or
source pricing for the Government Securities ATS using non-
government securities markets that are offered by a third-party by
arrangement with the broker-dealer operator or affiliates would also
be required to be disclosed under this Item.
---------------------------------------------------------------------------
The functionalities, procedures, or protocols required to be
disclosed would include, for example, offering order types to
facilitate transactions in the ATS and the Related Market, procedures
to allow subscribers to perform multi-leg transactions involving
another market and the ATS, or a protocol to allow a subscriber to
communicate with other persons to negotiate a trade including, for
example, a government security and non-government security. A Covered
ATS could offer, for example, Exchange-for-Physical (``EFP'')
transactions that can involve markets in addition to the ATS. An EFP
transaction where ATS subscribers agree to exchange a financial
product, such as a futures contract on a government security, for the
underlying related government security or NMS stock, would be
responsive to this Item. The Commission believes that it would be
important to participants to understand functionality, procedures, and
protocols made available to them, as they can impact their experience
in the ATS.\604\
---------------------------------------------------------------------------
\604\ To the extent that a Government Securities ATS offers a
functionality, procedure, or protocol using a market for government
securities (e.g., trading venue for U.S. Treasury Securities or
options) or an NMS Stock ATS offers a functionality, procedure, or
protocol using a market for NMS stocks, the Covered ATS would
disclose information about that functionality, procedure, or
protocol in Part III, Item 11 of Form ATS-N.
---------------------------------------------------------------------------
Information about how the ATS uses market data from a Related
Market, through an aggregator or otherwise, to provide the services it
offers would also be required by the form.\605\ Among other things, for
example, the ATS would need to disclose in response to this Item its
use of such market data to display, price, prioritize, execute, and
remove trading interest in the ATS.\606\ As part of this explanation,
the ATS would specify, if applicable, when the ATS may change sources
of market data to provide its services. In response to proposed Part
III, Item 11 of Form ATS-N, the ATS would explain how, for example,
market data from a Related Market is received by the ATS, compiled, and
delivered to the matching engine. For example, among other possible
arrangements, the ATS could explain that market data from a Related
Market is received and assembled by the broker-dealer operator, and
subsequently delivered to the matching engine, or that market data is
sent directly to the matching engine, which normalizes the data for its
use. The ATS would disclose, for example, whether it uses market data
from the futures market to price and execute EFP transactions and
describe how it uses that market data under this Item.
---------------------------------------------------------------------------
\605\ If a Covered ATS uses market data from another market that
trades government securities, that information would be disclosed
under Part III, Item 22 of revised Form ATS-N.
\606\ Disclosure of any market data used by the Covered ATS,
including market data for options and repos on government
securities, would be required under Part III, Item 22 of Form ATS-N.
---------------------------------------------------------------------------
A broker-dealer operator's activities in financial instruments
related to the securities that the ATS trades or offerings of a Related
Market, such as a futures exchange, along with its operation of an ATS,
raise the potential for information leakage of a subscriber's
confidential trading information, or the broker-dealer operator could
provide certain advantages to subscribers that use a Related Market
that it operates. As such, Item 11 would require information about
whether the functionality, protocols, procedures, and source of pricing
on the Covered ATS or the Related Markets are provided or operated by
the broker-dealer operator or its affiliates.
Request for Comment
121. What are commenters' views on the relationship between markets
for government securities and Related Markets and between markets for
NMS stocks and Related Markets and how investors may use these markets
together with a Covered ATS to achieve their trading objectives?
122. What aspects of government securities markets or NMS stock
markets and Related Markets, such as the futures markets, do market
participants use for trading on a Covered ATS? What information about
those markets might be useful to a subscriber and why?
l. Item 12: Liquidity Providers
Part III, Item 12 of Form ATS-N is designed to disclose information
about arrangements with liquidity providers. Like national securities
exchanges,\607\ ATSs might engage firms to provide liquidity on both
sides of the market. The Commission has observed that the overwhelming
majority of registered national securities exchanges have structured
programs for market makers, which generally set forth both obligations
(e.g., continuous quoting at or within the NBBO) and often, some
benefits (e.g., fee rebates). Similarly, a Covered ATS may want to
ensure that there is sufficient contra-side liquidity
[[Page 15561]]
available in the ATS in a particular security to incentivize market
participants to send trading interest in that security to the ATS. To
do this, the ATS may engage certain market participants to quote in a
security or trade against orders in the Covered ATS, performing similar
functions to a market maker on a national securities exchange.\608\
---------------------------------------------------------------------------
\607\ See, e.g., NYSE Guide Rule 104 (Dealings and
Responsibilities of DMMs), Nasdaq Rules Equity 2, Section 5 (Market
Maker Obligations).
\608\ These liquidity providers may quote in a particular
security in the ATS during trading hours and may receive a benefit
for performing this function, such as discounts on fees, rebates, or
the opportunity to execute with a particular type of segmented order
flow.
---------------------------------------------------------------------------
To the extent that a Covered ATS and a participant have entered
into an arrangement under which that participant undertakes obligations
to display, enter, or trade against trading interest on the Covered
ATS, the Commission believes that market participants should know both
the terms and conditions of such an arrangement and the identity of the
liquidity-provider ATS participant. Form ATS-N currently requires an
ATS to disclose the terms and conditions of an arrangement with a
liquidity provider and the names of any liquidity providers that are
either business units of the broker-dealer operator or affiliates of
the broker-dealer operator.\609\ When it adopted Form ATS-N, the
Commission explained that it was requiring disclosure regarding
liquidity providers because it believed that market participants would
want to know the identity of such liquidity providers to help evaluate
potential conflicts of interest or information leakage on the trading
platform.\610\ The Commission now believes that the names of all
liquidity providers should be disclosed to evaluate potential conflicts
of interest and the potential for information leakage. Specifically, if
a participant is obligated to provide contra-side liquidity and, for
example, derives a particular benefit in exchange for undertaking such
an obligation, the Commission believes that other users of the ATS
should know who that liquidity provider is, how it is expected to trade
in the ATS, and the benefit that it is receiving. This disclosure would
be similar to Exhibit M of Form 1, which requires national securities
exchanges to publicly disclose, among other things, the identity of all
market makers and liquidity providers. The Commission believes it
appropriate to require a similar level of disclosure for Covered ATSs
with regard to the identity of market makers and liquidity providers,
given the sizable market share of such entities in their respective
sectors.
---------------------------------------------------------------------------
\609\ See Part II, Items 1(c) and 2(c) of Form ATS-N.
\610\ See NMS Stock ATS Adopting Release, supra note 2, at
38829.
---------------------------------------------------------------------------
Additionally, the Commission believes that information about
liquidity providers would be useful to ATS participants who, for
example, may want their orders to only interact with agency orders (and
not with those of a liquidity provider), or, conversely, may themselves
want to become liquidity providers on the Covered ATS. Such arrangement
could take many forms, and the function of the liquidity provider on an
ATS could depend on the structure and trading protocols of the ATS.
This Item could cover, for example, arrangements or agreements between
the broker-dealer operator and another party to quote or trade on the
Covered ATS. The Item does not cover agreements with a subscriber that
has no obligation to buy or sell securities in the ATS. Furthermore, to
obtain disclosures about activity on Communication Protocol Systems,
the Commission is proposing to revise Part III, Item 12 of Form ATS-N,
which asks about whether there are arrangements to ``provide'' orders
and trading interest, and, instead, to ask about arrangements to
``display, enter, or trade against'' trading interest.
Accordingly, the Commission is proposing that Part III, Item 12
require a Covered ATS to disclose any formal or informal arrangements
with any person \611\ or the broker-dealer operator to display, enter,
or trade against trading interest in the ATS (e.g., undertaking to buy
or sell continuously or to meet specified thresholds of trading or
quoting activity). This will be in the form of a ``yes'' or ``no''
question, and if the ATS answers yes, it must both identify the
liquidity provider(s) and describe the arrangement(s), including the
terms and conditions.
---------------------------------------------------------------------------
\611\ The Commission is proposing to change the current
requirement to disclose arrangements with any ``Subscriber'' to
display, enter, or trade against trading interest in the Covered ATS
to require disclosure of any such arrangements with any ``persons.''
In the Commission's experience, arrangements to display, enter, or
trade against trading interest in a Covered ATS may include
arrangements with subscribers, non-subscriber participants who
submit orders through a subscriber or the broker-dealer operator,
and persons controlling subscribers or participants to the ATS. The
Commission is therefore proposing to revise the rule text by using
the term ``person'' to capture arrangements with non-subscribers
that could impact order flow on the ATS.
---------------------------------------------------------------------------
Request for Comment
123. Are there any arrangements between Covered ATSs and persons to
provide trading interest to the Covered ATS that may not be required by
this Item but should be? If any, what is the nature of those
arrangements, and why are they important to disclose publicly on Form
ATS-N?
124. Should Covered ATSs be required to identify liquidity
providers on Form ATS-N? Please explain why or why not, including any
advantages or disadvantages resulting from this disclosure.
m. Item 13: Segmentation; Notice
Part III, Item 13(a) of Form ATS-N is designed to disclose
information about how trading interest in the Covered ATS is segmented
into categories, classifications, tiers, or levels. The Covered ATS
would be required to explain the segmentation procedures, including how
and what trading interest is segmented. The Commission is proposing to
add in Item 13(a) of Form ATS-N a requirement to explain where the
identification of segmented trading interest is applied (e.g., when ATS
trading interest is received by the broker-dealer operator or entered
into the ATS). From the Commission's experience, systems may segment
trading interest when trading interest enters through the broker-dealer
(from the SOR or similar functionality), or when the trading interest
is entered into the ATS. The Commission believes subscribers would want
to understand where their trading interest is segmented so they can
assess who is making the decisions about how their trading interest
will be categorized when entered into the ATS and the level of
protections their confidential trading information will receive. The
Covered ATS would also be required to identify and describe any
categories, classifications, tiers, or levels and the types of trading
interest that are included in each and provide a summary of the
parameters for each segmented category and length of time each
segmented category is in effect. The Commission is proposing to add to
Item 13(a) that the parameters for each segmented category would
include when such category is determined, reviewed, and can be changed.
Item 13(a) also requires disclosure of any procedures for overriding a
determination of segmented category and would require how segmentation
can affect trading interest interaction.
This Item is designed to provide market participants with an
understanding of the categories of trading interest or types of
participants with which they may interact. In addition, the information
provided would allow them to both assess the consistency of a segmented
group and determine whether the manner in which the trading interest is
segmented comports with their views of how
[[Page 15562]]
certain trading interest should be categorized. Disclosure of the
procedures and parameters used to segment categories would allow a
participant to determine whether its view of what constitutes certain
trading interest it wants to seek or avoid is classified in the same
way by the Covered ATS. For example, a subscriber may find it useful to
understand the standards a Covered ATS uses to categorize high
frequency trading firms so that it can compare the criteria used by the
ATS with its view of what constitutes a high frequency trading firm,
and thus be able to successfully trade against or avoid such trading
interest. Similarly, information regarding the procedures applicable to
trading among segmented categories would allow market participants to
evaluate whether they can successfully trade against or avoid the
segments of trading interest. In response to the question regarding
segmentation on previously-proposed Form ATS-G in the 2020 Proposal,
one commenter stated that, as the fixed income market structure
continues to develop, types of segmentation options may occur in
Government Securities ATSs and should be disclosed.\612\
---------------------------------------------------------------------------
\612\ See Bloomberg Letter at 8.
---------------------------------------------------------------------------
Some Covered ATSs segment trading interest entered in the ATS
according to various categories for purposes of trading interest
interaction. For example, a Covered ATS could elect to segment trading
interest by type of participant (e.g., buy-side or sell-side firms,
PTFs, agency-only firms, firms above or below certain assets under
management thresholds). When segmenting trading interest in the ATS, a
Covered ATS might look to the underlying source of the trading interest
such as the trading interest of retail customers. Some Covered ATSs
segment by the nature of the trading activity, which could include
segmenting by patterns of behavior, time horizons of traders, or the
passivity or aggressiveness of trading strategies. Covered ATSs might
use some combination of these criteria or other criteria altogether.
The ATS might use these segmented categories to design its trading
interest interaction rules, allowing only trading interest from certain
categories to interact with each other.
The Commission recognizes the concern that describing the precise
criteria used by the ATS to segment trading interest could result in
gaming of those criteria by subscribers and thus reduce the
effectiveness of segmentation as a control. On the other hand, market
participants are interested in understanding how their trading interest
is categorized in the ATS and the types of market participants that
would interact with its trading interest. The Commission believes that
Part III, Item 13 of Form ATS-N appropriately balances these competing
interests by soliciting a summary of the parameters for each segmented
category. By requiring Covered ATSs to provide a summary of these
parameters on Form ATS-N, rather than a detailed analysis of the
parameters and how they are calculated, this Item is designed to avoid
responses that could allow the gaming or manipulation of segmentation
criteria.
Based on the Commission's experience, systems that offer RFQs or
BWIC protocols that bring buyers and sellers together to negotiate may
apply filtering technology to allow participants to more easily search
for securities with particular characteristics that comport with the
participants' needs or exclude securities that do not meet the
participants' needs. They may also offer counterparty filtering that
prevents transactions between certain participants (i.e., potential
counterparties) by prohibiting views of either party's inventory by the
other party. Such systems may also implement permissioning procedures
for subscribers to be able to view trading interest of certain other
subscribers. The Commission believes that market participants would
benefit from understanding how a Covered ATS controls the counterparty
interest that they, and their potential counterparties, can view and
interact with, and accordingly, the Commission is proposing to add new
Part III, Item 13(b), which would ask if the ATS, in the absence of
subscriber direction, can prevent a participant or its potential
counterparties from viewing or interacting with certain trading
interest (e.g., permissioning, filtering, or blocking).\613\ An ATS
that has such controls would be required to explain the processes,
including what a subscriber or counterparty is prevented from viewing
or interacting with and where this determination is made (i.e., when
trading interest is received at the broker-dealer operator or the ATS);
how and when the ATS prevents a subscriber or its potential
counterparty from viewing or interacting with certain trading interest;
any categories, classifications, tiers, or levels, and the types of
trading interest that the ATS uses to determine how subscribers can
view or interact with other trading interest; a summary of the
parameters for such processes and the length of time any such parameter
is in effect; any procedures for overriding a determination of any
category, classification, tier, or level that the ATS uses to designate
how subscriber trading interest can interact; how such processes can
affect trading interest interaction; and how a subscriber can view
filtered messages and any permissioning process and criteria for a
subscriber to send, receive, or interact with a message.
---------------------------------------------------------------------------
\613\ The Commission is proposing to specify that this question
relates to process implemented ``in the absence of subscriber
direction.'' The Commission is drawing a distinction from the
filtering or blocking that a subscriber can do in the ATS, which
would be disclosed in Part III, Item 14 (Counter-Party Selection).
If the ATS, on its own, and in the absence of subscriber directions,
filters certain subscribers from viewing the existence of certain
trading interest, that would be responsive to Part III, Item 13 of
Form ATS-N.
---------------------------------------------------------------------------
The Commission believes that market participants will benefit from
transparency regarding protocols that Covered ATSs use to limit in any
way the trading interest that certain subscribers can view or interact
with based on the identity of the counterparty. The Commission
recognizes that RFQs and similar systems may establish protocols to
block or filter participants from viewing or interacting with the
trading interest of certain potential counterparties. The Commission is
thus proposing to clarify in Part III, Item 13 of Form ATS-N that the
scope of the question would extend to ATS protocols involving the ATS
filtering or blocking trading interest.
Part III, Item 13(c) would address whether the ATS identifies
trading interest entered by a customer of a broker-dealer as customer
trading interest. Disclosing the origin of customer trading interest of
a broker-dealer could be a form of segmentation because it can
facilitate users restricting their trading to only certain types of
market participants and it can contribute to information leakage and
adverse selection of trading interest of institutional investors, who
generally trade passively. Accordingly, Part III, Item 13(c) would
require a Covered ATS to disclose if it identifies trading interest
entered by a customer of a broker-dealer in the ATS as customer trading
interest.
In addition, in Part III, Item 13(d) of Form ATS-N, the ATS would
be required to state whether it discloses to any person the designated
segmented or otherwise designated category, classification, tier, or
level of trading interest and, if so, provide a summary of the content
of the disclosure, when and how the disclosure is communicated, who
receives it, and whether and how such designation can
[[Page 15563]]
be contested. This requirement is substantially similar to the current
requirement of Part III, Item 13(d) of Form ATS-N, but the Commission
is proposing to amend this request to add designations other than
segmentation, such as permissioning, filtering, and blocking, that
would be responsive under proposed Part III, Item 13(b) of Form ATS-N.
This would provide information to market participants about the notice
that the ATS provides subscribers about the segmented category to which
they are assigned, and also, if applicable, who can obtain information
about the segmented categories of other subscribers.
Request for Comment
125. What information about the segmentation of trading interest by
a Covered ATS or any other practices or procedures that allow a Covered
ATS to control which counterparties view each other's trading interest
or are able to interact would be important to persons that use the
services of the ATS?
n. Item 14: Counter-Party Selection
Part III, Item 14(a) of Form ATS-N is designed to provide
information about whether trading interest can be designated to
interact or not interact with certain trading interest in the ATS by an
ATS participant. The Commission is proposing to make minor
modifications to this question including new examples of the types of
designations that a subscriber can make to control both interactions
with and matching against trading interest or a participant in the ATS.
These examples would include designations to interact with or execute
against a specific subscriber's trading interest or prevent the trading
interest of a subscriber from interacting with or executing against the
trading interest of that subscriber. If the ATS has such counterparty
selection available, it would be required to explain the counterparty
selection procedures, including how counterparties can be selected and
whether the designation affects the trading rules (e.g., order
interaction or priority) or communication protocols of the ATS.\614\ To
analyze whether the ATS is an appropriate venue to accomplish their
trading objectives, market participants have an interest in knowing
whether--and how--they may designate their trading interest to interact
or avoid interacting with specific trading interest or persons in the
ATS. Part III, Item 14 is designed to require disclosure of such
information.
---------------------------------------------------------------------------
\614\ The Commission is proposing minor changes to Form ATS-N,
Part III, Item 14, which references how the designation affects the
``interaction and priority of trading interest in the ATS'' to be
more inclusive of communication protocols.
---------------------------------------------------------------------------
For instance, the disclosures proposed under this Item would allow
a participant in the Covered ATS to know whether it can interact with
certain categories of trading interest in the ATS or can designate
trading interest submitted to the ATS to interact only with trading
interest of certain other types of ATS participants. The ATS might
allow subscribers to choose from categories of trading interest or
categories of participants that the broker-dealer operator segments in
the ATS. For example, buy-side or institutional subscribers might seek
to trade only against other buy-side or institutional trading interest,
or might seek to avoid trading against PTFs or high frequency trading
firms. Also, it would also be responsive to this Item for a Covered ATS
to state whether a subscriber can restrict interacting with its own
trading interest, whether such restrictions are by default or only upon
subscriber request, and any applicable limitations on such
restrictions. This Item would require description of any procedures
allowing a subscriber to limit its counterparty on an order-by-order
basis or a participant-by-participant basis, how it would go about
doing so, and how such selection would affect the interaction and
priority of trading interest. For example, an ATS would include in its
response to this Item whether a designation to interact with a specific
category of counterparty trading interest or participants can be made
by the subscriber (i.e., by marking its trading interest) or whether
the designation must be implemented by the broker-dealer, on the
subscriber's behalf. If the broker-dealer implements the counterparty
designation, the ATS would also include when such designation would go
into effect (e.g., on same trading day as the subscriber's selection or
on a date thereafter).
The Commission is also proposing to amend Form ATS-N to add a
requirement that the ATS disclose in Part III, Item 14(b) whether a
subscriber can designate trading interest that the subscriber or
potential counterparties can view (e.g., filtering, blocking,
permissioning). The ATS would be required to explain any such
processes, including how and when a subscriber can (or cannot)
designate which trading interest it or a potential counterparty can
view, any categories, classifications, or levels, and the types of
trading interest that subscribers are able to designate, a summary of
the parameters for such processes and the length of time any such
parameter is in effect, and how such processes can affect how trading
interest interacts in the ATS. The Commission believes this type of
functionality may be particularly relevant to communication protocols
and negotiation systems that may fall within the criteria of Rule 3b-
16(a), as proposed to be amended. From Commission staff's experience,
ATSs may disclose counterparty filters that could, for example, allow a
subscriber to prohibit itself from viewing a potential counterparty's
inventory or to prohibit a potential counterparty from viewing its
inventory. Under proposed Part III, Item 14(b), an ATS would include in
its response if, for example, participants in the ATS can choose not to
view trading interest from certain identified potential counterparties
or certain types of counterparties, such as those that have failed to
respond to RFQs in a given amount of time. Similarly, if a participant
can block certain potential counterparties from viewing its trading
interest, such functionality would be required to be disclosed in this
Item as well. Market participants should be aware of how participants
on the platform can choose not to interact with certain trading
interest. If, however, the ATS (and not the participant) makes these
designations and restricts the interactions of potential
counterparties, such designations and restrictions would be required to
be disclosed under Part III, Item 13.\615\
---------------------------------------------------------------------------
\615\ See supra Section IV.D.5.m.
---------------------------------------------------------------------------
Request for Comment
126. Should Form ATS-N request more or less information about how
trading interest can be designated to interact or not interact with
certain trading interest in the Covered ATS? Are there important forms
of counterparty selection that the Commission should address?
o. Item 15: Display and Visibility of Trading Interest
The Commission is proposing to restructure Part III, Item 15 so
market participants can more readily understand information regarding
trading interest that the Covered ATS displays to the subscribers, the
public, and any person, including the broker-dealer operator, and what
information regarding trading interest a subscriber of the ATS can
display through the ATS. Although, as discussed below, the Commission
proposes to require Covered ATSs to divide the responses to Part III,
Item 15(b) of current Form ATS-N into Items 15(a), (b), and (c) in
revised Form ATS-N, the Commission believes that these questions would
solicit substantially similar information
[[Page 15564]]
that is required by current Item 15(b) of Form ATS-N, in addition to
information that is relevant to communication protocols and the use of
non-firm trading interest.
Part III, Item 15(a) of Form ATS-N would require a Covered ATS to
disclose whether the ATS displays trading interest to subscribers or
the public (e.g., whether the ATS disseminates orders through market
data feeds or a website or sends invitations or requests to subscribers
about potential counterparties to trade with). If the ATS displays
trading interest to subscribers or the public, the ATS would be
required to explain what information the ATS displays (e.g., security,
price, size, direction, the identity of the sender, rating information
based on the sender's past performance in the ATS), how and when such
information is displayed, to whom such information is displayed (e.g.,
subscribers, public, types of market participant), and how long the
displayed information is available. In addition, the ATS would also be
required to indicate whether a subscriber can opt-out of the display of
its trading interest, and if so, the process for subscribers to do so.
This Item would also require the ATS to describe differences in
latencies with which the ATS displays subscribers' trading interest due
to a functionality of the ATS. For example, if a Covered ATS transmits
and displays its proprietary data feed to certain subscribers faster
than to other subscribers as a result of the alternative means offered
by the ATS to connect, such information would be responsive to this
Item. In addition, this Item would require an ATS that offers work-ups
to match trading interest to disclose the information that is displayed
to all subscribers or certain subscribers in public or private phases
of the work-up, as well as what characteristics of the trading interest
are displayed.
The ATS could display subscriber trading interest in a number of
ways. For instance, when an ATS sends electronic messages outside of
the ATS that expose the presence of trading interest in the ATS, it is
displaying or making known trading interest in the ATS. In Part III,
Item 15(a), a Covered ATS would be required to disclose the
circumstances under which the ATS sends these messages, the types of
market participants that received them, and the information contained
in the messages, including the exact content of the information, such
as symbol, price, size, attribution, or any other information made
known. An ATS may also offer a direct data feed from the ATS that
contains real-time order information.\616\ Some ATSs have arrangements,
whether formal or informal (oral or written), with third parties to
display the ATS's trading interest outside of the ATS, such as IOIs
from the subscribers being displayed on vendor systems or arrangements
with third parties to transmit IOIs between subscribers. A Covered ATS
would be required to include this type of information in its response
to this Item.
---------------------------------------------------------------------------
\616\ In the case of a Covered ATS offering a direct data feed
with information about trading interest in the ATS, the ATS would be
required to disclose under Part III, Item 15 what information the
data feed provides about the trading interest, the associated timing
in receiving the feed (e.g., real-time, delayed), how a subscriber
would receive the feed (e.g., connectivity), and if all subscribers
are treated the same in receiving the feed, including whether all
subscribers are eligible to receive it and any differences in
latency receiving the feed.
---------------------------------------------------------------------------
Part III, Item 15(b) of Form ATS-N would require a Covered ATS to
disclose whether a subscriber can use the ATS to display or make known
trading interest to any person (e.g., stream quotes to the subscribers
or the public or send a request for quote, IOI, conditional order, or
invitation to negotiate to a subscriber or the broker-dealer operator).
If yes, the ATS would explain what information the subscriber can
display through the ATS (e.g., security, price, size, direction, the
identity of the sender), procedures for subscribers to display such
information, how and when such information is displayed, to whom such
information is displayed (e.g., subscribers, public, types of market
participant), and how long the displayed information is available. In
addition, Communication Protocol Systems may offer functionalities or
protocols to allow their subscribers, who otherwise do not have the
ability to display their trading interest, to use the functionalities
or protocols to display trading interest information. Part III, Item
15(b) would differ from Part III, Item 15(a) in that Item 15(b) would
ask what information subscribers can display or make known about their
trading interest through the ATS whereas Part III, Item 15(a) would ask
what information regarding trading interest the ATS displays. For
example, an ATS that receives orders and disseminates top-of-book
information to subscribers would be required to disclose this in Item
15(a), while an RFQ system that allows participants to select when,
how, and to whom to display their trading interest to solicit
counterparty trading interest would be required to disclose this in
Item 15(b). The Commission is proposing the disclosure requirements of
Item 15(b) because it believes that ATS participants would want to know
whether a particular ATS would provide them with any protocol or
functionality that would enable them to stream quotes to other
subscribers or the public or send a request or invitation to negotiate
to another subscriber or the broker-dealer operator. The disclosures
regarding whether subscribers can display or make known their trading
interest and the types of information that the subscribers can display
would help market participants understand the extent to which potential
information leakage may occur on the ATS.
Part III, Item 15(c) of Form ATS-N would require a Covered ATS to
disclose whether any trading interest bound for the ATS is made known
to any person--not including employees of the ATS who are operating the
system. Many market participants are sensitive to precisely how and
when the ATS displays or otherwise makes known their trading interest
both inside and outside the ATS as such information could result in
other market participants trading ahead of their positions, and thus
possibly causing inferior execution prices for the participants whose
trading interest is displayed or otherwise made known. These
participants could use these disclosures to evaluate whether sending
trading interest to a particular ATS would achieve their trading
strategies. In particular, subscribers that use the services of Covered
ATSs, including customers of the broker-dealer operator, have limited
information about the extent to which their trading interest sent to
the ATS could be displayed outside the ATS.
For example, trading interest directed to the ATS could pass
through the broker-dealer operator's non-ATS systems or functionalities
such as an algorithm or a SOR, before entering the ATS. Such non-ATS
systems and functionalities could be used to support the broker-dealer
operator's other business units, including any trading venues.\617\ It
would be responsive to this Item to identify the recipient of displayed
information by identifying the functionality of the broker-dealer
operator (e.g., SOR, algorithm, trading desk), third party, or the type
of market participant \618\ that receives the displayed information.
If, for instance, the ATS displays orders to the broker-dealer
operator's SOR or trading desk, the ATS would indicate ``yes'' to this
[[Page 15565]]
question. If the answer is ``yes'' to either of these questions, the
ATS would be required to explain what information is displayed (e.g.,
security, price, size, direction, the identity of the sender), how and
when such information is displayed, to whom such information is
displayed (e.g., algorithm, SOR, trading desk, third party), and how
long the displayed information is available. If, for instance, trading
interest bound for the ATS passes through the broker-dealer operator's
common gateway or algorithm, the ATS would need to disclose these
functionalities as the trading interest was displayed to a
functionality of the broker-dealer operator that would likely be
outside the ATS. If trading interest resting in the ATS is displayed to
one or more of the broker-dealer operator business units, the ATS would
need to identify the business units of the broker-dealer operator by
type of market participant (e.g., institutional investors, PTFs, market
makers, affiliates, trading desks at the broker-dealer operator, market
data vendors, clearing entities, and potential subscribers, among
others). This Item is designed to ensure that the ATS discloses any
display of trading interest bound to the ATS or residing in the ATS not
otherwise captured in Part III, Items 15(a) and (b). Consistent with
the discussion above, the Commission believes that market participants
should have a full understanding of how and when their trading interest
becomes known to any person, particularly when the information is made
known to the broker-dealer operator's non-ATS-systems and
functionalities. The Commission further believes that information
required under this Item would help market participants assess the
potential for information leakage of subscribers' confidential trading
information to the broker-dealer operator's non-ATS systems and
functionalities.
---------------------------------------------------------------------------
\617\ The broker-dealer operator typically controls the logic
contained in these systems or functionality that determines where
trading interest that the broker-dealer operator receives will be
handled or sent.
\618\ See Part III, Item 1 of Form ATS-N (providing examples of
types of market participants).
---------------------------------------------------------------------------
The proposed Item would not require information about employees of
the ATS in non-trading related roles, such as technical, quality
assurance, compliance, or accounting roles, among others, that support
the ATS's operations and to whom trading interest are made known in the
performance of their duties.\619\
---------------------------------------------------------------------------
\619\ Covered ATSs, as proposed, would be subject to the
requirements of Rule 301(b)(10) and would be required to establish
adequate safeguards and procedures to protect subscribers'
confidential trading information, which must include: Limiting
access to the confidential trading information of subscribers to
those employees of the ATS who are operating the system or
responsible for its compliance with these or any other applicable
rules; and implementing standards controlling employees of the ATS
trading for their own accounts. See 17 CFR 242.301(b)(10).
---------------------------------------------------------------------------
Part III, Item 15(d) of Form ATS-N would require the ATS to
indicate whether it is an Electronic Communication Network (``ECN'') as
defined in Rule 600(a)(31) of Regulation ATS.\620\ NMS Stock ATSs that
are also ECNs may differ in how and where trading interest are
displayed. NMS Stock ATSs that indicate ``yes'' to this Item would also
be required to provide information in response to Part III, Items
15(a), (b), or (c) to inform market participants how ECNs display
trading interest.
---------------------------------------------------------------------------
\620\ Part III, Item 15(d) of revised Form ATS-N (which is
currently included in Part III, Item 15(a) of current Form ATS-N)
would be applicable only to NMS Stock ATSs because Rule 600(a)(31)
only applies to systems that trade NMS stocks. A Government
Securities ATS would select ``no'' in response to this question. The
Commission is also correcting a typo referencing Rule 600(a)(23) and
replacing the reference with Rule 600(a)(31).
---------------------------------------------------------------------------
Request for Comment
127. What information involving NMS stocks, government securities,
and repos do ATSs or Communication Protocol Systems display? Are there
levels of displayed information that a system may offer to market
participants? If so, what are the levels and are there any specific
requirements for a market participant to access that information? For
instance, do ATSs or Communication Protocol Systems have different
mechanisms or functionalities for displaying trading interest depending
on the subscriber? What functionalities does the system use to display
information in government securities and repos? Please explain the
purpose and operation of any such functionality.
128. For ATSs or Communication Protocol Systems that display
trading interest both on the system and outside the system, what is the
process for market participants to submit trading interest to interact
with the trading interest that is displayed outside the system?
129. Are there any aspects of display of trading interest on
Government Securities ATSs that should be specifically addressed in the
Item? Are there any aspects of display that are unique to Communication
Protocol Systems?
p. Item 16: Routing
Part III, Item 16 is designed to provide information about whether
trading interest in the ATS can be routed or sent to a destination
outside the ATS. As proposed, Part III, Item 16 would apply to both NMS
Stock ATSs and Government Securities ATSs. In the Commission's
experience, routing of government securities among trading venues is
not as prevalent as in the market for NMS stocks. To the extent it is
inapplicable, a Government Securities ATS would check ``no'' on Form
ATS-N. However, Government Securities ATSs may have mechanisms to send
trading interest outside the ATS. Accordingly, the Commission is
proposing to require Covered ATSs to disclose whether they route or
otherwise ``send'' trading interest outside of the ATS. If the Covered
ATS permits trading interest to be routed or sent to a destination
outside of the ATS, the ATS would be required to indicate whether
affirmative instructions from a subscriber must be obtained before its
trading interest can be routed or sent from the ATS, and provide a
description of the affirmative instruction and explain how the
affirmative instruction is obtained. If the ATS is not required to
obtain an affirmative instruction to route or send trading interest,
the ATS would be required to explain when trading interest can be
routed or sent from the ATS (e.g., at the discretion of the broker-
dealer operator). The Commission believes that such disclosures provide
ATS participants with the ability to gauge how their trading interest
would be handled by the ATS. Subscribers might, for example, have
concerns about the leakage of confidential trading information when
their orders are routed to other trading venues. The Commission
believes the disclosures in Part III, Item 16 would provide relevant
information for ATS participants to evaluate the potential for leakage
of their confidential trading information.
The Commission is also proposing to relocate Part II, Items 1(d)
and 2(d) of current Form ATS-N to Part III, Item 16(c) of revised Form
ATS-N.\621\ Specifically, proposed Item 16(c) of revised Form ATS-N
would request whether trading interest in the ATS can be routed or sent
to a destination operated or controlled by the broker-dealer operator
or an affiliate of the broker-dealer. If yes, the ATS would be required
to identify the destination and when and how trading interest is routed
or sent from the ATS to the destination. The Commission believes that
such information would help market participants evaluate whether the
Covered ATS sending trading interest to a trading venue operated or
controlled
[[Page 15566]]
by the broker-dealer operator or its affiliates poses a conflict of
interest and is consistent with its trading objectives.
---------------------------------------------------------------------------
\621\ As discussed above, the Commission believes it would be
more efficient for market participants and filers to consolidate the
current disclosure in Part II, Items 1(d) and 2(d) to proposed Part
III, Item 16(c). See supra Section IV.D.4.a.
---------------------------------------------------------------------------
Request for Comment
130. Do Government Securities ATSs (inclusive of Communication
Protocol Systems, as proposed) and Communication Protocol Systems that
trade NMS stocks send trading interest to destinations away from the
system? If so, how and under what circumstances? Are there any aspects
about how trading interest is sent away from a Covered ATS that should
be addressed by Form ATS-N? Have the mechanisms for routing to a
destination outside an NMS Stock ATS changed in any way since the
adoption of Form ATS-N for NMS Stock ATSs? If so, do commenters believe
that the Commission should require Covered ATSs to provide additional
information in Part III, Item 16 to reflect such change?
q. Item 17: Closing
Part III, Item 17 of Form ATS-N is designed to provide information
about differences between how trading interest is treated on the ATS
during the ATS's closing session(s) \622\ and during regular trading
hours established by the ATS. The Item is designed to provide market
participants with information about processes the Covered ATS uses to
transition to the next trading day, including whether the ATS offers
any particular order types during a closing session(s) or has different
procedures for closing trading for a particular trading session and
transitioning trading to the next trading day. The vast majority of
requests in Part III of revised Form ATS-N relate to trading during the
Covered ATS's regular trading hours. Therefore, when discussing
differences between trading during the Covered ATS's closing session(s)
and during regular trading hours set by the ATS, the Covered ATS would
be required to discuss differences as compared to relevant information
disclosed in Part III Items, including, among others, order types and
sizes and trading facilities (Item 7), use of non-firm trading interest
and communication protocols and negotiation functionality (Item 8),
segmentation and notice (Item 13), and display and visibility of
trading interest (Item 15). The Commission believes this information
would be important for market participants to understand the closing
procedures around a particular trading session, if any, to carry out
their trading objectives.\623\
---------------------------------------------------------------------------
\622\ The Commission is proposing to revise Item 17 of Form ATS-
N to clarify that the question relates to the ATS's closing
session(s), and that ``regular trading hours'' refers to the ATS's
regular trading hours.
\623\ The Item would, for example, require disclosure of any
procedures to match trading interest to set a single closing price
to maximize liquidity and accurately reflect market conditions at
the close of trading in the ATS.
---------------------------------------------------------------------------
r. Item 18: Fees
Part III, Item 18 of Form ATS-N \624\ would require a Covered ATS
to provide information on any fees or charges for use of the ATS's
services, including any fees or charges for use of the ATS's services
that are bundled with the subscriber's use of non-ATS services or
products offered by the broker-dealer operator or its affiliates, and
any rebate or discount of fees or charges. The Commission believes that
disclosures regarding fees on Form ATS-N are necessary and important,
and should not be voluntary for Covered ATSs. Fee disclosures on Form
ATS-N are designed to allow all market participants to analyze the fee
structures across Covered ATSs in an expedited manner and decide which
ATS offers them the best pricing according to the characteristics of
their order flow, the type of participant they are (if relevant), or
any other aspects of an ATS's fee structure that serves to provide
incentives or disincentives for specific market participants or trading
behaviors. Requiring disclosures of ATS fees is warranted as, in the
Commission's experience, fees can be a primary factor for market
participants in deciding where to send their trading interest.
---------------------------------------------------------------------------
\624\ As discussed above, the Commission is proposing to delete
current Part III, Item 18 of Form ATS-N (Trading Outside of Regular
Trading Hours) to combine such disclosure requests with Part III,
Item 4 (Hours of Operations). As a result of this deletion, the
Commission is proposing to re-number Part III, Items 19 through 26
of current Form ATS-N. The discussion herein refers to the Items as
proposed to be re-numbered.
---------------------------------------------------------------------------
Part III, Item 18 would request that Covered ATSs include in their
descriptions the types of fees, the structure of the fees, variables
that impact the fees, and differentiation among types of subscribers,
and whether the fee is incorporated into the price displayed for a
security, and the Commission would provide examples of responsive
information in a parenthetical in the text of each subpart.\625\ The
Item also would require a range for each type of fee (e.g.,
subscription, connectivity, and market data) charged on the Covered
ATS.
---------------------------------------------------------------------------
\625\ The Commission is including non-exhaustive lists of
examples of responsive information in parentheticals in the text of
the Item. For instance, for the description of the structure of the
fees, the Commission is providing as examples fixed, volume-based,
and transaction-based fee structures. For the description of
variables that impact the fees, the Commission is providing as
examples: The types of securities traded, block orders, and the form
of connectivity to the ATS. For the description of the
differentiation among types of subscribers for the fee, the
Commission is providing as examples the types of subscribers:
Broker-dealers, institutional investors, and retail investors.
---------------------------------------------------------------------------
The Commission is proposing to add the term ``market data'' to the
examples listed in Part III, Item 18 of the types of fees that a
Covered ATS must disclose. For example, if a Covered ATS distributed a
market data feed and charged a fee for it, the ATS would be required to
provide the information responsive to Item 18 regarding that fee. The
Commission believes this example may be relevant to Government
Securities ATSs, which are primarily lit venues that offer market data
to subscribers. While most NMS Stock ATSs do not disseminate market
data, a description of an NMS Stock ATS's market data fees is currently
required by the Item, which requires disclosure of ``any'' fee or
charge for use of the ATS services. Adding the example could assist
Covered ATSs in responding comprehensively to the Item.
The Commission recognizes that the fee structures of Covered ATSs
can vary and that not all Covered ATSs apply set tiers or categories of
fees for subscribers; however, the Commission believes that a market
participant should have sufficient information to understand the fees
for using the services of the Covered ATS. Recognizing the various fees
that can be charged by Covered ATSs, the Commission is specifying in
the fee request the types of information that a Covered ATS must
provide in response to the Commission's proposed request to describe
its fees (e.g., the structure of the fees, variables that impact each
fee, differentiation among types of subscribers, and the range of
fees). With regard to the variables that impact the fees set, ATSs
would be required to be specific and delineate how a given variable
would likely impact the fee level (e.g., higher or lower). In addition,
the Commission is proposing to add a new requirement not included in
current Form ATS-N that the Covered ATS must disclose whether the fee
is incorporated into the price displayed for a security (e.g., markups,
markdowns). For example, the price displayed by the security may be
higher (or lower) than the market price, and the broker-dealer would be
compensated by the difference between the displayed price and the
market price. The Commission believes that, in particular, such fees or
charges may be relevant to communication protocols that would be
[[Page 15567]]
included under the proposed definition of ``exchange.''
These disclosures are designed to provide market participants with
more insight regarding the fees charged so that they can better
understand how fees may apply to them and assess how such fees may
impact their trading strategies. Although the fees charged for Covered
ATS services may be individually negotiated between the broker-dealer
operator and the subscriber, the disclosures about the type of fees
charged by the Covered ATS are designed to help market participants
discern how the ATS's fees are organized and compare that information
across Covered ATSs, which could reduce the search costs of market
participants in deciding where to send their trading interest. The
Commission believes that Covered ATSs should be required to disclose
differences in the treatment among ``types of subscribers'' (e.g.,
broker-dealers, institutional investors, retail). This information
would allow subscribers to observe whether a Covered ATS is offering
preferential treatment for certain types of subscribers with respect to
fees.
Part III, Item 18(a) would cover charges to subscribers for their
``use of the ATS services'' \626\ and would not request information on
fees charged for non-ATS services by a third party not in contract with
the broker-dealer operator.\627\ Part III, Item 18(b) would require a
description of any bundled fees, including a summary of the bundled
services and products offered by the broker-dealer operator or its
affiliates, the structure of the fee, variables that impact the fee
(including, for example, whether the particular broker-dealer services
selected would impact the fee), differentiation among types of
subscribers, and range of fees. Part III, Item 18(b) is designed to
allow market participants to better evaluate fees for bundled services
and products that include access to the Covered ATS. Covered ATSs would
be required to provide information, including the relevant services and
products offered by the broker-dealer operator and its affiliates for
each bundled fee offered, that will provide context to market
participants with which to assess how bundled fees could apply to them
as subscribers.\628\
---------------------------------------------------------------------------
\626\ The Covered ATS services generally include those services
used for the purpose of effecting transactions in securities, or for
submitting, disseminating, or displaying trading interest in the
ATS. See 17 CFR 242.300(b).
\627\ See NMS Stock ATS Adopting Release, supra note 2, at 38858
(discussing what fees should be categorized as for use of the ATS's
services).
\628\ See NMS Stock ATS Adopting Release, supra note 2, at 38858
(discussing responses to current Item 19(b) (proposed Item 18(b))
depending on whether there is an explicit fee for the ATS as part of
any bundled services).
---------------------------------------------------------------------------
The disclosure requests under Part III, Item 18 would contain a
stand-alone Item--Item 18(c)--which requests information about rebates
and discounts of fees that are identified in subparts (a) and (b) of
Item 18. Item 18(c) would require information about rebates and
discounts that is similar to information required for fees (e.g., type
of rebate or discount, structure of the rebate or discount, variables
that impact the rebate or discount, differentiation among types of
subscribers, and range of rebate or discount).
Request for Comment
131. What fees should the Commission require a Covered ATS subject
to the Fair Access Rule to disclose on Form ATS-N? Are there any fees
disclosures that are unique to NMS Stock ATSs or Government Securities
ATSs and, if so, what information about those fees should be disclosed
on Form ATS-N?
132. What disclosures about bundled fees would be relevant and
useful to potential and current subscribers to the ATS?
133. What fees should the Commission require a Communication
Protocol System that operates as a Covered ATS to disclose on Form ATS-
N?
s. Item 19: Suspension of Trading
Part III, Item 19 of Form ATS-N would require a Covered ATS to
provide information about any procedures for suspending or stopping
trading in the ATS, including the suspension of trading in an NMS
stock, U.S. Treasury Security, or an Agency Security.\629\ This Item is
designed to, for example, inform market participants of whether, among
other things, a Covered ATS will continue to accept trading interest
after a suspension or stoppage occurs, whether the ATS cancels, holds,
or executes trading interest that was resting in the ATS before the
suspension or stoppage was initiated, and what type of notice the ATS
provides to subscribers regarding a suspension or stoppage. Examples of
system disruptions would include, but are not limited to, internal
software problems that prevent the Covered ATS's system from opening or
continuing trading,\630\ a significant increase in volume that exceeds
the ability of the trading system of the ATS to process incoming
trading interest,\631\ and the failure of the trading system of the ATS
to receive external pricing information that is used in the system's
pricing methodology. Information regarding a Covered ATS's procedures
about how trading interest might be handled by the ATS during a
suspension or stoppage of trading would be useful to market
participants because an ATS's procedures might require the cancelation
of existing trading interest or preclude the acceptance or execution of
trading interest during a suspension, both of which would impact a
subscriber's trading interest or its ability to trade in the ATS. This
information would better inform a subscriber's trading decisions at the
time of such an event and thus help that subscriber accomplish its
trading objectives. If a Covered ATS establishes different procedures
for suspending or stopping trading in the ATS depending on whether the
source of the disruption is internal or external, a description of both
procedures would be responsive to this request. In addition, this Item
would require disclosure of procedures whereby a Covered ATS suspends
trading in NMS stocks, U.S. Treasury Securities, or Agency Securities
so that it does not cross the volume thresholds, as proposed herein,
that may subject the ATS to certain Federal securities laws, including
the order display and execution access rule (Rule 301(b)(3)), Fair
Access Rule, or Regulation SCI. Information regarding the procedures
for how a Covered ATS would handle trading interest during a suspension
of trading or system disruption or malfunction would help the
Commission better monitor the securities markets.
---------------------------------------------------------------------------
\629\ The Commission is proposing to revise Form ATS-N, Part
III, Item 19 of revised Form ATS-N (numbered as Item 20 in current
Form ATS-N) to reference trading in U.S. Treasury Securities and
Agency Securities.
\630\ See Regulation SCI Adopting Release, supra note 3, at
72254-55 n.28.
\631\ See id. at 72255 n.29.
---------------------------------------------------------------------------
Request for Comment
134. Should Form ATS-N request information about any procedures for
suspending or stopping trading that is particularly relevant to
Government Securities ATSs (inclusive of Communication Protocol
Systems, as proposed) or Communication Protocol Systems that trade NMS
stock?
t. Item 20: Trade Reporting
Part III, Item 20 of Form ATS-N would require a Covered ATS to
provide information on any procedures and material arrangements for
reporting
[[Page 15568]]
transactions in the ATS.\632\ For Government Securities ATSs, FINRA
member firms are required to report transactions in U.S. Treasury
Securities and Agency Securities to TRACE.\633\
---------------------------------------------------------------------------
\632\ This question is substantially the same as Part III, Item
21 of current Form ATS-N.
\633\ See supra notes 228-229 and accompanying text.
---------------------------------------------------------------------------
Part III, Item 20 would require a Covered ATS to disclose its trade
reporting procedures for reporting transactions in the ATS to an SRO or
any alternative trade reporting destinations, if applicable. For
example, it would be responsive to Item 20 for a Covered ATS to
disclose whether the ATS has a specific procedure for reporting
transactions to the SRO at different times based on, for example, a
subscriber's use of a particular order type, or the type of subscriber
involved in the transaction. Covered ATSs would also be required to
disclose ``material'' arrangements for reporting transactions in the
ATS. The Commission recognizes that there could be arrangements
relevant to trade reporting, such as the specific software used to
report, that play a minor role in the ATS's trade reporting and need
not be disclosed. On the other hand, if a Covered ATS uses another
party to report transactions occurring in the ATS or has a backup
facility that it uses for trade reporting, that information is likely
to be responsive as a material arrangement. Requiring reporting only of
material arrangements would limit potential burdens on Covered ATSs
while providing market participants with sufficient information to
understand how their trade information will be reported. Also, the
proposed disclosure of the trade reporting procedures would allow the
Commission to more easily review the compliance of the Covered ATS with
its applicable trade reporting obligations as a registered broker-
dealer as proposed herein.
u. Item 21: Post-Trade Processing, Clearance, and Settlement
Part III, Item 21 is designed to provide information on any
procedures and material arrangements undertaken as a result of the
contractual agreements between the broker-dealer operator for the
Covered ATS \634\ and the ATS's participants to manage the post-trade
processing, clearance, and/or settlement of transactions on the Covered
ATS. The Commission is proposing revisions to Part III, Item 21 that
would request information about post-trade processing, which covers the
steps taken after execution to prepare a trade for clearance and/or
settlement. These steps include, but are not limited to, routing trade
information to relevant parties; enrichment of trade details with
supplemental information (such as counterparty account information)
required to effect settlement; performing allocations whereby a block
trade is broken down into various client accounts; comparing the terms
of a trade submitted by each counterparty (performing matching) to
reconcile the terms so as to generate an affirmed confirm; performing
sequential affirmation and confirmation processes; or sending
notifications to interested parties, such as custodians. These types of
activities can be performed both manually (with trading desk, middle
office, or back office personnel completing the steps) or through
automated activity processes (which seek to achieve the goal of
straight-through processing whereby trade information passes through
the necessary steps to effect settlement in an automated manner).
---------------------------------------------------------------------------
\634\ The contractual obligations of the ATS are ultimately
those of the broker-dealer operator. Because an ATS must register as
a broker-dealer, the broker-dealer operator controls the ATS and is
legally responsible for all operational aspects of the ATS and for
ensuring that the ATS complies with applicable Federal securities
laws and the rules and regulations thereunder. See NMS Stock ATS
Adopting Release, supra note 2, at 38819.
---------------------------------------------------------------------------
The proposed revisions to Part III, Item 21 provide some specific
examples of the types of procedures and material arrangements that
should be described by a Covered ATS under this Item, such as whether
the broker-dealer operator, or an affiliate of the broker-dealer
operator becomes a counterparty; submits trades to a registered
clearing agency; requires subscribers to have arrangements with a
clearing firm, or terminates trades. These examples are intended to be
illustrative and not the only types of material arrangements that may
exist. From Commission staff's experience reviewing Form ATS-N, the
Commission understands that broker-dealer operators have different
arrangements and contractual obligations that are important to
understanding the clearance and settlement of transactions in the ATS.
A Covered ATS would also be required to describe any user
requirements for such procedures and material arrangements, including
the type and extent of connectivity (e.g., FIX), and whether the
connectivity is to an order management system (OMS), execution
management system (EMS), end-of-month expirations (EOMS),
clearinghouse/custodian, or other system.
The integrity of the trading markets depends on the prompt and
accurate post-trade processing, clearance, and/or settlement of
securities transactions. For example, counterparties to a trade face
counterparty credit risk, regardless of whether they choose to clear
and settle bilaterally or through a central counterparty, and therefore
knowledge of any specific arrangements that are required by an ATS as
part of the clearing process promotes market integrity.\635\ The
Covered ATS's procedures or material arrangements that address post-
trade processing, clearance, and/or settlement are critical to ensuring
that a buyer receives securities and a seller receives proceeds in
accordance with the agreed-upon terms of the trade by settlement date.
The disclosures required by this Item are intended to cover each of the
steps in the post-trade process from the time of execution (including
whether the broker-dealer operator or an affiliate of the broker-dealer
operator is a counterparty to a transaction and whether the obligations
of a counterparty are ever assigned or novated), through trade matching
or affirmation/confirmation, and then through clearing procedures
(including whether the Covered ATS requires its participants to be a
member of a registered clearing agency, whether participants have any
particular clearing obligations, and whether transactions are--wholly
or partially--submitted to a registered clearing agency or cleared
bilaterally using clearing banks or clearing agents), until settlement
of the transaction (including whether counterparties make use of
custodians, settlement banks, or a registered clearing agency). If the
Covered ATS has adopted post-trade processing, clearing, and/or
settlement processes or imposes any obligations on its participants in
the event of a disruption (for example, a failure to deliver
securities, a liquidity shortfall, or a counterparty default), this
proposed Item should include a discussion of these processes and any
resulting participant obligations.
---------------------------------------------------------------------------
\635\ See Treasury Market Practices Group (TMPG), White Paper on
Clearing and Settlement in the Secondary Market for U.S. Treasury
Securities (July 12, 2018), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS-DraftPaper-071218.pdf. ``The
TMPG found that many market participants do not understand the role
of the [interdealer brokers] platform in terms of who their
counterparty credit risk was to and the roles of various market
participants in settlement and clearing.'' Id. at 27.
---------------------------------------------------------------------------
The Item requires the disclosure of ``material'' arrangements to
manage the post-trade processing, clearance, and/or settlement of
transactions on the Covered ATS. For example, an arrangement under
which another party would have a role in clearance or settlement may
constitute a material
[[Page 15569]]
arrangement that could trigger the disclosure requirement under Part
III, Item 21. Limiting the explanation required to material
arrangements would reduce the burden on Covered ATSs while at the same
time still allowing market participants to understand and more easily
compare such arrangements required across Covered ATSs.
Proposed Part III, Item 21 is also designed to help market
participants understand the measures the Covered ATS takes to manage
post-trade processing, clearance, and/or settlement of transactions.
Market participants should know and be able to understand any
requirements a Covered ATS places on its subscribers, or other persons
whose trading interest is sent to the ATS, to receive certain post-
trade processing, clearance, and/or settlement services. The Commission
believes market participants would likely find the disclosures required
by this Item to be useful in understanding the measures undertaken by a
Covered ATS to manage post-trade processing, clearance, and/or
settlement of subscriber orders in the ATS and allow them to more
easily compare these arrangements across Covered ATSs as part of
deciding where to send their trading interest. The Commission believes
that these disclosures would assist the Commission in better
understanding the post-trade processing, clearance, and/or settlement
procedures of Covered ATSs and risks and trends in the market as part
of its overall review of market structure.
Request for Comment
135. What aspects of the procedures and material arrangements
undertaken to manage the post-trade processing, clearance, and/or
settlement of transactions on Covered ATSs are important for ATSs to
disclose on Form ATS-N for the benefit of market participants?
v. Item 22: Market Data
Part III, Item 22 \636\ of Form ATS-N is designed to solicit
information about the sources of market data used by the Covered ATS
and how the ATS uses that market data from these sources to provide the
services that it offers. As the Commission is proposing to apply Form
ATS-N to Government Securities ATSs, the Commission is proposing to add
to Part III, Item 22 to include ``feeds from trading venues'' in the
examples of sources of market data, which may be applicable to
Government Securities ATSs. Specifically, market participants would
likely find it useful to know the source and specific purpose for which
the market data is used by the Covered ATS, as the market data received
by the ATS might affect the price at which trading interest is
prioritized and executed, including trading interest that is pegged to
an outside reference price. An NMS Stock ATS, for example, would be
required to provide the names of national securities exchanges from
which the ATS receives direct market data feeds, either from a vendor
or directly from the exchange, in addition to the specific types of
market data received from each source. In addition, a Covered ATS would
be required to provide information about how the ATS uses market data
to provide the services it offers. To avoid duplicative disclosure,
market data reflecting options traded on government securities that is
used by the ATS could be discussed in response to proposed Part III,
Item 11. The Commission is proposing to include determining the best
bid or offer (BBO) as an example of how the ATS uses market data, which
could be applicable to Government Securities ATSs. Among other things,
Part III, Item 22 requires the disclosure of the use of market data to
display, price, prioritize, execute, and remove trading interest. As
part of this explanation, the Covered ATS would be required to specify,
if applicable, when the ATS may change sources of market data to
provide its services. A Covered ATS would also be required to explain
how market data is received by the ATS, compiled, and delivered to the
matching engine. For example, among other possible arrangements, a
Covered ATS could explain in response to the Item that market data is
received and assembled by the broker-dealer operator, and subsequently
delivered to the matching engine, or that market data is sent directly
to the matching engine, which normalizes the data for its use.
---------------------------------------------------------------------------
\636\ This Item is currently numbered as Part III, Item 23 of
current Form ATS-N.
---------------------------------------------------------------------------
Request for Comment
136. What are the sources of market data in NMS stocks, government
securities, and repos that are available to market participants as well
as to Covered ATSs and how do market participants and ATSs use this
information? What disclosures about an ATS's use of market data would
be important to market participants?
w. Item 23: Order Display and Execution Access
Part III, Item 23 is designed to provide information about whether
an NMS Stock ATS is required to comply with Rule 301(b)(3)(ii) of
Regulation ATS.\637\ The Commission is not proposing to make changes to
this Item, other than specifying that this Item would be applicable to
NMS Stock ATSs, as the order display and execution access provisions
under Rule 301(b)(3) only apply to an ATS's NMS stock activities.\638\
---------------------------------------------------------------------------
\637\ Part III, Item 23 of revised Form ATS-N (currently
numbered as Part III, Item 24 of current Form ATS-N) would be
required only for NMS Stock ATSs, as the associated rule is
inapplicable to government securities. See also NMS Stock ATS
Adopting Release, supra note 2, at Section V.D.24.
\638\ 17 CFR 242.301(b)(3).
---------------------------------------------------------------------------
x. Item 24: Fair Access
Part III, Item 24 of Form ATS-N would provide a mechanism under
which a Covered ATS would notify market participants whether it has
triggered the proposed fair access threshold and, if so, whether the
ATS is subject to the Fair Access Rule. As described above, the
Commission is proposing to require Government Securities ATSs to comply
with the Fair Access Rule if they meet the applicable thresholds.\639\
As a result, Part III, Item 24 would be applicable to both NMS Stock
ATSs and Government Securities ATSs that meet the applicable
thresholds. Pursuant to proposed Rule 301(b)(5)(ii), a Covered ATS
would aggregate the trading volume for a security or category of
securities for ATSs that are operated by a common broker-dealer, or
ATSs that are operated by affiliated broker-dealers for the purpose of
calculating the volume thresholds.\640\ In connection with proposed
Rule 301(b)(5)(ii), the Commission is proposing to require the Covered
ATS to indicate in Part III, Item 24(a) through (c) if the ATS crossed
the volume thresholds ``whether by itself or aggregated pursuant to
Rule 301(b)(5)(ii).''
---------------------------------------------------------------------------
\639\ See supra Section III.D.
\640\ The Commission is proposing changes to the Fair Access
Rule, which are discussed in detail below. See infra Section V.A.2.
---------------------------------------------------------------------------
If a Covered ATS crosses the fair access thresholds, proposed Rule
301(b)(5)(iii)(A) \641\ requires the ATS to establish and apply
reasonable written standards for granting, limiting, and denying access
to the services of the ATS.\642\ If subject to the Fair Access Rule,
the Covered ATS would be required to describe the reasonable written
standards for granting, limiting, and denying access to the services of
the ATS pursuant to Rule 301(b)(5)(iii) of
[[Page 15570]]
Regulation ATS (as proposed to be applied herein).\643\ A description
of the Covered ATS's reasonable written standards in response to Part
III, Item 24 should be clear and comprehensive and should explain,
among other things, the objective and quantitative criteria upon which
the ATS's reasonable written standards are based, any differences in
access to the services of the ATS by applicant and current
participants, and why the standards including any differences in access
to the services of the ATS) are fair and not unreasonably
discriminatory. To the extent another person performs a function of the
ATS, the ATS would be required to provide reasonable written standards
for granting, limiting, or denying access to the services performed by
such person. In addition, an NMS Stock ATS must provide the ticker
symbol for each NMS stock for which the NMS Stock ATS has exceeded the
fair access threshold during each of the last 6 calendar months.
---------------------------------------------------------------------------
\641\ See infra Sections V.A.3 through V.A.4.
\642\ See 17 CFR 242.301(b)(5)(iii)(A). The Commission is
proposing that any change in a Covered ATS's response to Item 24
would be filed as a contingent amendment. See supra note 440 and
accompanying text.
\643\ The Commission is proposing revisions to Part III, Item 24
(currently numbered as Part III, Item 25) to conform to the proposed
rule text of the Fair Access Rule, including rule re-numbering,
describing the required written standards as ``reasonable,'' and to
reference standards limiting and denying access to the services of
the ATS.
---------------------------------------------------------------------------
The Commission believes that the proposed disclosures would
facilitate its oversight of Covered ATSs and their compliance with Rule
301(b)(5) as proposed herein. In addition, the proposed disclosures
would allow market participants to assess whether fair access is, in
fact, being applied by a Covered ATS that meets the fair access
threshold, in part by making publicly available a description of the
ATS's written standards for granting access.
Request for Comment
137. Is there other information that market participants might find
important or useful regarding the reasonable written standards for
granting, denying, and limiting access to the services of a Covered ATS
that is subject to the Fair Access Rule? If so, describe such
information and explain whether, and if so, why, such information
should be required to be provided on Form ATS-N.
y. Item 25: Aggregate Platform-Wide Data; Trading Statistics
Part III, Item 25 of Form ATS-N \644\ is designed to make public
aggregate, platform-wide statistics that a Covered ATS already
otherwise collects and publishes, or provides to one or more
subscribers to the ATS. The purpose of Item 25 is to place subscribers
on a level playing field with regard to aggregate, platform-wide
statistics about the Covered ATS that the ATS makes available.
---------------------------------------------------------------------------
\644\ This Item is currently numbered as Part III, Item 26 of
current Form ATS-N.
---------------------------------------------------------------------------
As explained above, the Commission is proposing to amend Form ATS-N
to solicit information about the use of non-firm trading interest in
the ATS, which relates to the proposed changes to Exchange Act Rule 3b-
16.\645\ Consistent with those proposed revisions, the Commission also
proposes to change the request for information on Part III, Item 25 to
require statistics beyond solely platform-wide order flow and execution
statistics. Specifically, the Commission proposes that Part III, Item
25 require a Covered ATS to disclose all aggregate, platform-wide
statistics that it publishes or provides to one or more subscribers.
Such statistics would include the order flow and execution data that is
currently solicited in Form ATS-N. In addition, the proposed disclosure
request would require a Covered ATS to disclose statistics related to
use of non-firm trading interest. On an RFQ system, such statistics
might include the percentage or total number of timed-out inquiries
(i.e., when a participant receives no prices or other responses after
posting an inquiry). With the use of a conditional order protocol, such
statistics could include market participants' firm-up rates (e.g., the
ATS sends a firm-up request to participants after their conditional
orders are matched).
---------------------------------------------------------------------------
\645\ See supra Section II.C.
---------------------------------------------------------------------------
While the Commission proposes to expand the scope of information
that this Item would solicit, the proposed disclosure request does not
require a Covered ATS to create, maintain, or publish any specific type
of statistic. As is the case with the current requirement, this
disclosure request only requires a Covered ATS to publicly disclose any
statistics within the scope of the question that it already discloses
to one or more subscribers. If a Covered ATS compiles a particular
statistic without distributing it (i.e., only uses it internally), it
would not be required to provide that statistic on Form ATS-N. Finally,
as with current Part III, Item 26 (proposed to be renumbered to Item
25), the proposed disclosure request does not require a Covered ATS to
provide on Form ATS-N any data that is otherwise required by Rule 605
of Regulation NMS.\646\ A Covered ATS may choose to create and publish
or provide to one or more subscribers or persons aggregate, platform-
wide statistics for different reasons. To the extent that a Covered ATS
has made a determination to create and publish or provide to
subscribers certain aggregate platform-wide data, the Commission
believes that others may also find such information useful when
evaluating the ATS as a possible venue for their trading interest.
---------------------------------------------------------------------------
\646\ See 17 CFR 242.605.
---------------------------------------------------------------------------
As with the current disclosure request, the proposed disclosure
request would not require a Covered ATS to amend its Form ATS-N every
time it receives a subscriber data request. To comply with the proposed
requirements under Part III, Item 25, Form ATS-N only requires a
Covered ATS to update its disclosures for Part III, Item 25 on a
quarterly basis.\647\ For instance, if a participant were to request
updated or new aggregate platform-wide statistics in January, the
Covered ATS would not be required to immediately file an updating
amendment containing these statistics after complying with the
participant's request. Rather, the ATS would need to file an updating
amendment within 30 days following the end of March. That updating
amendment must contain the most recently distributed version of these
statistics, as well as the most recently distributed version of all
other aggregate platform-wide data that was provided during that
quarter. The Commission notes that communications associated with the
responsive statistics are not required to be publicly filed. In the
prior example, for instance, if the statistics provided in the
quarterly amendment are the ones provided in January (i.e., those are
the latest version of those aggregate platform-wide statistics the ATS
distributed), the ATS would not (and should not) also attach to Form
ATS-N the participant's email requesting the statistics.
---------------------------------------------------------------------------
\647\ If, for example, a Covered ATS publishes or provides a
particular statistic on a daily basis, the ATS would include in
Exhibit 4 of Form ATS-N the statistic that was published or provided
to one or more subscribers on the last trading day of the calendar
quarter (e.g., the statistic published or provided on June 30th or
last trading day prior to June 30th). If a Covered ATS publishes or
provides a particular statistic weekly, the ATS would be required to
include in Exhibit 4 of Form ATS-N the statistic that was published
or provided to one or more subscribers at the end of the week prior
to the end of the calendar quarter (e.g., the statistic published
for the last full week of June).
---------------------------------------------------------------------------
Furthermore, Part III, Item 25 of Form ATS-N would only require a
Covered ATS to publicly disclose aggregate platform-wide data. As such,
a Covered ATS would not be required to disclose individualized or
custom reports containing data relating to that participant's specific
usage of the ATS. For example, an individual participant's trade
reports, order and execution quality statistics, and other statistics
[[Page 15571]]
specific to a participant's trading in the ATS would not be covered by
the disclosure request in Part III, Item 25. A Covered ATS would need
to independently evaluate any statistics that it compiles and
distributes to determine whether they are responsive to this disclosure
request.
Part III, Item 25 would require the Covered ATS to attach both the
responsive statistics and its explanation of the categories or metrics
of the statistics and the criteria or methodology used to calculate
those statistics as Exhibits 4 and 5, respectively. Also, in lieu of
filing Exhibits 4 and 5, the Covered ATS could certify that the
information requested under Exhibits 4 and 5 is available at the
website provided in Part I, Item 6 of the form and is accurate as of
the date of the filing. The Commission is proposing to add to the
instruction that if the ATS selects the checkbox, the ATS will maintain
its website in accordance with the rules for amending Form ATS-N
pursuant to Rule 304(a)(2)(i) to reflect any changes to such
information. This would require an ATS checking the box to update its
website as if it were Form ATS-N, and therefore, to update the
information, as appropriate pursuant to the Commission's rules for
amending Form ATS-N.
Request for Comment
138. Does Part III of Form ATS-N capture the information that is
most relevant to understanding the operations of the Government
Securities ATS and the use of non-firm trading interest on
Communication Protocol Systems? Are there any Items that commenters
believe are unnecessary? If so, why?
139. Should the Commission expand what Covered ATSs must disclose
on Form ATS-N? Is there other information that market participants
might find relevant or useful regarding the operations of Covered ATSs
that should be publicly disclosed? If so, describe such information and
explain whether, and if so, why, such information should be required to
be provided under Form ATS-N.
140. Is there any information related to repos that Form ATS-N
should require?
141. Is there any information related to options on government
securities that Form ATS-N should require?
142. Is there any information that would be required by Part III of
Form ATS-N that a Covered ATS should not be required to disclose due to
concerns regarding confidentiality, business reasons, trade secrets,
commercially sensitive information, burden, or any other concerns?
143. Should the Commission adopt a more limited or expansive
definition of ``affiliate'' for purposes of Part III? \648\
---------------------------------------------------------------------------
\648\ See supra note 533 for the definition of affiliate under
Form ATS-N.
---------------------------------------------------------------------------
144. Would the disclosures under Part III of Form ATS-N help market
participants better evaluate trading opportunities and decide where to
send trading interest to reach their trading objectives?
145. Would the proposed disclosures in Part III of Form ATS-N
require a Government Securities ATS to reveal too much (or not enough)
information about its structure and operations?
146. Are there ways to obtain the same information as would be
required from Government Securities ATSs by Part III of Form ATS-N
other than through disclosure on Form ATS-N? If so, how else could this
information be obtained?
147. Could the proposed requirement to disclose the information
that would be required by Part III of Form ATS-N impact innovation in
Government Securities ATSs?
148. Are there any aggregate platform-wide statistics of the
Covered ATS that should not be required to be disclosed under Item 25?
149. Has Form ATS-N allowed market participants to better evaluate
trading venues? If so, how? How do commenters believe the manner in
which NMS Stock ATSs currently disclose information on Form ATS-N could
be improved? Is the level of detail required appropriate? Are there any
aspects of Form ATS-N on which the Commission should provide further
guidance?
6. Part IV: Contact Information, Signature Block, and Consent to
Service
Part IV of Form ATS-N would require a Covered ATS to provide
certain basic information about the point of contact for the ATS, such
as the point of contact's name, title, telephone number, and email
address. Part IV would also require the Covered ATS to consent to
service of any civil action brought by, or any notice of any proceeding
before, the Commission or an SRO in connection with the ATS's
activities. The Commission is proposing that Form ATS-N would be filed
electronically and require an electronic signature.\649\ The signatory
to each Form ATS-N filing would be required to represent that the
information and statements contained on the submitted Form ATS-N,
including exhibits, schedules, attached documents, and any other
information filed, are current, true, and complete. Given that market
participants would use information disclosed on Form ATS-N to evaluate
potential venues, and that the Commission intends to use the
information to monitor developments of Covered ATSs, it is important
that Form ATS-N contain disclosures that are current, true, and
complete, and therefore the Commission is proposing to require that the
signatory to Form ATS-N make such an attestation.
---------------------------------------------------------------------------
\649\ To avoid confusion, the Commission is proposing to delete
language in the signature block in Part IV of Form ATS-N that refers
to the signatory as ``duly sworn.'' The Commission notes that unlike
Form ATS, Form ATS-N filings, which are submitted to EDGAR, are not
required to be notarized; instead, they are subject to the rules
governing electronic signatures set forth in Rule 302 of Regulation
S-T. See 17 CFR 232.302.
---------------------------------------------------------------------------
V. Proposed Amendments to Form ATS, Form ATS-R, and Other Conditions to
Regulation ATS
A. Proposed Amendments to the Fair Access Rule for all ATSs
In addition to the amendments to the Fair Access Rule for
Government Securities ATSs,\650\ the Commission is proposing several
amendments to the Fair Access Rule that would apply to all ATSs that
are subject to the rule. The proposed amendments are discussed below.
---------------------------------------------------------------------------
\650\ See supra Section III.B.4.
---------------------------------------------------------------------------
1. Rule Text Clarifications
The Commission is re-proposing to amend the Fair Access Rule, as
well as the Capacity, Integrity, and Security Rule under Rule
301(b)(6), to specify the use of volume to calculate the relevant
thresholds under the rule. For purposes of determining whether an ATS
crossed the average daily volume thresholds for compliance with the
Fair Access Rule, Rule 301(b)(5)(i) does not specify whether the ATS's
transaction volume in an NMS stock or an equity security that is not an
NMS stock and for which transactions are reported to an SRO is
calculated using the dollar or the share volume.\651\ In the Regulation
ATS Adopting Release, when discussing the Fair Access Rule, the
Commission stated that for these two types of securities, the test
should be based on the share volume.\652\ Similarly, Rules 301(b)(5)(i)
and (b)(6)(i) do not specify whether, for purposes of determining
compliance with the Fair Access Rule and the
[[Page 15572]]
Capacity, Integrity, and Security Rule, the volume for municipal
securities or corporate debt securities is calculated based on the
dollar or the share volume.\653\ In the Regulation ATS Adopting
Release, the Commission intended the test applicable to debt securities
to be based on the dollar volume.\654\ To mitigate any potential
confusion, the Commission is adding these terms to Rules 301(b)(5)(i)
and (b)(6)(i) to align the rule text with the Regulation ATS Adopting
Release.\655\
---------------------------------------------------------------------------
\651\ 17 CFR 242.301(b)(5)(i)(A)-(B).
\652\ See Regulation ATS Adopting Release, supra note 31, at
70873 (``Accordingly, if an [ATS] accounted for twenty percent or
more of the share volume in any equity security, it must comply with
the fair access requirements in granting access to trading in that
security.'') (emphasis added).
\653\ 17 CFR 242.301(b)(5)(i)(C)-(D); 17 CFR
242.301(b)(6)(i)(A)-(B).
\654\ See Regulation ATS Adopting Release, supra note 31, at
70873, 70875 (requiring compliance with the Fair Access Rule and the
Capacity, Integrity, and Security Rule if an ATS accounted for more
than 20 percent of the total ``share volume'' in a security with
respect to equity securities, and for more than 20 percent of the
``volume'' in a security with respect to debt securities). While
Form ATS-R requires an ATS to report total volume in terms of both
units and dollars for equity securities, it requires an ATS to
report the total settlement value only in dollar terms for municipal
securities and corporate debt securities. See id. at 70878.
\655\ See proposed Rule 301(b)(5)(i)(A)-(D); proposed Rule
301(b)(6)(i)(A)-(B).
---------------------------------------------------------------------------
The Commission is also re-proposing to amend Rules 301(b)(5)(i)(C)
and (D) to clarify that the average daily dollar volume in municipal
securities is provided by the SRO to which such transactions are
reported and average daily dollar volume in corporate debt securities
is provided by the SRO to which such transactions are reported.\656\
When Regulation ATS was adopted, transaction reporting plans for
municipal securities and corporate debt securities were being
developed.\657\ Today, transactions in municipal securities are
reported to the MSRB and transactions in corporate debt securities are
reported to FINRA. These two SROs provide the information that can be
used by ATSs to determine whether the ATS is subject to the Fair Access
Rule for these two categories of securities.\658\ This amendment will
add clarity to the rule given the established transaction reporting
regimes for municipal securities and corporate debt securities.
---------------------------------------------------------------------------
\656\ To the extent transactions are reported to multiple SROs,
the volume of transactions reported to such SROs would be combined
for the purpose of calculating whether the transactions meet the
threshold.
\657\ See Regulation ATS Adopting Release, supra note 31, at
70873.
\658\ See MSRB Rule G-14; FINRA Rule 6730. Electronic Municipal
Market Access (``EMMA''), which is a service operated by the MSRB,
and FINRA disseminate information on transactions in municipal
securities and corporate debt securities, respectively. See EMMA
Information Facility, available at https://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/Facilities/EMMA-Facility.aspx; FINRA Rule
6750.
---------------------------------------------------------------------------
2. Aggregation of Volume Threshold for Affiliated ATSs
The Commission is also proposing to amend the Rule 301(b)(5)(ii) of
the Fair Access Rule to aggregate the trading volume for a security or
category of securities for ATSs that are operated by a common broker-
dealer, or ATSs that are operated by affiliated broker-dealers, solely
for the purpose of calculating the average transaction volume under
Rule 301(b)(5)(i)(A) through (F).\659\ Today, there are single entities
that may be the registered broker-dealer operator for different types
of ATSs that trade different categories of securities (e.g., NMS Stock
ATS and non-NMS Stock ATS), and there are broker-dealers that may
operate multiple ATSs that trade the same type of securities with
different matching protocols (e.g., limit order book for one and
volume-weighted-average-price for the other). Likewise, there are
entities that control multiple subsidiary broker-dealers, each of which
operates one or more ATS or Communication Protocol System that trade
the same or different categories of securities.\660\ In these
instances, each ATS with a common broker-dealer operator--and each of
the affiliated Communication Protocol Systems that would be subject to
Regulation ATS under this proposal--must comply with Regulation
ATS.\661\
---------------------------------------------------------------------------
\659\ For Rule 301(b)(5)(ii), the Commission would refer to the
definition of affiliate used for purposes of Form ATS-N. See NMS
Stock ATS Adopting Release, supra note 2, at 38818-19. Affiliate was
defined to mean ``with respect to a specified Person, any Person
that, directly or indirectly, controls, is under common control
with, or is controlled by, the specified Person.'' Id. The
Commission is proposing to include the definition of affiliate in
proposed Rule 300(c). The currently defined term ``affiliate of a
subscriber'' in Rule 300(c) is not currently used in Regulation ATS,
and the Commission is therefore replacing such term with the
definition of ``affiliate.'' The proposed amended definition of
``affiliate'' would help ATSs determine whether to aggregate the
trading volume of ATSs operated by affiliated broker-dealer
operators. The proposed definition of ``affiliate'' is identical to
the definition of affiliate in Form ATS-N Explanation of Terms. Like
the definition of ``affiliate of a subscriber'' under current Rule
300(c), the proposed definition of ``affiliate'' would include a
specified person that, directly or indirectly, controls, is under
common control with, or is controlled by, the specified person, and
therefore would include employees of the specified person.
\660\ The term ``control'' is defined in Rule 300(f) of
Regulation ATS to mean: The power, directly or indirectly, to direct
the management or policies of the broker-dealer of an alternative
trading system, whether through ownership of securities, by
contract, or otherwise. A person is presumed to control the broker-
dealer of an alternative trading system if that person: Is a
director, general partner, or officer exercising executive
responsibility (or having similar status or performing similar
functions); directly or indirectly has the right to vote 25 percent
or more of a class of voting securities or has the power to sell or
direct the sale of 25 percent or more of a class of voting
securities of the broker-dealer of the alternative trading system;
or in the case of a partnership, has contributed, or has the right
to receive upon dissolution, 25 percent or more of the capital of
the broker-dealer of the alternative trading system. 17 CFR
242.300(f). See also NMS Stock ATS Adopting Release, supra note 2,
at 38818-19 (discussing definition of control).
\661\ See Rule 3a1-1(a)(2) (providing that an organization,
association, or group of persons shall be exempt from the definition
of ``exchange'' if it is in compliance with Regulation ATS) and Rule
301(a) (providing that an ATS shall comply with the requirements of
Rule 301(b)).
---------------------------------------------------------------------------
In response to the 2020 Proposal, one commenter stated that because
each ATS is unique, it believed that for purposes of determining
whether an ATS should be subject to the Fair Access Rule, volume should
be determined at an individual ATS level and not aggregated across
commonly controlled ATSs.\662\ The commenter stated that a broker-
dealer may choose to operate separate ATSs based on separate business
units within the broker-dealer, different technology backbones, or
different types of functionality, such as anonymous or fully disclosed
order books or auction-based offerings.\663\
---------------------------------------------------------------------------
\662\ See ICE Bonds Letter I at 6.
\663\ See id.
---------------------------------------------------------------------------
The Commission is concerned, however, that despite differences that
may exist between ATSs that are operated by a common broker-dealer or
ATSs operated by affiliated broker-dealers, there is a potential for a
broker-dealer operator or controlling entity for more than one broker-
dealer to structure its business to avoid triggering the fair access
thresholds, and thereby circumvent the Fair Access Rule. It could do
this by establishing multiple ATSs under one broker-dealer, or
establishing multiple broker-dealers that each operate an ATS, to trade
the same security or category of securities. The Fair Access Rule is
designed to ensure that market participants have reasonable access to
ATS market places that capture a significant percentage of national
trading volume for a security or type of security. When a single entity
operates multiple market places, that entity ultimately controls which
market participants have access to trading across those market places.
When an organization, such as a broker-dealer, for example,
provides an exchange market place for the same security or category of
security but chooses to divide the market place into component parts by
filing multiple Forms ATS or Forms ATS-N rather than filing a single
form encompassing all the component market places, that organization is
still the exchange providing a market place to bring together buyers
and sellers of securities
[[Page 15573]]
and ultimately controls access to the entire security or category of
securities that it makes available for trading across its multiple
ATSs. In the Commission's experience, ATSs under common operation of a
broker-dealer generally are designed to function as complementary
products of a single business of the broker-dealer as opposed to
separate market places competing against each other for order flow in
the same security or types of securities. In the Commission's
experience, it is typical for a broker-dealer that operates multiple
ATSs for the same security or category of securities to use, for
example, the same operations, technology, and administrative personnel
for purposes of its ATSs' trading operations. Furthermore, a single
entity controlling multiple ATSs often applies similar standards for
granting access across all of its ATSs that trade the same security or
category of security and applies the same market data, clearance,
settlement, and trade reporting processes, and procedures for
protecting subscriber confidential trading information. Even in the
case of a single parent company, for example, which controls several
affiliated broker-dealers that each operate an ATS for the same
category of security, access to each ATS is obtained from the broker-
dealer operator, and each broker-dealer operator is subject to the
direction of the parent company. Ultimately, those ATSs serve the
business interests of, and are under common control by, the parent
company.
Aggregating trading volume among ATS market places and
Communication Protocol Systems that would be subject to Regulation ATS
under this proposal--either operated by a common broker-dealer or by
affiliated broker-dealers--would help further the vital policy goal of
ensuring that no single entity is able to restrict fair access to a
security or type of security. As a result of this proposed change, if,
for example, a broker-dealer operated two NMS Stock ATSs that each
accounted for three percent of the average daily volume in an NMS stock
during at least four of the preceding six calendar months, both NMS
Stock ATSs would be subject to the Fair Access Rule for that security
because their aggregated volume exceeds the five percent threshold of
Rule 301(b)(5)(i)(A).\664\ If, instead, one of the ATSs had six percent
of the average daily volume for an NMS stock and the other ATS had one
percent, both NMS Stock ATSs would be subject to the Fair Access Rule
as a result of their common broker-dealer operator and aggregated
volume. In another example, if two broker-dealers that are subsidiaries
of the same parent company each operate an ATS for corporate bonds and
each ATS accounts for three percent of the average daily volume of
corporate bonds traded in the United States during at least four of the
preceding six calendar months, then both ATSs would be subject to the
Fair Access Rule. This result would be because the ATSs are operated by
affiliated broker-dealers and their aggregate volume exceeds the volume
threshold of Rule 301(b)(5)(i)(C).
---------------------------------------------------------------------------
\664\ Also, if one of the ATSs operated by the common broker-
dealer operator accounted for five percent of the average daily
volume in an NMS stock for three months and the other ATS accounted
for five percent of the average daily volume in the same NMS stock
for the subsequent three months, then both ATSs would be subject to
the Fair Access Rule for that NMS stock because aggregated they
would have crossed the volume threshold for more than four of the
preceding six calendar months.
---------------------------------------------------------------------------
3. Reasonable Written Standards
The Commission is proposing to amend the requirements related to
reasonable written standards.\665\ The Commission is proposing Rule
301(b)(5)(iii)(A) to provide that the ATS ``establish and apply
reasonable written standards for granting, limiting, and denying access
to the services of the alternative trading system.'' As discussed in
more detail below, the Commission is proposing to add the word
``reasonable'' before ``written standards'' to incorporate the concept
that is part of current Rule 301(b)(5)(ii)(B) (``not unreasonably
prohibit or limit'') and used in the Regulation ATS Adopting
Release.\666\ The Commission is also adding in the rule text, for the
removal of any doubt, that the ATS must ``apply'' the reasonable
written standards as established. For example, if an ATS establishes a
written standard that states subscribers' trading interest will not be
displayed to anyone, but the ATS in practice displays trading interest
to a subscriber, then the ATS would not be applying its established
written standards. Establishing the written standard is not sufficient
if the ATS is not following or applying them.
---------------------------------------------------------------------------
\665\ These requirements are currently in Rule 301(b)(5)(ii),
which the Commission is proposing to re-number as Rule
301(b)(5)(iii).
\666\ See Regulation ATS Adopting Release, supra note 31, at
70872. The Commission believes that the addition of ``reasonable''
is consistent with its intent as expressed in the Regulation ATS
Adopting Release. Specifically, in discussing the Fair Access Rule,
the Commission stated that ``fair treatment . . . is particularly
important'' when ATSs reach significant volume in a security, and
the rule would serve to prohibit ``unreasonably'' discriminatory
denials of access.
---------------------------------------------------------------------------
Also incorporated into proposed Rule 301(b)(5)(iii)(A), and taken
from current Rule 301(b)(5)(ii)(B), is that the written standards apply
to access of ``the services of the alternative trading system.'' This
addition to the rule text serves to emphasize that the Fair Access Rule
applies not only to the initial grant or denial of access to an
applicant of the ATS, but also to the services of the ATS that are
offered to current participants. ATS services, including, among others,
the provision of market data, order entry functionalities, priority
rules, segmentation procedures, negotiation features, communication
protocols, counterparty selection, and order types offered, would all
be subject to the provisions of the Fair Access Rule. The Commission is
also incorporating from current Rule 301(b)(5)(ii)(B) that the Fair
Access Rule applies when limiting and denying access to the ATS
services, not solely granting access.\667\ The application of the Fair
Access Rule to limitations and denials of access would help ensure that
market participants receive the full benefits of participation in an
ATS subject to the Fair Access Rule unless a limitation or denial of
access can be reasonably justified.
---------------------------------------------------------------------------
\667\ Rule 301(b)(5)(ii)(B) states that the ATS shall not
``unreasonably prohibit or limit'' (emphasis added) any person with
respect to the services of the ATS.
---------------------------------------------------------------------------
As indicated above, the Commission is making explicit in the text
of Rule 301(b)(5) that the written standards required under the Fair
Access Rule must be reasonable. An ATS subject to the Fair Access Rule
is not required to treat all participants the same in all instances;
however, the Fair Access Rule has always required that an ATS subject
to the rule provide reasonable access to ATS services.\668\ The
Commission is revising the rule text to make it clear that the written
standards must be reasonable. For an ATS's written standards to be
reasonable, the standards must be fair and not unreasonably
discriminatory. Some ATSs, for example, might offer different services,
or levels of a service, to one subscriber or among different classes of
subscribers. An ATS subject to the Fair Access Rule could not provide
services to one class of participants and not to other classes of
participants unless the ATS established standards with a reasonable
basis for treating the participant classes differently. For example, as
stated in the Regulation ATS Adopting Release, an ATS may establish a
standard that requires all participants be registered broker-dealers
and that ATS may deny access to the ATS to any applicant that is not a
[[Page 15574]]
registered broker-dealer.\669\ As part of its reasonable analysis, an
ATS subject to the Fair Access Rule must explain why the standard for
admitting registered broker-dealers rather than non-registered broker-
dealers is fair and not unreasonably discriminatory.\670\ Fees can be a
manner of limiting or denying services. In another example, an ATS that
charges certain fees to one class of participants but different fees to
another class of participants for the same service could not, if it
were subject to the Fair Access Rule, discriminate in this manner
unless it adopted reasonable written standards and applied them in a
fair and non-discriminatory manner. Also, to apply the standards fairly
and non-discriminatorily, the ATS's activities (or the activities of
persons performing a function of the ATS) must be carried out in
accordance with the established written standards of the ATS.
---------------------------------------------------------------------------
\668\ See supra notes 666-667.
\669\ See Regulation ATS Adopting Release, supra note 31, at
70874.
\670\ See proposed Rule 301(b)(5)(iii)(A)(4).
---------------------------------------------------------------------------
When assessing the reasonableness of standards under the Fair
Access Rule, the Commission may consider principles applied in the
national securities exchange context to guide its analysis of whether
an ATS's written standards are fair and not unreasonably
discriminatory. Under Section 6(b)(5) of the Exchange Act, for example,
a national securities exchange must show that its rules are not
designed to permit unfair discrimination between customers, issuers,
brokers or dealers.\671\ Sections 6(b)(2) and 6(c) of the Exchange Act
require national securities exchanges to consider the public interest
in administering their markets and to establish rules designed to admit
members fairly.\672\ National securities exchanges and ATSs are
regulated pursuant to separate statutory and rule provisions of the
Federal securities laws and there are different benefits and burdens
associated with each entity; however, as the Commission stated in the
Regulation ATS Adopting Release, fair access requirements are based on
the principle that qualified market participants should have fair
access to the U.S. securities markets, and such markets would include
ATSs subject to the Fair Access Rule.\673\
---------------------------------------------------------------------------
\671\ 15 U.S.C. 78f(b)(5).
\672\ 15 U.S.C. 78f(b)(2) and (c).
\673\ See Regulation ATS Adopting Release, supra note 31, at
70874.
---------------------------------------------------------------------------
The justification provided for why each written standard is fair
and not unreasonably discriminatory is an important aspect of an ATS's
compliance with the Fair Access Rule as proposed to be amended. The
same limitation or restriction on different ATSs may be unfair on one
ATS and not another depending on the design of the ATS and its
rationale for such a limitation. One commenter suggested that fair
access is not applicable to fixed income platforms where each
participant has discretion over which other participants they want to
trade with.\674\ Under these circumstances where ATS participants can
select their potential counterparties, the Commission would view an ATS
that implements the participant's choices as having adopted those as
ATS standards. As a result, the ATS subject to the Fair Access Rule
would need to establish reasonable written standards that, among other
things, justify why the differences in access between the selected and
not-selected counterparties are fair and non-discriminatory and thus
reasonable. For example, if subscribers selected their counterparties
based on the condition of the counterparty's balance sheet (e.g.,
totals for assets and liabilities), and the ATS implemented those
selections, then the ATS would need to include a justification in its
written standards for why implementing those selections is fair and not
unreasonably discriminatory.\675\ In cases where the Commission staff
reviews an ATS's fair access standards, whether in the description
provided under Item 24 of revised Form ATS-N for NMS Stock ATSs and
Government Securities ATSs (as proposed) or during an examination, the
Commission staff would review whether a given justification for the
standard is, for example, unreasonably discriminatory, or is pretextual
and, in fact, designed to thwart the goal of providing fair access to
qualified market participants.\676\
---------------------------------------------------------------------------
\674\ See MarketAxess Letter at 10.
\675\ In practice, the ATS participant making a selection of its
potential counterparties would need to provide the ATS with its
justification for selecting those counterparties, and the ATS would
need to evaluate whether the stated justification comports with the
Fair Access Rule, and if so, incorporate it into the ATS's
established written standards.
\676\ Rule 301(b)(5)(ii)(D) requires ATSs to report to the
Commission information on Form ATS-R regarding grants, limitations,
and denial of access to an ATS subject to the Fair Access Rule.
Specifically, Form ATS-R, Exhibit C requires the ATS to list of all
persons granted, denied, or limited access to the ATS during the
period covered by the report, designating for each person whether
they were granted, denied, or limited access; the date the ATS took
such action; the effective date of such action; and the nature of
any denial on limitation of access. The Commission stated in the
Regulation ATS Adopting Release that the Commission intended to
enforce the Fair Access Rule by reviewing Form ATS-R reports and
investigating any possible violations of the rules. See Regulation
ATS Adopting Release, supra note 31, at 70874.
---------------------------------------------------------------------------
Even if an ATS's written standard is equally applicable to all
participants, the ATS must nevertheless ensure the standard itself is
not unfair or unreasonably discriminatory or applied in an unfair or
unreasonably discriminatory manner. If an ATS included in its written
standards that it reserves the right to accept or deny applicants to
the ATS at its sole discretion, such standard may apply equally to all
applicants, but it would not be reasonable as it would contradict the
rule's goal of promoting fair access to the securities markets. In
another example, if an ATS adopts a written standard that it would only
accept participants with ``industry-leading reputations,'' such written
standard, depending on the justification, is unlikely to be considered
reasonable because of its subjectivity and potential substantial
limiting effect on market participants' access to the ATS. As stated in
the Regulation ATS Adopting Release, if an ATS applied its standards so
as to discriminate among similarly-situated participants, such actions
would be inconsistent with reasonable written standards because the ATS
would not be acting impartially. One example of this would be an ATS
that provides liquidity providers that met certain volume thresholds
with trading privileges, yet does not provide those privileges equally
to every qualifying liquidity provider. Another example would be a
Communication Protocol System that establishes a standard to track all
participants' ``firm up'' rates in response to requests for quotes but
subsequently denies or limits access to only certain subscribers that
exceed the firm-up threshold and not to other participants who likewise
exceeded the firm-up threshold.
The Commission is also proposing Rule 301(b)(5)(iii)(A)(1) through
(5) to provide minimum requirements for the reasonable written
standards that must be established, and applied, by an ATS that is
subject to the Fair Access Rule. These minimum requirements for what
the written standards must include do not alter the substantive
requirement that the written standards be reasonable. Rather, they
explain in more granular detail what is required to be sufficient
written standards to facilitate compliance. First, the Commission is
proposing Rule 301(b)(5)(iii)(A)(1) to require that an ATS's reasonable
written standards provide the dates that each written standard is
adopted, effective, and, if applicable, modified. This proposed
requirement is designed to assist Commission examination staff in their
evaluation of the application of an ATS's written standards as well as
help the staff understand the written fair
[[Page 15575]]
access standards that were in place at a given time.
Second, the Commission is proposing Rule 301(b)(5)(iii)(A)(2) to
require an ATS's reasonable written standards set forth any objective
and quantitative criteria upon which each standard is based.\677\
Objective or quantitative standards can help demonstrate an ATS's
compliance with the Fair Access Rule by limiting an ATS's discretion
and its ability to act arbitrarily with respect to an applicant to the
ATS or current participant. Nevertheless, an ATS's objective or
quantitative standards must still be fair and not unreasonably
discriminatory. An ATS could not, for example, establish, without
reasonable justification, a quantitative standard at such a high level
that it unfairly results in only a limited group of ATS participants
that can meet it. If an ATS, for example, sets its required firm up
rate on conditional orders at 95 percent, compliance with the Fair
Access Rule would depend on whether that standard was fair and whether
it unreasonably discriminated against those subscribers that did not
attain a 95 percent firm up rate.\678\
---------------------------------------------------------------------------
\677\ See Regulation ATS Adopting Release, supra note 31, at
70874 (providing minimum capital or credit requirements for
subscribers as an example of objective standards).
\678\ In assessing whether such a standard is reasonable, the
Commission could consider, among other things, the quantitative
criteria upon which the standard is based, the justification by the
ATS for why the standard is fair and not unreasonably
discriminatory, the differences in, and impact on, access to
services from the application of the standard, and other information
provided through discussions with the ATS.
---------------------------------------------------------------------------
In the case of an ATS that segments the order flow of its
participants into certain categories based on quantitative metrics,
such as reversion rates,\679\ the ATS's standards generally should
include, among other things, the metrics and factors used to determine
the segmented categories and, as explained further below, how the
metrics and factors are fair and not unreasonably discriminatory, and
thus are reasonable. The presence of the objective and quantitative
thresholds limits the ATS's discretion in differentiating among
participants (in this example, by setting segmented categories for
order interaction and thus denying certain participants the ability to
interact with other participants on the ATS). The quantitative
threshold still must be reasonable; an objective or quantitative
standard would not by itself be sufficient to comply with fair access.
In cases where an ATS has a written standard for access that is not
based on objective or quantitative criteria, the ATS must still justify
why the standard is reasonable, and more specifically, how such
standard is fair and not unreasonably discriminatory.
---------------------------------------------------------------------------
\679\ In the Commission's experience, a common method for ATSs
to segment order flow is to measure a security's change in price
within a certain (usually short) time period after an execution and,
based on that figure or reversion rate, assign a score to one or
both of the parties to the transaction. If a security's price moves
substantially after an execution, then that subscriber's (or
subscribers') score may cause it to be segmented into a class of
subscribers that is considered riskier to trade against and other
subscribers may select to not trade against that subscriber.
Subscribers are assigned scores based on their reversion rates and
segmented into classes or categories accordingly.
---------------------------------------------------------------------------
Third, the Commission is proposing Rule 301(b)(5)(iii)(A)(3) to
require that an ATS's reasonable written standards identify any
differences in access to the services of the ATS by applicants and
current participants. The purpose of this provision is to highlight
each instance where an ATS treats participants differently under the
established written standards. Under the Fair Access Rule, ATSs may
provide different services to different subscribers, or may vary how
services are offered among ATS participants; however, the ATS must have
a reasonable basis for doing so. An ATS might, for example, segment
participant order flow into specific categories (i.e., based upon the
type of market participant generating the order flow) to determine
order interaction. As a result, some subscribers can only interact with
certain subscribers and not others. In such a case, the ATS would be
required to, among other things, identify the segmentation categories
and criteria used to set the categories. If, for example, an ATS grants
certain trading privileges, such as being able to view certain trading
interest, to a person classified as a liquidity provider, the ATS would
be required to describe any such differences in treatment for the
liquidity provider. The identification of differences in treatment
required would also include those applicable to applicants to the ATS.
For example, if an ATS had different minimum capital and credit
requirements for applicants to the ATS, the ATS would need to identify
the differences in its written standards. As described above,
differences in access must be reasonable and the ATS would be required
to justify how such differences in access are fair and not unreasonably
discriminatory pursuant to proposed Rule 301(b)(5)(iii)(A)(4).
Fourth, the Commission is proposing Rule 301(b)(5)(iii)(A)(4) to
require that an ATS's reasonable written standards justify why each
standard, including any differences in access to the services of the
ATS, is fair and not unreasonably discriminatory. While the Fair Access
Rule does not require that the ATS treat all market participants
equally, the Fair Access Rule requires an ATS to have a reasonable
basis for not treating market participants equally. Accordingly, an ATS
would be required to justify in writing why its standards are fair and
not unreasonably discriminatory.\680\ Requiring an ATS to justify its
fair access standards in writing would facilitate Commission staff
review of those standards, whether by reviewing the standards in the
description provided under Item 24 of revised Form ATS-N for NMS Stock
ATSs and Government Securities ATSs (as proposed) or during an
examination of an ATS. Above, the Commission sets forth an example of
an ATS establishing different minimum capital and credit requirements
for applicants to the ATS. In addition to identifying that difference
in its written standards, the ATS would also be required to justify why
the difference is fair and not unreasonably discriminatory. The ATS
could, for instance, explain: (1) Objective or quantitative criteria
used to determine which minimum applies to which applicants and why the
ATS chose the objective and qualitative criteria that it did, which
would also meet the requirements of paragraph (b)(5)(iii)(A)(2)
outlined above; and (2) why those objective or quantitative criteria
are fair and not unreasonably discriminatory as applied to the ATS. If
there are no objective criteria, the ATS must explain why it is fair
and not unreasonably discriminatory to have and apply the capital and
credit requirements among applicants to the ATS.
---------------------------------------------------------------------------
\680\ As the Commission is proposing to relocate these
requirements under the requirements for an ATS's written standards
under Rule 301(b)(5)(iii)(A), the Commission is proposing to delete
the rule text under current Rule 301(b)(5)(ii)(B) and renumber
current paragraphs (b)(5)(ii)(B) and (C) to paragraphs (b)(5)(ii)(C)
and (D), respectively.
---------------------------------------------------------------------------
Finally, the Commission is proposing Rule 301(b)(5)(iii)(A)(5) to
require an ATS's reasonable written standards address any standard for
granting, limiting, or denying access to the services of the ATS
performed by persons other than the broker-dealer operator. From the
Commission's experience, persons other than the broker-dealer operator
may perform all or some functions of the ATS. In other cases, the
broker-dealer operator, or affiliate of the broker-dealer operator, may
direct the ATS participants to use the services of a person other than
the broker-dealer operator. In both such cases, the activities of those
persons can affect participants' access to the ATS,
[[Page 15576]]
and therefore, the ATS must ensure, through its written fair access
standards, that those persons have established reasonable written
standards for granting, denying, and limiting access to the ATS and are
applying those standards in a fair and non-discriminatory manner.
For example, an ATS that arranges for an entity to provide order
entry services to the ATS would be required to ensure that the order
entry provider has reasonable standards for ATS participants to access
the order entry services, and thus the ATS. The ATS would be required
to address in its reasonable written standards how the provider ensures
that its standards are reasonable because the activities of the
provider can impact the ability of participants to access the ATS. In
addition, if the ATS broker-dealer operator, or affiliate of the
broker-dealer operator, directs participants to use the services of
another entity in connection with the ATS, that ATS would be
responsible to ensure that such entity establishes reasonable standards
for access. For example, if the broker-dealer operator, or affiliate of
the broker-dealer operator, directs participants to use the services of
a certain clearing broker, the ATS would be required to ensure that the
clearing broker has reasonable written standards and to include in the
ATS's written standards the clearing broker's written standards for
granting, denying, or limiting access to its clearing services as they
relate to the ATS. The Commission is concerned that an ATS may attempt
to use an affiliate or third party to perform ATS activities or
functions while avoiding the application of Regulation ATS to those
activities or functions.\681\ Requiring an ATS subject to the Fair
Access Rule to address in its written standards the activities or
functions performed by persons in conjunction with the ATS other than
the broker-dealer operator would help ensure fair access to the ATS by
investors.
---------------------------------------------------------------------------
\681\ See Regulation ATS Adopting Release, supra note 31, at
70873, n.252.
---------------------------------------------------------------------------
4. Recordkeeping Requirements
The Commission is also proposing changes to the ATS recordkeeping
requirements under Rule 301(b)(5)(iii)(B), as proposed to be
amended.\682\ The Commission is proposing to replace the reference to
records relating to grants of access to ``subscribers'' with references
to ``participants.'' In the Commission's experience, ATSs can grant
access to customers of subscribers who may not themselves be
subscribers to the ATS. This proposed change would clarify that records
related to such participants would need to be made and kept under the
rule. In addition, the Commission is proposing to add to the rule text
that the ATS must make and keep records related to denials or
limitations of access and reasons for each applicant ``and
participant.'' By adding ``participant,'' the Commission will reflect
that it requires an ATS subject to the rules to keep records of when it
limits access to existing participants (not only ``applicants'') to the
ATS system. This is a technical change, as the current rule requires
the ATS to make and keep all records related to limitations of access
and reasons for such limitations, which would apply to both existing
participants, as well as applicants upon entry to the ATS.
---------------------------------------------------------------------------
\682\ This is currently in paragraph (b)(5)(iii)(C), but would
be renumbered to paragraph (b)(5)(iii)(B) under the proposed
changes.
---------------------------------------------------------------------------
The Commission is also proposing to add language to Rule
301(b)(5)(iii)(B)(1) and (2) to reference that grants of access and
denials of limits of access and reasons for limitation and denying
access to the services of the ATS would be under the standards provided
in proposed Rule 301(b)(5)(iii)(A). Referencing the standards in Rule
301(b)(5)(iii)(A) would clarify that grants, limitations, and denials
of ATS services would be under the standards of the rule, as proposed
to be revised. The Commission is also proposing to amend Rule
303(a)(1)(iii) of Regulation ATS to require an ATS subject to the Fair
Access Rule, for a period of not less than three years, the first two
years in an easily accessible place, to preserve at least one copy,
including each version, of such ATS's written standards for access to
trading, all documents relevant to the ATS decision to grant, deny, or
limit access to any person, and all other documents made or received by
the ATS in complying with the Fair Access Rule.\683\ This change would
modify the current rule to specify that the standards are ``written''
and that the ATS must maintain ``each version'' of the written
standards required under Rule 301(b)(5), which is consistent with the
previous Commission guidance.\684\
---------------------------------------------------------------------------
\683\ The Commission is also proposing to specify in Rule
303(a)(1)(iv) and (v) that an ATS must maintain ``each version'' of
copies of records made in the course of complying with Rule
301(b)(6) and copies of the written safeguards and written
procedures to protect subscribers' confidential trading information
and written oversight procedures created in the course of complying
with Rule 301(b)(10).
\684\ See Regulation ATS Adopting Release, supra note 31, at
n.251 (stating that the Commission expects an ATS to maintain a
record of its standards at each point in time, and that if the ATS
amends or modifies its access standards, the records kept should
reflect historic standards, as well as current standards).
---------------------------------------------------------------------------
5. Removal of the Exclusion for Passive Systems From the Fair Access
Rule
The Commission is re-proposing to remove an exclusion from
compliance with the Fair Access Rule under Rule 301(b)(5) and the
Capacity, Integrity, and Security Rule under Rule 301(b)(6) that is
applicable to ATSs that trade equities.\685\ An ATS is excluded from
complying with the requirements of the Fair Access Rule and the
Capacity, Integrity, and Security Rule if the ATS: (i) matches customer
orders for a security with other customer orders; (ii) such customers'
orders are not displayed to any person, other than employees of the
ATS; and (iii) such orders are executed at a price for such security
disseminated by an effective transaction reporting plan, or derived
from such prices.\686\ In adopting the exclusion, the Commission stated
that ATSs of this nature, the so-called ``passive systems,'' did not
contribute significantly to price discovery; however, the Commission
also stated that they had the potential to and frequently do affect the
markets from which their prices are derived, and thus, the Commission
would continue to monitor these systems and reconsider whether the
requirements should apply if concerns arise in the future.\687\
---------------------------------------------------------------------------
\685\ When adopting the exclusion, the Commission contemplated
that it would apply only to ATSs that trade equity securities, as
one of the elements of the exclusion requires that the prices in the
ATS be based on the SIP. The third prong of each exception states
that if an ATS meets the requirement, among others, to execute
customer orders ``at a price for such security disseminated by an
effective transaction reporting plan, or derived from such prices,''
the ATS would not be subject to the Fair Access Rule or Capacity,
Integrity, and Security Rule, as applicable. 17 CFR
242.301(b)(5)(iii)(C); 17 CFR 242.301(b)(6)(iii)(C).
\686\ 17 CFR 242.301(b)(5)(iii); 17 CFR 242.301(b)(6)(iii).
\687\ Regulation ATS Adopting Release, supra note 31, at 70853.
---------------------------------------------------------------------------
In the Regulation ATS Adopting Release, the Commission explained
that fair treatment by ATSs of subscribers is particularly important
when an ATS captures a large percentage of trading volume in a security
because investors lack access to viable alternatives to trading in the
ATS.\688\ Since the adoption of Regulation ATS, passive systems (as the
term is used in the Regulation ATS Adopting Release) for NMS stocks
have garnered a significant percentage of trading volume in securities
and have come to play an important role in matching buyers and sellers
of securities.\689\ Eliminating the
[[Page 15577]]
Rule 301(b)(5)(iii) exclusion would ensure that the Fair Access Rule is
applied as intended and help ensure fair treatment of applicants and
current subscribers by any type of ATS that captures a large percentage
of trading in a security or type of security.
---------------------------------------------------------------------------
\688\ Id. at 70872.
\689\ See NMS Stock ATS Adopting Release, supra note 2, at
38770-71.
---------------------------------------------------------------------------
The Commission is also re-proposing to amend Rule 301(b)(6) to
remove the exclusion from compliance with the Capacity, Integrity, and
Security Rule under Rule 301(b)(6)(iii).\690\ As part of Regulation
SCI, Rule 301(b)(6) of Regulation ATS was amended to no longer apply to
ATSs that trade equities because Regulation SCI superseded and replaced
the requirements of the Capacity, Integrity, and Security Rule with
regard to ATSs that trade NMS stocks and non-NMS stocks.\691\
---------------------------------------------------------------------------
\690\ 17 CFR 242.301(b)(6)(iii).
\691\ See Regulation SCI Adopting Release, supra note 3, at
72252, 72267.
---------------------------------------------------------------------------
Request for Comment
150. Should the Commission change the five percent fair access
threshold for NMS stocks, equity securities that are not NMS stocks,
corporate bonds, or municipal securities? If so, should the threshold
be changed higher or lower than the existing five-percent threshold
under Rule 301(b)(5)(i)? National securities exchanges are required to
have rules designed to prevent unfair discrimination \692\ and admit
members fairly.\693\ Because ATSs are operating pursuant to an
exemption from exchange registration, should the Commission eliminate
the volume threshold(s) for the Fair Access Rule and thus, require all
ATSs to provide fair access to their participants regardless of trading
volume? If yes, should the Commission eliminate the volume thresholds
for all categories of securities subject to the Fair Access Rule or
only specific categories?
---------------------------------------------------------------------------
\692\ 15 U.S.C. 78f(b)(5).
\693\ See 15 U.S.C. 78f(b)(2) and (c); 15 U.S.C. 78o-3(b)(8).
---------------------------------------------------------------------------
151. Should the Commission change the look-back period for applying
the fair access thresholds from four out of the preceding six months to
something different? For example, should an ATS be subject to fair
access if its average daily trading volume in a subject security is
five percent over the prior quarter or the prior month? Should the
Commission change to the look-back period for all categories of
securities subject to the Fair Access Rule, or just specific
categories?
152. Should the Commission allow or require ATSs to use sources of
market data other than published data provided by the SRO to which
trades are reported? If yes, which data sources?
153. Should the Commission change the Fair Access Rule for it to
apply categorically to NMS stocks rather than on a security-by-security
basis? For example, should the Commission change the fair access
threshold for equity securities so that an ATS would only be subject to
the requirements of the Fair Access Rule if its average daily trading
volume is five percent across all NMS stocks? Should the Commission
change the Fair Access Rule to provide fair access in all NMS stocks if
it surpasses the fair access threshold in a single NMS stock?
154. Should the Commission change the Fair Access Rule so that it
applies categorically, rather than on a security-by-security basis, to
equity securities that are not NMS stocks? For example, should the
Commission change the fair access threshold for equity securities so
that an ATS would only be subject to the requirements of the Fair
Access Rule if its average daily trading volume is five percent across
all equity securities that are not NMS stocks? Additionally, or
alternatively, should the Commission change the Fair Access Rule to
require an ATS to provide fair access in all NMS stocks if it surpasses
the fair access threshold in a single NMS stock?
155. Should the Commission adopt rules to amend the Rule
301(b)(5)(ii) of the Fair Access Rule to aggregate the trading volume
for a security or category of securities for ATSs that are operated by
a common broker-dealer, or ATSs that are operated by affiliated broker-
dealers, solely for the purpose of calculating the average transaction
volume under Rule 301(b)(5)(i)(A) through (F)?
156. Under Regulation ATS, an ATS would be subject to Rule
301(b)(3) (Order Display and Execution Rule) and Rule 301(b)(6)
(Capacity, Integrity and Security Rule) if the ATS exceeded certain
volume thresholds within a given period of time under the rules. Should
the Commission amend the Order Display and Execution Rule and the
Capacity, Integrity, and Security Rule to aggregate the trading volume
for a security or category of securities for ATSs that are operated by
a common broker-dealer, or ATSs that are operated by affiliated broker-
dealers, for the purpose of calculating the average transaction volume
under those rules?
157. Instead of aggregating trading volume across multiple ATSs
operated by a common broker-dealer, should the Commission amend
Regulation ATS to require a broker-dealer to operate only one ATS for a
category of security? If no, why is it important for one broker-dealer
to be able to offer multiple ATS market places for the trading of the
same category of security?
158. Should the Commission adopt the same standard of
reasonableness that is applied to national securities exchanges for
purposes of the Fair Access Rule? If not, what standard of
reasonableness should apply to ATSs that are subject to the Fair Access
Rule?
159. Should the Commission adopt requirements in addition to the
reasonable written standards proposed in Rule 301(b)(5)(iii)(A)(1)
through (4)? Should any of those standards be amended?
160. Should the Commission eliminate the exclusion from compliance
with the Fair Access Rule under Rule 301(b)(5)(iii) and with the
Capacity, Integrity, and Security Rule under Rule 301(b)(6)(iii)?
161. Should the Commission adopt the changes to the recordkeeping
provisions of the Fair Access Rule? Are there any additional records
that an ATS should be required to keep?
B. Electronic Filing of and Other Changes to Form ATS and Form ATS-R
The Commission is re-proposing revisions to Rule 301(b)(2), Form
ATS, and Form ATS-R to modernize Form ATS and Form ATS-R and to provide
that they are filed electronically. In addition, the Commission is
proposing to require ATSs to provide certain additional information on
Form ATS-R, including volume reporting for transactions in repurchase
and reverse repurchase agreements on the ATS. ATSs are required to file
the information required by Form ATS-R \694\ pursuant to Rule 301(b)(9)
within 30 calendar days after the end of each calendar quarter in which
the ATS has operated.\695\
---------------------------------------------------------------------------
\694\ See Form ATS-R. See also supra notes 144-147.
\695\ See 17 CFR 242.301(b)(9)(i). An ATS must also file Form
ATS-R more frequently upon request of the Commission. See Form ATS-R
Instructions.
---------------------------------------------------------------------------
First, the Commission is re-proposing an amendment to Rule
301(b)(2)(vi), which currently states that ``[e]very notice or
amendment filed pursuant to this paragraph (b)(2) shall constitute a
`report''' within the meaning of applicable provisions of the Exchange
Act. The Commission proposes to add a reference to Rule 301(b)(9) to
state that Form ATS-R, as is the case with Form ATS, constitutes a
report within the meaning of applicable provisions of the Exchange
Act.\696\
---------------------------------------------------------------------------
\696\ This amendment would be consistent with Rule
301(b)(2)(vii), which states that ``[a]ll reports filed pursuant to
this paragraph (b)(2) and paragraph (b)(9)'' of Rule 301 are, as
proposed, accorded confidential treatment subject to applicable law.
See 17 CFR 242.301(b)(2)(vii). The instructions to Form ATS and Form
ATS-R require an ATS to submit one original and two copies of Form
ATS and Form ATS-R to the Commission. See Form ATS and Form ATS-R
Instructions. In addition, Rule 301(b)(2)(vii) requires that an ATS
file copies of its Form ATS filings with the examining authority of
the SRO with which it is registered (e.g., FINRA) at the same time
it files with the Commission, and upon request, the ATS must provide
its SRO's surveillance personnel with duplicate Form ATS-R filings.
See 17 CFR 242.301(b)(2)(vii).
---------------------------------------------------------------------------
[[Page 15578]]
Next, the Commission is re-proposing to require that all Forms ATS
and ATS-R are filed with the Commission electronically. As proposed,
following the effective date of the proposed rule, all Form ATS filers
would be required to file an amendment on Form ATS in the electronic
format proposed herein that would also include all new information
required by revised Form ATS. Currently, ATSs are required to submit
paper submissions of Forms ATS and ATS-R to the Commission.\697\ The
Commission proposes to amend Rule 301(b)(2)(vii) to require that an ATS
must file a Form ATS or a Form ATS-R in accordance with the
instructions therein. The Commission is proposing to revise the
instructions to Form ATS and Form ATS-R to require that they be
submitted electronically via EDGAR.\698\ The Commission is also
proposing to require in Rule 301(b)(2)(vii) that reports provided for
in Rule 301(b)(2) and (9) shall be filed on Form ATS and Form ATS-R, as
applicable, and include all information as prescribed in Form ATS or
Form ATS-R, as applicable, and the instructions thereto.\699\ In
addition, the Commission is proposing to require that any Form ATS or
Form ATS-R shall be executed at, or prior to, the time Form ATS or Form
ATS-R is filed and shall be retained by the ATS in accordance with Rule
303 of Regulation ATS and Rule 302 of Regulation S-T, and the
instructions in Form ATS or Form ATS-R, as applicable.\700\ Among other
benefits, the electronic filing of Forms ATS and ATS-R would increase
efficiencies and decrease filing costs for ATSs (i.e., ATSs would no
longer be required to print and mail paper filings) and for Commission
staff when undertaking a review of these forms. Form ATS-N is required
to be filed in EDGAR. EDGAR is currently configured to support the
Commission's receipt and review of filings under Regulation ATS, and
requiring electronic Form ATS and Form ATS-R filings to be submitted
via EDGAR would be the most efficient way to facilitate their
electronic filing.
---------------------------------------------------------------------------
\697\ Rule 301(b)(2)(vii) of Regulation ATS specifies that
reports on Form ATS shall be considered filed upon receipt by the
Division of Trading and Markets, at the Commission's principal
office in Washington, DC See 17 CFR 242.301(b)(2)(vii).
\698\ See infra note 701 and accompanying text.
\699\ Accordingly, the Commission is proposing to delete the
provisions of Rule 301(b)(2)(vii) related to paper submission.
Specifically, the Commission is proposing to delete the sentence
that the reports shall be considered filed ``upon receipt by the
Division of Trading and Markets, at the Commission's principal
office in Washington, DC'' Additionally, although the Commission
would continue to require that duplicates of filings on Form ATS be
provided to the SRO that is the examining authority for each ATS,
and that duplicates of the Form ATS-R be made available to the
surveillance personnel of such SRO upon request, the Commission
proposes to eliminate the reference to ``originals'' in Rule
301(b)(2)(vii) because paper reports will no longer be furnished to
the Commission and there will therefore be no ``original'' version
of the reports.
\700\ The Commission notes that the proposed provisions would
conform to similar provisions of Rule 304, which provide for the
electronic filing of Form ATS-N. See 17 CFR 242.304(c).
---------------------------------------------------------------------------
To facilitate electronic filing, the Commission is proposing to
amend the text of General Instructions A.4 of Forms ATS and ATS-R to
require that all filings be submitted via EDGAR and prepared,
formatted, and submitted in accordance with Regulation S-T and the
EDGAR Filer Manual.\701\ The Commission also proposes to amend Forms
ATS and ATS-R General Instruction A.5 to state that a filing that is
defective may be rejected and not be accepted by the EDGAR system and
that any filing so rejected shall be deemed not filed. This is
consistent with the requirements of Regulation S-T, which provides the
rules for EDGAR submissions.\702\ The Commission also notes that the
instructions for current Form ATS contain similar language,\703\ but
the current instructions for Form ATS-R do not contain such language.
The Commission believes that it would be appropriate to reject a filing
as defective if it does not comply with the technical requirements of
the form, for example, if a Form ATS or Form ATS-R is missing exhibits,
or if the ATS does not provide a response to a Form ATS request or does
not comply with the electronic filing requirements. The Commission is
also proposing to amend General Instruction A.6 (``Recordkeeping'') of
both forms to reflect that records must be retained in accordance with
the EDGAR Filer Manual and Rule 303 of Regulation ATS and to conform to
the recordkeeping instructions on Form ATS-N, as revised.\704\
Instruction A.8 would also be revised to reflect updated Paperwork
Reduction Act estimates, and, to conform to changes the Commission is
proposing in Rule 301(b)(2)(vii),\705\ to state that types of
securities traded provided on Form ATS and Form ATS-R will not be
afforded confidential treatment. The Commission is also proposing to
add new Instruction A.8 to Form ATS to require that, for amendments,
the filer attach an Exhibit C marked to indicate additions to or
deletions from the disclosures in Items 1 through 6 of Form ATS. This
document would help enable the Commission to identify any changes to
the form more easily. Most ATSs currently provide such a marked
document to the Commission on a voluntary basis. The Commission is also
proposing to amend the instructions to Form ATS to state that Newly
Designated ATSs are required to file a Form ATS no later than the date
30 calendar days after the effective date of any final rule, if
adopted.\706\
---------------------------------------------------------------------------
\701\ The Commission proposes to eliminate the language in the
Form ATS instructions and Form ATS-R instructions requesting that an
ATS type all information because an ATS would not otherwise have the
option to handwrite any responses. The instructions for both forms
would be amended to eliminate the option to use a ``reproduction''
of the forms. The Commission also believes it is redundant to state
that the Form ATS or Form ATS-R must be the ``current version'' as
the ATS is required to attest that the form is ``current.'' The
Commission also proposes to delete the requirement to attach an
execution page with original manual signatures for Form ATS because,
as discussed above, Form ATS and Form ATS-R would be signed
electronically and thus there would be no need for an execution
page. The Commission also proposes to delete the instruction that
the name of the alternative trading system, CRD number, SEC file
number, and report period dates be listed on each page, as this
requirement will be unnecessary because the Form ATS or Form ATS-R
will be submitted as a single submission. Because Form ATS and Form
ATS-R would be submitted via EDGAR, the Commission is also proposing
to delete references to submitting the ``original'' and ``copies''
of the form to the Commission at the Commission's mailing address.
\702\ 17 CFR part 232. This is also consistent with the
requirements for Form ATS-N.
\703\ The Form ATS Instructions state that ``Form ATS shall not
be considered filed, unless it complies with applicable
requirements.''
\704\ Rule 303 of Regulation ATS provides the record
preservation requirements for ATSs. See 17 CFR 242.303.
\705\ See infra Section V.C.
\706\ See supra note 180 and accompanying text.
---------------------------------------------------------------------------
In addition, the Commission is re-proposing to amend Form ATS to
require an ATS filing an amendment on Form ATS to identify whether the
Form ATS filing is a material amendment under Rule 301(b)(2)(ii), a
periodic amendment under Rule 301(b)(2)(iii), or a correcting amendment
under Rule 301(b)(2)(iv).\707\ An ATS currently identifies an amendment
to current Form ATS by marking the ``Amendment to Initial Operation
Report'' box on Form ATS, and Form ATS currently does not ask the ATS
to specify whether the amendment to Form ATS is a material, periodic,
or correcting
[[Page 15579]]
amendment.\708\ Requiring an ATS to specify the type of amendment would
better enable the Commission to determine whether an ATS is in
compliance with Regulation ATS. The Commission also proposes requiring
an ATS that is filing a cessation of operations report to provide the
date that the ATS ceased to operate, which is not currently required on
Form ATS. The Commission believes that having information about the
date that the ATS ceased to operate would enable the Commission to
determine more readily whether an ATS is, or was, in compliance with
Regulation ATS.\709\
---------------------------------------------------------------------------
\707\ See Rule 301(b)(2)(ii)-(iv).
\708\ The Commission is also proposing to add cites to the
relevant rule text next to the check boxes on Form ATS identifying
whether the ATS is filing an Initial Operation Report (``IOR''),
amendment to IOR, or a cessation of operations report.
\709\ See Rule 301(b)(2)(v) (requiring an ATS to promptly file a
cessation of operations report on Form ATS in accordance with the
instructions therein upon ceasing to operate as an ATS).
---------------------------------------------------------------------------
The Commission is also re-proposing to amend Form ATS and Form ATS-
R to change the solicitation of information relating to the name of the
broker-dealer operator and the registration and contact information of
the broker-dealer operator. Because many broker-dealer operators of
ATSs engage in brokerage and/or dealing activities in addition to
operating an ATS, and some broker-dealers operate multiple ATSs, the
name of the broker-dealer operator of an ATS often differs from the
commercial name under which the ATS conducts business. To identify the
broker-dealer operator of an ATS and to assist the Commission in
collecting and organizing its filings and assessing whether the ATS has
met its requirement to register as a broker-dealer, Forms ATS and ATS-R
would require the ATS to indicate the full name of the broker-dealer
operator of the ATS, as it is stated on Form BD, in Item 1 of Form ATS
and Form ATS-R. To further facilitate compliance with the requirements
of Regulation ATS, as proposed, Form ATS and Form ATS-R would require
the ATS to indicate whether the filer is a broker-dealer registered
with the Commission and whether the broker-dealer operator has been
authorized by a national securities association to operate an ATS. Such
requirements would conform to the proposed requirements of Form ATS-
N.\710\ The Commission is proposing to conform Item 1 of Form ATS and
Form ATS-R \711\ to the requirements of Form ATS-N, which is currently
filed electronically. In addition, the Commission is proposing to add
to Item 1 of Form ATS and Form ATS-R a requirement that the ATS provide
the broker-dealer operator's LEI, if the broker-dealer operator has an
LEI,\712\ and the MPID of the broker-dealer operator.\713\ These
requests would help the Commission in identifying and corresponding
with ATSs and would conform to the identifying information on Form ATS-
N, as proposed to be revised.\714\ To determine whether the compliance
transition rules applicable to Newly Designated ATSs apply, the
Commission is also proposing to require the ATS to indicate if it is a
Newly Designated ATS in Item 2.
---------------------------------------------------------------------------
\710\ See supra Section IV.D.3.
\711\ Form ATS and Form ATS-R currently ask for the ATS's main
street address, mailing address, business telephone number and
facsimile number, and the contact information for the ATS's contact
person. The Commission is proposing to move the information requests
for the name and title and telephone number of the contact employee
to the signature block on the form, and to request an email address
for such person and not require the facsimile number. The proposed
signature block would ask for the primary street address and mailing
address of the ATS. The current certifications required in Form ATS
and Form ATS-R, including that the information filed is current,
true, and complete, would remain unchanged. However, the Commission
is proposing to delete the provision allowing for service of any
civil action pursuant to confirmed telegram and instead, permit
service of any civil action via email. The signature block on Form
ATS and Form ATS-R would conform to the signature block in Form ATS-
N, as proposed. See supra Section IV.D.6.
\712\ See supra note 506.
\713\ See supra Section IV.D.3 (proposing requiring the ATS to
disclose the MPID of its broker-dealer operator).
\714\ The Commission proposes to replace in Item 1 of Form ATS
and Form ATS-R the requests for the ATS's main street address,
mailing address, and business telephone number and facsimile number
with a requirement that the ATS provide the primary, and if any,
secondary physical street address of the ATS's matching system, as
well as a URL address for its website if it has a website. Knowing
the location of the matching system address and secondary matching
system address could be useful to the Commission in the event of,
for instance, a natural disaster that could impact market
participants' ability to trade in the ATS and potential latency that
could be experienced due to the location of the secondary site of
the ATS. The Commission is also requesting the full name of the
national securities association of the broker-dealer operator, the
effective date of the broker-dealer operator's membership with the
national securities association, and MPID of the ATS. In addition,
because any current or former names of the ATS would be searchable
on EDGAR and there will be multiple identifiers included on the
form, including MPID, the Commission is proposing to delete the
requirement that the ATS indicate if it is changing its name and
list its former name.
---------------------------------------------------------------------------
In addition, to facilitate the electronic filing of Form ATS, the
Commission is proposing to revise Form ATS to provide that the
narrative disclosures be included in a single document, rather than
multiple exhibits.\715\ The ATS would be required to provide the
information currently required in Exhibits A, B, C, E, F (other than a
copy of the ATS's subscriber manual and any other materials provided to
subscribers), G, H, and I in a single document. Because the subscriber
manual may be lengthy, it would be more efficient for the ATS to
provide a copy of its subscriber manual and any other materials
provided to subscribers, which are currently required to be included in
Exhibit F, as a separate, new Exhibit A. In addition, the Commission is
proposing new Exhibit B, which would include a copy of the
constitution, articles of incorporation or association, with all
amendments, and of the existing by-laws or corresponding rules or
instruments, whatever the name, of the alternative trading system.
Today, an ATS may, in lieu of attaching such documents, indicate that
the ATS makes such information publicly available on a continuous basis
on an internet site controlled by the ATS and indicate the website of
the ATS. Because the Commission is requiring the ATS to provide its
website in Part I,\716\ the Commission is proposing to include a
checkbox for the ATS to select if, in lieu of filing, the ATS certifies
that the information requested under the exhibit is available at the
website above and is maintained on a continuous basis and is accurate
as of the date of the filing.
---------------------------------------------------------------------------
\715\ In response to the 2020 Proposal, one commenter stated
that current Form ATS Exhibit F, which requires the ATS to provide
certain specified information about its operations and procedures,
should be amended to follow the same structure as current Form ATS
Exhibit G, which requires a ``brief description'' of the ATS's
procedures for reviewing system capacity, security, and contingency
planning procedures to provide ATS operators with latitude in the
manner in which they provide information to the Commission. See ICE
Bonds Letter I at 6-7. The Commission is not proposing a change to
the structure of Exhibit F of Form ATS to conform to the structure
of Exhibit G. The structures of Exhibits F and G are not dissimilar
in that they both require an ATS to provide a description of ATS
policies and procedures and that the information solicited by
Exhibit F is important for the Commission to understand and oversee
ATSs.
\716\ See supra note 714.
---------------------------------------------------------------------------
The Commission is also re-proposing to amend Form ATS-R to make it
easier for the Commission staff to identify if the ATS has met its
reporting obligations. First, the Commission is proposing to require an
ATS to specify whether it is filing a quarterly report amendment under
Rule 301(b)(9)(i) or a report for an ATS that has ceased to operate
under Rule 301(b)(9)(ii) and, if the latter, to indicate the date the
ATS ceased to operate. Requiring an ATS to indicate its type of Form
ATS-R filing would enable the Commission to more effectively review
Form ATS-R submissions and determine whether an ATS is in compliance
with Regulation ATS. The Commission is also proposing
[[Page 15580]]
to amend Form ATS-R to ask whether the ATS was subject to the fair
access obligations under Sec. 242.301(b)(5) during any portion of the
period covered by the report by adding a corresponding box for the ATS
to check ``yes'' or ``no.'' Currently, Form ATS-R requires an ATS that
is subject to the Fair Access Rule to report a list of all persons for
whom access to the ATS was granted, denied, or limited during the
period covered by the Form ATS-R.\717\ Asking the ATS to indicate
whether the ATS was subject to the Fair Access Rule during any portion
of the period covered by the report would facilitate the Commission's
review of Form ATS-R submissions.
---------------------------------------------------------------------------
\717\ See Form ATS-R and Form ATS-R Instructions, No. 8.
---------------------------------------------------------------------------
The Commission is also proposing changes to the Form ATS-R
categories of securities to modernize them and add more specificity
with regard to all categories of securities. Form ATS-R currently
requires ATSs to indicate the total dollar volume of government
securities transactions in the period covered by the report. The
Commission is proposing to require that ATSs specify the total dollar
volume of transactions in ``U.S. Treasury Securities'' and ``Agency
Securities'' under the heading ``Government securities.'' \718\ As
currently, ATSs would also be required to indicate the total dollar
volume in government securities overall. This change would help the
Commission facilitate compliance with the thresholds for the Fair
Access Rule and Regulation SCI, which the Commission is proposing would
be based on trading volume in U.S. Treasury Securities and Agency
Securities.\719\ To avoid double-reporting of transactions in after-
hours trading (reported under Item 6), the Commission is proposing to
specify that Item 4 pertains to transactions ``other than those for
after-hours trading.'' In addition, the Commission is proposing to
amend Form ATS-R to update the descriptions of certain categories of
securities for which volume is required to be reported on Form ATS-R by
an ATS. Specifically, the Commission is proposing to delete the
categories of securities, ``Nasdaq National Market Securities'' and
``Nasdaq SmallCap Market Securities,'' reported in Items 4 and 6 of
Form ATS-R.\720\ The proposal to require ATSs to file Form ATS-R
electronically via EDGAR would allow the Commission staff to easily
ascertain on which national securities exchanges the equity securities
the ATS traded during the applicable period, as disclosed in Exhibit B,
are traded. Therefore, it would no longer be necessary to separate out
the total volume of securities traded on the Nasdaq markets from the
total volume of securities traded on other national securities
exchanges. The proposal would require ATSs to report the total volume
previously reported under the ``Nasdaq National Market Securities'' and
``Nasdaq SmallCap Market Securities'' categories under ``Listed Equity
Securities.''
---------------------------------------------------------------------------
\718\ The Commission is proposing to add to the Form ATS-R
instructions the definitions of U.S. Treasury Security and Agency
Security, which would conform to the definitions the Commission is
proposing in Rule 300(o) and (p), respectively.
\719\ See supra Sections III.B.4 and III.C.
\720\ Currently, any equity securities traded on the Nasdaq
Global Market are required to be reported under ``Nasdaq National
Market Securities,'' and any equity securities traded on the Nasdaq
Capital Market are required to be reported under ``Nasdaq SmallCap
Market Securities.'' ``Listed Equity Securities'' include all other
equity securities listed on any other markets or national securities
exchanges, including the Nasdaq Global Select Market. Any rights and
warrants are required to be reported under the ``Rights and
Warrants'' category even if they are listed on a national securities
exchange. As proposed, Items 4B, 4C, 6B, and 6C would be deleted,
and therefore, Items 4D through 4N and Item 6D would be re-numbered.
---------------------------------------------------------------------------
The Commission is proposing to require ATSs to break down the
volume for corporate debt securities, currently reported in Item 4J, by
U.S. and non-U.S. corporate debt securities. Non-U.S. corporate debt
securities would include debt securities issued by a foreign issuer
(excluding a foreign government) in emerging markets as well as non-
emerging markets. In addition, the Commission is adding new Item 4L to
require ATSs to report total dollar volume for foreign sovereign debt
securities, which currently are required to be reported under other
debt securities in Item 4N. Foreign sovereign debt securities would be
defined in Instruction B of Form ATS-R as any security other than an
equity security, as defined in Sec. 240.3a11-1, issued or guaranteed
by a foreign government, as defined in Sec. 240.3b-4.\721\ Creating
subcategories of corporate debt securities and a reporting requirement
for foreign sovereign debt securities would improve the quality of data
that the Commission already gathers through Form ATS-R. In addition,
the proposed reporting requirements would help the Commission further
understand the amount of trading that occurs on the ATSs for corporate
bonds and foreign sovereign debt securities markets.
---------------------------------------------------------------------------
\721\ ``Debt Securities'' is defined as ``any security other
than an equity security, as defined in Sec. 240.3a11-1'' in Form
ATS-R. See Instruction B of Form ATS-R. Section 240.3b-4 (Rule 3b-
4(a) under the Exchange Act) defines ``foreign government'' as the
government of any foreign country or of any political subdivision of
a foreign country. See 17 CFR 240.3b-4.
---------------------------------------------------------------------------
The Commission is also proposing to add new Items 4N and 4O to Form
ATS-R, which would require ATSs to disclose the total unit and dollar
volume of transactions in repurchase agreements and reverse repurchase
agreements. Specifically, the Commission is proposing to require ATSs
to disclose the total unit \722\ and dollar volume of repurchase and
reverse repurchase transactions broken down by (1) whether the
transaction is overnight or term; \723\ (2) whether the transaction is
triparty \724\ or bilateral; \725\ and (3) the type of securities used
to finance the collateral--i.e., NMS stocks, U.S. Treasury Securities,
Federal Agency Securities, Agency Mortgage-Backed Securities, municipal
securities, U.S. and non-U.S. corporate debt securities, asset-backed
securities, foreign sovereign debt securities, and other
securities.\726\ If an ATS traded repurchase or reverse repurchase
agreements collateralized with other securities, the ATS would list the
other types of securities in proposed Item 4N or 4O. In the
Commission's experience, some ATSs that trade repurchase or reverse
repurchase agreements, which are currently required to be disclosed as
debt securities on Item 4N of Form ATS-R, currently provide in Item 5B
of
[[Page 15581]]
Form ATS-R on a voluntary basis a breakdown of nominal trade value of
each of these types of securities. Adding new Items 4N and 4O to Form
ATS-R to require that ATSs provide the total unit and dollar volume of
transactions in repurchase and reverse repurchase agreements would
require all ATSs that trade repurchase or reverse repurchase agreements
to take a consistent approach in providing this information. The
Commission understands that certain transaction information about
repurchase and reverse repurchase agreements is publicly
available.\727\ However, individual ATSs are not currently required to
provide the Commission with information breaking down the types of
transactions in repurchase and reverse repurchase agreements. In
addition, transactions in repurchase and reverse repurchase agreements
are not generally required to be reported to an SRO, and the absence of
information about the trading of repurchase and reverse repurchase
agreements that occur on ATSs impedes the Commission's oversight of
these markets. The proposed reporting requirement would enhance the
Commission's oversight of ATSs that trade repurchase and reverse
repurchase agreements.
---------------------------------------------------------------------------
\722\ For repurchase or reverse repurchase agreements
collateralized with a basket or group of securities, ``total unit
volume of transactions'' would mean the number of units within each
basket or group rather than the number of baskets or groups.
\723\ Overnight repo trades end in one business day, whereas
term repos mature on a specific future business day that is more
than one business day. See, e.g., Office of Financial Research, U.S.
Repo Market Data Release Methodology for Tri-party Repo, available
at https://www.financialresearch.gov/data/files/2021-04-Methodology-TPR.pdf; Office of Financial Research, U.S. Repo Market Data Release
Methodology for DVP Cleared Repo, available at https://www.financialresearch.gov/data/files/2021-04-Methodology-DVP.pdf.
\724\ See supra note 521. Triparty repurchase and reverse
repurchase transactions would include triparty trades between
members that participate in the Fixed Income Clearing Corporation's
(``FICC'') General Collateral Financing (GCF) Repo Service. On the
other hand, repurchase and reverse repurchase transactions in the
FICC's Delivery vs. Payment (``DVP'') Repo Service would be reported
under the bilateral category.
\725\ See supra note 522.
\726\ As a result, ATSs would report the total unit and dollar
volume of transactions for each of 80 categories of repos: 2 types
of agreements (repurchase or reverse repurchase) x 2 transaction
types (overnight or term) x 2 party types (bilateral or triparty) x
10 collateral types (NMS stocks, U.S. Treasury Securities, Federal
Agency Securities, Agency Mortgage-Backed Securities, municipal
securities, U.S. corporate debt securities, non-U.S. corporate debt
securities, asset-backed securities, foreign sovereign debt
securities, or other securities).
\727\ For instance, the Treasury Department's Office of
Financial Research (``OFR'') collects data on repurchase agreements
cleared by triparty clearing banks and major central counterparties,
such as the FICC, and publishes aggregate statistics on these
transactions broken out by three venues--which are the triparty
market, FICC's DVP Service, and FICC's GCP Repo Service--collateral,
tenor, volume, and rates. See OFR, U.S. Repo Market Data Release,
available at https://www.financialresearch.gov/data/us-repo-data/.
---------------------------------------------------------------------------
Finally, the Commission is proposing to add new Item 5C, which
would require an ATS to list the types of listed options reported in
Item 4F of Form ATS-R. Item 4F of Form ATS-R currently requires ATSs to
disclose the total unit volume and dollar volume of transactions in
listed options. Under new Item 5C, an ATS might indicate, for example,
that it trades equity options and options on government securities.
This would provide the Commission with more specific information about
the types of options that each ATS trades.
In addition, because the Commission is proposing to change the
definition of ``exchange'' to include systems that use trading
interest, the Commission is proposing to revise Form ATS to require
information related to the entry of ``trading interest.'' Communication
Protocol Systems that transact in securities other than NMS stocks or
government securities or repos will be required to file Form ATS if
they choose to comply with Regulation ATS and the resulting disclosures
will help the Commission oversee these systems. In addition, the
Commission is proposing to include in Form ATS the definition of
``trading interest'' identical to that proposed in Rule 3b-16(e) and
Rule 300(q).\728\ The Commission is also proposing to change the
definition of ``subscriber'' to conform to the changes the Commission
is proposing in Rule 300(b).\729\ Form ATS Item 3.g (current Exhibit
F.a) requests that the ATS provide information about ``the manner of
operations of the alternative trading system.'' \730\ An ATS that
either operates a Communication Protocol System, or an order-driven
system, would be required to provide information about the manner of
operations on Form ATS that is akin to information provided in response
to in Part III of Form ATS-N (e.g., display, connectivity,
segmentation, market data, counterparty selection).\731\ For example,
ATSs that use orders generally should provide information about order
types and sizes, and the trading facilities and rules for bringing
together the orders of buyers and sellers on the ATS. ATSs that use
non-firm trading interest generally should provide information about
the communication protocols and functionalities of the ATS, including
the use of messages, requirements related to the size of trading
interest, and procedures governing the communication protocols.
---------------------------------------------------------------------------
\728\ See supra note 98 and accompanying text.
\729\ See id.
\730\ See Item 4.g of Form ATS, as proposed to be revised.
\731\ See NMS Stock ATS Adopting Release, supra note 2, at 38869
(describing that many of the disclosure items on Form ATS-N are also
required by respondents in whole or in part on current Form ATS).
See also NMS Stock ATS Proposing Release, supra note 29, at 81099-
102 (describing that some of the disclosures of Form ATS-N that the
Commission was proposing were already required under Form ATS).
---------------------------------------------------------------------------
Request for Comment
162. Would the proposed changes to Form ATS and Form ATS-R enhance
the Commission's oversight of ATSs? Do commenters disagree with any of
the proposed modifications? If so, what alternatives should the
Commission implement?
163. Form ATS-R requires an ATS to quarterly report volume of
transactions for certain securities, all subscribers that were
participants in the ATS, and securities that were traded in the ATS.
Should the Commission adopt amendments to Form ATS-R to add, change, or
modify any of the requests for information on Form ATS-R? Are the
current categories of securities and the proposed categories of
securities for reporting transaction volume to the Commission
appropriate?
164. Should Form ATS-R require ATSs to disclose total unit volume
in government securities, U.S. Treasury Securities, and/or Agency
Securities?
165. Proposed Items 4N and 4O of Form ATS-R would require ATSs to
report unit and dollar volume of transactions in repurchase and reverse
repurchase agreements broken down by, among other categories, whether
the transaction is triparty or bilateral. Do commenters believe that
categorizing repurchase and reverse repurchase agreements into these
two segments would yield useful information to the Commission? Do
commenters believe that the Commission should require ATSs to
separately report volumes for repurchase and reverse repurchase
agreements in the FICC's GCF Repo Service and FICC's DVP Service rather
than include them under volumes for triparty and bilateral,
respectively? Are there any types of securities, not otherwise covered
in proposed Items 4N and 4O, that are used as collateral in repurchase
and reverse repurchase agreements?
166. Proposed Items 4N and 4O of Form ATS-R would require ATSs to
report transaction volumes of repurchase and reverse repurchase
agreements in total unit and dollar volume. Do commenters believe that
ATSs should be required to provide the unit volume as well as the
dollar volume?
167. Are there characteristics unique to repurchase or reverse
repurchase agreements collateralized with a basket or group of
securities that would make reporting those repurchase or reverse
repurchase agreements in both unit and dollar volume in Form ATS-R
unduly burdensome or inappropriate for ATSs? For such basket repos, the
Commission is proposing to define ``total unit volume of transactions''
as the number of units within each basket or group rather than the
number of baskets or groups. Do commenters believe ``unit'' should be
defined differently for basket repos?
168. Proposed Item 4J of Form ATS-R would require ATSs to report
dollar volume of transactions in U.S. and non-U.S. corporate debt
securities. Do commenters believe that the two subcategories would
yield useful information to the Commission? Non-U.S. corporate debt
securities would include debt securities issued by a foreign issuer in
emerging markets as well as non-emerging markets. Do commenters believe
that the Commission should require ATSs to
[[Page 15582]]
further break down the volume for non-U.S. corporate debt securities by
type of market--emerging and non-emerging? If so, how should ``emerging
markets'' be defined for the purpose of reporting on Form ATS-R? Do
commenters believe ``emerging markets'' should be defined by country or
region?
169. Do commenters believe that the Commission should require ATSs
to report total dollar volume of foreign sovereign debt securities on
Form ATS-R, as proposed? Should the proposed definition of sovereign
debt securities be modified in any way?
170. Instruction A.1 of Form ATS-R requires ATSs to file Form ATS-R
within 30 days after the end of each calendar quarter, or more
frequently upon the request of the Commission. Do commenters believe
that the Commission should request information from ATSs on Form ATS-R
on a more frequent basis (e.g., monthly)? Do commenters believe that
such request would be unduly burdensome for ATSs?
171. Form ATS requires an ATS to report information to the
Commission about the ATS, including but not limited to, types of
subscribers and differential access to services, types of securities
traded, counsel, governance documents, service providers, manner of
operations, including entry of trading interest, order execution
procedures, clearance and settlement procedures, and trade reporting,
procedures for reviewing system capacity, security, and contingency
planning, procedures to safeguard subscriber funds and securities, and
direct owners. Should the Commission adopt amendments to Form ATS to
add, change, or modify any of the requests for information on Form ATS?
The proposed changes to Rule 3b-16 would require Communication Protocol
Systems that trade securities other than NMS stocks or government
securities or repos to file Form ATS. Are there any changes that the
Commission should make to Form ATS that would be relevant to
Communication Protocol Systems? If so, please identify the request and
explain how it should be amended.
172. Should the Commission amend Form ATS to require disclosures
similar to disclosures required on Part II of Form ATS-N, which
requests information about ATS-related activities of the broker-dealer
operator and its affiliates?
173. Should the Commission amend Form ATS to include questions
similar to those in Part III of Form ATS-N, which requests information
about the manner of the ATS's operations?
174. Are there any specific items on Form ATS-N, currently or as
proposed to be revised, that the Commission should incorporate into
Form ATS?
175. Should the Commission amend Rule 301(b)(2) and Form ATS to
provide that Form ATS is publicly disseminated? If so, should any of
the information on Form ATS be kept confidential?
C. Amendment to Rule 301(b)(2)(vii)
Rule 301(b)(2)(vii) provides that all reports filed pursuant to
Rules 301(b)(2) and (9) are ``deemed confidential.'' \732\ As a result,
the Commission does not make Form ATS and Form ATS-R disclosures
available to the public, including the types of securities that the ATS
trades or intends to trade.\733\ Currently, the Commission makes public
on a monthly basis on the Commission website information about ATSs
that have a Form ATS on file with the Commission, which includes the
name of the ATS, any name(s) under which business is conducted, and the
location of each ATS. The list also identifies each ATS that filed a
cessation of operations report in the prior month. While the Commission
does not approve Form ATS filings, the list is designed to inform the
public about ATSs that have noticed their operations with the
Commission.
---------------------------------------------------------------------------
\732\ See 17 CFR 242.301(b)(2)(vii).
\733\ The Commission notes, however, that Form ATS and Form ATS-
R are available to the examination staff of state securities
authorities and SROs. See Instruction A.7 of Form ATS and Form ATS-
R. See also 17 CFR 242.301(b)(2)(vii) (requiring duplicate of
filings on Form ATS be provided to the surveillance personnel
designated by the SRO that is the examining authority for each ATS,
and that duplicates of the Form ATS-R be made available to the
surveillance personnel of such SRO upon request).
---------------------------------------------------------------------------
The Commission is re-proposing to amend Rule 301(b)(2) to clarify
that being ``deemed confidential'' means receiving confidential
treatment under a relevant Commission regulation subject to applicable
law \734\ and to eliminate confidential treatment for information about
the type(s) of securities that the ATS trades as disclosed in the
Exhibit B, subpart (a) of Form ATS and Exhibit B of Form ATS-R. The
Commission does not believe that ATSs will be harmed by these
disclosures because a vast majority of ATSs currently publicize the
types of securities in which they transact, for example, on the website
for the ATS or the website of the ATS broker-dealer operator. The
Commission publishes on its website a list of ATSs that have an active
Form ATS on file with the Commission; however, information about types
of securities traded is not provided on that list and the Commission
frequently receives requests from the public and regulators for more
detail in the Commission's publication about the types of securities
traded by ATSs. Disclosing this information could help the public
understand a fundamental aspect of an ATS. To allow for this narrow
exception, the Commission is proposing to amend Rule 301(b)(2)(vii) of
Regulation ATS to state that the content of reports filed under Rule
301(b)(2) and (9) ``(except for types of securities traded provided on
Form ATS and Form ATS-R) will be accorded confidential treatment
subject to applicable law.''
---------------------------------------------------------------------------
\734\ See, e.g., 17 CFR 200.83, 240.24b-2.
---------------------------------------------------------------------------
Request for Comment
176. Should the Commission amend Rule 301(b)(2)(vii) to make Form
ATS, Form ATS-R, or both public? Should the Commission amend Rule
301(b)(2)(vii) to make any other disclosures provided on Form ATS or
Form ATS-R public?
177. Should the Commission eliminate confidential treatment for
information about the type(s) of securities that the ATS trades as
disclosed on Form ATS and Form ATS-R?
VI. General Request for Comment
The Commission is requesting comments from all members of the
public. The Commission particularly requests comment from the point of
view of persons who operate ATSs that would meet the proposed
definition of Government Securities ATS, subscribers to those systems,
and investors. The Commission seeks comment on all aspects of the
proposed rule amendments and proposed form, particularly the specific
questions posed above. Commenters are requested to provide empirical
data in support of any arguments or analyses. With respect to any
comments, the Commission notes that they are of the greatest assistance
to its rulemaking initiative if accompanied by supporting data and
analysis of the issues addressed in those comments and by alternatives
to the Commission's proposals where appropriate.
VII. Paperwork Reduction Act
Certain provisions of the proposed rule amendments contain
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\735\ The Commission is
submitting these collections of information to the Office of Management
and Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d)
and 5 CFR 1320.11. An agency
[[Page 15583]]
may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless the agency displays a currently
valid control number. The Commission is proposing to alter seven
existing collections of information and apply such collections of
information to new categories of respondents. The titles of such
existing collections of information are:
---------------------------------------------------------------------------
\735\ 44 U.S.C. 3501 et seq.
------------------------------------------------------------------------
OMB control
Rule Rule title No.
------------------------------------------------------------------------
Rule 301 of Regulation ATS..... Regulation ATS Rule 301 3235-0509
Amendments.
Rule 302 of Regulation ATS..... Rule 302 (17 CFR 3235-0510
242.302) Recordkeeping
Requirements for
Alternative Trading
Systems.
Rule 303 of Regulation ATS..... Rule 303 (17 CFR 3235-0505
242.303) Record
Preservation
Requirements for
Alternative Trading
Systems.
Rule 304 of Regulation ATS..... Regulation ATS Rule 304 3235-0763
and Form ATS-N.
17 CFR 240.15b1-1 (Rule 15b1-1 Form BD and Rule 15b1-1 3235-0012
under the Exchange Act). Application for
Registration as a
Broker-Dealer.
17 CFR 232.10(b) (Rule 10(b) of Form ID................ 3235-0328
Regulation S-T).
Rules 1001 through 1007 of Regulation SCI and Form 3235-0703
Regulation SCI. SCI.
------------------------------------------------------------------------
A. Summary of Collection of Information
The proposed amendments create burdens under the PRA by (1) adding
new categories of respondents to the seven existing collections of
information noted above and (2) modifying the requirements of two of
those collections, as noted below. The proposed amendments do not
create any new collections of information. The collections of
information and applicable categories of new respondents \736\ are
summarized in the following table: \737\
---------------------------------------------------------------------------
\736\ See infra Section VII.C for a description of the
categories of respondents.
\737\ Unless otherwise described, none of the existing
information collections are being revised with new requirements.
----------------------------------------------------------------------------------------------------------------
Collection of information Rule Burden description Respondent categories
----------------------------------------------------------------------------------------------------------------
Rule 301 of Regulation ATS and Forms Rule 301(b)(2)......... Revised Burden: File Certain Communication
ATS and ATS-R. initial operations Protocol Systems.
report using the All Other Form ATS
proposed modernized Filers.
Form ATS.
Rule 301(b)(5)......... Comply with fair access Certain Communication
standards Protocol Systems.
recordkeeping and fair Certain Legacy
access notice Government Securities
requirements for ATSs.
certain securities, Certain NMS Stock ATSs.
including, as Certain Other ATS
proposed, U.S. Filers.
Treasury Securities
and Agency Securities.
Rule 301(b)(6)......... Comply with ATS- Certain Communication
specific systems Protocol Systems.
capacity, integrity
and security
recordkeeping and
systems outages notice
requirements.
Rule 301(b)(9)......... Revised Burden: File All Communication
quarterly reports Protocol Systems.
using the proposed All Legacy Government
modernized Form ATS-R. Securities ATSs.
All NMS Stock ATSs.
All Other Form ATS
Filers.
Rule 301(b)(10)........ Comply with written All Communication
safeguards and Protocol Systems.
procedures requirement. All Currently Exempted
Government Securities
ATSs.
Rule 302 of Regulation ATS........... Rule 302............... Comply with ATS All Communication
recordkeeping Protocol Systems.
requirements (required All Currently Exempted
by Rule 301(b)(8)). Government Securities
ATSs.
Rule 303 of Regulation ATS........... Rule 303............... Comply with ATS record All Communication
preservation Protocol Systems.
requirements (required All Currently Exempted
by Rule 301(b)(8)). Government Securities
ATSs.
Rule 304 of Regulation ATS and Form Rule 304............... Revised Burden: File Certain Communication
ATS-N. initial Form ATS-N Protocol Systems.
(required by Rule All Legacy Government
301(b)(2)(viii)), as Securities ATSs.
proposed to be revised. All NMS Stock ATSs.
Rule 15b1-1 and Form BD.............. Rule 15b1-1............ Register as a broker- Certain Communication
dealer using Form BD Protocol Systems.
(required by Rule Certain Currently
301(b)(1)). Exempted Government
Securities ATSs.
Form ID.............................. Rule 101 of Regulation Apply for EDGAR access Certain Communication
S-T. using Form ID. Protocol Systems.
Certain Currently
Exempted Government
Securities ATSs.
[[Page 15584]]
Regulation SCI....................... Rules 1001-1007 of Comply with Regulation Certain Communication
Regulation SCI. SCI. Protocol Systems.
Certain Legacy
Government Securities
ATSs.
----------------------------------------------------------------------------------------------------------------
B. Proposed Use of Information
The existing information collections affected by the proposed
amendments are used as described below:
1. Rule 301 of Regulation ATS and Forms ATS and ATS-R
Rule 301 of Regulation ATS sets forth the conditions that an ATS
must comply with to be exempt pursuant to Exchange Act Rule 3a1-
1(a)(2). Rule 301 requires an ATS to register as a broker-dealer. Rule
301 further requires all ATSs that wish to comply with Regulation ATS
to file an initial operation report on Form ATS. The initial operation
report requires information regarding operation of the system including
the manner of operation, how subscribers access the trading system, and
the types of securities traded. ATSs are also required to notice
changes in their operations by filing amendments to Form ATS to the
Commission.
In addition, Regulation ATS requires ATSs to provide quarterly
transaction reports on Form ATS-R. ATSs are also required to file
cessation of operations reports on Form ATS. The gathering of such
information permits the Commission to oversee the operation of such
systems and track the growth of their role in the securities markets.
The Commission is proposing revisions to Rule 301(b)(2), Form ATS,
and Form ATS-R to modernize Form ATS and Form ATS-R and to provide that
they are filed electronically. The Commission believes that, among
other benefits, the electronic filing of Forms ATS and ATS-R would
increase efficiencies and decrease filing costs for ATSs.
ATSs with significant volume are required to comply with
requirements for fair access pursuant to Rule 301(b)(5) of Regulation
ATS. As proposed, such ATSs would be required to establish and apply
reasonable written standards for granting, limiting, and denying access
to the services of the ATS and make and keep records of all grants of
access including, for all subscribers, the reasons for granting such
access, and all denials or limitations of access, and the reasons for
each applicant for denying or limiting access.\738\ The Commission is
proposing to apply the Fair Access Rule to the trading of U.S. Treasury
Securities and Agency Securities. The Commission believes that, today,
the principles undergirding the Fair Access Rule are equally relevant
to a Government Securities ATS and amending the Fair Access Rule to
include the trading of U.S. Treasury Securities and Agency Securities
would help ensure the fair treatment of potential and current
subscribers to ATSs that consist of a large percentage of trading
volume in these two types of securities.
---------------------------------------------------------------------------
\738\ See supra Section V.A.
---------------------------------------------------------------------------
ATSs with significant volume are also required to comply with
requirements for systems capacity, integrity and security pursuant to
Rule 301(b)(6), which, together with the requirements under Rule 302,
requires ATSs to preserve any records made in the process of complying
with the systems capacity, integrity, and security requirements. In
addition, such ATSs are required to notify Commission staff of material
systems outages and significant systems changes.
The Commission uses the information provided pursuant to Rule 301
to comprehensively monitor the growth and development of ATSs to
confirm that investors effecting trades through the systems are
adequately protected, and that the systems do not impede the
maintenance of fair and orderly securities markets or otherwise operate
in a manner that is inconsistent with the Federal securities laws. In
particular, the information collected and reported to the Commission by
ATSs enables the Commission to evaluate the operation of ATSs with
regard to national market system goals, and monitor the competitive
effects of these systems to ascertain whether the regulatory framework
remains appropriate to the operation of such systems.
Without the information provided on Forms ATS and ATS-R, the
Commission would not have readily available information on a regular
basis in a format that would allow it to determine whether such systems
have adequate safeguards. Further, in the absence of Rule 301, the
Commission would not regularly obtain uniform trading data to identify
areas where surveillance by SROs may be more appropriately tailored to
the detection of fraudulent, deceptive and manipulative practices that
may be peculiar to an automated trading environment.
2. Rule 302 of Regulation ATS
Rule 302, as proposed to be amended,\739\ would require ATSs to
make a record of subscribers to the ATS, daily summaries of trading in
the ATS and time-sequenced records of trading interest information in
the ATS. Regulators (including the Commission and SROs) use the
information contained in the records required to be preserved by Rule
302 to ensure that ATSs are in compliance with Regulation ATS as well
as other applicable rules and regulations. Without the data required by
Rule 302, regulators would be limited in their ability to comply with
their statutory obligations, provide for the protection of investors,
and promote the maintenance of fair and orderly markets.
---------------------------------------------------------------------------
\739\ See supra notes 165-166 and accompanying text.
---------------------------------------------------------------------------
3. Rule 303 of Regulation ATS
Rule 303 describes the record preservation requirements for ATSs.
Rule 303 also describes how such records must be maintained, what
entities may perform this function, and how long records must be
preserved.
The information contained in the records required to be preserved
by Rule 303 is used by regulators (including the Commission and the
SROs) to ensure that ATSs are in compliance with Regulation ATS as well
as other applicable rules and regulations. Without the data required by
Rule 303, regulators would be limited in their ability to comply with
their statutory obligations, provide for the protection of investors,
and promote the maintenance of fair and orderly markets.
4. Rule 304 of Regulation ATS and Form ATS-N
Rule 304 provides conditions for NMS Stock ATSs seeking to rely on
the exemption from the definition of ``exchange'' provided by Rule 3a1-
1(a) of the Exchange Act, including to file a Form ATS-N, and for that
Form ATS-N to become effective. Form ATS-N requires NMS Stock ATSs to
provide information about their manner of operations, the broker-dealer
operator, and the ATS-related activities of the broker-dealer operator
and its affiliates to comply with the conditions provided under Rule
304. Form ATS-N promotes
[[Page 15585]]
more efficient and effective market operations by providing more
transparency to market participants about the operations of NMS Stock
ATSs and the potential conflicts of interest of the controlling broker-
dealer operator and its affiliates, and helps brokers meet their best
execution obligations to their customers. Operational transparency
rules, including Form ATS-N, are designed to increase competition among
trading centers in regard to order routing and execution quality.
As discussed above, the Commission is re-proposing to amend Rule
304(a) to require that a Covered ATS, which would include a Government
Securities ATS, must comply with Rules 300 through 304 of Regulation
ATS, as applicable, to be exempt pursuant to Rule 3a1-1(a)(2). As
proposed, all Government Securities ATSs would be required to comply
with Rule 304, as proposed to be amended, to file Form ATS-N, as
revised.\740\
---------------------------------------------------------------------------
\740\ See supra Section IV.A.
---------------------------------------------------------------------------
The Commission is proposing to revise Form ATS-N to include
information it previously proposed on Form ATS-G, including a question
requiring information about interaction with related markets, which
would be required to be responded to by both Government Securities ATSs
and NMS Stock ATSs.\741\ The Commission is also proposing to reorganize
certain questions on Form ATS-N and to require disclosure about any
surveillance and monitoring that is conducted with respect to the
ATS.\742\ The Commission believes that the proposed revisions to Form
ATS-N will continue to allow for better comparisons between ATSs, and
applying Form ATS-N to Government Securities ATSs will help enable
market participants to compare Government Securities ATSs.
---------------------------------------------------------------------------
\741\ See supra Section IV.D.1.
\742\ See supra Section IV.D.5.
---------------------------------------------------------------------------
The Commission is also proposing certain amendments to Form ATS-N
that would apply globally to Form ATS-N unless otherwise noted.\743\
The Commission believes that Form ATS-N's public disclosures would
provide important information to market participants that would help
them better understand these operational facets of Government
Securities ATSs and select the best trading venue based on their needs.
---------------------------------------------------------------------------
\743\ See supra Section IV.D.
---------------------------------------------------------------------------
5. Rule 15b1-1 and Form BD
The Commission uses the information disclosed by applicants in Form
BD: (1) To determine whether the applicant meets the standards for
registration set forth in the provisions of the Exchange Act; (2) to
develop a central information resource where members of the public may
obtain relevant, up-to-date information about broker-dealers, municipal
securities dealers, and government securities broker-dealers, and where
the Commission, other regulators, and SROs may obtain information for
investigatory purposes in connection with securities litigation; and
(3) to develop statistical information about broker-dealers, municipal
securities dealers, and government securities broker-dealers. Without
the information disclosed in Form BD, the Commission could not
effectively implement policy objectives of the Exchange Act with
respect to its investor protection function.
6. Form ID
The information provided on Form ID allows the Commission staff to
review applications for EDGAR access and, if the application is
approved, assign identification numbers (if the applicant does not
already have an identification number) and access codes to applicants
to permit filing on EDGAR. Form ID is essential to EDGAR security.
7. Regulation SCI
Regulation SCI requires certain key market participants to, among
other things: (1) Have comprehensive policies and procedures in place
to help ensure the robustness and resiliency of their technological
systems, and also that their technological systems operate in
compliance with the Federal securities laws and with their own rules;
and (2) provide certain notices and reports to the Commission to
improve Commission oversight of securities market infrastructure.
C. Respondents
The categories of respondents for which the proposed amendments
create a burden under the PRA are described below.
1. Legacy Government Securities ATSs
As discussed above, the Commission is re-proposing amendments to
Regulation ATS that would require a Currently Exempted Government
Securities ATS that seeks to operate pursuant to the exemption from the
definition of an ``exchange'' under Exchange Act Rule 3a1-1(a)(2), and
thus not be required to be registered as a national securities
exchange, to comply with Regulation ATS as proposed \744\ and that
Current Government Securities ATSs will have to comply with the
enhanced requirements for Government Securities ATSs.\745\ The
Commission estimates the total number of Currently Exempted Government
Securities ATSs to be 7 \746\ and Current Government Securities ATSs to
be 17,\747\ and some or all of this number will be subject to the
following collections of information as estimated below:
---------------------------------------------------------------------------
\744\ See supra Section III.B.2.
\745\ See supra Section IV.A.
\746\ The Commission estimates that there are 7 Currently
Exempted Government Securities ATSs that would be newly subject to
the requirements of the exemption under Rule 3a1-1(a)(2) and will be
required to comply with the applicable sections of Regulation ATS,
as amended. The Commission estimates that 5 such ATSs limit their
trading activity to government securities and the other 2 ATSs limit
their trading activity to repos.
\747\ As of September 30, 2021, 17 Government Securities ATSs
currently operate pursuant to a Form ATS currently on file with the
Commission.
----------------------------------------------------------------------------------------------------------------
Collection of information Rule Number of respondents Description
----------------------------------------------------------------------------------------------------------------
Rule 301 of Regulation ATS and Rule 301(b)(5)........ 7..................... The Commission estimates
Forms ATS and ATS-R. that certain Legacy
Government Securities ATSs
would satisfy the
conditions for the
proposed application of
the Fair Access Rule to
Government Securities ATS
and be subject to the
related recordkeeping and
notice provisions.
[[Page 15586]]
Rule 301(b)(9)........ 24.................... The Commission estimates
that all Legacy Government
Securities ATSs will have
to comply with the
requirement to file
quarterly reports on the
proposed modernized Form
ATS-R. The proposal would
impose the full currently-
authorized baseline burden
of filing on Currently
Exempted Government
Securities ATSs, for which
the requirement is new.
For Current Government
Securities ATSs, the
proposal would only impose
the marginal new burden of
filing using the
modernized version of the
form.
Rule 301(b)(10)....... 7..................... The Commission estimates
that all Currently
Exempted Government
Securities ATSs will have
to comply with the
requirement to have
written safeguards and
written procedures to
protect subscribers'
confidential trading
information.
Rule 302 of Regulation ATS......... Rule 302.............. 7..................... The Commission estimates
that all Currently
Exempted Government
Securities ATSs will have
to comply with the
recordkeeping requirements
for ATSs.
Rule 303 of Regulation ATS......... Rule 303.............. 7..................... The Commission estimates
that all Currently
Exempted Government
Securities ATSs will have
to comply with the record
preservation requirements
for ATSs.
Rule 304 of Regulation ATS and Form Rule 304.............. 24.................... The Commission estimates
ATS-N. that all Legacy Government
Securities ATSs will have
to comply with the
requirement to file
initial Form ATS-N, as
proposed to be revised.
Rule 15b1-1 and Form BD............ Rule 15b1-1........... 1..................... The Commission estimates
that certain Currently
Exempted Government
Securities ATSs currently
operated by a bank and not
registered as a broker-
dealer will have to
register using Form BD.
Form ID............................ Rule 101 of Regulation 1..................... The Commission estimates
S-T. that the same subset of
Currently Exempted
Government Securities ATSs
that are not currently
registered as a broker-
dealer will also have to
file Form ID to apply for
EDGAR access.
Regulation SCI..................... Rules 1001-1007 of 1 Legacy Government The Commission estimates
Regulation SCI. Securities ATS that that certain Legacy
is an existing SCI Government Securities ATSs
entity and 1 that is would meet the specified
a new SCI entity. volume threshold to meet
the proposed amended
definition of ``SCI
alternative trading
system'' and be subject to
the requirements of
Regulation SCI.
----------------------------------------------------------------------------------------------------------------
2. Communication Protocol Systems
As discussed above, the Commission is proposing to amend Exchange
Act Rule 3b-16(a) to cause Communication Protocol Systems to fall
within the definition of ``exchange'' and believes that such
Communication Protocol Systems would likely choose to register as a
broker dealer and be regulated under the Regulation ATS exemption than
register as a national securities exchange because of the lighter
regulatory requirements imposed on ATSs, as compared to registered
exchanges.\748\ The Commission estimates the total number of
Communication Protocol Systems to be 22,\749\ and some or all of this
total number will be subject to the following collections of
information as estimated below:\750\
---------------------------------------------------------------------------
\748\ See supra Section II.D.
\749\ Some of the below estimates could change based on how the
Communication Protocol Systems structure their operations if subject
to Regulation ATS. For example, the Commission is basing some of the
below estimates on the assumption that operators of Communication
Protocol Systems that are affiliated with existing broker-dealers
would structure their operations so that the existing broker-dealer
would operate the ATS to avoid the costs of new broker-dealer
registration. In addition, the Commission estimates that 2
Communication Protocol Systems that trade municipal securities or
corporate debt securities would meet the volume thresholds to
satisfy the conditions for complying with ATS-specific systems
capacity, integrity and security recordkeeping as well as systems
outages requirements. This number is based on aggregate data
reported by broker-dealers and could vary based on how these systems
structure their businesses.
\750\ The estimated respondents for the Rule 304/Form ATS-N
collection of information is based on the assumption that systems
that operate multiple market places that are affiliated with a new
or existing broker-dealer will all be operated by such broker-
dealer, and that such systems will not register multiple broker-
dealers to operate multiple affiliated ATSs.
----------------------------------------------------------------------------------------------------------------
Number of
Collection of information Rule respondents Description
----------------------------------------------------------------------------------------------------------------
Rule 301 of Regulation ATS and Forms Rule 301(b)(2)........... 14 The Commission estimates that
ATS and ATS-R. certain Communication
Protocol Systems, which
trade securities other than
NMS stocks or government
securities or repos, would
be required to file the
proposed modernized Form
ATS.
[[Page 15587]]
Rule 301(b)(5)........... 8 The Commission estimates that
certain Communication
Protocol Systems would meet
the volume thresholds in
government securities, NMS
stocks, corporate debt
securities, municipal
securities, equity
securities that are not NMS
stocks and for which
transactions are reported to
an SRO and be subject to the
Fair Access Rule and the
related recordkeeping and
notice provisions.
Rule 301(b)(6)........... 2 The Commission estimates that
certain Communication
Protocol Systems that trade
municipal securities or
corporate debt securities
and meet certain volume
requirements would satisfy
the conditions for complying
with ATS-specific systems
capacity, integrity and
security recordkeeping as
well as systems outages
requirements.
Rule 301(b)(9)........... 22 The Commission estimates that
all Communication Protocol
Systems will have to comply
with the requirement to file
quarterly reports on the
proposed modernized Form ATS-
R.
Rule 301(b)(10).......... 22 The Commission estimates that
all Communication Protocol
Systems will have to comply
with the requirement to have
written safeguards and
written procedures to
protect subscribers'
confidential trading
information.
Rule 302 of Regulation ATS............ Rule 302................. 22 The Commission estimates that
all Communication Protocol
Systems will have to comply
with the recordkeeping
requirements for ATSs.
Rule 303 of Regulation ATS............ Rule 303................. 22 The Commission estimates that
all Communication Protocol
Systems will have to comply
with the record preservation
requirements for ATSs.
Rule 304 of Regulation ATS and Form Rule 304................. 8 The Commission estimates that
ATS-N. certain Communication
Protocol Systems that trade
NMS stocks or government
securities or repos would be
required to file Form ATS-N,
as proposed to be revised.
Rule 15b1-1 and Form BD............... Rule 15b1-1.............. 6 The Commission estimates that
certain Communication
Protocol Systems are not
currently registered as or
affiliated with a broker-
dealer and will have to
register using Form BD.
Form ID............................... Rule 101 of Regulation S- 6 The Commission estimates that
T. the same subset of
Communication Protocol
Systems that are not
currently registered as or
affiliated with a broker-
dealer will also have to
file Form ID to apply for
EDGAR access.
Regulation SCI........................ Rules 1001-1007 of 2 The Commission estimates that
Regulation SCI. certain Communication
Protocol Systems that trade
government securities, NMS
stocks, or equity securities
other than NMS stocks
reported to an SRO would
meet the specified volume
threshold to meet the
proposed amended definition
of ``SCI alternative trading
system'' and be subject to
the requirements of
Regulation SCI.
----------------------------------------------------------------------------------------------------------------
3. NMS Stock ATSs
As discussed above, the Commission is proposing to revise Form ATS-
N to include information it previously proposed on Form ATS-G,
including adding questions requiring information about interaction with
related markets, surveillance and monitoring on the ATS, and liquidity
providers, which would be required to be responded to by both
Government Securities ATSs and NMS Stock ATSs.\751\ The Commission is
also proposing to reorganize certain questions on Form ATS-N.\752\ The
Commission estimates the total number of NMS Stock ATSs to be 34 \753\
and that all will be subject to the following collections of
information as estimated below:
---------------------------------------------------------------------------
\751\ See supra Section IV.D.1.
\752\ See id. and Section IV.D.4-5. In addition, for purposes of
calculating whether an ATS meets the Fair Access Rule volume
thresholds, the Commission is proposing to aggregate trading volume
among certain affiliated ATSs. See supra Section V.A. At this time,
the Commission estimates that no NMS Stock ATSs would be subject to
the Fair Access Rule as a result of the proposed changes to
aggregate affiliated ATS trading volume, and that the proposed
change would therefore impose no additional burden. Also see infra
note 1085.
\753\ As of September 30, 2021, there are 34 NMS Stock ATSs that
have filed an effective Form ATS-N with the Commission. For the
purpose of this PRA analysis, NMS Stock ATSs include only those that
operate today. The burden on Communication Protocol Systems that the
Commission estimates will trade NMS stocks are included in the
discussion of that category of respondent. See supra, Section
VII.C.2; infra, Section VII.D.3.
----------------------------------------------------------------------------------------------------------------
Number of
Collection of information Rule respondents Description
----------------------------------------------------------------------------------------------------------------
Rule 301 of Regulation ATS and Forms Rule 301(b)(9)........... 34 The Commission estimates that
ATS and ATS-R. all NMS Stock ATSs will have
to prospectively comply with
the requirement to file
quarterly reports on the
proposed modernized Form ATS-
R.
[[Page 15588]]
Rule 304 of Regulation ATS and Form Rule 304................. 34 The Commission estimates that
ATS-N. all NMS Stock ATSs will be
required to re-file their
current electronic Form ATS-
N disclosure using Form ATS-
N, as proposed to be
revised.
----------------------------------------------------------------------------------------------------------------
4. Other Form ATS Filers
There is set of respondents (``Other Form ATS Filers'') that are
currently required to file Form ATS and are neither NMS Stock ATSs nor
exclusively \754\ Legacy Government Securities ATSs and will continue
to have an obligation to file Form ATS after the effective date of any
final rule. These filers will incur burdens to comply with the proposed
revisions to Forms ATS and ATS-R discussed above.\755\ The Commission
estimates the total number of Other Form ATS Filers to be 59 \756\ and
that these respondents will be subject to the following collections of
information as estimated below:
---------------------------------------------------------------------------
\754\ Government Securities ATSs that also have trading
activities other than in government securities or repos will be
required to separately report that activity on Form ATS after the
effective date of any final rule.
\755\ See supra Section V.B. In addition, for purposes of
calculating whether an ATS meets the Fair Access Rule volume
thresholds, the Commission is proposing to aggregate trading volume
among certain affiliated ATSs. See supra Section V.A. At this time,
the Commission estimates that no Other Form ATS Filers would be
subject to the Fair Access Rule as a result of the proposed changes
to aggregate affiliated ATS trading volume, and that the proposed
change would therefore impose no additional burden. As discussed
above, the Commission is also re-proposing to remove an exclusion
from compliance with the Fair Access Rule under Rule 301(b)(5) and
the Capacity, Integrity, and Security Rule under Rule 301(b)(6) that
is applicable to ATSs that trade equities and also re-proposing
revisions to Rule 301(b)(2), Form ATS, and Form ATS-R to modernize
Form ATS and Form ATS-R and to provide that they are filed
electronically. See id. The Commission does not expect, however,
that any ATSs will be newly subject to the Fair Access Rule or the
Capacity, Integrity, and Security Rule as a result of removing the
exclusion. Also see infra note 1085.
\756\ As of September 30, 2021, there are 61 ATSs that file Form
ATS. Two of these trade only government securities or repos and, as
proposed, would only be required to file a Form ATS-N and amendments
to Form ATS-N after the effective date of any final rule.
Accordingly, the Commission estimates that 59 ATSs will continue to
file Form ATS amendments.
----------------------------------------------------------------------------------------------------------------
Number of
Collection of information Rule respondents Description
----------------------------------------------------------------------------------------------------------------
Rule 301 of Regulation ATS and Forms Rule 301(b)(2)........... 59 The Commission estimates that
ATS and ATS-R. all Other Form ATS Filers
will be required to re-file
their current paper Form ATS
disclosure using the
proposed modernized Form
ATS.
Rule 301(b)(9)........... 59 The Commission estimates that
all Other Form ATS Filers
will have to comply
prospectively with the
requirement to file
quarterly reports on the
proposed modernized Form ATS-
R.
----------------------------------------------------------------------------------------------------------------
D. Total PRA Burdens
1. Burden of Rule 301 of Regulation ATS and Forms ATS and ATS-R
a. Rule 301(b)(2) Burden on Communication Protocol Systems and Other
Form ATS Filers
As discussed above, the Commission is proposing to amend Exchange
Act Rule 3b-16(a), which would cause Communication Protocol Systems to
fall within the definition of ``exchange'' and believes that such
Communication Protocol Systems would likely choose to register as a
broker dealer and be regulated under the Regulation ATS exemption.\757\
Certain Communication Protocol Systems that trade securities other than
NMS stocks or government securities would be subject to requirements
under Rule 301(b)(2), including to file an IOR and amendments thereto
using the proposed modernized and electronic \758\ Form ATS.
---------------------------------------------------------------------------
\757\ See supra Section II.D.
\758\ The Commission believes that the proposed electronic
submission of Forms ATS and ATS-R would impose no additional burden
on existing filers under Regulation ATS such as Other Form ATS
Filers. These respondents would already have been required to
register as broker-dealers pursuant to Rule 301(b)(1), and
registered broker-dealers have been assigned a CIK number and do not
need to submit a Form ID to access EDGAR. A broker-dealer that has
never used EDGAR to make electronic submissions may use its assigned
CIK number to receive access codes that will allow that broker-
dealer operator to submit Form ATS-N filings on EDGAR without
needing to apply for a Form ID, so the proposed changes would not
impose a burden under the existing Rule 15b1-1 and Form BD or Form
ID collections of information on this category of respondents.
---------------------------------------------------------------------------
Other Form ATS Filers--current Form ATS filers that are not
required to file Form ATS-N after the effective date of any final
rule--would incur a burden to comply with the requirements to file Form
ATS using the proposed modernized form. To comply with the requirements
of revised Form ATS, such respondents would be required to re-file
their most recently-filed Form ATS IOR or Amendment to IOR using the
proposed modernized Form ATS. The Commission estimates an initial
burden of 20.5 hours \759\ and an annual burden of 5 hours \760\ per
respondent for complying with Rule 301(b)(2) and the following total
initial and annual burdens:
---------------------------------------------------------------------------
\759\ The Commission's currently approved baseline burden for
the average initial compliance burden for each Form ATS IOR is 20
hours (Attorney at 13 hours + Compliance Clerk at 7 hours). See
Extension Without Change of a Currently Approved Collection:
Regulation ATS Rule 301 Amendments; ICR Reference No. 202101-3235-
011; OMB Control No. 3235-0509 (June 9, 2018), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202101-3235-011
(``Rule 301 PRA Supporting Statement''). The Commission is proposing
amendments to Part I of Form ATS, which would add an additional
burden of 0.5 hours per filing using the modernized form (Compliance
Clerk at 0.5 hours), and therefore the average compliance burden for
each Form ATS filing would be 20.5 hours. See supra Section V.B and
infra Section VII.E (discussing proposed changes).
\760\ The Commission's currently approved baseline burden for
the average ongoing compliance burden for each amendment to a Form
ATS IOR is 4 hours ((Attorney at 1.5 hours + Compliance Clerk at 0.5
hours) x 2 IOR amendments a year). See Rule 301 PRA Supporting
Statement, supra note 759. The Commission is proposing amendments to
Part I of Form ATS, including a requirement applicable to an ATS
filing an IOR amendment to attach as Exhibit 3 a marked document to
indicate changes to ``yes'' or ``no'' answers and additions or
deletions from any Item in Part I, Part II, and Part III, which
would add an additional annual burden of 1 hour per ATS using the
modernized form (Compliance Clerk at 0.5 hours x 2 IOR amendments a
year). Therefore the average compliance burden for each Form ATS
filing would be 5 hours. See supra Section V.B and infra Section
VII.E (discussing proposed changes).
[[Page 15589]]
----------------------------------------------------------------------------------------------------------------
Total burden
(number of
Number of Burden per respondents x
Burden type Respondent type respondents respondent burden per
(hours) respondent)
(hours)
----------------------------------------------------------------------------------------------------------------
Initial............................. Communication Protocol 14 20.5 287
Systems.
Annual 5 70
Initial............................. Other Form ATS Filers. 59 20.5 1,209.5
Annual 5 295
----------------------------------------------------------------------------------------------------------------
b. Rule 301(b)(5) Burden on Communication Protocol Systems and Legacy
Government Securities ATSs
As discussed above, the Commission is proposing to apply the Fair
Access Rule to the trading of U.S. Treasury Securities and Agency
Securities. Certain Communication Protocol Systems and Legacy
Government Securities ATS that trade U.S. Treasury Securities and
Agency Securities and meet the relevant thresholds would be newly
subject to the requirements of Rule 301(b)(5) of Regulation ATS.\761\
In addition, for purposes of calculating whether an ATS meets the Fair
Access Rule volume thresholds, the Commission is proposing to aggregate
trading volume among certain affiliated ATSs, which will impose a
burden on certain NMS Stock ATSs and Other Form ATS Filers that trade
securities subject to the Fair Access Rule.\762\ There is no initial
burden associated with the currently approved collection of information
for this requirement.\763\ The Commission estimates an annual
compliance burden of 37 hours per respondent \764\ and the following
total annual burdens:
---------------------------------------------------------------------------
\761\ See supra Section II.D.2.
\762\ See proposed Rule 301(b)(5)(ii). See supra Section V.A.
\763\ See Rule 301 PRA Supporting Statement, supra note 759.
\764\ The Commission's currently approved baseline for the
average compliance burden per respondent is 37 hours = 10 hours for
Fair Access Standards recordkeeping (Attorney at 5 hours x 2
responses a year) + 27 hours for Fair Access notices (Attorney at 1
hour x 27 responses a year). See Rule 301 PRA Supporting Statement,
supra note 759.
----------------------------------------------------------------------------------------------------------------
Total annual
burden (number
Number of Annual burden of respondents x
Respondent type respondents per respondent annual burden
(hours) per respondent)
(hours)
----------------------------------------------------------------------------------------------------------------
Communication Protocol Systems.............................. 8 37 296
Legacy Government Securities ATSs........................... 7 37 259
----------------------------------------------------------------------------------------------------------------
c. Rule 301(b)(6) Burden on Communication Protocol Systems
As discussed above, the Commission is proposing to amend Exchange
Act Rule 3b-16(a) to cause Communication Protocol Systems to fall
within the definition of ``exchange'' and believes that such
Communication Protocol Systems would likely choose to register as a
broker dealer and be regulated under the Regulation ATS exemption.
Certain Communication Protocol Systems that trade municipal and
corporate debt securities and meet the relevant thresholds would be
newly subject to the systems capacity, integrity, and security
recordkeeping and systems outages notice requirements of Rule 301(b)(6)
of Regulation ATS. There is no initial burden associated with the
currently approved collection of information for this requirement.\765\
The Commission estimates an annual compliance burden of 11 hours per
respondent \766\ and the following total annual burden:
---------------------------------------------------------------------------
\765\ See Rule 301 PRA Supporting Statement, supra note 759.
\766\ The Commission's currently approved baseline for the
average compliance burden per respondent is 11.25 hours = 10 hours
for systems capacity, integrity and security recordkeeping (Attorney
at 10 hours) + 1.25 hours for systems outages notice (Attorney at
.25 hours x 5 systems outages a year). See Rule 301 PRA Supporting
Statement, supra note 759.
----------------------------------------------------------------------------------------------------------------
Total annual burden
Number of Annual burden (number of respondents x
Respondent type respondents per respondent annual burden per
(hours) respondent) (hours)
----------------------------------------------------------------------------------------------------------------
Communication Protocol Systems..................... 2 11.25 22.5
----------------------------------------------------------------------------------------------------------------
d. Rule 301(b)(9) Burden on All Respondents
All respondent categories--Communication Protocol Systems, Legacy
Government Securities ATSs, NMS Stock ATSs, and Other Form ATS Filers--
are subject to the requirements of Rule 301(b)(9) and would incur a
burden to file quarterly transaction reports using the proposed
modernized and electronic \767\ Form ATS-R.
---------------------------------------------------------------------------
\767\ As discussed above, the Commission believes that the
proposed electronic submission of Form ATS-R would impose no
additional burden on current Forms ATS and ATS-N filers. See supra
note 758.
---------------------------------------------------------------------------
[[Page 15590]]
Presently, neither Currently Exempted Government Securities ATSs--
the subset of Legacy Government Securities ATSs not operating pursuant
to a Form ATS on file with Commission as of the effective date of any
final rule--nor Communication Protocol Systems--are required to file
quarterly transaction information on Form ATS-R, but the proposed
amendments will newly impose on all respondents in these categories the
currently-approved baseline burden of filing Form ATS-R and the
additional burden of filing using the proposed modernized form.\768\
---------------------------------------------------------------------------
\768\ The Commission's currently approved baseline for the
average compliance burden for each Form ATS-R filing is 4 hours
(Attorney at 3 hours + Compliance Clerk at 1). See Rule 301 PRA
Supporting Statement, supra note 759. The Commission is proposing
amendments to Form ATS-R, which would add an additional burden of
0.75 hours per filing (Compliance Manager at 0.25 hours + Compliance
Clerk at 0.5), and therefore the average compliance burden for each
Form ATS-R filing would be 4.75 hours. See supra Section V.B and
infra Section VII.E (discussing proposed changes to Form ATS-R
applicable to all ATSs).
---------------------------------------------------------------------------
Current Government Securities ATSs--the subset of Legacy Government
Securities ATSs operating pursuant to a Form ATS on file with
Commission as of the effective date of any final rule--as well as NMS
Stock ATSs and Other Form ATS Filers already incur a burden to file
Form ATS-R, so the proposed rules would only impose upon them the new
increased burden of filing on the modernized version of Form ATS-R.
There is no initial burden associated with the currently approved
collection of information for this requirement.\769\ The Commission
estimates an annual compliance burden of 19 hours per new Form ATS-R
respondent \770\ and 3 hours per existing Form ATS-R respondent; \771\
and the following total annual burdens:
---------------------------------------------------------------------------
\769\ See Rule 301 PRA Supporting Statement, supra note 759.
\770\ The annual burden per Currently Exempted Government
Securities ATS or Communication Protocol System would be 4.75 hours
x 4 quarterly filings annually = 19 burden hours.
\771\ The annual burden per existing Form ATS-R respondent would
be 0.75 hours x 4 quarterly filings annually = 3 burden hours.
----------------------------------------------------------------------------------------------------------------
Total annual burden
Number of Annual burden (number of respondents
Respondent type respondents per respondent x annual burden per
(hours) respondent) (hours)
----------------------------------------------------------------------------------------------------------------
Communication Protocol Systems........................ 22 19 418
Currently Exempted Government Securities ATSs......... 7 19 133
Current Government Securities ATSs.................... 17 3 51
NMS Stock ATSs........................................ 34 3 102
Other Form ATS Filers................................. 59 3 177
----------------------------------------------------------------------------------------------------------------
e. Rule 301(b)(10) Burden on Communication Protocol Systems and
Currently Exempted Government Securities ATSs
Rule 301(b)(10) requires ATSs to establish adequate written
safeguards and written procedures to protect subscribers' confidential
trading information. Neither Currently Exempted Government Securities
ATSs nor Communication Protocol Systems are presently subject to any of
the requirements of Rule 301(b), but the current proposal will newly
impose on all respondents in these categories the currently-approved
baseline burden of complying with Rule 301(b)(10) after the effective
date of any final rule.\772\ The Commission estimates an initial burden
of 8 hours \773\ and an annual burden of 4 hours \774\ per respondent
for complying with Rule 301(b)(10) and the following total initial and
annual burdens:
---------------------------------------------------------------------------
\772\ The proposal would not impose a new burden on Current
Government Securities ATSs, NMS Stock ATSs, and Other Form ATS
Filers, as these categories of respondents would already be required
to comply with Rule 301(b)(10) before the effective date of any
final rule.
\773\ The Commission's currently approved baseline for the
average initial compliance burden is 8 hours (Attorney at 7 hours +
Compliance Clerk at 1 hour). See Rule 301 PRA Supporting Statement,
supra note 759.
\774\ The Commission's currently approved baseline for the
average ongoing compliance burden is 4 hours (Attorney at 2 hours +
Compliance Clerk at 2 hours). See Rule 301 PRA Supporting Statement,
supra note 759.
----------------------------------------------------------------------------------------------------------------
Burden per Total burden (number of
Burden type Respondent type Number of respondent respondents x burden
respondents (hours) per respondent) (hours)
----------------------------------------------------------------------------------------------------------------
Initial.......................... Communication 22 8 176
Protocol Systems.
Annual 4 88
Initial.......................... Currently Exempted 7 8 56
Government
Securities ATSs.
Annual 4 28
----------------------------------------------------------------------------------------------------------------
2. Burden of Rules 302 and 303 of Regulation ATS on Communication
Protocol Systems and Currently Exempted Government Securities ATSs
Rule 301(b)(8) of Regulation ATS requires ATSs to comply with the
recordkeeping requirements of Rule 302 and the record preservation
requirements of Rule 303.
[[Page 15591]]
The proposal would newly impose the currently-approved baseline burden
of complying with these rules on Communication Protocol Systems and
Currently Exempted Government Securities ATS.\775\ The Commission
estimates an annual burden of 45 hours per respondent to comply with
Rule 302 \776\ and 15 hours to comply with Rule 303; \777\ and the
following total annual burdens:
---------------------------------------------------------------------------
\775\ The proposal would not impose a new burden on Current
Government Securities ATSs, NMS Stock ATSs, and Other Form ATS
Filers, as these categories of respondents would already be required
to comply with Rules 302 and 303 before the effective date of any
final rule.
\776\ The Commission's currently approved baseline for the
average compliance burden is 45 hours (Compliance Clerk at 45
hours). See Extension Without Change of a Currently Approved
Collection: Rule 302 (17 CFR 242.302) Recordkeeping Requirements for
Alternative Trading Systems; ICR Reference No. 201906-3235-011; OMB
Control No. 3235-0510 (October 24, 2019), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201906-3235-011.
There is no initial burden associated with this rule.
\777\ The Commission's currently approved baseline for the
average compliance burden is 15 hours (Compliance Clerk at 15
hours). See Extension Without Change of a Currently Approved
Collection: Rule 303 (17 CFR 242.303) Record Preservation
Requirements for Alternative Trading Systems; ICR Reference No.
202101-3235-010; OMB Control No. 3235-0505 (June 25, 2021),
available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202101-3235-010. There is no initial burden
associated with this rule.
----------------------------------------------------------------------------------------------------------------
Total annual burden
Number of Annual burden (number of respondents
Rule Respondent type respondents per respondent x annual burden per
(hours) respondent) (hours)
----------------------------------------------------------------------------------------------------------------
Rule 302......................... Communication 22 45 990
Protocol Systems.
Rule 303 15 330
Rule 302......................... Currently Exempted 7 45 315
Government
Securities ATSs.
Rule 303 15 105
----------------------------------------------------------------------------------------------------------------
3. Burden of Rule 304 of Regulation ATS and Form ATS-N on Communication
Protocol Systems, Legacy Government Securities ATSs, and NMS Stock ATSs
As discussed above, the Commission is proposing to amend Exchange
Act Rule 3b-16(a) to cause Communication Protocol Systems to fall
within the definition of ``exchange'' and believes that such
Communication Protocol Systems would likely choose to register as a
broker dealer and be regulated under the Regulation ATS exemption.\778\
Under the proposal, Government Securities ATSs (inclusive of
Communication Protocol Systems) would be subject to the proposed
changes to Regulation ATS related to Government Securities ATSs.\779\
Those respondents, as well as Communication Protocol Systems that trade
NMS Stocks, will be newly required to file Form ATS-N as revised,\780\
pursuant to Rule 304. In addition, existing NMS Stock ATSs that do not
also trade in government securities will, after the effective date of
any final rule, be required to re-file their most recent Form ATS-N or
Form ATS-N amendment using the revised Form ATS-N. The Commission
estimates the initial burden for new filers of Form ATS-N, as revised--
Currently Exempted Government Securities ATSs and Communication
Protocol Systems that trade government securities or NMS Stocks--to be
136.4 hours.\781\ The Commission estimates the initial burden for
Current Government Securities ATSs, which currently file on Form ATS,
to file on Form ATS-N, as revised, to be 116.4 hours.\782\ The
Commission estimates the initial burden for existing NMS Stock ATSs
that do not also trade government securities, which currently file on
Form ATS-N, to be 8 hours.\783\ The Commission estimates that the
annual burden for each new Form ATS-N respondent to file amendments to
Form ATS-N is 47 hours.\784\ The total estimated initial and annual
\785\ burdens for each respondent type are as follows:
---------------------------------------------------------------------------
\778\ See supra Section II.D.
\779\ See supra Section III.
\780\ See supra Section IV.
\781\ The Commission's currently approved baseline burden for
the average initial compliance burden for each initial Form ATS-N is
130.4 hours (currently approved baseline burden to complete an
initial Form ATS at 20 hours: Attorney at 13 hours and Compliance
Clerk at 7 hours; see Rule 301 PRA Supporting Statement, supra note
759) + (Part I at 0.5 hour) + (Part II at an average of 29 hours) +
(Part III at an average of 78.75 hours) + (Access to EDGAR at 0.15
hours) + (Posting link to published Form ATS-N on ATS website at 2
hours) = 130.4 burden hours. See Extension Without Change of a
Currently Approved Collection: Regulation ATS Rule 304 and Form ATS-
N; ICR Reference No. 202109-3235-014; OMB Control No. 3235-0763
(January 3, 2022), available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202109-3235-014 (``Rule 304 PRA Supporting
Statement''). The aggregate totals by professional, including the
baseline, are estimated to be approximately 54.6 hours for an
Attorney, 0.5 hours for a Chief Compliance Manager, 34.55 hours for
a Compliance Manager, 32.25 hours for a Senior Systems Analyst, 1
hour for a Senior Marketing Manager, and 7.5 hours for a Compliance
Clerk. The Commission estimates that the proposed amendments to Form
ATS-N would add an additional burden of 6 hours per filing (Attorney
at 2.5 hours, Compliance Manager at 1.5 hours, Senior Systems
Analyst at 1.5 hours, and Compliance Clerk at 0.5 hours), and
therefore the average compliance burden for each new Form ATS-N
filer would be 136.4 hours. See supra Section V.B and infra Section
VII.E (discussing proposed changes).
\782\ The Commission estimates that existing Form ATS filers
will not incur the portion of the currently approved baseline burden
to file an initial Form ATS-N that is attributable to completing an
initial Form ATS, estimated at 20 hours. See Rule 304 PRA Supporting
Statement, supra note 781. Thus, the total initial burden for these
respondents will be 116.4 hours (130.4 hours baseline burden to file
an Initial Form ATS-N-20 hours + 6 hours per filing to complete the
proposed revised items of Form ATS-N). See id.
\783\ The Commission estimates the proposal would impose upon
current Form ATS-N filers a one-time burden of 8 hours: The marginal
burden of 6 hours to respond to the revised items in the form (see
supra note 781) + 2 hours for a Compliance Clerk to reorganize their
current Form ATS disclosures to respond to revised Form ATS-N.
\784\ The currently approved baseline burden for filing
amendments to Form ATS-N is 47 hours ((Attorney at 5.5 hours +
Compliance Manager at 2 hours + Compliance Clerk at 1.9 hours) x 5
amendments a year). See Rule 304 PRA Supporting Statement, supra
note 781.
\785\ The currently approved baseline annual burden for Rule 304
contemplates NMS Stock ATSs filing amendments to Form ATS-N, and
this proposal does not add to that burden.
[[Page 15592]]
----------------------------------------------------------------------------------------------------------------
Total burden (number of
Number of Burden per respondents x burden
Burden type Respondent type respondents respondent per respondent, rounded
(hours) to nearest 0.5 hours)
----------------------------------------------------------------------------------------------------------------
Initial.......................... Communication 8 136.4 1,091
Protocol Systems.
Annual 47 376
Initial.......................... Currently Exempted 7 136.4 955
Government
Securities ATSs.
Annual 47 329
Initial.......................... Current Government 17 116.4 1,979
Securities ATSs.
Annual 47 799
Initial.......................... NMS Stock ATSs...... 34 8 272
----------------------------------------------------------------------------------------------------------------
4. Burden of Rule 15b1-1 and Form BD on Communication Protocol Systems
and Currently Exempted Government Securities ATSs
Rule 301(b)(1) of Regulation ATS requires ATSs to register as a
broker-dealer under section 15 of the Act. The proposal would newly
impose the currently-approved baseline burden of complying with the
Rule 15b1-1 and Form BD collection of information on certain
Communication Protocol Systems and Currently Exempted Government
Securities ATSs that are not already registered as broker-dealers.\786\
The Commission estimates an initial burden of 2.75 hours \787\ and an
annual burden of 1 hour \788\ per respondent for completing Form BD and
the following total initial and annual burdens:
---------------------------------------------------------------------------
\786\ The proposal would not impose a new burden on Current
Government Securities ATSs, NMS Stock ATSs, and Other Form ATS
Filers, as these categories of respondents are already subject to
the requirement of Regulation ATS, and specifically Rule 301(b)(1)
to register as a broker-dealer. The Commission also estimates that a
subset of Communication Protocol Systems and Currently Exempted
Government Securities ATSs would already be registered as broker-
dealers.
\787\ The Commission's currently approved baseline burden for
the average initial compliance burden for each Form BD is 2.75 hours
(Compliance Manager at 2.75 hours). See Extension Without Change of
a Currently Approved Collection: Form BD and Rule 15b1-1.
Application for registration as a broker-dealer; ICR Reference No.
201905-3235-016; OMB Control No. 3235-0012 (August 7, 2019),
available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201905-3235-016. (``Form BD PRA Supporting
Statement'').
\788\ The Commission's currently approved baseline burden for
the average ongoing compliance burden for each respondent amending
Form BD is .95 hours (Compliance Manager at 0.33 hours x 2.87
amendments per year). See Form BD PRA Supporting Statement, supra
note 787.
----------------------------------------------------------------------------------------------------------------
Total burden (number of
Number of Burden per respondents x burden
Burden type Respondent type respondents respondent per respondent, rounded
(hours) to nearest 0.5 hours)
----------------------------------------------------------------------------------------------------------------
Initial.......................... Communication 6 2.75 16.5
Protocol Systems.
Annual .95 5.5
Initial.......................... Currently Exempted 1 2.75 3
Government
Securities ATSs.
Annual .95 1
----------------------------------------------------------------------------------------------------------------
5. Burden of Form ID on Communication Protocol Systems and Currently
Exempted Government Securities ATSs
The same subset of Communication Protocol Systems and Currently
Exempted Government Securities ATSs that are not already registered as
broker-dealers discussed above would also newly incur the currently-
approved baseline burden of the Form ID collection of information
necessary to apply for EDGAR access.\789\ The Commission estimates an
initial burden of 0.15 hours \790\ and no annual burden per respondent
for completing Form ID, and the following total burdens:
---------------------------------------------------------------------------
\789\ As discussed above, respondents burdened under the PRA by
this proposal that are already registered as broker-dealers would
not incur this burden. See supra note 786.
\790\ See Revision of a Currently Approved Collection: Form ID--
EDGAR Password; ICR Reference No. 202104-3235-022; OMB Control No.
3235-0328 (April 29, 2021), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202104-3235-022.
----------------------------------------------------------------------------------------------------------------
Total initial burden
Initial burden (number of respondents
Respondent type Number of per respondent x initial burden per
respondents (hours) respondent, rounded to
nearest 0.5 hours)
----------------------------------------------------------------------------------------------------------------
Communication Protocol Systems........................ 6 0.15 1
Currently Exempted Government Securities ATSs......... 1 0.15 0
----------------------------------------------------------------------------------------------------------------
6. Burden of Regulation SCI on Communication Protocol Systems and
Legacy Government Securities ATSs
As discussed above, the Commission is re-proposing to amend
Regulation SCI to expand the definition of ``SCI alternative trading
system'' to include Government Securities ATSs that meet a specified
volume threshold, which would, in turn, fall within the definition of
``SCI entity'' and, as a result, be subject to the requirements of
Regulation SCI.\791\ As proposed, (1) Communication Protocol Systems
that transact in U.S. Treasuries, Agency Securities, NMS stocks, or
equity securities other than NMS stocks reported to an SRO and (2)
Legacy Government Securities ATSs could become newly subject to the
requirements of Regulation SCI if they
[[Page 15593]]
satisfy the thresholds set forth in the proposed amended definition of
``SCI alternative trading system.'' \792\
---------------------------------------------------------------------------
\791\ See supra Section III.C.
\792\ The proposal would not impose a new burden on (1)
Communications Protocol Systems that transact in categories of
securities that are not within the definition of ``SCI alternative
trading system,'' (2) NMS Stock ATSs, which are already subject to
the requirements of Regulation SCI (unless they are Communication
Protocol Systems that meet the Regulation SCI thresholds in NMS
stocks), and (3) Other Form ATS Filers, which, as defined in this
proposal, do not transact in the categories of securities within the
definition of ``SCI alternative trading system.''
---------------------------------------------------------------------------
The Commission estimates 2 Communication Protocol Systems will
initially satisfy the conditions and thresholds set forth in the
proposed amended definition of ``SCI alternative trading system'' that
are not existing SCI entities or affiliated with SCI entities and will
incur a higher initial burden to comply. With respect to Legacy
Government Securities ATSs, the Commission estimates that 1 respondent
will qualify as an SCI alternative trading system that is currently an
SCI entity or is affiliated with an SCI entity and will incur a lower
initial burden to comply with Regulation SCI, and 1 respondent will
qualify as an SCI alternative trading systems that is not an existing
SCI entity or affiliated with an SCI entity and will incur the higher
initial burden to comply.
The Commission estimates an initial compliance burden for existing
SCI entities of 1,017.15 hours,\793\ an initial compliance burden for
new SCI entities of 2,034.3 hours,\794\ an annual compliance burden for
all qualifying SCI entities of 2,458.65 hours,\795\ and the following
total initial and annual burdens:
---------------------------------------------------------------------------
\793\ The Commission's currently approved baseline burden for
the average initial compliance burden for an existing SCI entity
that is not an SRO or a plan processor is 1,017.15 hours. See
Extension Without Change of a Currently Approved Collection:
Regulation SCI and Form SCI; ICR Reference No. 201807-3235-001; OMB
Control No. 3235-0703 (September 26, 2018) available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201807-3235-001
(``2018 SCI PRA Supporting Statement'').
\794\ The Commission's currently approved baseline burden for
the average initial compliance burden for an existing SCI entity
that is not an SRO or a plan processor is 2,034.3 hours. See 2018
SCI PRA Supporting Statement supra note 793.
\795\ The Commission's currently approved baseline burden for
the average ongoing compliance burden for an SCI entity that is not
an SRO or a plan processor is 2,458.6 hours. See 2018 SCI PRA
Supporting Statement supra note 793.
----------------------------------------------------------------------------------------------------------------
Total burden (number of
Burden description/ Number of Burden per respondents x burden
Burden type respondent type respondents respondent per respondent, rounded
(hours) to nearest 0.5 hours)
----------------------------------------------------------------------------------------------------------------
Initial.......................... Compliance with 1 1,017.15 1,017
Annual........................... Regulation SCI 2,458.65 2,458.5
(Legacy Government
Securities ATSs
that are existing
SCI entities).
Initial.......................... Compliance with 1 2,034.3 2,034.5
Annual........................... Regulation SCI 2,458.65 2,458.5
(Legacy Government
Securities ATSs
that are new SCI
entities).
Initial.......................... Compliance with 2 2,034.3 4,068.5
Annual........................... Regulation SCI 2,458.65 4,917.5
(Communication
Protocol Systems
that are new SCI
entities).
----------------------------------------------------------------------------------------------------------------
E. Request for Comments
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
178. Evaluate whether the proposed collection of information is
necessary for the proper performance of the Commission's functions,
including whether the information shall have practical utility;
179. Evaluate the accuracy of the Commission's estimates of the
burden of the proposed collection of information;
180. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
181. Evaluate whether there are ways to minimize the burden of
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology; and
182. Evaluate whether the proposed amendments would have any
effects on any other collection of information not previously
identified in this section.
Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Vanessa Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090, with reference to File Number S7-02-22.
Requests for materials submitted to OMB by the Commission with regard
to this collection of information should be in writing, with reference
to File Number S7-02-22 and be submitted to the Securities and Exchange
Commission, Office of FOIA/PA Services, 100 F Street NE, Washington, DC
20549-2736. As OMB is required to make a decision concerning the
collection of information between 30 and 60 days after publication, a
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication.
VIII. Economic Analysis
A. Introduction
We are mindful of the economic effects that may result from the
proposed amendments, including the benefits, costs, and the effects on
efficiency, competition, and capital formation.\796\ This section
analyzes the expected economic effects of the proposed rules relative
to the current baseline, which consists of the current market and
regulatory framework in existence today.
---------------------------------------------------------------------------
\796\ Exchange Act Section 3(f) requires the Commission, when it
is engaged in rulemaking pursuant to the Exchange Act and is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f). In
addition, Exchange Act Section 23(a)(2) requires the Commission,
when making rules pursuant to the Exchange Act, to consider among
other matters the impact that any such rule would have on
competition and not to adopt any rule that would impose a burden on
competition that is not necessary or appropriate in furtherance of
the purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
A significant number of buyers and sellers for securities are
brought together through Communication Protocol Systems, Government
Securities ATSs, ATSs trading other securities asset classes, and
registered exchanges, but this activity is subject to different
regulations according to the type of venue and asset class. By amending
Exchange Act Rule 3b-16 to include Communication Protocol Systems
within the definition of exchange and ending the exemption for
Government Securities ATSs, the proposed amendments would functionally
apply
[[Page 15594]]
Regulation ATS to an additional number of entities not currently
regulated by it. This would have a number of benefits, including
enhanced regulatory oversight and protection for investors, a reduction
in trading costs and improvement in execution quality, and enhancement
of price discovery and liquidity.
The proposed amendments would also have costs for those entities
subject to new requirements, including compliance costs associated with
filing forms such as Form ATS-N or Form ATS, protecting confidential
information, keeping certain records, and complying with the Fair
Access Rule and/or Regulation SCI.
B. Baseline
1. Current State of Communication Protocol Systems
Communication Protocol Systems bring together buyers and sellers of
securities through the use of non-firm trading interest and by
providing structured methods for communication. Three common types of
protocols, RFQ, stream axes, and conditional order protocols, along
with their potential advantages and disadvantages for participants, are
described in following subsections.\797\ Subsequent sections discuss
details of Communication Protocol Systems that are particular to
different asset classes.\798\
---------------------------------------------------------------------------
\797\ See infra Tables VIII.5 and VIII.6 for a breakdown of the
market share of different protocols, including ATS protocols, in the
markets for government securities and corporate debt.
\798\ See infra Sections VIII.B.2.b, VIII.B.3.b, VIII.B.4.b,
VIII.B.5.d, VIII.B.6.b, and VIII.B.7.
---------------------------------------------------------------------------
a. Request-for-Quote Protocol
As described in Section II.B.2, an RFQ protocol system typically
allows market participants to obtain quotes for a particular security
by simultaneously sending messages to one or more potential
respondents. The initiating participant is typically required to
provide information related to the request in a message, which may
include the name of the initiating participant, CUSIP, side, and size.
Participants that observe the initiating participant's request have the
option to respond to the request with a price quote. These respondents
are typically dealers in the relevant asset class, and are often,
though not always, pre-selected. The initiating participant can then
select among the respondents by either accepting one of multiple
responses or rejecting all responses, usually within a ``good for''
time period. After the initiating participant and a respondent agree on
the terms of the trade, the trade will then proceed to post-trade
processing.
Initiating participants have an incentive to invite multiple
respondents to an RFQ, because receiving more quotes increases price
competition and thus may improve execution quality.\799\ The Commission
understands that it is common for an RFQ to include at least three
participants.
---------------------------------------------------------------------------
\799\ See MarketAxess Letter at 3, stating that variations of
the RFQ protocol can allow clients to simultaneously request
liquidity on an anonymous basis from over 1,000 platform
participants, and that connecting to more counterparties improves
trading outcomes and lowers transaction costs for liquidity
providers and takers.
---------------------------------------------------------------------------
The number of respondents that are invited to participate in the
RFQ is generally less than the total number of dealers available
through the system.\800\ There may be several reasons for this. First,
the Commission understands that the system itself may limit the total
number of respondents that can be selected for a single RFQ, typically
to five counterparties. This limitation may encourage dealers to
respond to RFQs, since it reduces the number of other dealers they
would compete with in any give request session.
---------------------------------------------------------------------------
\800\ See supra Section V.A.3, discussing the applicability of
fair access to platforms where each participant has discretion over
which other participants they want to trade.
---------------------------------------------------------------------------
A second reason stems from the initiating participant's possible
incentive to limit the degree of information leakage. If the trade the
initiating participant is seeking to complete with the help of the RFQ
is not completely filled in that one session, and other participants
know this, quotes the initiating participant receives elsewhere may be
affected, including in subsequent RFQ sessions.
A third reason is that respondents and initiators both have an
incentive to limit price impact because of the expense it will add to
the offsetting trade that must follow. Specifically, a dealer who takes
a position to fill a customer order through an RFQ will often
subsequently offset that position in the interdealer market. If a large
number of dealers are invited to participate in an RFQ, this would lead
to widespread knowledge that the dealer with the winning bid will now
try to offset that position, which could impact the prices available to
that dealer in the interdealer market.
Because RFQs give the initiating participant the opportunity to
mitigate the information leakage described above, they may give the
initiating participant more control over its information than a limit
order book (``LOB'').\801\
---------------------------------------------------------------------------
\801\ This reduction in information leakage may be offset by the
fact that on disclosed RFQs, the initiator's identity is revealed to
participants in the session, which may be an especially sensitive
bit of information to reveal.
---------------------------------------------------------------------------
Once the initiator receives responses from the counterparties, the
initiator can select a quote with which to trade. On some RFQ
platforms, it is at this point that both sides become committed to the
trade. However, there are other RFQ platforms which allow the
respondent an opportunity to confirm the trade. Additionally, after the
RFQ session has ended, the system may inform other respondents to the
RFQ of the price of the second best quote. This allows them to get
information as to what other respondents are quoting in the market,
while limiting information leakage regarding the details of the actual
trade that took place.
Anonymous RFQ sessions may reduce information leakage more than a
disclosed RFQ, because the identity of the initiating participant might
otherwise reveal something about the initiating participant's
willingness to pay.\802\ However, this means respondents are not able
to price quotes on the basis of an ongoing relationship with the
counterparty.
---------------------------------------------------------------------------
\802\ The use of anonymous RFQ is not uniform across asset
classes. The Commission preliminarily believes that anonymous RFQ is
uncommon in the market for U.S. Treasury Securities.
---------------------------------------------------------------------------
RFQ systems have disadvantages for the initiating participants,
when compared with LOBs. For liquid securities, trading on an RFQ
system results in less price competition among respondents when
compared with an LOB, if the number of respondents are limited.
Compared to an LOB, respondents cannot see what quotes they would have
to beat to win the auction, and may not have to compete with as many
respondents to provide a quote.
Also, the Commission understands that there may be less straight-
through processing when trading is conducted via an RFQ protocol
system, as opposed to on an exchange. Furthermore, depending on the
type of asset being traded, there may not be centralized means of
clearing and settlement available. For these reasons, the Commission
understands that one reason why disclosed RFQs are used is so that RFQ
initiating participants can choose dealers with whom the initiator has
an established relationship.\803\ Then, after an RFQ session has ended,
all necessary processing for the trade is completed through this
relationship, in the same way that a transaction might
[[Page 15595]]
be processed via bilateral voice trading.\804\
---------------------------------------------------------------------------
\803\ See, e.g., MarketAxess Letter at 5, stating that the
majority of RFQ trades are completed on a name-disclosed basis with
no central clearing party.
\804\ Bilateral voice trading refers to telephone calls, chat
messages, etc.
---------------------------------------------------------------------------
In order to facilitate processing of the trade while maintaining
the anonymity of the counterparties, the operator of the anonymous RFQ,
which is typically a broker-dealer, may act as a counterparty to each
side of the trade. Also, the Commission understands that anonymous RFQs
are often received by all liquidity providers participating on the
platform, instead of a pre-selected few. The Commission understands
that providing an intermediary broker to act as a counterparty to each
side of a trade on the system may also function as a convenience to RFQ
participants generally, by allowing the system to help facilitate more
straight-through processing.
As described in Section II.B.2, RFQ Lists, also referred to as BWIC
or OWIC,\805\ are a variation of the RFQ protocol in which quotes are
solicited for multiple securities simultaneously. Market participants
use RFQ Lists to complete trades in a number of different securities at
the same time. Bringing all liquidity providers together into a single,
multi-security RFQ may be a more efficient way of trading multiple
securities at once than initiating a separate RFQ session for each
security, especially if it is important to complete the trades close
together in time. However, the use of the joint session may reveal more
about the trading intentions of the initiator to its counterparties
than using separate RFQ sessions, where information leakage is more
limited, as respondents may be less aware of the complete position the
initiator is seeking to take.
---------------------------------------------------------------------------
\805\ See supra note 58.
---------------------------------------------------------------------------
b. Stream Axes
As defined in Section II.B.2, ``stream axes'' are systems that
electronically display continuous trading interest (firm or non-firm)
in a security or type of security to participants on the systems. The
Commission understands a typical stream axe to operate as follows:
Dealers submit an indication or indications of interest (``axe'' or
``axes''), which may include price quotes and sizes for buying and
selling securities. Axes are streamed to participants, updating
continuously as dealers adjust prices and inventory offerings. A market
participant may choose an axe with which to trade at the broadcasted
price and size. In some cases, the axes are streamed on a non-anonymous
basis, which permits the prices to be customized to the recipient on
the basis of the relationship between the recipient and the dealer.
Stream axes differ from RFQs in that the dealer streaming the axes
receives less information about the counterparty's trading intentions
before the trade is agreed to. Stream axes are similar to an LOB in
this way. This lack of information may end up reflected in the prices
the dealer chooses to stream, as well as the type of dealer who chooses
to participate in stream axes. Therefore, the decision to use an RFQ or
stream axe may depend on the trading intentions of the participant. The
stream axes protocol gives the participant receiving the stream the
free option to trade at whatever price is being streamed at the moment,
without revealing anything about its trading intentions beyond its
identity. On the other hand, this may be less conducive to trading in
certain sizes, and may not result in the same price as an RFQ.
c. Conditional Order Protocol
Section II.B.2 defines conditional orders as trading interest that
may not be executable until after a user takes subsequent action, for
example, sending a firm-up invitation message to other participants.
Conditional order protocols often allow the matched parties to modify
the attributes of the non-firm trading interest before accepting the
firm-up invitation. If both matching parties accept the firm-up invite,
the parties would agree upon the terms of the trade and an execution
would occur.
Unlike LOBs, conditional order protocols allow participants to
ultimately decline a transaction after receiving a response to their
quote. This may be particularly useful for large size orders or for
illiquid securities, for which search costs may be particularly high.
For example, participants can place conditional orders on various
systems in search of liquidity, and use the fact that the orders are
non-firm to avoid the risk of double-execution by declining some
responses if they receive more than one. However, the ability for the
matched counterparty to also decline to transact implies that the risk
of non-execution on conditional order protocols is likely higher than
that of LOBs.
2. Current State of Government Securities Market
The market for U.S. Government securities is large both in terms of
the outstanding debt and daily trading volume. According to the
Treasury Department, as of the end of 2020, the total amount
outstanding of marketable Treasury Securities was approximately $21
trillion.\806\ The Financial Accounts of the United States Z.1 released
by the Federal Reserve Board shows that the amount outstanding of
Agency- and GSE-Backed Securities is about $10.1 trillion, as of the
end of 2020.\807\ According to data published by SIFMA, in September
2021, the average daily trading volume in government securities was
about $850.1 billion, or roughly 95 percent of all fixed income trading
volume in the U.S.\808\ This includes $582.1 billion average daily
trading in U.S. Treasury Securities, $265.7 billion in Agency MBSs, and
$2.4 billion in other Agency Securities.
---------------------------------------------------------------------------
\806\ See Monthly Statement of the Public Debt of the United
States, dated December 31, 2020, available at https://www.treasurydirect.gov/govt/reports/pd/mspd/2020/opds122020.pdf.
\807\ See Financial Accounts of the United States Z.1 at 177,
available at https://www.federalreserve.gov/releases/z1/20210311/z1.pdf.
\808\ See SIFMA Fixed Income Trading Volume, available at
https://www.sifma.org/resources/research/us-fixed-income-securities-statistics/. The stated figures include Treasury Securities, Agency
MBS, and Federal Agency Securities.
---------------------------------------------------------------------------
a. ATSs in the Market for U.S. Government Securities
i. Operations and Market Share of Government Securities ATSs
The variety of market participants trading on Government Securities
ATSs has increased since their inception. While Government Securities
ATSs in the market for U.S. Treasury Securities historically only
allowed bank and non-bank dealers \809\ to trade, beginning in 2003,
firms that were neither banks nor dealers, such as hedge funds,
insurance companies, and PTFs, gained permission from the ATSs to trade
directly on Government Securities ATSs.\810\ The Commission estimates
that there are currently 17 ATSs trading in government securities
(either Treasury or Agency securities, or both) that have a Form ATS on
file.\811\
[[Page 15596]]
Additionally, the Commission estimates that 7 Currently Exempted
Government Securities ATSs are not currently required to register as a
national securities exchange or comply with Regulation ATS.\812\
---------------------------------------------------------------------------
\809\ Absent an exception or an exemption, Section 15(a)(1) of
the Exchange Act makes it unlawful for a ``dealer'' to effect any
transactions in, or to induce or attempt to induce the purchase or
sale of, any security unless registered with the Commission in
accordance with Section 15(b) of the Exchange Act. Similarly,
Section 15C of the Exchange Act makes it unlawful for a ``government
securities dealer'' (other than a registered broker-dealer or
financial institution) to induce or attempt to induce the purchase
or sale of any government security unless such government securities
dealer is registered in accordance with Section 15C(a)(2).
\810\ See Letter from Jim Greco, CEO, Direct Match, to David R.
Pearl, Office of the Executive Secretary, U.S. Department of the
Treasury, dated April 22, 2016, (``Direct Match Letter'') at 5,
available at https://www.treasurydirect.gov/instit/statreg/gsareg/RFIcommentletterDirectMatch.pdf at 6-7.
\811\ See supra Section VII.C.1. The Commission estimates that
some of these ATSs only support Treasuries trading to facilitate
hedging in conjunction with corporate bonds transactions, but
typically are not used for outright Treasuries trading. See also ICE
Bonds Letter I at 3, stating that this offering of Government
Securities ATSs gives participants the convenience of electronically
trading in instruments with correlated trading activities in a
centralized location.
\812\ As discussed in Section I, a Currently Exempted Government
Securities ATS is defined as an ATS that limits its securities
activities to government securities or repos and registers as a
broker-dealer or is a bank. Currently Exempted Government Securities
ATSs transact exclusively in government securities or repos, and are
not required to file a Form ATS.
---------------------------------------------------------------------------
Currently, Government Securities ATSs account for a significant
percentage of all Treasury trading activity reported to TRACE.\813\ As
shown in Table VIII.1, ATSs accounted for approximately 32 percent of
U.S. Treasury Securities trading volume in the first half of 2021.
Dealer participants on current ATSs use them as a source of liquidity
in government securities, including the liquidity needed to efficiently
fill customer orders outside the current ATSs. The Commission
understands that this means some portion of dealer transactions on
Government Securities ATSs are associated with the dealers' activity in
filling customer orders.
---------------------------------------------------------------------------
\813\ TRACE aggregation and analysis methods follow those used
by Treasury market regulators and FINRA, including adjustments for
multiple trade reports for a single transaction and counting only
one trade report for an ATS or inter-dealer broker (IDB). Commission
staff uses the regulatory version of TRACE in its analysis.
A ``Give-Up'' ID is reported when a principal to a transaction
delegates another participant to report a trade on its behalf. When
a ``Give-Up'' ID is reported, the corresponding reporting or contra-
party is replaced with the ``Give-Up'' ID. This ensures that trades
are attributed to the principals to each transaction. System control
numbers are used to link corrected, canceled, and reversed trade
messages with original new trade messages. In these cases, only
corrected trades are kept and all cancellation and reversal messages
and their corresponding new trade messages are removed.
Special care must be taken when counting market volume. When a
FINRA registered broker directly purchases from another FINRA
member, two trade messages are created. If those FINRA registered
brokers transact through an IDB, four trade messages are created,
two for the IDB and one for each member. In both cases, the volume
from only one report is needed. To ensure that double counting of
transactions does not occur, only the following trade messages are
summed to calculate market volume: Sales to non-IDB members, sales
to identified customers, such as banks, hedge funds, asset managers,
and PTFs, and purchases from and sales to customers and affiliates.
Any trade in which the contra-party is an IDB is excluded. Thus, in
the case of trades involving IDBs, only the IDBs' sale message is
added to overall volume.
Table VIII.1--ATS Market Share Analysis
----------------------------------------------------------------------------------------------------------------
Number of
Treasury Agency unique
securities securities platforms
----------------------------------------------------------------------------------------------------------------
Num. of Current Gov. Sec. ATSs.................................. 13 7 15
Num. of Currently Exempted Gov. Sec. ATSs....................... 5 1 5
Num. of Grouped-Affiliated ATSs................................. 18 7 ..............
Total volume share of Current Gov. Sec. ATSs.................... 24.5% 11.6% ..............
Total volume share of Currently Exempted Gov. Sec. ATSs......... 9.6% 0.7% ..............
Total volume share of Grouped-Affiliated ATSs Companies......... 34.1% 12.3% ..............
----------------------------------------------------------------------------------------------------------------
Above 10% Market Share
----------------------------------------------------------------------------------------------------------------
Num. of Current Gov. Sec. ATSs.................................. 1 1 2
Num. of Currently Exempted Gov. Sec. ATSs....................... 0 0 0
Num. of Grouped-Affiliated ATSs................................. 2 1 ..............
Total volume share of Current Gov. Sec. ATSs.................... 15.2% 11.6% ..............
Total volume share of Currently Exempted Gov. Sec. ATSs......... .............. .............. ..............
Total volume share of Grouped-Affiliated ATSs................... 15.2% .............. ..............
----------------------------------------------------------------------------------------------------------------
Above 5% Market Share
----------------------------------------------------------------------------------------------------------------
Num. of Current Gov. Sec. ATSs.................................. 2 1 2
Num. of Currently Exempted Gov. Sec. ATSs....................... 0 0 0
Num. of Grouped-Affiliated ATSs................................. 4 1 ..............
Total volume share of Current Gov. Sec. ATSs.................... 21.3% 11.6% ..............
Total volume share of Currently Exempted Gov. Sec. ATSs......... .............. .............. ..............
Total volume share of Grouped-Affiliated ATSs................... 23.7% .............. ..............
----------------------------------------------------------------------------------------------------------------
Above 4% Market Share
----------------------------------------------------------------------------------------------------------------
Num. of Current Gov. Sec. ATSs.................................. 2 1 2
Num. of Currently Exempted Gov. Sec. ATSs....................... 0 0 0
Num. of Grouped-Affiliated ATSs................................. 4 1 ..............
Total volume share of Current Gov. Sec. ATSs.................... 21.3% 11.6% ..............
Total volume share of Currently Exempted Gov. Sec. ATSs......... .............. .............. ..............
Total volume share of Grouped-Affiliated ATSs................... 23.7% .............. ..............
----------------------------------------------------------------------------------------------------------------
Above 3% Market Share
----------------------------------------------------------------------------------------------------------------
Num. of Current Gov. Sec. ATSs.................................. 2 1 2
Num. of Currently Exempted Gov. Sec. ATSs....................... 2 0 2
Num. of Grouped-Affiliated ATSs................................. 8 1 ..............
Total volume share of Current Gov. Sec. ATSs.................... 21.3% 11.6% ..............
Total volume share of Currently Exempted Gov. Sec. ATSs......... 7.9% .............. ..............
Total volume share of Grouped-Affiliated ATSs................... 32.0% .............. ..............
----------------------------------------------------------------------------------------------------------------
[[Page 15597]]
Above 2% Market Share
----------------------------------------------------------------------------------------------------------------
Num. of Current Gov. Sec. ATSs.................................. 3 1 3
Num. of Currently Exempted Gov. Sec. ATSs....................... 2 0 2
Num. of Grouped-Affiliated ATSs................................. 8 1 ..............
Total volume share of Current Gov. Sec. ATSs.................... 23.7% 11.6% ..............
Total volume share of Currently Exempted Gov. Sec. ATSs......... 7.9% .............. ..............
Total volume share of Grouped-Affiliated ATSs................... 32.0% .............. ..............
----------------------------------------------------------------------------------------------------------------
Each panel reports the volume share (%) for Government Securities ATSs and the number of Government Securities
ATSs above the specified market share level. Grouped-Affiliated ATSs refer to ATSs operated by a common broker-
dealer or affiliated broker-dealer and for which their volume would be aggregated under the proposed changes to
the Fair Access Rule. Treasury Securities include nominal bonds, TIPS and STRIPS. Agency Securities include
Agency Debentures, Agency Collateralized Mortgage Obligations, and Agency Pass-Through Mortgage Backed
Securities.\a\ Trading volume is measured in dollar volume in par value. Data is based on the regulatory
version of TRACE for U.S. Treasury Securities and TRACE for Agency Securities from April 1, 2021 to September
30, 2021.\b\ \c\
----------------------------------------------------------------------------------------------------------------
\a\ Agency Pass-through Mortgage Backed Securities include those traded in specified pool transactions and those
to be announced. ``Agency Debenture'' is equivalent to ``Federal Agency Security,'' as used in Part I, Item
8(b) of Form ATS-N. ``Agency Mortgage Backed Securities'' as used in Part I, Item 8(b) of Form ATS-N include
both ``Agency Collateralized Mortgage Obligations'' and ``Agency Pass-Through Mortgage Backed Securities.''
\b\ The analysis based on TRACE is necessarily limited to transactions reported to TRACE, which may not be all
transactions in government securities. Transactions that take place on non-FINRA member ATSs or between two
non-FINRA members are not reported to TRACE.
\c\ Trades reported to TRACE may include trades conducted on a Communication Protocol System if one participant
in the trade is a FINRA member. The volume reported in this table is categorized given this limitation.
Government Securities ATSs have evolved such that they operate with
a level of technology use and speed of trading that is similar to that
observed on NMS Stock ATSs, particularly in the secondary electronic
cash market for on-the-run U.S. Treasury Securities.\814\ Some
Government Securities ATSs operate as anonymous LOB systems and offer
features such as low latency connectivity, direct market data feeds,
co-location services, and a variety of order types. In addition to
facilitating low latency trading, the Commission understands that the
data feeds provided by Government Securities ATS serve as a source for
real-time prices in the market for government securities.\815\ In
providing such information to market participants about Treasury prices
in particular, these feeds may serve as a source for real-time risk-
free rate benchmarks, which help price other financial instruments.
---------------------------------------------------------------------------
\814\ See October 15 Staff Report, supra note 188, at 35-36,
discussing increased electronic trading in the market for
Treasuries. See also Bloomberg Letter at 5, stating that liquid on-
the-run government securities are mostly traded on central limit
order books and Bloomberg Letter at 21, stating that ATSs are a
significant source of liquidity for on-the-run U.S. Treasury
Securities.
\815\ See Letter from Dan Cleaves, Chief Executive Officer,
BrokerTec Americas, and Jerald Irving, President, ICAP Securities
USA LLC, to David R. Pearl, Office of the Executive Secretary,
Treasury Department, dated April 22, 2016 at 7, available at https://www.treasurydirect.gov/instit/statreg/gsareg/ICAPTreasuryRFILetter.pdf.
---------------------------------------------------------------------------
PTFs have a significant presence on Government Securities
ATSs.\816\ Table VIII.2 shows that, during April to September of 2021,
PTFs accounted for approximately 25.4 percent of total on-the-run U.S.
Treasury Securities ATS trading volume. There were 41 PTFs operating on
ATSs that trade U.S. Treasury Securities as of August 2021. The
Commission understands that PTFs trading on the electronic market for
U.S. Treasury Securities often employ automated, algorithmic trading
strategies that rely on speed and allow the PTFs to quickly execute
trades, or cancel or modify quotes in response to perceived market
events.\817\ The Commission understands that PTFs contribute liquidity
to the trading environment on Government Securities ATSs.\818\
---------------------------------------------------------------------------
\816\ See supra Section III.A.
\817\ See October 15 Staff Report at 32, 35-36, 39.
\818\ One market participant stated that this liquidity
provision may fill a gap that was left after the introduction of
post-2008 financial crisis regulations and their subsequent effects
on dealers. See Direct Match Letter at 7.
Table VIII.2--On-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
Number of Volume share
venues Volume (%)
----------------------------------------------------------------------------------------------------------------
On-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
ATSs............................................................ 18 812,480 49.7
Customer trades............................................. 11 52,754 3.2
Dealer trades............................................... 18 344,781 21.1
PTF trades.................................................. 11 414,945 25.4
Non-ATS Interdealer Brokers..................................... 24 118,067 7.2
Customer trades............................................. 19 77,334 4.7
Dealer trades............................................... 23 40,252 2.5
PTF trades.................................................. 9 481 0.0 \a\
Bilateral dealer-to-dealer trades............................... 352 92,051 5.6
Bilateral dealer-to-customer trades............................. 333 604,823 37.0
Bilateral dealer-to-PTF trades.................................. 97 7,250 0.4
-----------------------------------------------
[[Page 15598]]
Total................................................... .............. 1,634,671 100.0
----------------------------------------------------------------------------------------------------------------
This table reports trading volume and volume share for ATSs,\b\ Non-ATS interdealer brokers, bilateral dealer-to-
dealer transactions, bilateral dealer-to-customer, and bilateral dealer-to-PTF transactions for on-the-run U.S.
Treasury Securities. On-the-run U.S. Treasury Securities are the most recently issued nominal coupon
securities. Nominal coupon securities pay a fixed semi-annual coupon and are currently issued at original
maturities of 2, 3, 5, 7, 10, 20, and 30 years. Treasury Bills and Floating Rate Notes are excluded. Volume is
the average weekly dollar volume in par value (in millions of dollars) over the 6-month period, from April 1,
2021, to September 30, 2021.\c\ Number of Venues is the number of different trading venues in each category and
the number of distinct MPIDs for bilateral transactions.\d\ Market Share (%) is the measure of the dollar
volume as a percent of total dollar volume.\e\ The volumes of ATSs and non-ATS interdealer brokers are broken
out by Customer trades, Dealer trades, and PTF trades within each group.\f\ Data is based on the regulatory
version of TRACE for U.S. Treasury Securities from April 1, 2021, to September 30, 2021. Bilateral trades are a
catchall classification that may include trades conducted via bilateral negotiation, as well as trades
conducted electronically via platforms not registered with FINRA as an ATS. Bilateral trades may include trades
conducted on Communication Protocol Systems.
----------------------------------------------------------------------------------------------------------------
\a\ The percentage to the nearest non-zero is 0.02%.
\b\ See supra notes b and c in Table VIII.1.
\c\ FINRA reports volume as par volume, where par volume is the volume measured by the face value of the bond,
in dollars. See relevant weekly volume files, available at https://www.finra.org/filing-reporting/trace/data/trace-treasury-aggregates.
\d\ Dealers are counted using the number of distinct MPIDs.
\e\ Total dollar volume (in par value) is calculated as the sum of dollar volume for ATSs, non-ATS interdealer
brokers, bilateral dealer-to-dealer transactions, and bilateral dealer-to-customer transactions.
\f\ We identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE
for U.S. Treasury Securities. The regulatory version of TRACE for U.S. Treasury Securities includes an
identifier for customer and interdealer trades. Furthermore, we use MPID for non-FINRA member subscriber
counterparties in the regulatory version of TRACE for U.S. Treasury Securities to identify PTF trades on ATSs.
Table VIII.1 also shows that trading in the Treasury Securities
market is concentrated on a few large ATSs.\819\ The largest ATS by
Treasury dollar volume has 15.2 percent of the total Treasury
Securities market reported to TRACE. Two Government Securities ATSs
have dollar volumes that are over five percent of the total TRACE
volume figure, and four have dollar volumes over three percent.
---------------------------------------------------------------------------
\819\ All ATSs identified in this table are determined by the
regulatory version of TRACE. TRACE data contains an identifier for
trades occurring on ATSs, identifying the MPID of the ATS.
---------------------------------------------------------------------------
Table VIII.2 shows that the majority of trading in on-the-run
government securities reported to TRACE goes through Government
Securities ATSs. Specifically, Government Securities ATSs accounted for
nearly 50 percent of total dollar volume.
When on-the-run securities transition to off-the-run status, their
trading activity shifts away from Government Securities ATSs, and
towards other transaction methods, including Communication Protocol
Systems.\820\ This is reflected in Table VIII.3, which shows that
Government Securities ATSs account for approximately 21 percent of the
total dollar volume of off-the-run Treasury trading reported to
TRACE.\821\ Table VIII.3 also shows that, while dealers remain a
significant contributor to ATS trading in Treasury Securities in the
off-the-run market, PTFs make up a smaller percentage of volume than
they do in the on-the-run market.
---------------------------------------------------------------------------
\820\ One commenter referenced that market participants trading
in less liquid off-the-run securities are better able to find
liquidity in non-ATS trading methods. See Bloomberg Letter at 5 and
21-22.
\821\ See supra note 193.
Table VIII.3--Off-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
Number of Volume share
venues Volume (%)
----------------------------------------------------------------------------------------------------------------
Off-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
ATSs............................................................ 17 110,945 21.7
Customer trades............................................. 10 13,304 2.1
Dealer trades............................................... 17 83,668 13.0
PTF trades.................................................. 11 13,973 2.2
Non-ATS Interdealer Brokers..................................... 22 43,604 6.8
Customer trades............................................. 18 15,092 2.4
Dealer trades............................................... 21 28,451 4.4
PTF trades.................................................. 12 61 0.0 \a\
Bilateral dealer-to-dealer trades............................... 509 47,912 7.5
Bilateral dealer-to-customer trades............................. 333 437,665 68.2
Bilateral dealer-to-PTF trades.................................. 114 1,415 0.2
-----------------------------------------------
Total................................................... .............. 641,540 100.0
----------------------------------------------------------------------------------------------------------------
[[Page 15599]]
This table reports trading volume and volume share for ATSs,\b\ non-ATS interdealer brokers, bilateral dealer-to-
dealer transactions, bilateral dealer-to-customer, and bilateral dealer-to-PTF transactions for off-the-run
U.S. Treasury Securities. Off-the-run or ``seasoned'' U.S. Treasury Securities include TIPS, STRIPS, and
nominal coupon securities issues that preceded the current on-the-run nominal coupon securities. Number of
Venues is the number of different trading venues in each category and the number of distinct MPIDs for
bilateral transactions. Volume is the average weekly dollar volume in par value (in millions of dollars) over
the 6-month period, from April 1, 2021, to September 30, 2021. Market Share (%) is the measure of the dollar
volume as a percent of the total dollar volume. The volumes of ATSs and non-ATS interdealer brokers are broken
out by Customer trades, Dealer trades, and PTF trades within each group.\c\ Data is based on the regulatory
version of TRACE for U.S. Treasury Securities from April 1, 2021, to September 30, 2021. Bilateral trades are a
catchall classification that may include trades conducted via bilateral negotiation, as well as trades
conducted electronically via platforms not registered with FINRA as an ATS. Bilateral trades may include trades
conducted on Communication Protocol Systems.
----------------------------------------------------------------------------------------------------------------
\a\ The percentage to the nearest non-zero is 0.009%.
\b\ See supra notes b and c of Table VIII.1.
\c\ We identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE
for U.S. Treasury Securities. The regulatory version of TRACE for U.S. Treasury Securities includes an
identifier for customer and interdealer trades. Furthermore, we use MPID for non-FINRA member subscriber
counterparties in the regulatory version of TRACE for U.S. Treasury Securities to identify PTF trades on ATSs.
Government Securities ATSs also play a significant role in the
market for Agency Securities, accounting for approximately 12 percent
of the total dollar volume reported to TRACE. Like in the Treasury
market, dealers play a significant role in trading on ATSs for Agency
Securities.\822\
---------------------------------------------------------------------------
\822\ Agency Securities are those issued by U.S. Government
sponsored enterprises (``GSEs'') such as Federal Home Loan Banks
(``FHLBs''), the Federal National Mortgage Association (``Fannie
Mae''), and the Federal Home Loan Mortgage Corporation (``Freddie
Mac'').
---------------------------------------------------------------------------
It is the Commission's understanding that PTFs play only a small
role in the market for Agency Securities. The Commission invites
comment on the role of PTFs in trading Agency Securities. The
Commission also requests comment on the providers of liquidity in the
market for Agency Securities.
Table VIII.4--Agency Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
Number of Volume share
venues Volume (%)
----------------------------------------------------------------------------------------------------------------
Agency Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
ATSs............................................................ 8 31,940 12.3
1Customer trades............................................ 7 6,767 2.6
1Dealer trades.............................................. 7 25,173 9.7
PTF trades.................................................. 3 1 \a\ 0.0
Non-ATS Interdealer Brokers..................................... 13 7,935 3.0
Customer trades............................................. 9 1,096 0.4
Dealer trades............................................... 13 6,838 2.6
PTF trades.................................................. 5 0 \b\ 0.0
Bilateral dealer-to-dealer trades............................... 470 12,170 4.7
Bilateral dealer-to-customer trades............................. 470 206,777 79.9
Bilateral dealer-to-PTF trades.................................. 84 3 \c\ 0.0
-----------------------------------------------
Total....................................................... .............. 264,916 100.0
----------------------------------------------------------------------------------------------------------------
This table reports trading volume and volume share for ATSs,\d\ non-ATS interdealer brokers, bilateral dealer-to-
dealer transactions, and bilateral dealer-to-customer transactions for U.S. Agency Securities. Agency
Securities include Agency Debentures, Agency Collateralized Mortgage Obligations, and Agency Pass-Through
Mortgage Backed Securities. Number of Venues is the number of different trading venues in each category and the
number of MPIDs for bilateral transactions. Volume is the average daily dollar volume in par value (in millions
of dollars) over the 6-month period, from April 1, 2021, to September 30, 2021. Market Share (%) is the measure
of the dollar volume as a percent of the total dollar volume. The volume of ATSs and non-ATS interdealer
brokers are broken out by Customer trades and Dealer trades within each group.\e\ Data is based on the
regulatory version of TRACE for Agency Securities from April 1, 2021, to September 30, 2021. Bilateral trades
are a catchall classification that may include trades conducted via bilateral negotiation, as well as trades
conducted electronically via platforms not registered with FINRA as an ATS. Bilateral trades may include trades
conducted on Communication Protocol Systems.
----------------------------------------------------------------------------------------------------------------
\a\ The percentage to the nearest non-zero is 0.0003%.
\b\ The percentage to the nearest non-zero is 0.00007%.
\c\ The percentage to the nearest non-zero is 0.001%.
\d\ See supra notes b and c of Table VIII.1.
\e\ We identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE
for Agency Securities. The regulatory version of TRACE for Agency Securities includes an identifier for
customer and interdealer trades.
[[Page 15600]]
ii. Regulatory Environment for Government Securities ATSs
The regulatory environment for Government Securities ATSs varies
according to whether the ATS is a Current Government Securities ATS or
a Currently Exempted Government Securities ATS, and whether the ATS is
operated by a registered broker-dealer. Differences in reporting
requirements can lead to an uneven competitive landscape for Government
Securities ATSs and leave room for regulatory arbitrage.\823\ In
addition, current regulation for Government Securities ATSs does not
require public disclosure about operations, fair access, or robust
systems.
---------------------------------------------------------------------------
\823\ One commenter stated that the lack of a consistent
regulatory framework for entities that undertake similar activities
leads to opportunities for arbitrage and may result in market
fragmentation, which in turn may cause reduced market liquidity. See
Tradeweb Letter at 9.
---------------------------------------------------------------------------
Much of the difference in regulatory treatment among Government
Securities ATSs comes from the fact that Current Government Securities
ATSs must comply with Regulation ATS, while Currently Exempted
Government Securities ATSs do not. For example, Currently Exempted
Government Securities ATSs are not required to file Form ATS with the
Commission, while ATSs that trade U.S. Government securities as well as
non-government securities, such as corporate or municipal securities,
must have filed Form ATS as a confidential filing with the Commission
when they began operations, and will incur the cost to do so again if
there is a material change in operations.\824\
---------------------------------------------------------------------------
\824\ The Commission may use this information in monitoring,
examinations and enforcement.
---------------------------------------------------------------------------
Current Government Securities ATSs are also required to
confidentially report their transaction dollar volume in government
securities to the Commission on a quarterly basis via Form ATS-R within
30 days after the end of each calendar quarter. Currently Exempted
Government Securities ATSs are not subject to this requirement.
Unlike Current Government Securities ATSs, Currently Exempted
Government Securities ATSs are not required to establish written
safeguards and written procedures to protect subscribers' confidential
trading information.\825\ To the extent that a Currently Exempted
Government Securities ATS does not have these procedures, or has them
but the procedures are not adequate,\826\ a subscriber's confidential
trading information might be at risk of unauthorized disclosure or
subject to potential misuse.
---------------------------------------------------------------------------
\825\ These requirements come from Rule 301(b)(10) of Regulation
ATS. Current Government Securities ATSs are currently subject to
these rules. See supra Section II.D.2.
\826\ Currently Exempted Government Securities ATSs are not
required to file their written safeguards and written procedures
with the Commission. Therefore, absent an examination by the
Commission staff, the Commission is not able to determine which
Currently Exempted Government Securities ATSs currently have
adequate, written safeguards and written procedures to protect
subscribers' confidential trading information. At the same time,
based on the experience of the Commission, the Commission believes
that some Currently Exempted Government Securities ATSs currently
have, and maintain in writing, safeguards and procedures to protect
subscribers' confidential trading information, as well as the
oversight procedures to ensure such safeguards and procedures are
followed.
---------------------------------------------------------------------------
Current Government Securities ATSs must also comply with certain
additional requirements, such as recordkeeping requirements pursuant to
Rule 301(b)(8). These include requirements to make and keep certain
records for an audit trail of trading activity, such as time-sequenced
order information, as well as information about current subscribers and
summaries of trading activity. The requirement to keep such records may
impose compliance costs on Current Government Securities ATSs to which
Currently Exempted Government Securities ATSs are not subjected. To the
extent that Currently Exempted Government Securities ATSs do not
voluntarily maintain records similar to those required by Rule
301(b)(8), detection and investigation of potential market
irregularities may be inhibited.
A further disparity exists in the case of the estimated one bank-
operated Currently Exempted Government Securities ATS. All other
Currently Exempted Government Securities ATSs and all Current
Government Securities ATSs are registered broker-dealers that incur the
costs of registering with the Commission as well as the costs of SRO
membership, and face operational regulatory reporting
requirements.\827\ In contrast, the estimated one bank-operated
Currently Exempted Government Securities ATS is not required to
register as a broker-dealer with the Commission and thus, does not have
to file Form BD with the Commission or be subject to FINRA rules.
---------------------------------------------------------------------------
\827\ See FINRA Letter at 2-3, stating that nearly all
Government Securities ATSs currently are FINRA members
---------------------------------------------------------------------------
The estimated one bank-operated Currently Exempted Government
Securities ATS does not report government securities transactions to
TRACE. All transactions in government securities that include at least
one FINRA member are required to be reported to TRACE within 15 minutes
of the time of execution.\828\ Trades on ATSs operated by FINRA members
may be required to be reported to TRACE, by either the ATS,
counterparties to the trade, or both, depending on whether the
counterparties are FINRA members and whether the ATS holds itself out
as a party to the trade.\829\
---------------------------------------------------------------------------
\828\ See supra note 228 and corresponding text discussing TRACE
reporting requirements for U.S. Government securities.
\829\ FINRA Rule 6731 exempts certain ATSs from TRACE reporting
requirements as long as all of the following conditions are met: All
trades are between ATS subscribers that are both FINRA members; the
ATS demonstrates that member subscribers are fully disclosed to one
another at all times, the system does not permit automatic execution
and a member must take affirmative steps to agree to a trade, the
trade does not pass through any ATS account and the ATS does not
hold itself out as a party to the trade; and the ATS does not
exchange TRACE-Eligible Securities or funds on behalf of its
subscribers, take either side of the trade for clearing or
settlement purposes, or in any other way insert itself into the
trade; the ATS and the member subscribers acknowledge and agree in
writing that the ATS shall not be deemed a party to the trade for
purposes of trade reporting and that trades shall be reported by
each party to the transaction; and the ATS agrees to provide to
FINRA on a monthly basis data relating to the volume of trades by
security executed by the ATS's member subscribers using the ATS's
system. Furthermore, Rule 6732 exempts certain transactions on ATS
from TRACE reporting requirements as long as all of the following
conditions are met: The trade is between FINRA members; the trade
does not pass through any ATS account, and the ATS does not exchange
TRACE-Eligible Securities or funds on behalf of the subscribers,
take either side of the trade for clearing or settlement purposes,
or in any other way insert itself into the trade; the ATS agrees to
provide to FINRA on a monthly basis data relating to each exempted
trade occurring on the ATS's system pursuant to this Rule 6732; the
ATS remits to FINRA a transaction reporting fee for each exempted
sell transaction occurring on the ATS; and the ATS has entered into
a written agreement with each party to the transaction that such
trade must be reported by such party. See also FINRA Letter at 6-7,
stating that a fixed income ATS is a ``party to a transaction'' in a
TRACE-eligible security occurring through its system and has TRACE
transaction reporting obligations, unless an exception or exemption
applies.
---------------------------------------------------------------------------
Neither Current Government Securities ATSs nor Currently Exempted
Government Securities ATSs are required to make disclosures on public
forms, and this might lead to information asymmetries amongst different
subscribers. For example, certain Government Securities ATSs might make
voluntary disclosures regarding their operations as a signal of quality
to some customers,\830\ without disclosing the same information to
other customers or market participants generally. As a result, some
subscribers have limited information which may affect their trading
decisions.
---------------------------------------------------------------------------
\830\ For example, the ATS may disclose order execution
statistics to some customers.
---------------------------------------------------------------------------
There is no legal mechanism to prevent Government Securities ATSs
from unreasonably denying or limiting
[[Page 15601]]
subscribers' access, because the Fair Access Rule does not currently
apply to any ATS that trades government securities.\831\ When a
Government Securities ATS has a significant share of trading volume in
government securities, unfairly discriminatory actions might hurt
investors because viable alternatives to trading on such a high-volume
system might be limited. To the extent this happens, it results in
higher trading costs and a reduced efficiency with which such excluded
participants achieve trading objectives, which may also lead to
concentration in the market for dealers in government securities.\832\
Furthermore, market forces alone might not be sufficient to prevent a
Government Securities ATS from unreasonably denying access to some
market participants.\833\
---------------------------------------------------------------------------
\831\ See supra Section II.D.2, discussing the Fair Access Rule
requirements.
\832\ One commenter stated that registered investment companies
generally are not able to directly access liquidity on most Treasury
interdealer platforms. See ICI Letter at 4.
\833\ See MFA Letter at 3, stating that currently there is no
mechanism to prevent Government Securities ATSs from unreasonably
denying or limiting subscribers' access to an ATS that is a
significant market for government securities.
---------------------------------------------------------------------------
The Commission preliminarily believes that Government Securities
ATSs may not fully internalize the cost of the externalities associated
with not having robust, resilient systems, as would be required by the
provisions of Regulation SCI and Rule 301(b)(6) of Regulation ATS.
Without appropriate safeguards in place for Government Securities ATSs,
technological vulnerabilities continue to exist and could lead to the
potential for costly failures, disruptions, delays, intrusions, and the
reduction in systems up-time,\834\ which could harm the price discovery
process and price efficiency of government securities. Systems issues
pose significant negative externalities on the market, in that if a
trading system of a Government Securities ATS with significant trading
volume fails, this failure will not only force the ATS to forgo revenue
but might also diminish trading in government securities during the
disruption. This would increase the trading costs of market
participants that have optimized their trading strategy under the
assumption that all Government Securities ATSs with significant volume
are fully operational, and might harm the price discovery process and
liquidity flows for government securities.\835\ In addition, price
discovery in securities that use government security transaction prices
as risk-free rate benchmarks might also be harmed.\836\
---------------------------------------------------------------------------
\834\ Systems up-time is a measure of the time that a computer
system is running and available.
\835\ On January 11, 2019, the largest trading platform in on-
the-run U.S. Treasury Securities, experienced a system outage
approximately from 2 p.m. to 3:30 p.m. ET. While the outage resulted
in a modest reduction in market volume, had it occurred at a time
other than late on a Friday afternoon when trading activity is
normally already low, the outage could have resulted in more adverse
consequences on the overall market. See also Elizabeth Stanton, Nick
Baker, & Matthew Leising, Treasuries Hit by One-Hour Outage on
Biggest Electronic Platform, Bloomberg, January 13, 2019, https://www.bloomberg.com/news/articles/2019-01-11/brokertec-inter-dealer-treasury-broker-suffers-outage.
\836\ As noted in the October 15 Staff Report, price discovery
is especially important in the secondary market for on-the-run U.S.
Treasury Securities because the transaction prices are used as risk-
free rate benchmarks to price other securities transactions.
---------------------------------------------------------------------------
One commenter on the 2020 Proposal stated that ``many Government
Securities ATSs may already align with industry standards that achieve
many of the same goals of Regulations SCI, although in slightly
different manner.'' \837\ While the Commission recognizes that
Government Securities ATSs have some incentives to maintain robust
systems to remain competitive and thereby reduce systems issues, the
Commission believes that market forces alone may not be sufficient to
significantly reduce systems issues, because some of the impact of
these systems issues represent an externality to the Government
Securities ATS.\838\
---------------------------------------------------------------------------
\837\ See BrokerTec Letter at 6.
\838\ A commenter on the 2020 stated ``. . . we believe that
market forces alone may be insufficient to significantly reduce
systems issues in the market for trading and execution services in
government securities.'' See MFA Letter at 6.
---------------------------------------------------------------------------
A comment letter received in response to the Treasury Request for
Information stated that many Government Securities ATSs adopted system
testing and control procedures that followed the recommended best
practices of the Treasury Market Practices Group.\839\ However, these
best practices are meant only as useful operational guideposts rather
than binding rules, and each trading venue can choose if it wants to
comply and how to comply, which might provide weak only incentives to
internalize the externality costs associated with system failures.
---------------------------------------------------------------------------
\839\ See Letter from Mike Zolik, Nate Kalich, and Larry
Magargal, Ronin Capital LLC, to David R. Pearl, Office of the
Executive Secretary, U.S. Department of the Treasury, dated March
19, 2016, at 31-33, available at https://www.treasurydirect.gov/instit/statreg/gsareg/RoninCapital.pdf. See also BrokerTec Letter at
6. The Treasury Market Practices Group promotes a robust control
environment for government securities trading, using internal
controls and risk management. See Treasury Market Practices Group,
Best Practices For Treasury, Agency Debt, and Agency Mortgage-Backed
Securities Markets (July 2019), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/TMPG_BestPractices_071119.pdf.
---------------------------------------------------------------------------
The Commission is aware of 1 Government Securities ATS operated by
a broker-dealer that also operates an NMS Stock ATS that is an SCI
entity and so may already comply with much of Regulation SCI.
b. Communication Protocol Systems in the Market for Government
Securities
Communication Protocol Systems play a significant role in the
market for government securities. The Commission estimates that there
are 3 Communication Protocol Systems operating in the market for
government securities that may meet the definition of exchange under
the proposed changes to Exchange Act Rule 3b-16. The Commission
understands that these systems are a significant component of the
dealer-to-customer segment of the U.S. Treasury market and account for
approximately 30 to 40 percent of the total trading volume in U.S.
Treasuries.\840\ One of the roles of such systems is to provide a means
to communicate trading interest in the dealer-to-customer market.\841\
---------------------------------------------------------------------------
\840\ See infra Section VIII.B.2.d, Table VIII.5. Some part of
the stream axes volume accounted for in that table may be ATS
volume.
\841\ As described in Section III.A, the secondary market for
U.S. Treasury Securities is generally bifurcated between the dealer-
to-customer market and the interdealer market. See also Bloomberg
Letter at 5, referencing that the bifurcating of the market is due
to some extent to structural issues in clearing.
---------------------------------------------------------------------------
The Commission understands that investors who wish to transact in
government securities generally do so with a dealer on a principal
basis. Communication Protocol Systems typically facilitate the first
step in a principal trade, namely trading between the dealer and
customer. In this capacity, the systems provide a way for customers to
obtain quotes from dealers and to select a dealer to fill their order,
in addition to the other reasons for using a Communication Protocol
System described in Section VIII.B.1. The Commission understands that
dealers and PTFs may also use Communication Protocol Systems to demand
liquidity in government securities, a decision which may be motivated
by the possibility of executing block trades with less information
leakage compared to ATSs.\842\
---------------------------------------------------------------------------
\842\ See supra Section VIII.B.1.a, discussing information
leakage and RFQs.
---------------------------------------------------------------------------
The Commission understands that dealer respondents on RFQ systems
in the market for government securities typically provide a continuous
stream of indicative, non-firm quotes that are aggregated into a single
quote and made
[[Page 15602]]
available to all participants who may wish to initiate an RFQ on the
trading system. Such quotes may also be disseminated over the internet
to the general public. These indicative quote streams are an important
service on RFQ systems for at least two reasons. First, they are a
source of price information in government securities, and the
Commission understands that some market data vendors may rely
exclusively on such quote streams for the information they provide on,
for example, the Treasury market. In providing such transparency in the
Treasury market, these quote streams may be used as a risk-free rate
benchmark, and to help price other financial instruments. Second, the
quote streams give potential participants in the RFQ a sense of what
quotes they would receive in response to a request without having to
make a request, which helps these market participants get a sense of
the market without revealing trading interest.
Communication Protocol Systems do not meet the current definition
of an exchange and thus are not subject to regulation either as an
exchange or an ATS. This means they face a regulatory regime similar to
that of Currently Exempted Government Securities ATSs as described in
Section VIII.B.1.ii above. Furthermore, depending on how much of a role
the Communication Protocol System takes in facilitating the transaction
(e.g., acting as a counterparty to each side of the trade), and whether
the Communication Protocol System operator and/or parties to the
transaction are FINRA members, transactions taking place through the
Communication Protocol System may not be reported to TRACE at all.
The Commission estimates that a single Communication Protocol
System trading in government securities is not currently operated by a
registered broker-dealer. This system does not currently incur the
costs of registering with the Commission as well as the costs of SRO
membership, and is not subject to FINRA operational regulatory
reporting requirements.
c. Other Methods of Trading in U.S. Government Securities
Market participants may also transact in government securities via
bilateral voice trading. As the Commission understands, a market
participant wishing to make a purchase or sale of government securities
would phone a potential counterparty, typically a dealer in government
securities, to inquire about specific securities. The parties would
then negotiate on price and size. If there were agreement, the parties
would execute a trade. If not, the liquidity demander could repeat this
process to find a more suitable counterparty. The Commission
understands that a liquidity demander would typically contact more than
one dealer, in order to compare quotes.
Bilateral voice trading can be attractive to traders in government
securities because this method of trading allows for flexibility,
minimizes information leakage relative to other trading protocols, and
may be conducive to maintaining relationships. The lack of information
leakage may cause bilateral voice trading to be a useful method for
traders seeking to execute large block trades of government securities.
d. Competition for U.S. Government Securities Trading Services
Government securities are traded through a diverse set of methods,
including ATSs, Communication Protocol Systems, and bilateral
negotiation methods such as voice trading. The Commission preliminarily
believes that each type of trading method may be more prevalent in
separate segments of the government securities market.
Table VIII.5--U.S. Treasury Securities Trading Protocol Market Share
----------------------------------------------------------------------------------------------------------------
Stream axes
Limit order book RFQ \a\ Voice
----------------------------------------------------------------------------------------------------------------
26.3............................................................ 29.9 10.4 33.4
----------------------------------------------------------------------------------------------------------------
This table reports volume share by trading protocol type in the market for U.S. Treasury Securities. Market
Share (%) is the measure of the dollar volume as a percent of total dollar volume. Data is based on Coalition
Greenwich's Greenwich MarketView data from January 2021 through September 2021. Voice protocol is calculated as
the remainder of volume after accounting for Limit Order Book, RFQ, and Stream Axes reported directly to
Coalition Greenwich from aggregated FINRA TRACE volume.
----------------------------------------------------------------------------------------------------------------
\a\ Coalition Greenwich's Greenwich MarketView refers to this data value as ``Stream/Click-to-Engage.''
ATSs and Communication Protocol Systems compete with one another to
attract order flow. Table VIII.5 shows the percentage of TRACE-reported
Treasury Securities transactions that are completed using different
trading protocols, and shows that the use of ATSs and Communication
Protocol Systems to transact in Treasury Securities are roughly evenly
matched in terms of volume.\843\ LOB volume represents ATS trades, and
the Commission understands that some amount of stream axes volume may
also be from ATSs. The remaining portion of stream axes and the RFQ
volume represent Communication Protocol Systems in this market.
---------------------------------------------------------------------------
\843\ One commenter pointed out that, at around 30 percent, U.S.
Treasury market ATS market share is at a similar level that NMS
equities ATS market share was in 1999 when Regulation ATS was
adopted. The commenter stated that the exemption of Treasury
securities from Regulation ATS gave Treasury market structure time
to develop, but the market has now matured to a point where the
exemption should be reconsidered. See Bloomberg Letter at 21.
---------------------------------------------------------------------------
The Commission understands that the primary customers of ATSs tend
to be dealers and PTFs. The Commission understands that many of the
PTFs trading on Government Securities ATSs utilize latency-sensitive
trading strategies.\844\ Such strategies would likely not be possible
to implement when trading on a Communication Protocol System, or via
bilateral voice trading. This gives ATSs an advantage in attracting
such order flow. Because orders on LOB ATSs are generally displayed to
all participants on the ATS, ATSs with LOBs may have more price
competition among liquidity providers than alternatives. Also, ATSs,
unlike non-ATS trading services, can offer certain additional execution
protocols, such as crossing mechanisms and auctions, which generally
meet the current definition of an exchange.
---------------------------------------------------------------------------
\844\ See supra Section VIII.B.2.a.i for additional discussion
on the role of PTFs in the Treasury market.
---------------------------------------------------------------------------
Government Securities ATSs compete on fees, trading features, and
by attracting liquidity to their system. As described above in Section
VIII.B.2.a, a substantial amount of order flow in government securities
is concentrated on the largest Government Securities ATS.\845\
---------------------------------------------------------------------------
\845\ See supra Section VIII.B.2.a.i.
---------------------------------------------------------------------------
[[Page 15603]]
The primary customers of Communication Protocol Systems are those
market participants in the dealer-to-customer market. Customers seeking
to trade government securities may find the sophistication and
infrastructure required to trade on ATSs to not be cost-effective
relative to the type and quantity of trading they wish to undertake.
This may give the Communication Protocol Systems an advantage in
attracting such traders. In addition, Communication Protocol Systems
offer features that ATSs might not, such as the ability to trade on a
fully disclosed, non-anonymous basis; or the ability to connect trading
in Treasuries to related trades in corporate bonds.\846\
---------------------------------------------------------------------------
\846\ See supra Sections VIII.B.1 and VIII.B.2.b for additional
details on the nature of Communication Protocol Systems. See infra
Section VIII.B.3.b for additional details on the trading of
corporate bonds on Communication Protocol Systems.
---------------------------------------------------------------------------
Communication Protocol Systems compete with each other through the
fees they charge, and through innovation and improvement in the type
and quality of the protocols they offer. The Commission preliminarily
believes that such competition among Communication Protocol Systems may
explain the proliferation of different types of protocols.
Both ATSs and Communication Protocol Systems compete against the
option of transacting through bilateral voice trading. Such methods of
trading in government securities have been common historically and
continue to be used today. As described above in Section VIII.B.2.c,
these methods of trading provide traders with the ability to customize
transactions on the basis of a relationship between the two parties. At
the same time, these trades may be more cumbersome and may suffer from
a lack of price competition relative to Communication Protocol Systems
and ATSs.
The Commission preliminarily believes that the differences in
regulatory regimes among ATSs and between ATSs and Communication
Protocol Systems \847\ can lead to an uneven competitive landscape and
adversely impact the potential for robust competition in the market for
government securities.\848\
---------------------------------------------------------------------------
\847\ See supra Section VIII.B.2.a.ii, discussing the regulatory
regime for Government Securities ATSs and Section VIIIB.2.b,
discussing the regulatory regime for Communication Protocol Systems.
\848\ See ICE Bonds Letter II at 2, stating that the significant
regulatory burdens on fixed income ATSs puts them at a competitive
disadvantage to non-ATS trading systems that are not subject to
these same regulatory obligations. See also ICE Bonds Letter II at
5, stating that market participants are harmed when electronic
trading systems that perform market place functions in fixed income
securities are not subject to the same requirements as a fixed
income ATSs, and that if the regulatory obligations of operating a
fixed income ATS become too burdensome or impair the ability of
fixed income ATSs to compete, it may discourage the expansion of
ATSs and potentially encourage operators of fixed income ATSs to
restructure their operations to avoid being characterized as an ATS.
---------------------------------------------------------------------------
The Commission believes that the current lack of public disclosure
about the operations and potential conflicts of interest of Government
Securities ATSs and Communication Protocol Systems that currently trade
government securities might hinder competition among these ATSs and
between Government Securities ATSs and Communication Protocol Systems
in the market for government securities. Competition among Government
Securities ATSs and between Government Securities ATSs and non-ATS
trading systems would affect the trading costs of government securities
market participants, including dealers, PTFs, hedge funds, and
institutional investors. Their trading costs include bid-ask
spreads,\849\ search costs in the selection of trading venues and
counterparties, and trading venue fees. When deciding which trading
system most suits their trading objectives, market participants
consider various operational facets of the system, such as order
handling, order types, order segmentation, trading functionalities, and
any potential conflicts of interest that might arise from the operator
of the trading service or its affiliates. Trading system fees would
also be a factor for market participants in deciding between trading
systems.
---------------------------------------------------------------------------
\849\ The estimated average daily relative quoted spread for
interdealer transactions for on-the-run U.S. Treasury Securities is
small, approximately 0.8 bps for 2-year Treasury Securities and 2.4
bps for 10-year Treasury Securities. The estimated average daily
relative quoted spread for interdealer transactions for off-the-run
U.S. Treasury Securities, approximately 1.7 bps for 2-year Treasury
Securities and 5.4 bps for 10-year Treasury Securities, is larger
compared to that of on-the-run Treasury Securities. Spreads have
narrowed in the past couple of years with a change to a smaller
minimum trading increment of \1/8\ of 1/32 of $1. The average daily
relative quoted spread is computed as the daily average of the
difference between the intraday offer and bid prices divided by the
corresponding price mid-quote. See also Paolo Pasquariello & Clara
Vega, The On-the-Run Liquidity Phenomenon, 92 J. Fin. Econ. 1
(2009); Tobias Adria, Michael Fleming, & Or Shachar, Market
Liquidity after the Financial Crisis (June, 28, 2017), Federal
Reserve Bank of New York, Liberty Street Economics, available at
https://libertystreeteconomics.newyorkfed.org/2017/06/market-liquidity-after-the-financial-crisis.html.
---------------------------------------------------------------------------
3. Current State of Corporate Debt Market
Although smaller than the market for government securities, the
market for corporate debt securities (``corporate bonds'') represents a
significant part of the fixed income market. In September 2021, the
average daily dollar volume of corporate bond trading was $26.4
billion, including $19.8 billion in investment-grade bonds and $6.5
billion in high-yield bonds.\850\ One commenter stated that levels of
trading in corporate debt have typically been lower than in other fixed
income markets, such as government securities: While corporate bonds
made up 20 percent of new issuances in Q4 2020, they only made up 4.4
percent of fixed income market trading.\851\ However, the commenter
pointed out that the absolute dollar volume of corporate bond trading
volume is still very significant, as is the overall size of the market:
As of January 2021, the corporate bond market is valued at $9.3
trillion in investment-grade and $2.4 trillion in high-yield debt
outstanding.\852\ Estimates put the annualized growth rate of the
corporate bond market at 5.2 percent between 2008 and 2019, a growth
rate second only to that of government securities within the fixed
income space.\853\
---------------------------------------------------------------------------
\850\ See https://finramarkets.morningstar.com/BondCenter/TRACEMarketAggregateStats.jsp?bondType=C. While there are many types
of corporate bonds, most tend to fall within two categories:
Investment-grade bonds and high-yield bonds (also commonly referred
to as ``non-investment-grade'' or ``junk'' bonds). High-yield bonds
tend to have higher yields than both government securities and
investment-grade bonds, but are also subject to a higher degree of
risk.
\851\ See Healthy Markets Letter at 8.
\852\ See id.
\853\ See https://vegaeconomics.com/trends-in-the-us-corporate-bond-market-since-the-financial-crisis.
---------------------------------------------------------------------------
Trading in corporate bonds tends to be more illiquid than trading
in government securities, with liquidity often concentrated in the
largest and most recently issued bonds.\854\ One commenter referenced
that only 18 percent of corporate bonds trade each day, and only 8
percent have more than five trades on any given day.\855\ Several
commenters stated that this is due in part to the highly idiosyncratic
nature of corporate bond characteristics,\856\ which
[[Page 15604]]
can differ along many different dimensions, including issuer, tenor,
coupon rate, and covenants.\857\ One commenter stated that, compared to
the equity market, the large number of individual CUSIPs in the
corporate debt market has resulted in a meaningful subset of corporate
bonds without market makers, which in turn lowers the liquidity of
these bonds.\858\
---------------------------------------------------------------------------
\854\ See A Financial System That Creates Economic
Opportunities: Capital Markets, U.S. Department of the Treasury,
October 2017, available at https://www.treasury.gov/press-center/press-releases/documents/a-financial-system-capital-markets-final-final.pdf (``Treasury Report'') at 85.
\855\ See Bloomberg Letter at 9, citing Financial Times at
https://www.ft.com/content/3175772a-7ea0-3b61-ae53-063459e78c42.
Another commenter gave a similar number, estimating that only 17
percent of the more than 43,000 unique U.S. investment-grade bonds
traded on any given day in 2020. See MarketAxess Letter at 3.
\856\ See Bloomberg Letter at 20, mentioning that the corporate
bond market is non-standard and highlighting the importance of
market-making, and MarketAxess Letter at 3, stating that liquidity
is lower for corporate bonds than for equities because, while there
are only a few thousand common stocks, there are hundreds of
thousands of CUSIPs for corporate and municipal bonds. See also ICI
Letter at 8, stating that corporate bond liquidity varies
dramatically across bonds due to their diverse nature, and that
liquidity shifts can be exacerbated during times of market stress.
\857\ See https://fredblog.stlouisfed.org/2015/10/illiquidity-in-the-bond-market/.
\858\ See MarketAxess Letter at 3.
---------------------------------------------------------------------------
Corporate bondholders, who are mainly institutional investors such
as mutual funds, pension funds, insurance companies, and banks,\859\
have traditionally facilitated their trades through broker-dealers on a
principal basis.\860\ The past decade has seen an increasing shift
towards trading arrangements in which dealers quickly arrange
offsetting trades when intermediating between buyers and sellers so as
to avoid taking on significant inventory risk for extended periods of
time. A more recent trend has seen a rise in the direct participation
of institutional investors as corporate bond liquidity providers: In
April 2020, one corporate bond RFQ platform reported a record 900 firms
providing liquidity, including 700 asset managers.\861\
---------------------------------------------------------------------------
\859\ One commenter stated that registered investment companies
(``funds'') held 21 percent of bonds issued by both U.S. corporate
issuers and foreign bonds held by U.S. residents as of year-end
2019. See ICI Letter at 1-2.
\860\ See, e.g., https://www.marketwatch.com/story/u-s-corporate-debt-soars-to-record-10-5-trillion-11598921886.
(Retrieved from Factiva database); O'Hara, M., & Zhou, X.A. (2021).
Anatomy of a liquidity crisis: Corporate bonds in the COVID-19
crisis. Journal of Financial Economics.
\861\ See McDowell, Hayley. (2020, April 30). ``MarketAxess
reveals record number of buy-side acted as liquidity providers in
COVID-19 crisis,'' THETRADE, available at https://www.thetradenews.com/marketaxess-reveals-record-buy-side-acted-liquidity-providers-covid-19-crisis/.
---------------------------------------------------------------------------
a. ATSs in the Market for Corporate Debt
In September 2021, corporate bond trading on ATSs accounted for 7.7
percent of total TRACE-reported corporate bond trading volume in terms
of dollar volume.\862\ Currently, the Commission understands that there
are 12 ATSs with a Form ATS on file trading corporate bonds.\863\
Protocols in corporate bond ATSs include limit order books (LOBs),
displayed and non-displayed venues, and auctions, among others.
According to Table VIII.6, the most commonly reported protocol used for
trading corporate bonds via ATSs is an auction. Typically, auctions
operate by periodically crossing at prices that maximizes the amount of
buy and sell trading interest that can be executing at that price.
---------------------------------------------------------------------------
\862\ See TRACE Monthly Volume Files, available at https://www.finra.org/finra-data/browse-catalog/trace-volume-reports/trace-monthly-volume-files. One commenter referenced similar numbers for
2020, stating that corporate bond trades (including both investment-
grade and high-yield bonds) on all ATSs represented 6.4 percent of
the trade volume and 18.7 percent of the trade count reported to
TRACE. See MarketAxess Letter at 1.
\863\ In addition, a small percentage of corporate bonds are
exchange-traded on trading systems such as NYSE Bonds and the Nasdaq
Bond Exchange. See, e.g., https://www.nyse.com/markets/bonds and
https://www.nasdaq.com/solutions/nasdaq-bond-exchange. Trading
volume in exchange-traded bonds was reported to be around $19
billion as of January 2020. See Uhlfelder, Eric, (Jan. 2020), A
Forgotten Investment Worth Considering: Exchange-Traded Bonds, The
Wall Street Journal, available at https://www.wsj.com/articles/a-forgotten-investment-worth-considering-exchange-traded-bonds-11578279781. (Retrieved from Factiva database).
---------------------------------------------------------------------------
Corporate bond ATSs are mostly used by dealers, who may be either
using them to trade on behalf of retail investors or to rebalance
excess inventories.\864\ A Division of Economic Risk and Analysis
(``DERA'') white paper on corporate bond ATSs finds that large dealers
(i.e., those in the highest quartile of trading volume and number of
bonds traded) are more likely to provide corporate bond quotes on ATSs
than smaller dealers.\865\
---------------------------------------------------------------------------
\864\ See Kozora, M., Mizrach, B., Peppe, M., Shachar, O., &
Sokobin, J.S. (2020). Alternative Trading Systems in the Corporate
Bond Market. FRB of New York Staff Report, (938).
\865\ See Craig, L., Kim, A., & Woo, S.W. (2020). Pre-trade
Information in the Corporate Bond Market. U.S. Securities and
Exchange Commission, Division of Economic and Risk Analysis White
Paper. White papers and analyses are prepared by SEC staff in the
course of rulemaking and other Commission initiatives. The U.S.
Securities and Exchange Commission disclaims responsibility for any
private publication or statement of any employee or Commissioner.
White papers express the authors' views and do not necessarily
reflect those of the Commission, the Commissioners, or other members
of the staff.
---------------------------------------------------------------------------
Similar to Current Government Securities ATSs, an ATS that trades
in corporate debt securities must comply with the requirements of
Regulation ATS, including registering as a broker-dealer.\866\ Also,
similar to Current Government Securities ATSs, corporate bond ATSs are
not required to make public disclosures, and, as discussed above, this
lack of disclosure requirements might lead to information asymmetries
amongst different subscribers.\867\ Further, corporate bond ATSs with
significant volume \868\ are required to comply with the requirements
of the Fair Access Rule.\869\ Moreover, ATSs that trade in corporate
debt must also comply with Rule 301(b)(6) of Regulation ATS
(``Capacity, Integrity, and Security Rule'') if they meet certain
volume thresholds.\870\ The requirements of Rule 301(b)(6), while
similar, are less rigorous and less costly than the requirements of
Regulation SCI.
---------------------------------------------------------------------------
\866\ See supra Section II.D.2. See also supra Section
VIII.B.2.a.ii for a discussion about the effects of these
regulations and the costs to comply.
\867\ See supra Section VIII.B.2.b.ii for additional discussion
on the effects of a lack of public disclosure.
\868\ An ATS trading in corporate debt securities is subject to
the Fair Access Rule if, during at least four of the preceding six
months, the ATS had five percent or more of the average daily volume
in corporate debt securities traded in the United States. See 17 CFR
242.301(b)(5)(i) and https://www.sec.gov/tm/faq-regulation-ats-fair-access-rule.
\869\ See supra Section II.D.2. Also, see supra Section
VIII.B.2.b.ii describing the impact of the Fair Access Rule.
\870\ See 17 CFR 242.301(b)(6) and supra note 157 and
corresponding text. Rule 301(b)(6) currently applies to an ATS that
trades only corporate debt securities with 20 percent or more of the
average daily volume traded in the United States during at least
four of the preceding six calendar months. One commenter stated
that, given current aggregate ATS volumes, it is unlikely that any
single ATS will approach 20 percent of overall corporate debt market
volume. See MarketAxess Letter at 10.
---------------------------------------------------------------------------
All transactions in corporate bonds that include at least one FINRA
member are required to be reported to TRACE within 15 minutes of the
time of execution.\871\ Furthermore, trades on ATSs operated by FINRA
members may be required to be reported to TRACE, by either the ATS,
counterparties to the trade, or both, depending on whether the
counterparties are FINRA members and whether the ATS holds itself out
as a party to the trade.\872\ Academic studies have shown that TRACE
reporting requirements have reduced overall trading costs in corporate
bond markets,\873\ but may increase the cost of
[[Page 15605]]
trading through large dealers, who previously were able to offer lower
transaction costs due to their information advantages.\874\
---------------------------------------------------------------------------
\871\ See FINRA Rule 6730(a)(1) requiring FINRA members to
report transactions in TRACE-Eligible Securities, which FINRA Rule
6710 defines to include corporate debt securities. For each
transaction in corporate debt securities, a FINRA member would be
required to report the CUSIP number or similar numeric identifier or
FINRA symbol; size (volume) of the transaction; price of the
transaction (or elements necessary to calculate price); symbol
indicating whether transaction is a buy or sell; date of trade
execution (``as/of'' trades only); contra-party's identifier;
capacity (principal or agent); time of execution; reporting side
executing broker as ``give-up'' (if any); contra side introducing
broker (in case of ``give-up'' trade); the commission (total dollar
amount), if applicable; date of settlement; if the member is
reporting a transaction that occurred on an ATS pursuant to FINRA
Rule 6732, the ATS's separate Market Participant Identifier
(``MPID''); and trade modifiers as required. See FINRA Rule 6730(c).
\872\ See supra note 829 describing exemptions for ATS
transaction reporting to TRACE.
\873\ See, e.g., Edwards, A.K., Harris, L.E., & Piwowar, M.S.
(2007). Corporate bond market transaction costs and transparency.
The Journal of Finance, 62(3), 1421-1451.
\874\ See Bessembinder, H., Maxwell, W., & Venkataraman, K.
(2006). Market transparency, liquidity externalities, and
institutional trading costs in corporate bonds. Journal of Financial
Economics, 82(2), 251-288.
---------------------------------------------------------------------------
b. Communication Protocol Systems in the Market for Corporate Debt
Communication Protocol Systems play a significant role in the
market for corporate debt. Table VIII.6, which breaks down corporate
bond dollar volumes according to different trading protocols, shows
that corporate bond trading on Communication Protocol Systems
(including anonymous and disclosed RFQs, portfolio trading, and stream
axes), accounted for 23.1 percent of total corporate bond trading
volume during the first half of 2021. Currently, the Commission
estimates that there are 8 Communication Protocol Systems trading
corporate bonds that may meet the definition of exchange under the
proposed changes to Exchange Act Rule 3b-16.
One commenter stated that protocols such as electronic RFQs in the
fixed income market evolved from single dealer order routing and the
use of the ``three quote rule,'' in which institutional investors would
seek three quotes from three dealers in order to assist them in getting
the best prices. According to the commenter, in more liquid securities,
electronification has allowed traders to better organize pre-trade
data, allowing for new Communication Protocol Systems that enable
functionalities such as RFQ Lists and other multiple-security trade
messaging inquiries.\875\
---------------------------------------------------------------------------
\875\ See Bloomberg Letter at 12.
---------------------------------------------------------------------------
``Portfolio trading'' is a multi-security protocol that may be
particularly useful for corporate bond market participants. This
protocol is similar to RFQ Lists as defined in Section II.B.2 and
discussed in Section VIII.B.1.b; however, while RFQ Lists permit users
to respond with quotes for only some of the securities listed,
securities that are listed in a portfolio trading protocol are executed
for the entire portfolio at a single price with a single
counterparty.\876\ One industry report estimates that two to five
percent of TRACE trading volume in investment-grade bonds is executed
via portfolio trading protocols.\877\ Furthermore, one report estimates
that portfolio trading volume increased by 159 percent between 2019 and
2021.\878\ The ``all-or-none'' nature of portfolio trading can be
especially beneficial for corporate bond market participants who wish
to trade baskets of securities that include some difficult-to-trade
bonds. Specifically, market participants may be able to receive better
prices for more illiquid bonds, which may or may not be balanced out by
receiving worse prices on more liquid bonds.\879\ Additionally,
portfolio trading also tends to be faster than list trading, as there
is less of a need to look at each individual security. However, these
trades tend to be complex and may be more difficult to automate, as
they often require extensive negotiations.\880\
---------------------------------------------------------------------------
\876\ See Husveth, Ted (2021) ``Electronic Portfolio Trading
Rewrites the Corporate Bond Liquidity Playbook,'' Tradeweb,
available at https://www.tradeweb.com/newsroom/media-center/insights/blog/electronic-portfolio-trading-rewrites-the-corporate-bond-liquidity-playbook/.
\877\ See McPartland, Kevin (2020), ``All Electronic Trading is
Not Created Equal,'' Greenwich Associates, available at https://www.greenwich.com/fixed-income/all-electronic-trading-not-created-equal.
\878\ See McPartland, Kevin (2021), ``Making the Case for
Portfolio Trading,'' Greenwich Associates, available at https://www.greenwich.com/fixed-income/making-case-portfolio-trading.
\879\ One commenter stated that submitting multiple securities
as a portfolio of liquid and less-liquid securities enables a
liquidity provider to potentially offer better prices than trading
each security individually. See Bloomberg Letter at 13.
\880\ See McPartland, Kevin (2020), ``All Electronic Trading is
Not Created Equal,'' Greenwich Associates, available at https://www.greenwich.com/fixed-income/all-electronic-trading-not-created-equal; and Husveth, Ted (2021) ``Electronic Portfolio Trading
Rewrites the Corporate Bond Liquidity Playbook,'' Tradeweb,
available at https://www.tradeweb.com/newsroom/media-center/insights/blog/electronic-portfolio-trading-rewrites-the-corporate-bond-liquidity-playbook/.
---------------------------------------------------------------------------
While not necessarily its own protocol, one functionality that is
increasingly being added to corporate bond Communication Protocol
Systems involves so-called ``net spotting.'' Spotting is the practice
of hedging corporate bond transactions through offsetting government
security transactions, which is useful for participants as corporate
bonds--investment-grade bonds in particular--are typically traded ``on
spread,'' i.e., quoted relative to a benchmark government bond yield.
This practice has led to interlinkages between the corporate bond and
government securities markets.\881\ However, the Commission understands
that manual spotting can suffer from inefficiencies resulting from time
delays in completing trades in the two markets.
---------------------------------------------------------------------------
\881\ See Bloomberg Letter at 8, referencing the Joint Staff
Report on the U.S. Treasury Market on October 15, 2014, available at
https://www.treasury.gov/press-center/pressreleases/Documents/Joint_Staff_Report_Treasury_10-15-2014.pdf, stating that markets,
including the U.S. Treasury market, are connected through
``automated trading strategies that involve a nearly instantaneous
response to common trading signals or that seek to arbitrage short-
lived opportunities across related interest-rate products.''
---------------------------------------------------------------------------
``Net spotting,'' which incorporates automated spotting
functionalities into corporate bond Communication Protocol Systems, may
reduce these inefficiencies. This practice calculates a net interest
rate exposure resulting from a spot trade, producing a net position
that can be traded as a single transaction.\882\ Net spotting may help
to reduce transaction costs of spot trades. A growth in the popularity
of this practice is also likely to increase interlinkages between
trading protocols in the corporate bond and government securities
markets. One trading system operator estimates that, only six months
after adding net spotting functionality to its trading system, almost
10 percent of the corporate bond trading volume on its trading system
was using this functionality.\883\
---------------------------------------------------------------------------
\882\ See ``Net Spotting: Reducing Trading Costs for U.S.
Corporate Bonds,'' (2021), Tradeweb, available at https://www.tradeweb.com/newsroom/media-center/insights/commentary/net-spotting-reducing-trading-costs-for-u.s.-corporate-bonds/.
\883\ See id.
---------------------------------------------------------------------------
In recent years, driven in part by an increase in the popularity of
corporate bond exchange-traded funds (ETFs), there is some evidence
that PTFs have begun to enter the corporate bond market.\884\ One
factor that may correlate with the entry of these firms is the ability
to use portfolio trading protocols to more efficiently trade in the
bonds underlying corporate bond ETFs.\885\ Therefore, unlike in the
market for government securities, in which PTFs prefer to trade on
Government Securities ATSs, PTFs may have a more active presence on
corporate bond Communication Protocol Systems than on corporate bond
ATSs.\886\
---------------------------------------------------------------------------
\884\ See https://www.greenwich.com/blog/what%E2%80%99s-next-high-frequency-traders, which mentions that one PTF has begun to
trade using corporate bond RFQs.
\885\ See, e.g., Rennison, Joe, Armstrong, Robert, and
Wigglesworth, Robin, January 22, 2020, ``The new kings of the bond
market,'' Financial Times, available at https://www.ft.com/content/9d6e520e-3ba8-11ea-b232-000f4477fbca.
\886\ See supra Section VIII.B.2.b for a discussion of PTFs'
role in government securities ATSs.
---------------------------------------------------------------------------
Corporate bond Communication Protocol Systems do not meet the
current definition of an exchange and thus are not subject to exchange
registration or the requirements of Regulation ATS, such as
requirements for robust systems.\887\ The Commission
[[Page 15606]]
estimates that there are currently 2 Communication Protocol Systems
with sufficient corporate bond trading volume such that they would
otherwise be over the threshold for the Capacity, Integrity, and
Security Rule 301(b)(6).\888\ Several commenters stated that the
resiliency of the fixed income market during the COVID crisis showed
that the current structure of the fixed income market, and of the
electronic trading market in particular, is already resilient and
robust.\889\
---------------------------------------------------------------------------
\887\ See supra Section VIII.B.2.b for discussion of the effects
of not being subject to such regulations. One commenter stated that,
given the lack of a central clearing party for corporate and
municipal bond trades, each participant has the discretion over
which other participants they wish to extend credit to and trade;
therefore, fair access to a corporate bond Communication Protocol
System may not have the same meaning given to it in the equity ATS
context as the system does not have the ability to ensure that all
participant have the same access to liquidity. See MarketAxess
Letter at 10. Another commenter stated that Communication Protocol
Systems such as RFQs do not pose the same technological risks as,
e.g., fully automated central limit order books (CLOBs) because
trading is slower, there are fewer algorithms that may malfunction,
and, if RFQ systems are unavailable, parties can continue to
negotiate and execute transactions bilaterally away from the trading
system. See Tradeweb Letter at 6.
\888\ See supra notes 157 and 870. One commenter stated that,
other than Rule 301(b)(6)(ii)(F) and (G), it expects that nearly all
existing platforms already meet or are trying to meet the
requirements of Rule 301(b)(6). See MarketAxess Letter at 11.
Another commenter that runs a fixed-income Communication Protocol
System stated that it invested in proper contingency planning,
disaster recovery, robustness, and resiliency to ensure there is no
disruption in service. See FlexTrade Systems Letter at 3.
\889\ See, e.g., Bloomberg Letter at 18 and 23 and MarketAxess
Letter at 12.
---------------------------------------------------------------------------
The Commission estimates that 6 Communication Protocol Systems for
corporate bonds are not currently operated by registered broker-
dealers. These systems do not currently incur the costs of registering
with the Commission as well as the costs of SRO membership, and are not
subject to FINRA operational regulatory reporting requirements.\890\
---------------------------------------------------------------------------
\890\ One commenter stated that, even if Communication Protocol
System providers do not meet the standard of brokerage activity,
since registered broker-dealers are using these trading systems,
they are supervised under FINRA standards for brokers relying on
outsourced technology. The commenter states that these systems are
also monitored by broker-dealer, who are incentivized to do so. See
Bloomberg Letter at 30-31.
---------------------------------------------------------------------------
A corporate bond transaction on a Communication Protocol System is
reported to TRACE if at least one party to the transaction is a FINRA
member, and/or if the Communication Protocol System itself is a member
of FINRA.\891\ Depending on how much of a role the Communication
Protocol System takes in facilitating the transaction (e.g., acting as
a counterparty to each side of the trade), and whether the
Communication Protocol System operator and/or parties to the
transaction are FINRA members, transactions taking place through the
Communication Protocol System may not be reported to TRACE at all.\892\
---------------------------------------------------------------------------
\891\ One commenter pointed out that FINRA has recently proposed
changes to TRACE reporting of portfolio trades. See Bloomberg Letter
at 14, citing FINRA request for comment, Regulatory Notice 20-24,
September 15, 2020, available at https://www.finra.org/sites/default/files/2020-07/Regulatory-Notice-20-24.pdf.
\892\ See FINRA Rule 6730(a)(1) requiring FINRA members to
report transactions in TRACE-Eligible Securities. See also supra
note 228 and https://www.finra.org/rules-guidance/notices/14-53.
---------------------------------------------------------------------------
c. Other Methods of Trading in the Market for Corporate Debt Securities
While the electronic trading of corporate bonds through ATSs and
Communication Protocol Systems has grown over time,\893\ traditionally
corporate bonds trading has taken place bilaterally through either
dealer-to-dealer or dealer-to-customer negotiations, often using
telephone calls. There is evidence that such manual transactions
methods remain an important part of the corporate bond market: Table
VIII.6 shows that 71.4 percent of trading in corporate bonds was
facilitated via bilateral voice trading during the first half of 2021.
---------------------------------------------------------------------------
\893\ One commenter stated that approximately 32 percent of
investment-grade and 23 percent of high-yield corporate bond daily
dollar volumes are executed electronically. See BDA Letter at 1.
---------------------------------------------------------------------------
Transactions in corporate bonds that do not take place on
electronic platforms will be reported to TRACE if at least one party to
the trade is a member of FINRA.\894\
---------------------------------------------------------------------------
\894\ See FINRA Rule 6730(a)(1) requiring FINRA members to
report transactions in TRACE-Eligible Securities. See also supra
note 228 and https://www.finra.org/rules-guidance/notices/14-53 and
https://www.finra.org/filing-reporting/market-transparency-reporting/trace/faq/reporting-corporate-and-agencies-debt.
---------------------------------------------------------------------------
d. Competition for Corporate Debt Securities Trading Services
The trading of corporate debt securities takes place through a
variety of different methods, including ATSs, Communication Protocol
Systems, and informal bilateral trading methods such as voice trading.
These different methods compete with each other for customers, and may
appeal to different segments of the corporate market depending on that
segment's preferences and trading needs. Trading systems within the ATS
and Communication Protocol System spaces also compete with one another
on the basis of fees, trading features, and their ability to attract
liquidity.
One commenter stated that the choice of trading method is driven
largely by liquidity considerations, with less liquid securities
trading via manual protocols such as voice trading, more liquid
securities using protocols such as RFQs, and the most liquid securities
trading electronically on ATSs using protocols such as LOBs and call
auctions.\895\ Other commenters stated that the majority of corporate
bonds are not liquid enough to support order book trading,\896\ which
may be one reason why there is not much corporate bond trading volume
in ATSs as compared to Communication Protocol Systems, and why there is
less ATS trading in corporate bonds as compared to other securities,
such as government securities. As discussed in Section VIII.B.1,
customers who want to trade electronically but are concerned about
information leakage may be more likely to use Communication Protocol
Systems, particularly RFQs, as opposed to ATSs. One study finds that
corporate bond ATSs may be most utilized for smaller transactions in
investment-grade bonds, which are less vulnerable to information
asymmetry, and transaction in bonds that have (all else being equal)
experienced a recent decrease in secondary market trading volume, for
which search costs may be high.\897\
---------------------------------------------------------------------------
\895\ See Bloomberg Letter, Figure 2. See also Bloomberg Letter
at 14. See also MarketAxess Letter at 2, stating that institutional
investors in credit markets prefer RFQs because they have found that
liquidity on demand results in the best pricing for illiquid
securities.
\896\ See, e.g., ICI Letter at 6 and MarketAxess Letter at 3.
\897\ See Kozora, M., Mizrach, B., Peppe, M., Shachar, O., &
Sokobin, J.S. (2020). Alternative Trading Systems in the Corporate
Bond Market. FRB of New York Staff Report, (938).
---------------------------------------------------------------------------
As shown in Table VIII.6, the majority (65.4 percent) of non-voice
trading in corporate bonds is conducted on RFQs. About one fourth of
RFQ volume is anonymous, and, while the majority of corporate bond
trading volume on RFQs is disclosed, even participants on disclosed
RFQs often have greater flexibility over the extent to which they
reveal their trading interest, for example by limiting how many
entities can view their trading interest or by refraining from
responding to a quote request.\898\ RFQs may also help facilitate a
wider variety of functionalities that market bond participants find
particularly useful, such as portfolio trading and net spotting.
Automated executions and limited negotiation possibilities may make
these functionalities more difficult to implement on many ATSs.
---------------------------------------------------------------------------
\898\ See Section VIII.B.1 for a discussion on the difference
between disclosed and anonymous RFQs.
[[Page 15607]]
Table VIII.6--Corporate Debt Securities and Dollar Volume Share by Trading Protocol
--------------------------------------------------------------------------------------------------------------------------------------------------------
Limit order Non-displayed Portfolio Stream axes
Anonymous RFQ Disclosed RFQ Auction book venue \a\ trading \b\ Voice
--------------------------------------------------------------------------------------------------------------------------------------------------------
4.8..................................... 13.9 3.0 2.4 0.1 2.2 2.2 71.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table reports volume share by trading protocol type in the market for corporate debt securities. Market Share (%) is the measure of the dollar
volume as a percent of total par dollar volume. Data is based on Coalition Greenwich's Greenwich MarketView data from April 2021 through September
2021. Voice market share is calculated as a remainder of total market volume after accounting for electronic protocols volume reported to Coalition
Greenwich.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Non-displayed venues are referred to as ``dark pools'' in the Coalition Greenwich's Greenwich MarketView data.
\b\ Coalition Greenwich's Greenwich MarketView refers to this data value as ``Stream/Click-to-Engage.''
Customers may prefer other methods such as bilateral voice trading
because they wish to transact in less liquid bonds that may require
more intermediation to find a counterparty, despite the possibility
that the lack of price competition may lead to higher trading costs.
One academic study shows that the movement of corporate bond trading
volume from voice trading to an RFQ-type protocol system mainly reduced
transaction costs for the most liquid securities.\899\ However, one
commenter referenced that the electronification of manual trading
methods, while improving operational efficiencies, does not
fundamentally change liquidity in the corporate bond market as the same
intermediaries and interactions between dealers and customers are still
involved.\900\
---------------------------------------------------------------------------
\899\ See Hendershott, T., & Madhavan, A. (2015). Click or call?
Auction versus search in the over-the[hyphen]counter market. The
Journal of Finance, 70(1), 419-447.
\900\ See Bloomberg Letter at 9 and10, citing Treasury Report.
---------------------------------------------------------------------------
Similarly to the market for government securities, the Commission
preliminarily believes that the differences in regulatory regime
between ATSs and other trading methods, including Communication
Protocol Systems such as RFQs and others, can lead to an uneven
competitive landscape and adversely impact the potential for robust
competition in the market for corporate debt securities.\901\
Specifically, the lack of public disclosure about the operations and
potential conflicts of interest of Communication Protocol Systems
trading in corporate bonds might hinder competition among these trading
systems and between Communication Protocol Systems and ATSs in the
market for corporate bond trading services.
---------------------------------------------------------------------------
\901\ See supra Section VIII.B.2.d.
---------------------------------------------------------------------------
The fact that ATSs are subject to numerous regulatory requirements
that Communication Protocol Systems, which may perform a similar market
place function, are not subject to may place ATSs at competitive
disadvantage compared to Communication Protocol Systems as a result of
the associated compliance costs and potentially higher barriers to
entry. Furthermore, one commenter stated that the different regulatory
treatment of fixed income trading platforms, with some platforms
regulated as ATSs, some regulated as broker-dealers, and others not
regulated at all, leaves room for regulatory arbitrage.\902\
---------------------------------------------------------------------------
\902\ See Tradeweb Letter at 6.
---------------------------------------------------------------------------
4. Current State of the Municipal Securities Market
The market for municipal securities (``municipal bonds'')
represents another important part of the fixed income market. Daily
trading volumes in the municipal bond market averaged around $12.4
billion during the 2020 calendar year.\903\ Average trade sizes in this
market tend to be smaller than in other fixed income markets: In
September 2021, 81 percent of trades were for $100,000 or less,
reflecting the higher presence of retail investors in this market.\904\
---------------------------------------------------------------------------
\903\ See Municipal Securities Rulemaking Board, Muni Facts,
available at https://www.msrb.org/News-and-Events/Muni-Facts.
\904\ See Municipal Securities Rulemaking Board, Municipal Trade
Statistics, available at https://emma.msrb.org/MunicipalTradeStatistics/ByTradeCharacteristic.aspx.
---------------------------------------------------------------------------
The relatively large role of retail investors in the market for
municipal bonds represents one important way in which this market
differs from the markets for government securities and corporate bonds.
Unlike in the markets for other fixed income securities, which are
mostly owned by institutional investors, retail investors play a
prominent role in the ownership of municipal bonds, with 45.2 percent
of municipal bonds held by households and nonprofits as of 2020.\905\
This is largely due to the tax-exempt status of most municipal bonds,
which makes them attractive to households but less attractive to
institutional investors such as pension funds, whose holdings are
already tax-deferred or tax exempt. Municipal bond markets also tend to
be highly localized, as investors that are located in geographic
proximity to an issuer are more likely to be informed about that
issuer, and tax benefits are often conferred on investors that are
located in the same state as the issuer.\906\
---------------------------------------------------------------------------
\905\ See ``Trends in Municipal Bond Ownership'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Other-Market-Topics. Note that this
source groups together households and nonprofit organizations. One
commenter pointed out the role of registered investment companies
(``funds'') in this market, stating that funds held 29 percent of
municipal bonds outstanding as of year-end 2019. See ICI Letter at
1-2.
\906\ See Schultz, P. (2012). The market for new issues of
municipal bonds: The roles of transparency and limited access to
retail investors. Journal of Financial Economics, 106(3), 492-512.
---------------------------------------------------------------------------
Households tend to be buy-and-hold investors, which may contribute
to overall low liquidity levels in the secondary market for municipal
bonds. In 2018, less than one percent of outstanding municipal bonds
traded on a typical day, and, as in the corporate bond market,
liquidity is mostly concentrated in newly-issued bonds.\907\
Furthermore, there is evidence that trading in municipal bonds has
declined in recent years, as secondary market trading volume declined
by about 19 percent between 2019 and 2021.\908\
---------------------------------------------------------------------------
\907\ See Bessembinder, H., Spatt, C., & Venkataraman, K.
(2020). A survey of the microstructure of fixed-income markets.
Journal of Financial and Quantitative Analysis, 55(1), 1-45.
\908\ See ``2021 Municipal Market Trading Update,'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
---------------------------------------------------------------------------
The market for municipal bonds is highly heterogeneous, and perhaps
even more fragmented than the market for corporate bonds. In addition
to a wide diversity of bond characteristics, including maturity, tax
status, and coupon type, there are more than 50,000 different issuers
in the municipal bond market, including state and local governments,
towns, cities, and counties, who as of 2020 have issued
[[Page 15608]]
around one million unique bonds valuing $3.9 trillion.\909\
---------------------------------------------------------------------------
\909\ See Municipal Securities Rulemaking Board, Muni Facts,
available at https://www.msrb.org/News-and-Events/Muni-Facts. This
is compared to the corporate bond market, in which there are around
43,000 unique securities with a total market size around $10.6
trillion. See also SIFMA letter at 9 (stating that there are 50,000
issuers of municipal securities and one million unique municipal
bonds, compared to 30,000 unique corporate bonds).
---------------------------------------------------------------------------
The market for municipal bonds is largely an OTC market, in which
investors place orders with dealers who execute these orders by either
committing their own capital (via principal trades) or by searching the
market for counterparties (via riskless principal trades or agency
trades).\910\ Academic research of regulatory data has shown that the
interdealer market in municipal bonds has a decentralized network
structure composed of between 10 to 30 central dealers and more than
2,000 periphery dealers.\911\ Further research shows that the highly
geographically localized nature of this market can limit competition
between dealers.\912\
---------------------------------------------------------------------------
\910\ See ``Analysis of Municipal Securities Pre-Trade Data from
Alternative Trading Systems'' (2018), Municipal Securities
Rulemaking Board, available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/msrb-staff-analysis-of-municipal-securities-pre-trade-data.pdf.
\911\ See Li, D., & Sch[uuml]rhoff, N. (2019). Dealer networks.
The Journal of Finance, 74(1), 91-144.
\912\ See Schultz, P. (2013). State taxes, limits to arbitrage
and differences in municipal bond yields across states. Unpublished
working paper. University of Notre Dame.
---------------------------------------------------------------------------
a. ATSs in the Market for Municipal Securities
ATSs play an increasingly important role in the municipal bond
market. Between August 2016 and April 2021, an estimated 56.4 percent
of municipal bond interdealer trades (26 percent in terms of dollar
volume) were conducted via ATSs.\913\ One commenter stated that, in
2020, more than 1.7 million trades were reported to the MSRB as being
executed on an ATS, 1.55 million of which were for $100,000 or less,
showing that ATSs are of particular significance for individual
investors.\914\ The Commission understands that there are currently 6
reporting ATSs trading in municipal securities. One commenter stated
that tremendous consolidation in the municipal securities ATS market
has occurred over time, such that there are only a few remaining ATSs
with significant trading in municipal bonds.\915\
---------------------------------------------------------------------------
\913\ See ``Characteristics of Municipal Securities Trading on
Alternative Trading Systems and Broker's Broker Platforms'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports. See also Letter from Edward J.
Sisk, Chair, Municipal Securities Rulemaking Board, dated March 1,
2021 (``MSRB Letter''), stating that MSRB trade data shows that ATSs
were involved in 21 percent of all trades and 55 percent of all
inter-dealer trades in the municipal bond market.
\914\ The commenter also stated that the median size of trades
reported as occurring on an ATS was $25,000 and that, for trades of
$100,000 or less, ATSs accounted for 24 percent of all trades and 59
percent of all inter-dealer trades. See MSRB Letter at 2-3.
\915\ See SIFMA letter at 11.
---------------------------------------------------------------------------
As mentioned in the introduction to Section VIII.B.4 above,
municipal bond owners are typically retail investors. Retail investors
are unlikely to subscribe directly to ATSs, and so almost all trades
executed on ATSs are from dealer quotes.\916\ A DERA white paper found
that, during a three-month period in 2014, 62 percent of trades on ATSs
were between dealers and customers, including both retail and
institutional investors, while the remainder were interdealer
trades.\917\ The white paper also found that large broker-dealers are
more likely to post quotes on ATSs than small broker-dealers.\918\
---------------------------------------------------------------------------
\916\ See ``Characteristics of Municipal Securities Trading on
Alternative Trading Systems and Broker's Broker Platforms'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
\917\ See Craig, L., Kim, A., & Woo, S.W. (2018). Pre-Trade
Information in the Municipal Bond Market. DERA White Paper,
available at https://www.sec.gov/files/DERA_WP_Pre-trade_Information_in_the_Municipal_Bond_Market.pdf.
\918\ See id.
---------------------------------------------------------------------------
In terms of available protocols, municipal bond ATSs offer LOB-
based protocols, but many also offer protocols similar to RFQs. For the
latter, quote information is only available to a limited subset of ATS
participants. This shortage of public pre-trade information may make it
more difficult for retail investors in this market, who may not have
access to quote information, to ensure that they are getting the best
prices; in fact, the DERA white paper found that smaller retail-sized
municipal bond trades tend to receive worse prices than large
trades.\919\
---------------------------------------------------------------------------
\919\ See id. The paper defines institutional-size trades as
trades greater than $100,000, and retail-size trades as trades less
than $100,000, citing Harris and Piwowar (2006), who use trade size
of $100,000 to distinguish retail- and institutional-size customer
trades. See Harris, L.E., & Piwowar, M.S. (2006). Secondary trading
costs in the municipal bond market. The Journal of Finance, 61(3),
1361-1397.
---------------------------------------------------------------------------
80 percent of all quoted municipal bonds have only a single quote
offered by a single broker at any given point in time, which
corresponds to the heterogeneous nature of this market.\920\ Another
reason why municipal bonds tend to be thinly quoted may be the
difficulty in shorting municipal bonds, as Internal Revenue Service
(IRS) rules regulating the shorting of tax-exempt securities and
difficulties in locating securities to borrow makes shorting in this
market costly.\921\ A dealer likely will not quote in a bond unless it
already owns that bond.
---------------------------------------------------------------------------
\920\ See ``Characteristics of Municipal Securities Trading on
Alternative Trading Systems and Broker's Broker Platforms'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
\921\ See ``Municipal Securities Pre-Trade Market Activity: What
Has Changed Since 2015?'' (2020), Municipal Securities Rulemaking
Board, available at https://www.msrb.org/Market-Topics/~/
link.aspx?_id=9089AC4BA1F144B388D090177FADCDD6&_z=z.
---------------------------------------------------------------------------
ATSs that trade in municipal bonds face many of the same regulatory
requirements as those that trade in corporate bonds, including
complying with Regulation ATS.\922\ This includes requirements that
ATSs with significant volume in municipal securities markets must
comply with the Fair Access Rule \923\ and with Rule 301(b)(6) of
Regulation ATS (``Capacity, Integrity, and Security Rule'').\924\
---------------------------------------------------------------------------
\922\ See supra note 866 and Section VIII.B.2.a.ii for a
discussion of the impact of some of the elements of Regulation ATS.
\923\ An ATS trading in municipal debt securities is subject to
the Fair Access Rule if, during at least four of the preceding six
months, the ATS had five percent or more of the average daily volume
in municipal debt securities traded in the United States. See 17 CFR
242.301(b)(5)(i) and https://www.sec.gov/tm/faq-regulation-ats-fair-access-rule. See supra Section VIII.B.2.a.ii for a discussion of the
impact of the Fair Access Rule.
\924\ See 17 CFR 242.301(b)(6) and supra note 157 and
corresponding text. Rule 301(b)(6) currently applies to an ATS that
trades only municipal debt securities with 20 percent or more of the
average daily volume traded in the United States during at least
four of the preceding six calendar months. See supra Section
VIII.B.3.a for a discussion of the current impact of being subjected
to Rule 301(b)(6).
---------------------------------------------------------------------------
Broker-dealers operating in the municipal bond market must be
registered with the Municipal Securities Rulemaking Board (MSRB), which
creates rules governing their conduct and transparency.\925\ Since
2005, all MSRB-registered dealers must report municipal bond trades
within 15 minutes of the time of execution to the MSRB's Real-Time
Transaction Reporting System (RTRS).\926\ Since
[[Page 15609]]
2016, dealer-reported trades to the MSRB have been required to include
an indicator to identify trades that have been executed on an ATS.\927\
Trades that take place on an ATS are required to be reported both by
the member dealers that transact with the ATS, as well as by the ATS if
that ATS has taken a principal position between the buyer and seller.
If the ATS only facilitates the connection between the buyer and seller
but does not take a principal or agency position, it has no reporting
requirement under MSRB rules.\928\
---------------------------------------------------------------------------
\925\ The MSRB is an SRO that is overseen by the SEC. See
Municipal Securities Rulemaking Board, The Role and Jurisdiction of
the MSRB, available at https://www.msrb.org/About-MSRB/About-the-MSRB.
\926\ See MSRB Rule G-14 requiring brokers, dealers and
municipal securities dealers (``dealers'') to report transactions in
municipal securities. The following transactions in municipal debt
securities are exempt from reporting requirements: Transactions in
securities without assigned CUSIP numbers; transactions in Municipal
Fund Securities; and inter-dealer transactions for principal
movement of securities between dealers that are not inter-dealer
transactions eligible for comparison in a clearing agency registered
with the Commission. Dealers are exempt from reporting if they do
not affect any transactions in municipal securities or if they only
deal in exempt transactions.
\927\ See MSRB Letter at 3. One commenter stated that a
difference between ATS trade reporting requirements between FINRA
and MSRB is that, while the MSRB, like FINRA, requires an ATS flag
for reports to their Real-time Trade Reporting System, this only
applies to interdealer trades conducted on ATSs, not trades with
customers. See BDA Letter at 3.
\928\ See Regulatory Notice 2015-07, Municipal Securities
Rulemaking Board, May 26, 2015, available at https://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices?type=All&filter=2015.
---------------------------------------------------------------------------
b. Communication Protocol Systems in the Market for Municipal
Securities
At least 43.6 percent of interdealer trades (74.1 percent in terms
of dollar volume) in the municipal bond market take place via trading
methods that are not ATSs, including 38.3 percent direct dealer-to-
dealer and 5.3 percent on broker's broker platforms.\929\ At least some
of these transaction are likely to take place via Communication
Protocol Systems. The Commission estimates that there are currently 3
Communication Protocol Systems operating in the municipal debt market
that may meet the definition of exchange under the proposed changes to
Exchange Act Rule 3b-16.
---------------------------------------------------------------------------
\929\ See id.
---------------------------------------------------------------------------
Of particular interest in this context are broker's broker
platforms. A broker's broker is defined by the MSRB as a dealer that
principally effects transactions for other dealers or that holds itself
out as a broker's broker.\930\ The broker's broker does not participate
in the decision to buy or sell and does not exercise discretion as to
the price at which a transaction is executed or determine the timing of
a trade.\931\ While broker's brokers traditionally conducted their
activities via bilateral means such as voice trading, they have
increasingly made use of electronic systems.\932\ Most electronic
broker's broker platforms use only quote solicitation protocols and do
not post quotes; those that do post quotes typically are registered as
an ATS with the SEC.\933\ However, only about 1.6 percent of all inter-
dealer trades take place on broker's broker platforms that are
registered as ATSs.
---------------------------------------------------------------------------
\930\ See Municipal Securities Rulemaking Board, MSRB Rule G-43.
\931\ See SIFMA, ``The Role of Municipal Securities Broker's
Brokers in the Municipal Markets,'' 2017.
\932\ See ``Characteristics of Municipal Securities Trading on
Alternative Trading Systems and Broker's Broker Platforms'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
\933\ See ``Characteristics of Municipal Securities Trading on
Alternative Trading Systems and Broker's Broker Platforms'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
---------------------------------------------------------------------------
The Commission estimates that 1 Communication Protocol System
trading in municipal bonds is not currently operated by a registered
broker-dealer. This system is not subject to exchange registration or
the requirements of Regulation ATS, and is not subject to FINRA
operational regulatory reporting requirements.\934\
---------------------------------------------------------------------------
\934\ In this respect they are similar to Communication Protocol
Systems in the market for corporate debt. See supra Sections
VIII.B.3.b and VIII.B.3.d for a discussion of the impact of not
being subject to these regulations.
---------------------------------------------------------------------------
If the Communication Protocol System only facilitates the
connection between the buyer and seller but does not take a principal
or agency position to the transaction, the Communication Protocol
System may not currently be required to report post-trade data under
MSRB rules.\935\ However, trades that take place on a Communication
Protocol System will currently be reported to MSRB's RTRS if at least
one party to the transaction is a municipal bond dealer.
---------------------------------------------------------------------------
\935\ See Regulatory Notice 2015-07, Municipal Securities
Rulemaking Board, May 26, 2015, available at https://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices?type=All&filter=2015.
---------------------------------------------------------------------------
c. Other Methods of Trading in the Market for Municipal Securities
Similar to other fixed income markets, the market for municipal
securities has traditionally relied on bilateral voice trading.\936\ As
mentioned above in the introduction to Section VIII.B.4, due to the
particularly fragmented and localized nature of the municipal bond
market, competition between individual dealers may be limited.\937\
Therefore, it is likely that the lack of pre-trade price transparency
in a market traditionally dominated by bilateral voice trading has been
particularly costly for municipal bond customers, who lack both price
information and bargaining power when negotiating prices with their
dealers over the phone. In fact, transaction costs in the municipal
bond market have typically been large compared to other markets, and
academic studies have indeed attributed these large transaction costs
to a lack of price transparency and subsequent information asymmetry
between dealers and customers.\938\ One MSRB report found that
technological advancements in this market and the movement away from
voice trading and towards electronic trading have helped reduce
transaction costs for dealer-customer trades by 51 percent between 2005
and 2018.\939\
---------------------------------------------------------------------------
\936\ One commenter estimated only 15 percent of daily dollar
trading volume in municipal bonds is executed electronically. See
BDA Letter at 1.
\937\ See Schultz, P. (2012). The market for new issues of
municipal bonds: The roles of transparency and limited access to
retail investors. Journal of Financial Economics, 106(3), 492-512.
\938\ See Harris, L.E., & Piwowar, M.S. (2006). Secondary
trading costs in the municipal bond market. The Journal of Finance,
61(3), 1361-1397.
\939\ See ``Transaction Costs for Customer Trades in the
Municipal Bond Market: What is Driving the Decline?'' (2018),
Municipal Securities Rulemaking Board, available at https://
www.msrb.org/Market-Topics/~/
link.aspx?_id=9089AC4BA1F144B388D090177FADCDD6&_z=z.
---------------------------------------------------------------------------
Transactions that take place via bilateral negotiations will only
be reported to MSRB's RTRS if at least one party to the transaction is
a MSRB-member dealer.
d. Competition for Municipal Securities Trading Services
The trading of municipal debt securities takes place through a
variety of different methods, including electronic protocols through
ATSs and Communication Protocol Systems, as well as more traditional
methods such as telephone calls. These various methods compete with one
another in attracting order flow.
Due to the buy-and-hold nature of municipal bond trading, usually
brokers' main task is to locate investors that are willing to buy new
issues.\940\ ATSs may help to reduce search costs. Indeed, one study
finds that dealers are more likely access ATS systems for trades that
are more difficult to price and that face substantial search costs,
such as smaller-sized trades and trades involving municipal bonds with
complex features.\941\ Accordingly, 90 percent of quotes on municipal
bond ATSs are offer quotes.\942\ On the other hand, the vast majority
of RFQs on municipal bond ATSs are requests for
[[Page 15610]]
bids, reflecting that RFQ protocols are more likely to be used when
customers want to sell.\943\
---------------------------------------------------------------------------
\940\ See Schultz, P. (2012). The market for new issues of
municipal bonds: The roles of transparency and limited access to
retail investors. Journal of Financial Economics, 106(3), 492-512.
\941\ See ``Characteristics of Municipal Securities Trading on
Alternative Trading Systems and Broker's Broker Platforms'' (2021),
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
\942\ See ``Municipal Securities Pre-Trade Market Activity: What
Has Changed Since 2015?'' (2020), Municipal Securities Rulemaking
Board, available at https://www.msrb.org/Market-Topics/~/
link.aspx?_id=9089AC4BA1F144B388D090177FADCDD6&_z=z.
\943\ See id.
---------------------------------------------------------------------------
Meanwhile, empirical results show that broker's broker platforms,
which may have functionalities similar to Communication Protocol
Systems, are more likely to be used for large-sized trades, and less
likely to be used for municipal bonds with complex features.\944\ The
study implied that this is because the lower price transparency on many
broker's broker platforms, which do not post quotes, makes these
systems less useful for trading securities that are difficult to price.
---------------------------------------------------------------------------
\944\ See id.
---------------------------------------------------------------------------
Meanwhile, similar to the case of corporate bond markets, RFQs may
instead be preferred by traders that want to limit information leakage,
such as in case of large-sized trades.\945\ Furthermore, as in the
market for corporate bonds, one commenter stated that the majority of
municipal bonds are not liquid enough to support order book
trading.\946\
---------------------------------------------------------------------------
\945\ See Section VIII.B.3.
\946\ See ICI Letter at 6-7.
---------------------------------------------------------------------------
More generally, for the reasons described in Section VIII.B.4.c,
the movement of municipal bond trading onto electronic platforms has
helped to reduce transaction costs. Specifically, an increase in
transparency in this market has particularly been beneficial for retail
investors who otherwise have little access to municipal bond
information.\947\
---------------------------------------------------------------------------
\947\ See Craig, L., Kim, A., & Woo, S.W. (2018). Pre-Trade
Information in the Municipal Bond Market. DERA White Paper,
available at https://www.sec.gov/files/DERA_WP_Pre-trade_Information_in_the_Municipal_Bond_Market.pdf.
---------------------------------------------------------------------------
The Commission preliminarily believes that, as in other fixed
income markets, the differences in regulatory regime between ATSs and
other trading methods can lead to an uneven competitive landscape and
adversely impact the potential for robust competition in the market for
municipal debt securities.
5. Current State of the Equity Market
The market for U.S. equity securities represents one of the largest
U.S. and global financial markets. As of 2020, the capitalization of
the U.S. equity market was estimated to be more than $40 trillion.\948\
The market for equity trading services is served by exchanges, ATSs,
other trading systems, such as OTC systems, and other liquidity
providers (such as internalizers). The type of trading system on which
an equity security is eligible to trade will depend on the equity
security's characteristics, including whether the issuing company
periodically reports its financial information and whether the security
is exchange-listed and/or registered with the SEC. U.S. equity
securities contain NMS stocks (including ETFs), OTC securities, and
restricted stocks, in addition to other types of securities.
---------------------------------------------------------------------------
\948\ See ``Market capitalization of listed domestic companies
(current US$)--United States,'' The World Bank, available at https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?locations=US.
---------------------------------------------------------------------------
a. Categorization and Trading Characteristics of U.S. Equity Securities
The largest and most liquid part of the U.S. equity market consists
of national market system (NMS) stocks. In general, NMS stocks are
exchange-listed equity securities for which transactions are reported
pursuant to an effective transaction reporting plan.\949\ As of August
2021, there were around 5,669 equities listed across five
exchanges.\950\ In September 2021, the average daily trading volume in
NMS stocks across all market centers was $545 billion.\951\ The market
for trading services in NMS stocks consists of 16 national securities
exchanges, and 34 ATSs, as well as other off-exchange trading venues,
including broker-dealer internalizers and wholesalers.\952\
---------------------------------------------------------------------------
\949\ See Regulation NMS Rules 600(b)(46) and (47) (17 CFR
242.600(b)(46) and (47)).
\950\ See https://www.finra.org/filing-reporting/oats/oats-reportable-securities-list. This includes NYSE Arca, NYSE MKT, BZX
Exchange (BATS), NASDAQ, and New York Stock Exchange (NYSE).
\951\ See CBOE Historical Market Volume Data, available at
https://www.cboe.com/us/equities/market_statistics/historical_market_volume/market_history_monthly_2019.csv. The
statistic is calculated by summing the ``Total Notional'' value for
all entries in September 2021, and then dividing this sum by the
number of trading days in September 2021 (21).
\952\ There are 34 NMS Stock ATSs operating with a Form ATS-N on
file. See Form ATS-N Filings and Information, available at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm. Wholesalers
are broker-dealers to whom retail brokers send their clients' orders
to be filled internally (as opposed to sending the trade orders to
an exchange). Typically, a wholesaler promises to provide price
improvement relative to the NBBO for filled orders. Wholesalers
often pay retail brokers for sending their clients' orders to the
wholesaler.
---------------------------------------------------------------------------
One subset of NMS stocks that has been increasing in popularity in
recent years includes exchange-traded funds (ETFs). ETFs are securities
that are registered as open-end investment companies or unit investment
trusts under the Investment Company Act of 1940 (the ``1940
Act''),\953\ that typically track financial instruments or bundles of
financial instruments (such as an index), and are listed on national
securities exchanges. ETFs are investment vehicles that issue shares
that can be bought or sold throughout the day on securities exchanges
in the secondary market at a market-determined price. The ETF market
has seen significant growth in the past decade, as the number of ETFs
nearly doubled from 1,134 to 2,204 and net assets more than quintupled,
from $939 billion to more than $5.3 trillion.\954\ ETF secondary market
trading made up 26 percent of total daily U.S. stock market trading on
average in 2020.\955\ At the same time, ETF liquidity may be highly
concentrated, with studies estimating that more than 85 percent of all
ETF value traded is concentrated in around 150 ETFs, or around five
percent of all ETFs.\956\ As with other NMS securities, ETFs can be
traded on exchanges and at off-exchange venues.
---------------------------------------------------------------------------
\953\ This discussion does not address other types of exchange-
traded products that are not registered under the 1940 Act, such as
exchange-traded commodity funds or exchange-traded notes. See
https://www.sec.gov/investor/alerts/etfs.pdf. It is estimated that
at year-end 2020, less than 3% of net assets were held in ETFs that
are not registered with or regulated by the SEC under the Investment
Company Act of 1940; see https://www.icifactbook.org/21_fb_ch4.html.
\954\ See https://www.icifactbook.org/21_fb_ch4.html.
\955\ See id.
\956\ See id.
---------------------------------------------------------------------------
There is also a significant market for stocks that are not listed
on a national securities exchange, which are often referred to as over-
the-counter (OTC) equities.\957\ As of August 2021, there were 8,777
unlisted stocks that fell under FINRA reporting requirements.\958\
Unlike NMS stocks, which may trade on- or off-exchange, OTC equities
may only trade off-exchange, on ATSs or through Communication Protocol
Systems for example.\959\ Liquidity in OTC equities can be limited: A
2019 Commission analysis estimated that only 44 percent of quoted OTC
equities are traded per day, and two percent did not trade at all
during the 2019 calendar year.\960\
---------------------------------------------------------------------------
\957\ The Commission estimates that quoted OTC securities were
valued at approximately $32.3 trillion in 2019, with 94.7 percent of
the total market capitalization coming from companies that also have
securities listed on public foreign exchanges.
\958\ See https://www.finra.org/filing-reporting/oats/oats-reportable-securities-list/.
\959\ See ``Unraveling the Mystery of Over-the-Counter Trading''
(2016), FINRA, available at https://www.finra.org/investors/insights/unraveling-mystery-over-counter-trading.
\960\ See SEC Release No. 34-87115, ``Publication or Submission
of Quotations Without Specified Information'' Proposed Rule and
Concept Release, available at https://www.sec.gov/rules/proposed/2019/34-87115.pdf.
---------------------------------------------------------------------------
OTC equities tend to be held by small investors. One academic study
found that institutions only held about 26 percent of OTC stocks, as
compared to 71 percent of listed stocks, implying
[[Page 15611]]
that most owners of OTC stocks are retail investors.\961\ A study found
that retail investors may be attracted to the low price of OTC
equities, which include equities that trade under $5 per share (so-
called ``penny stocks'').\962\
---------------------------------------------------------------------------
\961\ See Andrew Ang et al., Asset Pricing in the Dark: The
Cross-Section of OTC Stocks, 26 Rev. Fin. Studs. 2985-3028 (2013).
\962\ See ``Unraveling the Mystery of Over-the-Counter Trading''
(2016), FINRA, available at https://www.finra.org/investors/insights/unraveling-mystery-over-counter-trading.
---------------------------------------------------------------------------
Transparency in the market for OTC securities can be limited. While
some OTC equity trading systems require issuers to register their
securities with the SEC and/or periodically file their financial
statements (either with the SEC or with the trading venue), other
systems may trade in OTC equities without any reporting standards or
eligibility requirements.\963\ The market for OTC equities is largely
regulated by FINRA under Section 15A of the Securities Exchange Act of
1934, which requires FINRA to, among other things, establish rules
governing the form and content of quotations for securities sold
otherwise than on an exchange.
---------------------------------------------------------------------------
\963\ See https://www.sec.gov/reportspubs/investor-publications/investorpubsmicrocapstockhtm.html. Note that, as discussed in infra
Section VIII.5.d, recent amendments to 17 CFR 240.15c2-11 (Rule
15c2-11 of the Exchange Act) adopted in September 2020 limit public
quoting in OTC equities for which current financial statement
information is not publically available.
---------------------------------------------------------------------------
One particular type of unlisted securities is referred to as
restricted (or sometimes ``control'') stocks. Restricted stocks are
either unregistered shares issued by public companies in private
placements \964\ or shares (both registered and unregistered) held by
an issuer or its affiliates (such as insiders and large shareholders).
The secondary market for restricted stocks is governed by SEC Rule 144,
and allows restricted stocks to be sold to the public if several
conditions are met.\965\ While investments in restricted stocks are
typically limited to only accredited investors, new SEC rules adopted
in 2015 under Section 401 of the Jumpstart Our Business Startups (JOBS)
Act, often referred to as ``Regulation A+,'' expanded the ability for
non-accredited investors to trade in certain unregistered equities.
Eligible restricted stocks can be traded on a number of electronic
platforms that specialize in the secondary market for restricted
shares, as well as through broker-dealers.\966\
---------------------------------------------------------------------------
\964\ Unregistered securities typically avoid SEC registration
through one of two exemptions: Regulation D offerings, which are
mostly limited to accredited (i.e., institutional or high-net-worth)
investors, and Regulation A offerings, which are open to
unaccredited investors.
\965\ See https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144htm.html. These conditions include a minimum
holding period, the availability of up-to-date information about the
issuing company, and certain limits to the size of the trade. In
addition, notice of trades by affiliates are required to be filed
with the SEC, and the trades themselves must be handled by a broker
as a routine transaction (e.g., no special commissions).
\966\ See, e.g., Private Equity Exchange (https://peqx.com/);
Nasdaq Private Market (https://www.nasdaq.com/secondmarket).
---------------------------------------------------------------------------
b. ATSs in the Equity Market
As mentioned above, NMS stocks that are listed on national
securities exchanges may trade both on exchanges and at off-exchange
trading venues, including on ATSs. Currently there are 34 NMS Stock
ATSs, collectively handling an average of around 453 million trades
during Q3 2021.\967\ Since the adoption of Regulation NMS in 2005, the
market for trading services has become more fragmented, and the
proportion of NMS stocks trading off-exchange has increased. For
example, as of July 2020, NMS Stock ATSs comprised approximately 10
percent of consolidated dollar volume, and other off-exchange volume
totaled approximately 23 percent of consolidated dollar volume.\968\
---------------------------------------------------------------------------
\967\ See https://www.finra.org/filing-reporting/otc-transparency/ats-quarterly-statistics.
\968\ See Market Data Infrastructure Final Rule, Release No.
90610 (Dec. 9, 2020), available at https://www.sec.gov/rules/final/2020/34-90610.pdf.
---------------------------------------------------------------------------
NMS Stock ATSs generally operate as non-displayed venues, which do
not display quotes. Traditionally, market participants that used non-
displayed venues to trade listed stocks have been large institutional
investors seeking to execute block trades. However, average trade sizes
in many ATSs have shrunk from block-size trades to smaller trade sizes
that match those of traditional exchanges. In 2018, the Commission
found that, while eight NMS Stock ATSs had average trade sizes larger
than 10,000 shares, the vast majority had average trade sizes between
100 and 460 shares, which is similar to average trade sizes on the
national securities exchanges.\969\ One feature, among others, that may
attract some market participants to non-displayed venues is their lower
information leakage as compared to trades on exchanges.
---------------------------------------------------------------------------
\969\ See SEC Release No. 34-83663, ``Regulation of NMS Stock
Alternative Trading Systems,'' available at https://www.sec.gov/rules/final/2018/34-83663.pdf.
---------------------------------------------------------------------------
NMS Stock ATSs are subject to Regulation ATS and are also required
to file and publicly disclose Form ATS-N. Furthermore, those with
significant volume are required to comply with the requirements of
Regulation SCI \970\ and the Fair Access Rule.\971\ Trades in NMS
stocks that are transacted off-exchange, which includes transactions on
ATSs, are required to be reported to one of three FINRA Trade Reporting
Facilities (TRF).\972\ If the execution is handled by an ATS, then in
most cases the ATS has the reporting obligation and must report itself
as a counterparty to both sides of the trade.\973\
---------------------------------------------------------------------------
\970\ An ATS trading in NMS stock is subject to Regulation SCI
if, during at least four of the preceding six months, the ATS had
five percent or more in any single NMS stock, and 0.25 percent or
more in all NMS stocks, of the average daily dollar volume reported
by applicable effective transaction reporting plans, or one percent
or more, in all NMS stocks, of the average daily dollar volume
reported by applicable effective transaction reporting plans. See
https://www.sec.gov/divisions/marketreg/regulation-sci-faq.shtml.
See supra Section VIII.B.2.a.ii for a discussion of the impact of
Regulation SCI.
\971\ An ATS trading in NMS stock is subject to the Fair Access
Rule if, during at least four of the preceding six months, the ATS
had five percent or more of the average daily volume in an NMS stock
reported by an effective transaction reporting plan. See 17 CFR
242.301(b)(5)(i) and https://www.sec.gov/tm/faq-regulation-ats-fair-access-rule. See supra Section VIII.B.2.a.ii for a discussion of the
impact of the Fair Access Rule.
\972\ These include FINRA/Nasdaq TRF Carteret, FINRA/Nasdaq TRF
Chicago, and FINRA/NYSE TRF. See https://www.finra.org/filing-reporting/trf/trf-exchange-participants.
\973\ See https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq. Certain transactions are
exempt from FINRA TRF reporting requirements; see https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq#500 and FINRA Rules 6282(f)(1), 6380A(e)(1),
6380B(e)(1), and 6622(e)(1).
---------------------------------------------------------------------------
Furthermore, national securities exchanges, national securities
associations and Industry Members \974\ that receive or originate
orders \975\ in Eligible Securities \976\ are required to
[[Page 15612]]
report any Reportable Event \977\ to the Consolidated Audit Trail
(CAT), which is designed to capture customer and order event
information from the time of order inception through routing,
cancellation, modification, or execution in a single, consolidated data
source. The Participants \978\ have issued guidance stating that
trading interest must be ``firm'' to fall within the definition of an
``order,'' and thus be reportable to CAT, and so certain trading
interest (e.g., conditional orders) that may be available on some ATSs
is not reportable to the CAT until it is ``firmed up''/confirmed.\979\
---------------------------------------------------------------------------
\974\ The National Market System Plan Governing the Consolidated
Audit Trail (CAT NMS Plan) is a national market system plan approved
by the Commission pursuant to Section 11A of the Exchange Act and
the rules and regulations thereunder. See Securities Exchange Act
Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23,
2016). The CAT NMS Plan and subsequent amendments to the Plan are
available at https://catnmsplan.com/about-cat/cat-nms-plan. Section
1.1 of the CAT NMS Plan defines an Industry Member as a member of a
national securities exchange or a member of a national securities
association. ``CAT Reporters'' include national securities
exchanges, national securities associations and Industry Members
that are required to record and report information to the Central
Repository pursuant to SEC Rule 613(c).
\975\ Section 1.1 of the CAT NMS Plan defines the term
``order,'' with respect to Eligible Securities, as having the
meaning set forth in 17 CFR 242.613(j)(8) (SEC Rule 613(j)(8)). SEC
Rule 613(j)(8) defines an ``order'' as any order received by a
member of a national securities exchange or national securities
association from any person; any order originated by a member of a
national securities exchange or national securities association; or
any bid or offer.
\976\ Section 1.1 of the CAT NMS Plan defines Eligible
Securities as'' (a) all NMS Securities and (b) all OTC Equity
Securities,'' where OTC Equity Securities are defined as any equity
security, other than an NMS Security, subject to prompt last sale
reporting rules of a registered national securities association and
reported to one of such association's equity trade reporting
facilities.'' This includes both OTC Equity Securities and
transactions in Restricted Equity Securities effected pursuant to
Securities Act Rule 144A. See CAT NMS Plan, supra note 974.
\977\ According to Section 1.1 of the CAT NMS Plan, ``Reportable
Event'' includes, but is not limited to, the original receipt or
origination, modification, cancellation, routing, execution (in
whole or in part) and allocation of an order, and receipt of a
routed order. See CAT NMS Plan, supra note 974.
\978\ The Participants are the national securities exchanges and
national securities associations who collectively control and
operate the CAT.
\979\ See CAT FAQ B40, available at https://www.catnmsplan.com/faq. This release refers to the FAQs published by the Participants
because the Commission believes those FAQs are guiding the how
Industry Members are reporting information to the CAT. The
Commission has not approved the FAQs so is expressing no view in
this release regarding such FAQs.
---------------------------------------------------------------------------
OTC equities also trade on ATSs. There are currently five ATSs
operating in the OTC equity market. As of Q3 2021, FINRA reports that
OTC equity ATSs collectively handled around 4 million trades.\980\ ATSs
that offer trading services in OTC equities also typically operate as
interdealer quotation systems (IDQS), which regularly disseminate
broker-dealer quotes.\981\ The majority of OTC equity trading on ATSs
is concentrated on one platform, which executed more than 60 percent of
OTC equity ATS trading in Q1 2021. ATSs that trade in OTC equities
usually segment securities into different markets or use eligibility
status symbols to inform investors regarding issuers' regulatory
compliance and disclosure.\982\ This is designed to inform investors
whether companies are current or delinquent in their filing
requirements in the interest of transparency.\983\ One academic study
found that OTC equities that are subject to stricter disclosure
requirements have higher market quality, including higher liquidity and
lower crash risk.\984\
---------------------------------------------------------------------------
\980\ See https://www.finra.org/filing-reporting/otc-transparency/ats-quarterly-statistics. Note that this dataset
aggregates volume across two OTC Link LLC-operated ATSs under the
label OTC LINK ECN ATS.
\981\ Rule 15c2-11 of the Exchange Act defines an inter-dealer
quotation system as any system of general circulation to brokers or
dealers that regularly disseminates quotations of identified brokers
or dealers, and further defines a qualified inter-dealer quotation
system as any inter-dealer quotation system that meets the
definition of an ``alternative trading system'' and operates
pursuant to the exemption from the definition of an ``exchange.''
\982\ For example, the OTC Link LLC ATS is organized into
several market places, broadly organized according to the issuers'
regulatory compliance and disclosure: OTCQX, which includes equities
that are subject to and current with the reporting requirements of
the Exchange Act, and that additionally meet numerous other
eligibility requirements; OTCQB, which includes equities that are
subject to and current with the reporting requirements of the
Exchange Act, but not subject to any additional eligibility
requirements; and Pink Sheets, which includes equities without any
reporting or eligibility requirements. A fourth tier, the so-called
``Expert Market'' or ``Grey Market,'' contains equities that are not
or cannot be publically quoted, either due to regulatory
restrictions or lack of investor interest. See https://www.sec.gov/reportspubs/investor-publications/investorpubsmicrocapstockhtm.html.
Additionally, for another example, see https://www.globalotc.com/brokers/eligible-securities.
\983\ See Cass Sanford, Understanding the Expert Market, OTC
Markets Blog (March 25, 2021), available at https://blog.otcmarkets.com.
\984\ See Br[uuml]ggemann, U., Kaul, A., Leuz, C., & Werner,
I.M. (2018). The twilight zone: OTC regulatory regimes and market
quality. The Review of Financial Studies, 31(3), 898-942.
---------------------------------------------------------------------------
FINRA is the SRO that regulates trading in OTC securities. The
Commission understands that the current ATS market place for OTC
equities has evolved to replace the functions formally performed by the
OTC Bulletin Board (OTCBB), a FINRA-operated inter-dealer quotation
system for OTC equities that was retired by FINRA in November
2021.\985\ In its filing with the SEC, FINRA cited technological
advancements and ``the subsequent increase in alternative electronic
venues with more extensive functionality than the OTCBB'' as reasons
for its retirement, which highlights market participants' preference
for electronic trading systems in this market.\986\ Concurrently to its
retirement of the OTCBB, FINRA has adopted new Rule 6439 (Requirements
for Member Inter-Dealer Quotation Systems), which implements additional
requirements for firms that operate systems that regularly disseminate
quotes in OTC equities, including requirements related to fair access,
transparency, and systems integrity.\987\ Furthermore, trades to which
a FINRA member is a party must be reported to FINRA's OTC Reporting
Facility (ORF) within ten seconds of execution.\988\ This includes
executions in OTC equities, as well as executions in restricted stocks
effected under 17 CFR 230.144A (Securities Act Rule 144A); however,
trades in restricted equity securities effected under Rule 144A are
reported to the ORF for regulatory purposes only and are not publicly
disseminated. Similarly to requirements for FINRA's TRF described
above, if the execution is handled by an ATS, then in most cases the
ATS has the reporting obligation and must report itself as a
counterparty to both sides of the trade.\989\ In addition, OTC equities
fall within the definition of ``Eligible Securities'' under the CAT NMS
Plan, and therefore any eligible events in OTC equities are reportable
to CAT.\990\
---------------------------------------------------------------------------
\985\ See https://www.finra.org/rules-guidance/notices/21-38.
\986\ See SEC Release No. 34-90067, October 1, 2020, ``Self-
Regulatory Organizations; Financial Industry Regulatory Authority,
Inc.; Notice of Filing of a Proposed Rule Change to Adopt FINRA Rule
6439 (Requirements for Member Inter-Dealer Quotation Systems) and
Delete the Rules Related to the OTC Bulletin Board Service,''
available at https://www.sec.gov/rules/sro/finra/2020/34-90067.pdf.
\987\ See https://www.finra.org/rules-guidance/notices/21-28.
\988\ FINRA Rule Series 6620 and 7300 govern OTC and restricted
equity trade reporting to FINRA Facilities. See https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq.
\989\ See supra note 973.
\990\ See supra notes 974 to 979 and corresponding discussion.
---------------------------------------------------------------------------
In addition to its requirements under FINRA, ATSs that trade in OTC
equities must comply with Regulation ATS, including filing Form ATS and
periodically filing Form ATS-R, and complying with Regulation SCI \991\
and the Fair Access Rule if volume thresholds are met.\992\ However,
ATSs that trade in OTC equities are not required to file and publicly
disclose Form ATS-N.
---------------------------------------------------------------------------
\991\ An ATS trading in non-NMS stock is subject to Regulation
SCI if, during at least four of the preceding six months, the ATS
had five percent or more of the average daily volume in transactions
that are reported to and calculated by a self-regulatory
organization, such as FINRA. See https://www.sec.gov/divisions/marketreg/regulation-sci-faq.shtml. See supra Section VIII.B.2.a.ii
for a discussion of the impact of Regulation SCI.
\992\ An ATS trading in non-NMS stock is subject to the Fair
Access Rule if, during at least four of the preceding six months,
the ATS had five percent or more of the average daily volume in non-
NMS stock transactions that are reported to and calculated by a
self-regulatory organization, such as FINRA. See 17 CFR
242.301(b)(5)(i) and https://www.sec.gov/tm/faq-regulation-ats-fair-access-rule. See supra Section VIII.B.2.a.ii for a discussion of the
impact of the Fair Access Rule.
---------------------------------------------------------------------------
c. National Securities Exchanges for NMS Stock
NMS Stock ATSs compete with national securities exchanges in the
market for trading services in NMS securities. Currently, 16 national
securities exchanges effect transactions in NMS stocks. These exchanges
[[Page 15613]]
accounted for 58 percent of NMS security share volume and 65 percent of
NMS security dollar volume in September 2021.\993\ National securities
exchanges have greater regulatory obligations than NMS Stock ATSs. They
must register with the Commission on Form 1, file proposed rule changes
with the Commission under Section 19(b) of the Exchange Act, and are
SROs. The proposed rule changes of national securities exchanges must
be made available for public comment,\994\ and in general, these
proposed rule changes publicly disclose, among other things, details
relating to the exchange's operations, procedures, and fees. The
Commission reviews the rules of national securities exchanges, a
process which requires, among other things, that to approve certain
rule changes, the Commission find that the national securities
exchange's proposed rule changes are consistent with the Exchange
Act.\995\ National securities exchanges and other SROs also have
regulatory obligations, such as enforcing their rules and the Federal
securities laws with respect to their members, which do not apply to
market participants such as ATSs.\996\
---------------------------------------------------------------------------
\993\ See CBOE Historical Market Volume Data, available at
https://www.cboe.com/us/equities/market_statistics/historical_market_volume/, market_history_monthly_2021.csv. This
statistic is calculated by dividing the sum of all non-FINRA entries
for the month of September 2021 divided by the sum of all entries
for the month of September 2021.
\994\ See 15 U.S.C. 78s(b)(1).
\995\ See 15 U.S.C. 78s(b).
\996\ See, e.g., Section 19(b) of the Exchange Act, 15 U.S.C.
78s(b)(1), and Section 6(b) of the Exchange Act, 15 U.S.C. 78f(b).
---------------------------------------------------------------------------
While national securities exchanges have more regulatory
obligations than NMS Stock ATSs, they also enjoy certain unique
benefits that are not afforded to NMS Stock ATSs. While national
securities exchanges are SROs, and are thus subject to surveillance and
oversight by the Commission, they can still establish norms regarding
conduct, trading, and fee structures for external access. Trading
venues that elect to register as national securities exchanges may gain
added prestige by establishing listing standards for their securities.
Additionally, national securities exchanges can be direct participants
in NMS plans, which provides additional sources of revenue and input
into the operation of the national market system that is not available
to NMS Stock ATSs.\997\
---------------------------------------------------------------------------
\997\ See Regulation ATS Adopting Release, supra note 31, at
70880, 70902-70903 (Section discussing generally some of the
obligations and benefits of registering as a national securities
exchange).
---------------------------------------------------------------------------
d. Communication Protocol Systems in the Equity Market
The Commission estimates that there are currently 4 Communication
Protocol Systems operating in the market for NMS stocks that may meet
the definition of exchange under the proposed changes to Exchange Act
Rule 3b-16. Furthermore, the Commission understands that some NMS Stock
ATSs offer functionalities similar to Communication Protocol Systems,
such as conditional orders and indications of interest (IOIs), both of
which can interact with their limit order books. As mentioned in
Section II.B.2, the Commission has observed that 26 NMS Stock ATSs have
disclosed on their public Form ATS-N that they send or receive messages
indicating trading interest, such as conditional orders.
While NMS Stock ATSs may make use of Communication Protocol System
functionalities, there is limited evidence that Communication Protocol
Systems play a significant role in the non-ATS OTC market for liquid
NMS stocks in the U.S.\998\ One commenter stated that NMS stocks and
ETFs with limited liquidity are now beginning to use protocols such as
RFQ to bridge liquidity gaps.\999\ However, because the Commission
lacks data on the use of protocols that would qualify as Communication
Protocol Systems by non-ATS trading systems operating in the OTC equity
market, it is unable to quantify to what extent Communication Protocol
Systems are used in the non-ATS OTC market for NMS stocks. The
Commission requests comment on this issue.
---------------------------------------------------------------------------
\998\ On the contrary, RFQ platforms are increasingly playing a
role in block trading in European equities, particularly in the wake
of the 2018 adoption of MiFID II, which placed limits on other off-
exchange sources of liquidity. See, e.g., Basar, Shanny. (2020,
March 31). MarketsMedia, available at https://www.marketsmedia.com/icap-adds-to-equity-rfqs/.
\999\ See Bloomberg Letter at 3, 10, 20, and 23. The commenter
also referenced that trading in small and micro NMS stocks on
exchanges has been difficult and has not necessarily improved with
recent technological changes. See Bloomberg Letter at 21, citing
https://www.nasdaq.com/articles/nasdaqs-proposal-improve-trading-environment-small-and-medium-growth-companies-and.
---------------------------------------------------------------------------
Communication Protocol System operators cite their protocols'
abilities to service very large orders, the option for participants to
pick and choose which aspects of their order to disclose (e.g., price
or size), and higher discretion as advantages of these protocols over
trading on exchanges or ATSs.\1000\ However, some market participants
have expressed skepticism over information leakage in the use of RFQs
for equity transactions, as their use may signal that the participants
are unable to locate ``natural'' sources of liquidity.\1001\
---------------------------------------------------------------------------
\1000\ See ``RFQ for Equities: One Year On,'' (2019), Tradeweb,
available at https://www.tradeweb.com/newsroom/media-center/insights/blog/rfq-for-equities-one-year-on/.
\1001\ See, e.g., McDowell, Hayley. (2018, October 23). ``Buy-
side throws doubt on RFQ for equities as `last chance saloon' for
liquidity,'' THETRADE, available at https://www.thetradenews.com/buy-side-throws-doubt-rfq-equities-last-chance-saloon-liquidity/.
---------------------------------------------------------------------------
Communication Protocol Systems may also play a role in the trading
of U.S.-listed ETFs. However, the Commission lacks data to quantify
what proportion of ETF volume trades via Communication Protocol
Systems. At least one trading system operator claims to offer several
protocols, including RFQ, for trading in U.S.-listed ETFs.\1002\ The
use of Communication Protocol Systems for trading in ETFs may be
motivated by a lack of liquidity in some ETF securities, and associated
risks involved in trading in illiquid ETFs.\1003\ Similar to the
corporate bond market, the use of Communication Protocol Systems may
also be used for the trading of bundles of securities in order to
facilitate transaction services for participants that may be using the
same Communication Protocol System to trade in the securities
underlying ETFs.\1004\
---------------------------------------------------------------------------
\1002\ See, e.g., ``ETFs'', Tradeweb, available at https://www.tradeweb.com/our-markets/institutional/equities/ETPs_Funds/.
Additional market participants may also be developing Communication
Protocol Systems for U.S.-listed ETFs. See, e.g., Rennison, Joe,
April 4, 2019, ``MarketAxess muscles into ETF industry with Virtu
tie-up,'' Financial Times, available at https://www.ft.com/content/b88d53b6-5709-11e9-a3db-1fe89bedc16e.
\1003\ See, e.g., Bae, K., & Kim, D. (2020). Liquidity risk and
exchange-traded fund returns, variances, and tracking errors.
Journal of Financial Economics, 138(1), 222-253.
\1004\ See supra Section VIII.B.3.b for a discussion of
portfolio trading on Communication Protocol Systems in the corporate
bond market.
---------------------------------------------------------------------------
Unlike NMS Stock ATSs, Communication Protocol Systems that trade
NMS stocks are not subject to any of the requirements of Regulation SCI
or Regulation ATS, including the requirement to file the public Form
ATS-N. Trades in NMS stocks that are transacted elsewhere than on an
exchange, which may include transactions executed on a Communication
Protocol System, are required to be reported to FINRA TRF as discussed
in Section VIII.B.5.a if at least one of the parties to the transaction
is a FINRA member.
Trading interest on Communication Protocol Systems may not be
required to be reported to CAT, depending on the nature of the
solicitation and/or response(s) as firm or non-firm. CAT guidance
issued by the Participants
[[Page 15614]]
provides that non-firm expressions of trading interest that contain
information about the security name, side, size, capacity and/or price,
which includes IOIs and RFQs, do not fall within the definition of an
``order'' and are therefore not reportable to CAT.\1005\ However, this
guidance also states that any response to an RFQ or other form of
solicitation response that is accessible electronically and is
immediately actionable (i.e., no further manual or electronic action is
required by the responder providing the quote in order to execute or
cause a trade to be executed) is reportable whether or not it is
ultimately accepted. Furthermore, once an order is ``firmed up'' by the
initiating participant and winning bidder, the origination of the new
order by the initiating participant, the routing of that new order to
the winning bidder, and the acceptance of that order by the winning
bidder are all reportable events, with the initiating participant
reporting the new order and routing events, and the winning bidder
reporting the order acceptance, as well as any subsequent actions taken
to process the order.\1006\
---------------------------------------------------------------------------
\1005\ See CAT FAQ B3, available at https://www.catnmsplan.com/faq.
\1006\ See CAT FAQ B45, available at https://www.catnmsplan.com/faq.
---------------------------------------------------------------------------
The Commission understands that the majority of trading in OTC
equities takes place on IDQS, most of which are registered as ATSs.
However, there may be some IDQS or other OTC equity trading systems
that are not registered as ATSs and that operate using trading
protocols that would qualify as Communication Protocol Systems.\1007\
The Commission estimates that there may currently be 1 Communication
Protocol System operating in the OTC equity market. Such a trading
system may not be subject to FINRA Rule 6439 or trade reporting
requirements, or quoting requirements under the amended Rule 15c2-11
discussed in the next paragraph, if it is not operated by a FINRA
member and does not meet the definition of a ``qualifying'' IDQS. The
Commission lacks the data to estimate the number or trading volume of
IDQS or other OTC equity trading systems that operate as Communication
Protocol Systems and are not registered as broker-dealers. The
Commission requests comment on this topic.
---------------------------------------------------------------------------
\1007\ See SEC Release No. 34-87115, ``Publication or Submission
of Quotations Without Specified Information'' Proposed Rule and
Concept Release, available at https://www.sec.gov/rules/proposed/2019/34-87115.pdf.
---------------------------------------------------------------------------
Communication Protocol Systems may also play a role in the Grey
Market for OTC equities.\1008\ Recent amendments to Rule 15c2-11 of the
Exchange Act adopted in September 2020 limit public quoting in OTC
equities for which current financial statement information is not
publically available.\1009\ This limits the ability of many OTC
equities to trade on ATSs,\1010\ but many OTC securities are still
traded even without publically available quotes.\1011\ However, due to
the opacity of this market, the Commission lacks data to estimate the
extent to which broker-dealers trading in Grey Market equities are
using protocols that would qualify as Communication Protocol Systems
and requests comment on this issue.
---------------------------------------------------------------------------
\1008\ See supra note 982.
\1009\ See https://www.sec.gov/news/press-release/2020-212.
\1010\ In compliance with the amendments, in March 2021 OTC
Markets announced that OTC equities without current public
information would be moved off its Pink Sheets market place. See
https://blog.otcmarkets.com/2021/03/25/understanding-the-expert-market/.
\1011\ In 2018, the Commission estimated that 5,915 OTC
securities were traded at some point during the year without having
published quotations, and 3% of these securities had average daily
trading volumes above $100,000. See SEC Release No. 34-87115,
``Publication or Submission of Quotations Without Specified
Information'' Proposed Rule and Concept Release, available at
https://www.sec.gov/rules/proposed/2019/34-87115.pdf.
---------------------------------------------------------------------------
Communication Protocol Systems may play a role in the secondary
market for restricted shares. The Commission preliminarily estimates
that there are currently 10 Communication Protocol Systems operating in
the market for restricted shares. Furthermore, an estimated 2 of these
are run by non-broker-dealers, who therefore would not currently be
subject to the associated costs of complying with broker-dealer filing
and conduct obligations, including becoming a member of an SRO, such as
FINRA.\1012\
---------------------------------------------------------------------------
\1012\ See supra Section III.B.1.
---------------------------------------------------------------------------
Unlike ATSs that trade OTC equities, Communication Protocol Systems
that trade OTC equities are not subject to any of the requirements of
Regulation ATS. Trades in OTC equities and restricted equities effected
under Securities Act Rule 144A that are transacted elsewhere than on an
exchange, which may include transactions executed on a Communication
Protocol System, are required to be reported to FINRA's OTC ORF as
described in Section VIII.B.5.a, if at least one of the parties to the
transaction is a FINRA member.
e. Other Methods of Trading in Equities
The majority of off-exchange trading in NMS stocks occurs outside
of ATSs. A DERA white paper estimated that, in 2014, non-ATS off-
exchange trading in NMS stocks represented nearly 17 percent of total
equity market dollar volume; \1013\ by July 2020, this number increased
to 23 percent, while trading on ATSs was composed of only 10 percent of
total equity market dollar volume.\1014\ The DERA white paper found
that more than a third of non-ATS trading volume in NMS stock comprised
of retail orders executed by OTC market makers.\1015\ Block trades
(i.e., trades larger than 10,000 shares) made up a higher percentage of
non-ATS trading volume than ATS trading volume.\1016\ Additionally,
single-dealer platforms (SDPs) accounted for nine percent of off-
exchange trading volume in Q3 2021.\1017\
---------------------------------------------------------------------------
\1013\ See Tuttle, L.A. (2014). OTC trading: Description of non-
ATS OTC trading in National Market System stocks. DERA White Paper.
\1014\ See Market Data Infrastructure Final Rule, Release No.
90610 (Dec. 9, 2020), available at https://www.sec.gov/rules/final/2020/34-90610.pdf.
\1015\ See Tuttle, L.A. (2014). OTC trading: Description of non-
ATS OTC trading in National Market System stocks. DERA White Paper.
A more recent study found that retail wholesalers accounted for 49.9
percent of off-exchange trading in Q3 2021. See Rosenblatt
Securities, November 4, 2021, ``A Closer Look at Off Exchange and
Retail Market Share.''
\1016\ See Tuttle, L.A. (2014). OTC trading: Description of non-
ATS OTC trading in National Market System stocks. DERA White Paper.
Specifically, defining block trades as trades of 10,000 or more
shares, block trades comprised only 0.10 percent of dark ATS trading
while they comprise 2.53 percent of non-ATS OTC trading.
\1017\ SDPs do not permit participants to post liquidity, but
rather offer bilateral trading with the counterparty operating the
venue. See id.
---------------------------------------------------------------------------
The Commission believes that manually negotiated trades via the
telephone are still taking place in the market for NMS stocks, in
particular for large block trades by institutional investors.\1018\ A
survey taken in April 2014 estimated that more than 55 percent of buy-
side U.S. equity trading was still being executed via phone
calls.\1019\
---------------------------------------------------------------------------
\1018\ See, e.g., https://www.ft.com/content/44841008-3cf7-11e4-a2ab-00144feabdc0.
\1019\ In the survey, market participants cited the expertise
and consulting services offered by brokers as some of the benefits
of using the phone to conduct ``high touch'' trades. See https://www.greenwich.com/press-release/high-touch-execution-consulting-services-and-performance-driving-technologies-spell.
---------------------------------------------------------------------------
Additionally, it is likely that traditional bilateral negotiations
are still actively used in the market for OTC equities as well,
particularly in the Grey Market and the market for restricted equities,
where electronic trading may be limited due to restrictions on public
quoting activity. However, due to the opacity of this market, it is
difficult to estimate the extent to which voice trading still plays a
role in the market for OTC and restricted equities.
As described above in Section VIII.B.5.a, trades in equities that
are transacted elsewhere than on an
[[Page 15615]]
exchange, which may include transactions executed via voice trading,
are required to be reported to either FINRA's TRF (in the case of NMS
stocks) or ORF (in the case of OTC or restricted equities) if at least
one of the parties to the transaction is a FINRA member. As described
above, trades in restricted equity securities are reported for
regulatory purposes only and are not publicly disseminated.
f. Competition in the Market for Equity Trading Services
As discussed above, since Regulation NMS was adopted in 2005, the
market for equity trading services has become more fragmented, with
trading fragmented not only across exchanges, but across different
trading systems (exchanges, ATSs, and non-ATS off-exchange trading
venues). For instance, from 2005 to 2013, there was a decline in the
market share of trading volume for exchange-listed stocks on
NYSE.\1020\ At the same time, there was an increase in the market share
of newer national securities exchanges such as NYSE Arca, Cboe BYX, and
Cboe BZX.\1021\ This development increased competition in the market
for trading services. Several academic studies have shown that an
increase in competition between exchanges, or between exchanges and
ATSs, improves market quality by reducing transactions costs and
increasing liquidity.\1022\
---------------------------------------------------------------------------
\1020\ See Securities Exchange Act Release No. 76474 (Nov. 18,
2015), 80 FR 80998, 81112 (Dec. 28, 2015) (Regulation of NMS Stock
Alternative Trading Systems Proposing Release).
\1021\ See id.
\1022\ See, e.g., Foucault, T., & Menkveld, A.J. (2008).
Competition for order flow and smart order routing systems. The
Journal of Finance, 63(1), 119-158; O'Hara, M., & Ye, M. (2011). Is
market fragmentation harming market quality? Journal of Financial
Economics, 100(3), 459-474.
---------------------------------------------------------------------------
Trading venues compete with each other along a number dimensions in
order to attract order flow. For example, in addition to other ways,
trading venues can compete via fees, rebates, speed, and trading
protocols in order to attract order flow.\1023\ However, the actual
level of competition that any given trading venue faces may depend on
multiple factors including the liquidity of a stock as well as the type
of trading venue and market participant engaging in the trade. A market
participant's preference for where to trade can depend on a number of
factors, including, among other things, speed, anonymity, and price
impact. The choice of trading venue may also be limited by regulatory
restrictions on where certain equities may be traded and by whom, as
quoting activities in some OTC stocks are restricted, and some
investors are prohibited from trading in certain types of equities,
such as restricted stocks.
---------------------------------------------------------------------------
\1023\ See, e.g., Cantillon, E., & Yin, P.L. (2011). Competition
between exchanges: A research agenda. International journal of
industrial organization, 29(3), 329-336; Budish, E., Lee, R.S., &
Shim, J.J. (2019). A Theory of Stock Exchange Competition and
Innovation: Will the Market Fix the Market? National Bureau of
Economic Research.
---------------------------------------------------------------------------
6. Current State of Options Markets
There are currently 16 exchanges (``options exchanges'') and 1 ATS
offering listed options trading services. During the month of October
2021, approximately 39 million options contracts, equating to
approximately $21 billion in total premiums, were traded daily on
exchanges.\1024\ The market for listed options has been historically
dominated by institutional investors; \1025\ however, the market has
seen a dramatic increase in retail investor participation in recent
years.\1026\
---------------------------------------------------------------------------
\1024\ See OCC Monthly & Weekly Volume Statistics, available at
https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Monthly-Weekly-Volume-Statistics. These statistics
were calculated by downloading the monthly files for ``Equity,''
``Index,'' and ``ETF'' options for October 2021. The OCC combined
value from each file was added together and divided by the trading
days in October 2021 to generate these statistics.
\1025\ See Bennett, Jay, John Colon, and John Feng. (2010). FIA,
available at https://secure.fia.org/files/css/magazinearticles/article-1446.pdf.
\1026\ See Thyagaraju Adinarayan, ``Retail trading fever drives
U.S. equity option volumes to record monthly high'', Reuters, (2021,
February 3). (Retrieved from Factiva database).
---------------------------------------------------------------------------
a. Currently Regulated Trading Systems in the Market for Listed Options
The market for listed options trading services is dominated by
registered exchanges. This dominance stems from the role of the Options
Clearing Corporation (OCC), which is the sole entity clearing trades
for exchange-listed options, security futures, and OTC options.\1027\
Central clearing of listed options incentivizes the use of exchanges.
Exchanges offer traders a centralized location to interact with other
traders in the market. Exchanges compete with each other by offering
different cost structures to participate on the exchange, and differing
order types to allow customers advanced trading strategies. Largely due
to regulation,\1028\ options exchanges offer the ability to route
orders to competing options exchanges in the event of a competing
option exchange having the best price for a given options order. Thus,
while there is competition amongst options exchanges for trading
services, they are joined together in an integrated market system.
---------------------------------------------------------------------------
\1027\ See ``What Is OCC?'' The Options Clearing Corporation,
available at https://www.theocc.com/Company-Information/What-Is-OCC.
\1028\ See https://www.sec.gov/rules/final/34-43591.htm.
---------------------------------------------------------------------------
There is one ATS in the market for listed options. As the
Commission understands, this ATS offers participants an RFQ
protocol.\1029\ A customer may accept the quote the ATS returns from
the RFQ protocol. However, the orders are routed to an exchange for
execution.
---------------------------------------------------------------------------
\1029\ See ``Liquidity Management Software For US Listed Options
Market'', DASH Financial, available at https://dashfinancial.com/execution-services/dash-ats/.
---------------------------------------------------------------------------
As described above, the ATS in the market for listed option trading
services competes with exchanges by offering the potential of price
improvement on orders, the ability to view market liquidity without
submitting a firm order, and the ability to interact with multiple
market makers, across multiple exchanges, simultaneously. It should be
noted, however, that this competition is not direct; the ATS ultimately
sends orders to exchanges, and thus could be seen as complementary to
exchanges.
Options exchanges are subject to many of the same regulations as
NMS Stock trading systems. Options exchanges are part of the NMS and
are required to participate in many NMS plans. Options exchanges also
are subject to Regulation SCI.
Similar to other security types, an ATS that trades in listed
option securities must comply with Regulation ATS and broker-dealer
filing and conduct obligations, including becoming a member of an SRO,
such as FINRA. In addition, listed options fall within the definition
of ``eligible securities'' under the CAT NMS Plan, and therefore any
eligible events in listed options are reportable to CAT.\1030\
---------------------------------------------------------------------------
\1030\ See supra notes 974 to 979 and corresponding discussion.
---------------------------------------------------------------------------
b. Communication Protocol Systems in the Market for Listed Options
As the Commission understands, there is currently 1 Communication
Protocol System trading in listed options that may meet the definition
of exchange under the proposed changes to Exchange Act Rule 3b-
16.\1031\ This Communication Protocol System operates in a similar
fashion to the single ATS in the market for listed options described
above in Section VIII.B.6.a. This system offers an RFQ protocol that
allows a customer to request a quote for a specified option. The system
then surveys market makers
[[Page 15616]]
of options exchanges. The system returns the quotes to the customer,
where the customer has the ability to accept one of the proposed
trades. The trade is then executed on the option exchange. The
Commission requests comment on the full role of Communication Protocol
Systems in the market for listed options.
---------------------------------------------------------------------------
\1031\ See ``Request-for-Quote Options Trading'', Tradeweb,
available at https://www2.tradeweb.com/optionsweb.
---------------------------------------------------------------------------
Communication Protocol Systems compete with options exchanges and
ATSs for trading services. Similar to ATSs, Communication Protocol
Systems in the market for listed options ultimately interact with
exchanges in their trading operations; thus, the competition between
Communication Protocol Systems and exchanges might be better
characterized as a complementary relationship. As the Commission
understands, competition between ATSs and Communication Protocol
Systems in the market for listed options occurs primarily through the
quality of their trading systems, cost structures, and speed of RFQ
protocol completion.
Communication Protocol Systems in the market for listed options are
not formally regulated by any regulatory authority. This lack of
regulation puts listed option ATSs at a disadvantage compared to
Communication Protocol Systems. The Commission believes that the
participation of the OCC in centrally clearing options trades on
exchanges is a major factor contributing to the decision of traders to
trade on options exchanges compared to using Communication Protocol
Systems and ATSs.
As in the market for equities, trading interest in listed options
on Communication Protocol Systems may not be required to be reported to
CAT, depending on the nature of the solicitation and/or response(s) as
firm or non-firm.\1032\
---------------------------------------------------------------------------
\1032\ See supra notes 1005 and 1006 and corresponding
discussion.
---------------------------------------------------------------------------
7. Other Securities
a. Repurchase and Reverse Repurchase Agreements
The market for repurchase and reverse repurchase agreements \1033\
plays a role both in the stability of the banking and financial system
and in the transmission of U.S. monetary policy. Repurchase agreements
account for between $4 trillion and $6 trillion in notional value
trades daily.\1034\ Moreover, reverse repurchase agreements have become
an important tool of monetary policy. Specifically, the market for
reverse repurchase agreements is used by banks to lend out excess
reserves, while the market for repurchase agreements is used to borrow
to meet reserve requirements.\1035\
---------------------------------------------------------------------------
\1033\ See supra Section III.A for a discussion of ``repos''
(repurchase agreements and reverse repurchase agreements on
government securities). While U.S. Treasury Securities are
frequently used as the underlying collateral of repurchase and
reverse repurchase agreements, other securities may also be used,
such as corporate bonds and stocks.
\1034\ See Board of Governors of the Federal Reserve System
(US), All Sectors; Federal Funds and Security Repurchase Agreements;
Asset, Level [BOGZ1FL892050005Q], retrieved from FRED, Federal
Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BOGZ1FL892050005Q, December 2, 2021.
\1035\ See, e.g., Cheng, Jeffrey and David Wessel. ``What is the
repo market, and why does it matter?'' (2020). Brookings Institute,
available at https://www.brookings.edu/blog/up-front/2020/01/28/what-is-the-repo-market-and-why-does-it-matter/.
---------------------------------------------------------------------------
The Commission estimates that there are currently 4 ATSs \1036\
facilitating trades in repurchase and reverse repurchase agreements.
Furthermore, the Commission estimates that 3 Communication Protocol
Systems facilitate trading in repurchase and reverse repurchase
agreements that may meet the definition of exchange under the proposed
changes to Exchange Act Rule 3b-16.\1037\ The Commission understands
that these systems typically use U.S. Treasury securities as collateral
for trades in repurchase and reverse repurchase agreements conducted on
their systems. The Commission understands that RFQ systems for
repurchase and reverse repurchase agreements are a relatively recent
and rapidly growing phenomenon.\1038\
---------------------------------------------------------------------------
\1036\ These ATSs are Current Government Securities ATSs. See
supra note 5.
\1037\ See, e.g., ``Tradeweb Reports September 2021 Total Volume
of $21.7 Trillion and Average Daily Volume of $1.02 Trillion,''
(2021). Tradeweb, available at https://www.tradeweb.com/newsroom/
media-center/news-releases/tradeweb-reports-september-2021-total-
volume-of-$21.7-trillion-and-average-daily-volume-of-$1.02-trillion/
; CME Group. (2021, July 2). ``CME Group Reports Q2 and June 2021
Monthly Market Statistics,'' CME Group, available at https://www.cmegroup.com/media-room/press-releases/2021/7/02/cme_group_reportsq2andjune2021monthlymarketstatistics.html;
``MarketAxess Announces Monthly Volume Statistics for September
2021,'' (2021). MarketAxess, available at https://investor.marketaxess.com/news-releases/news-release-details/marketaxess-announces-monthly-volume-statistics-september-2021;
``MarketAxess 3Q21: Stat Sheet,'' (2021), MarketAxess, available at
https://www.marketaxess.com/pdf/match-repo-stat-sheet.pdf; ``GLMX
Gains ATS and Broker-Dealer Status,'' (2018). THETRADE, available at
https://www.thetradenews.com/glmx-gains-ats-broker-dealer-status/.
\1038\ See ``Bloomberg launches electronic repo trading
system,'' (2005), Finextra, available at https://www.finextra.com/newsarticle/14580/bloomberg-launches-electronic-repo-trading-system.
---------------------------------------------------------------------------
Repurchase and reverse repurchase agreement transactions usually
involve collateral haircuts and counterparty risk inherent in the
contract. Counterparty risk may give market participants an incentive
to maintain balances across multiple liquidity providers to reduce
exposure to a single liquidity provider. This incentive to maintain
balances across multiple liquidity providers may be alleviated, at
least partially, if trades in repurchase and reverse repurchase
agreements with liquidity providers are centrally cleared as in
triparty repo trades.\1039\ The interest in maintaining balances across
multiple liquidity provider in bilateral transactions has spurred the
introduction and adoption of electronic RFQ platforms.\1040\
---------------------------------------------------------------------------
\1039\ See supra note 521 defining triparty repos.
\1040\ See also Trott, Tom, (2018), ``Electronic RFQ Repo
Markets,'' Tradeweb, available at https://www.tradeweb.com/newsroom/media-center/insights/commentary/electronic-rfq-repo-markets/ and
Trott, Tom, (2018). ``Electronic RFQ Repo Markets: The Solution for
Reporting Challenges and Laying the Building Blocks for
Automation,'' Tradeweb, available at https://www.tradeweb.com/4a6f74/globalassets/newsroom/media-center/insights/commentary/repo_-tradeweb.pdf.
---------------------------------------------------------------------------
Under FINRA Rule 6730(e), repurchase and reverse repurchase
agreement transactions involving TRACE-Eligible Securities are not
reportable to TRACE.\1041\ However, repurchase and reverse repurchase
agreement holdings and transactions are currently subject to several
other reporting requirements.\1042\
---------------------------------------------------------------------------
\1041\ See ``6730. Transaction Reporting'', FINRA, available at
https://www.finra.org/rules-guidance/rulebooks/finra-rules/6730.
\1042\ See https://www.financialresearch.gov/briefs/files/OFRbr-2015-03-repo-sec-lending.pdf. The Treasury's Office of Financial
Research (OFR) requires daily reporting by covered central
counterparties of centrally cleared U.S. repurchase and reverse
repurchase agreement transactions, which covers about half of the
estimate U.S. market for repurchase and reverse repurchase
agreements. See 84 FR 4975 (Feb. 20, 2019) (https://www.federalregister.gov/documents/2019/02/20/2019-02639/ongoing-data-collection-of-centrally-cleared-transactions-in-the-us-repurchase-agreement-market). OFR publishes daily aggregate data on
rates and volumes of repurchase and reverse repurchase agreement
transactions in each segment, by tenor or collateral. See https://www.financialresearch.gov/data/us-repo-data/. The Federal Reserve
Bank of New York (FRBNY) reports daily demand, utilization, rates
and participants of the Federal Reserve's Reverse Repo Facility.
Primary dealers are subject to weekly reporting requirements by the
Federal Reserve Bank of New York using Form FR2004, which describes
the repurchase and reverse repurchase agreement positions,
cumulative transactions, and outstanding financial arrangements and
becomes publically available a day after reporting. FR2004 does not,
however, include information on haircuts, rates, and counterparty
exposures. Non-primary dealers are not required to submit FR2004,
and consequently there is less available data on their bilateral
transactions. U.S. chartered depository institutions and bank
holding companies are required to report netted repurchase and
reverse repurchase agreement positions on a quarterly basis, which
becomes publically available. Much of the publically available data
from regulatory agencies is consolidated and produced quarterly by
the Federal Reserve Board in the form of the Financial Accounts of
the United States (Z.1).
---------------------------------------------------------------------------
The Commission is unable to determine the full scope of the role
[[Page 15617]]
played by Communication Protocol Systems in the market for repurchase
and reverse repurchase agreements because the Commission lacks data on
the volume facilitated by these systems. The Commission requests
comment on the full role of Communication Protocol Systems in this
market.
b. Asset-Backed Securities
Asset-backed securities (ABS) are securities that are
collateralized by an underlying pool of assets, usually constructed
from bundled loans such as mortgages, leases, credit card balances, and
student loans. A broad definition of asset-backed securities may
include assets such as Collateralized Bond Obligations (CBO),
Collateralized Debt Obligations (CDO), Collateralized Loan Obligations
(CLO), and Non-Agency Commercial Mortgage Backed Securities (CMBS),
along with non-agency mortgage-backed securities (MBS). The majority of
holders of ABS are large institutional investors. Data from 2015 shows
that asset managers are the largest holders of ABS, making up around 60
percent of buyers, followed by hedge funds (18 percent) and banks (10
percent).\1043\
---------------------------------------------------------------------------
\1043\ See https://www.greenwich.com/fixed-income-fx-cmds/understanding-us-fixed-income-market.
---------------------------------------------------------------------------
The presence of large institutions in this market is also evident
in looking at the secondary market trading data. In September 2021,
average daily trading volume in the ABS market was around $8 billion.
At the same time, there was only an average of 823 trades per day,
reflecting that average trade sizes in this market are very
large.\1044\ Due to the complexity and heterogeneity of ABS products,
liquidity in this market tends to be low. The majority of ABS never
trade after issuance.\1045\
---------------------------------------------------------------------------
\1044\ See https://www.finra.org/finra-data/browse-catalog/trace-volume-reports/trace-monthly-volume-files. We include trading
data for Asset Backed Securities (``ABS'') and Collateralized Bond
Obligations (CBO), Collateralized Debt Obligations (CDO),
Collateralized Loan Obligations (CLO), and Non-Agency Commercial
Mortgage Backed Securities (CMBS). See https://www.finra.org/finra-data/browse-catalog/trace-volume-reports/about-trace-monthly-volume-reports for definitions.
\1045\ See Bessembinder, H., Maxwell, W.F., & Venkataraman, K.
(2013). Trading activity and transaction costs in structured credit
products. Financial Analysts Journal, 69(6), 55-67.
---------------------------------------------------------------------------
There is evidence that the size of the ABS market has shrunk since
the 2008 financial crisis. Not only have new issues of ABS declined
sharply after the financial crisis, but overall daily trading volume in
secondary ABS markets fell by 16 percent between 2013 and 2017.\1046\
The Commission understands that very little ABS trading takes place on
ATSs. In September 2021, less than 0.1 percent of the average daily
trading volume in ABS was reported to TRACE as having taken place on
ATSs.\1047\ The Commission estimates that there are currently 3 ATSs
offering trading in ABS. Additionally, the Commission estimates that 1
ATS trades non-agency MBS securities.\1048\
---------------------------------------------------------------------------
\1046\ See He, A., & Mizrach, B. (2017). Analysis of securitized
asset liquidity. Research Note, FINRA Office of the Chief Economist.
\1047\ See https://www.finra.org/finra-data/browse-catalog/trace-volume-reports/trace-monthly-volume-files.
\1048\ Note that Form ATS doesn't have a specific category for
ABS. The number of ATSs trading in ABS is estimated from a
combination of the number of ATSs that report Form ATS-R volume for
``Other Debt Securities,'' which could include asset-backed
securities, and TRACE MPIDs with ABS-related volumes and ATS flags.
---------------------------------------------------------------------------
As the data mentioned above shows, 99.9 percent of ABS trading
volume takes place through trading methods other than ATSs, and some of
this trading volume may take place using protocols that qualify as
Communication Protocol Systems. The Commission estimates that there are
3 Communication Protocol Systems trading in ABS that may meet the
definition of exchange under the proposed changes to Exchange Act Rule
3b-16. As in other fixed income markets, Communication Protocol Systems
trading in ABS do not meet the current definition of an exchange and
thus are not subject to the exchange regulatory framework. The
Commission estimates that 1 Communication Protocol System trading in
ABS is not currently operated by a registered broker-dealer. This
system does not currently incur the costs of registering with the
Commission as well as the costs of SRO membership, and is not subject
to FINRA operational regulatory reporting requirements.
It is likely that the vast majority of trading in ABS still takes
place via bilateral voice trading. Industry participants have pointed
out that the complexity of this market makes it more likely that
traders want discussions with and access to individualized guidance
from dealers and analysts in deciding whether to trade, which can be
difficult to achieve on more automated electronic platforms.\1049\
---------------------------------------------------------------------------
\1049\ See ``ABS East 2014: Securitization Shrugs off Electronic
Trading,'' (2014). American Banker, available at https://asreport.americanbanker.com/news/abs-east-2014-securitization-shrugs-off-electronic-trading.
---------------------------------------------------------------------------
Since 2011, FINRA has required FINRA members to report transaction
prices and quantities in ABS to TRACE.\1050\ In 2015, FINRA began
publishing post-trade price information for ABS, which is available to
the public no later than 15 minutes after the trade is executed.\1051\
---------------------------------------------------------------------------
\1050\ See FINRA Rule 6730(a)(1) requiring FINRA members to
report transactions in TRACE-Eligible Securities, which FINRA Rule
6710 defines to include asset-backed securities. For each
transaction in asset-backed securities, a FINRA member would be
required to report the CUSIP number or similar numeric identifier or
FINRA symbol; size (volume) of the transaction; price of the
transaction (or elements necessary to calculate price); symbol
indicating whether transaction is a buy or sell; date of trade
execution (``as/of'' trades only); contra-party's identifier;
capacity (principal or agent); time of execution; reporting side
executing broker as ``give-up'' (if any); contra side introducing
broker (in case of ``give-up'' trade); the commission (total dollar
amount), if applicable; date of settlement; if the member is
reporting a transaction that occurred on an ATS pursuant to FINRA
Rule 6732, the ATS's separate Market Participant Identifier
(``MPID''); and trade modifiers as required. See FINRA Rule 6730(c).
\1051\ See https://www.finra.org/media-center/news-releases/2015/finra-brings-transparency-asset-backed-securities-market.
---------------------------------------------------------------------------
C. Economic Effects and Effects on Efficiency, Competition, and Capital
Formation
The Commission has considered the economic effects of the proposed
amendments to Exchange Act Rule 3b-16, Regulation ATS, and Regulation
SCI.
The Commission recognizes that under the proposed amendments, a
bank-operated Currently Exempted Government Securities ATS or
Communication Protocol System could choose to register as an exchange
rather than choose to comply with the Regulation ATS exemption, which
includes registering as a broker-dealer.\1052\ A bank-operated
Currently Exempted Government Securities ATS or Communication Protocol
System that chooses to register as an exchange would be an SRO and
subject to the requirements under Section 6 of the Exchange Act.\1053\
The Commission preliminarily believes that registering as a national
securities exchange would enhance regulatory oversight, market
surveillance, and investor protection.\1054\ Registering as an exchange
would also result in costs associated with applying to register as a
national securities exchange and complying with the requirements under
Section 6(b) of the Exchange Act, such as the requirement to be so
organized and have the capacity to carry out the
[[Page 15618]]
purposes of the Exchange Act and enforce member compliance with Federal
securities laws and the rules of the exchange.\1055\ However, the
Commission expects that many Communication Protocol Systems would not
elect to register as an exchange but instead would register as a
broker-dealer and comply with Regulation ATS because the regulatory
costs associated with registering and operating as an exchange would be
higher than those associated with registering as a broker-dealer and
complying with Regulation ATS.\1056\ Similarly, the Commission
preliminarily believes that a bank-operated Currently Exempted
Government Securities ATS would also choose to structure its business
to comply with the relatively lighter regulatory requirements of
Regulation ATS.
---------------------------------------------------------------------------
\1052\ As proposed, Currently Exempted Government Securities
ATSs that are operated by banks would be required to structure their
business to either comply with Regulation ATS or register as a
national securities exchange. See supra footnote 261. The Commission
also expects Currently Exempted Government Securities ATSs currently
registered as broker-dealers will continue to operate as broker-
dealers under the proposal rather than register as a national
securities exchange.
\1053\ See supra Section II.A.
\1054\ See Regulation ATS Adopting Release at 70903-07 for a
discussion of benefits and costs for registering as a national
securities exchange.
\1055\ See generally supra Section II.D.1 (discussing the
national securities exchange registration requirements under
Sections 6 of the Exchange Act).
\1056\ See supra Section II.B.3.
---------------------------------------------------------------------------
The Commission has attempted, where possible, to quantify the
benefits and costs anticipated to result from the amendments to
Exchange Act Rule 3b-16, Regulation ATS, and Regulation SCI. However,
as explained in more detail below, because the Commission does not
have, and in certain cases does not believe it can reasonably obtain
data to inform the Commission on certain economic effects, the
Commission is unable to quantify certain economic effects. Further,
even in cases where the Commission has some data, it might not be
practicable to perform a quantitative analysis due to the number and
type of assumptions necessary to quantify certain economic effects,
which would likely render any such quantification unreliable.
Therefore, certain parts of the discussion below are qualitative in
nature and focus on the direction of the various effects of the
amendments. The inability to quantify certain benefits and costs,
however, does not mean that the overall benefits and costs of the
proposed amendments are insignificant.
1. Benefits
The Commission has considered the benefits of the proposed
amendments to Exchange Act Rule 3b-16, Regulation ATS, and Regulation
SCI.
a. Enhancement of Regulatory Oversight and Investor Protection
The proposed amendments to Exchange Act Rule 3b-16, which would
include Communication Protocol Systems within the definition of
exchange, along with the proposed amendments to remove the exemption
from compliance with Regulation ATS for Currently Exempted Government
Securities ATSs and apply the enhanced disclosure and filing
requirements of Rule 304 to all Government Securities ATSs would
enhance regulatory oversight and investor protection.\1057\
---------------------------------------------------------------------------
\1057\ The proposed amendments would enhance regulatory
oversight and investor protection by requiring: Non-broker-dealer-
operated Communication Protocol Systems and bank-operated Currently
Exempted Government Securities ATSs to register as a broker-dealers;
Communication Protocol Systems and Currently Exempted Government
Securities ATSs to safeguard subscribers' confidential trading
information; Communication Protocol Systems and Currently Exempted
Government Securities ATSs to comply with recordkeeping and
reporting requirements; Communication Protocol Systems that are not
Government Securities ATSs nor NMS Stock ATSs to file Form ATS; and
Government Securities ATSs and Communication Protocol Systems that
are NMS Stock ATSs to file Form ATS-N. One commenter on the 2020
Proposal stated that removing the exemption for Currently Exempted
Government Securities ATSs would significantly improve market
transparency and resiliency, and that requirements to provide
transparency to market participants regarding key aspects of the
platform, and comply with fair access requirements would promote
market integrity and help to ensure that multilateral U.S. Treasury
trading venues are subject to appropriate regulatory oversight. See
Citadel Letter at 1. Another commenter stated that the extension of
Regulation ATS to include Currently Exempted Government Securities
ATSs would help foster investor protection and market integrity. See
FINRA Letter at 2.
---------------------------------------------------------------------------
The proposed amendments would enhance regulatory oversight and
investor protection and help facilitate market surveillance by
extending the broker-dealer registration requirement of Regulation ATS
to Currently Exempted Government Securities ATSs that are operated by
banks (i.e., bank-operated Currently Exempted Government Securities
ATSs) and Communication Protocol Systems that are not operated by
registered broker-dealers (i.e., non-broker-dealer-operated
Communication Protocol Systems).\1058\ Registering as a broker-dealer
would require, among other things, the filing of Form BD and SRO
membership. Such requirements would allow the Commission and an SRO to
examine bank-operated Currently Exempted Government Securities ATSs and
non-broker-dealer-operated Communication Protocol Systems for
compliance with Federal securities laws.\1059\ Furthermore, upon
registering as broker-dealers and becoming members of an SRO, these
Currently Exempted Government Securities ATSs and Communication
Protocol Systems would be required to report certain transactions to an
SRO for public dissemination, which would help facilitate market
surveillance by the SRO.\1060\
---------------------------------------------------------------------------
\1058\ Non-broker-dealer-operated Communication Protocol Systems
without a broker-dealer affiliate would be required to register as
broker-dealers with the Commission and become members of an SRO
under the proposed Rule 301(b)(1). Proposed Rule 301(b)(1) would
enhance regulatory oversight over the estimated 1 bank-operated
Currently Exempted Government Securities ATS and 9 non-broker-
dealer-operated Communication Protocol Systems (6 non-broker-dealer-
operated Communication Protocol Systems without a broker-dealer
affiliate and 3 non-broker-dealer-operated Communication Protocol
Systems with a broker-dealer affiliate). See also Section
VIII.C.2.a.ii for a discussion about a bank-operated Currently
Exempted Government Securities ATS and non-broker-dealer-operated
Communication Protocol Systems with a broker-dealer affiliate
adopting a registered affiliate structure to comply with the
proposed Rule 301(b)(1).
\1059\ The broker-dealer registration would enable the
Commission to examine the trading operations of registered broker-
dealer operators and FINRA to examine its members and markets that
its members operate. See also supra Section II.D.2.
\1060\ FINRA Rule 6730(a)(1) would require its members to report
transactions of certain securities to FINRA. See FINRA Rule
6730(a)(1) requiring FINRA members to report transactions in TRACE-
Eligible Securities, which FINRA Rule 6710 defines to include any
debt security that is U.S. dollar-denominated and is: Issued by a
U.S. or foreign private issuer, and, if a restricted security, sold
pursuant to Securities Act Rule 144A; issued or guaranteed by an
Agency or a Government-Sponsored Enterprise; or a U.S. Treasury
Security. Debt securities issued by foreign sovereigns and Money
Market Instruments are explicitly excluded. Note that, under FINRA
Rule 6730(e), repurchase and reverse repurchase transactions
involving TRACE-Eligible Securities are not reportable to TRACE. See
also MSRB Rule G-14 requiring brokers, dealers and municipal
securities dealers (``dealers'') to report transactions in municipal
securities. See supra note 829 describing exemptions for ATS
transaction reporting to TRACE and supra note 926 describing
exemptions for transaction reporting to MSRB's RTRS. Trades in
restricted equities effected under Securities Act Rule 144A that are
transacted elsewhere than on an exchange are required to be reported
to FINRA's OTC Reporting Facility (ORF) if at least one of the
parties to the transaction is a FINRA member. See supra note 988.
---------------------------------------------------------------------------
The magnitude of benefits from this increase in transaction
transparency depends on the portion of transactions executed by bank-
operated Currently Exempted Government Securities ATSs and non-broker-
dealer-operated Communication Protocol Systems. However, these
platforms are not subject to transaction reporting obligations, and
thus, the Commission cannot estimate the magnitude of this benefit
because the Commission does not have data on transactions executed by
the estimated 1 bank-operated Currently Exempted Government Securities
ATS and 9 non-broker-dealer-operated Communication Protocol
Systems.\1061\
---------------------------------------------------------------------------
\1061\ The Commission estimates that there is currently 1 non-
broker-dealer-operated Communication Protocol System trading in
government and agency securities, corporate and municipal debt
securities, and ABS/MBS. The Commission also estimates that there
are 5 additional non-broker-dealer-operated Communication Protocol
Systems trading in corporate debt securities, 2 trading in
restricted equities, and 1 trading in repos. One commenter on the
2020 Proposal stated that, even if benefits from expanding
Regulation ATS to bank-operated Currently Exempted Government
Securities ATSs are limited by the Commission's estimate that there
is only one bank-operated Currently Exempted Government Securities
ATS today, the Proposal will also help maintain and promote the
integrity of the Treasuries audit trail in the future to the extent
it limits the opportunity for trades to be done on non-broker-dealer
ATSs to avoid inclusion in the TRACE audit trail. See FINRA Letter
at 4.
---------------------------------------------------------------------------
[[Page 15619]]
Furthermore, the proposed requirements with respect to safeguarding
subscribers' confidential trading information would enhance investor
protection by helping to prevent Currently Exempted Government
Securities ATSs and Communication Protocol Systems from potentially
abusing such information. The requirements to establish written
safeguards and procedures to protect subscribers' confidential trading
information and to separate ATS functions from other broker-dealer
functions for Currently Exempted Government Securities ATSs and
Communication Protocol Systems would reduce the chance that a
subscriber's confidential information is accessed or shared
inappropriately.\1062\ While the Commission lacks information on the
extent to which the confidential trading information of subscribers to
Currently Exempted Government Securities ATSs and Communication
Protocol Systems is currently accessed or shared inappropriately,\1063\
the requirements would promote the protection of confidential
information even if such information is not being inappropriately
accessed or shared.
---------------------------------------------------------------------------
\1062\ One commenter on the 2020 Proposal stated that requiring
Currently Exempted Government Securities ATSs to adopt written
safeguards and written procedures to protect subscribers'
confidential trading information and to separate ATS functions from
other broker-dealer functions can help protect the integrity of a
subscriber's confidential trading information that could otherwise
be at risk of unauthorized disclosure and subject to potential
misuse, and that such safeguards and practices also can help prevent
the sharing of confidential subscriber trading information by ATSs
with other customers or having the operator of the ATS use the
confidential trading information of other subscribers to advantage
its own trading on the ATS. See MFA Letter at 3.
\1063\ Although the Commission currently lacks this information,
we describe above a potential scenario where the confidential
trading information of a subscriber could be impermissibly shared
with the personnel of the broker-dealer operator or any of its
affiliates, and the broker-dealer operator, in turn, could
potentially abuse that relationship to provide itself or its
affiliates with a direct competitive advantage over that subscriber.
See supra Section VIII.B.2.a.ii.
---------------------------------------------------------------------------
Moreover, the proposed amendment to apply the recordkeeping \1064\
and reporting requirements \1065\ of Regulation ATS to Currently
Exempted Government Securities ATSs and Communication Protocol Systems
would help improve regulatory oversight because the requirements to
keep and preserve records of customer trading interest and transactions
would create an audit trail of trading activities on these
systems.\1066\ This information would allow the Commission to better
monitor the types of investors that trade on these systems, help the
Commission understand the role these systems play in their respective
securities markets, and improve the ability of the Commission or an SRO
to detect and investigate potential irregularities that might occur in
markets in which these systems operate.
---------------------------------------------------------------------------
\1064\ See supra Section II.D.2 for a discussion about the
requirements of Rule 302 and 303.
\1065\ Rule 301(b)(9) would require filing of Form ATS-R.
\1066\ One commenter on the 2020 Proposal stated that requiring
currently exempted Government Securities ATSs to comply with the
recordkeeping and reporting requirements of Regulation ATS and
requiring such ATSs to file a confidential Form ATS-R with the
Commission would improve the Commission's ability to monitor
currently exempted Government Securities ATSs and improve its
oversight of the market for government securities execution services
overall. See MFA Letter 3.
---------------------------------------------------------------------------
By requiring Currently Exempted Government Securities ATSs and
Communication Protocol Systems to provide certain information on Form
ATS-R, such as a list of all securities traded and all subscribers that
were participants on the ATS during a reporting quarter, the Commission
would be able to better monitor the trading on ATSs and evaluate for
compliance with the Federal securities laws including Fair Access Rule
and Regulation SCI, if applicable. The information collected on Form
ATS-R regarding fair access grants, denials, and limitations of access
to ATSs along with the proposed amendment to ask the ATS to indicate
whether it was subject to the Fair Access Rule during any portion of
the period covered by the report would help the Commission oversee
those ATSs to evaluate for compliance with the Fair Access Rule.
Furthermore, requiring information with respect to repurchase and
reverse repurchase transactions on Form ATS-R would help the Commission
identify and monitor important ATSs in the market for repurchase and
reverse repurchase agreements.
The proposed amendments to require Government Securities ATSs
\1067\ and Communication Protocol Systems that are NMS Stock ATSs
\1068\ to file Form ATS-N would help facilitate the Commission's
regulatory oversight and enhance investor protection. Under the
proposed amendments, Current Government Securities ATSs would file Form
ATS-N in lieu of Form ATS for their government securities trading
operations. In addition, under the proposed amendments, Currently
Exempted Government Securities ATSs and Communication Protocol Systems
that are either Government Securities ATSs or NMS Stock ATSs would be
required to file Form ATS-N. Information reported on Form ATS-N would
provide the Commission with increased and better quality information on
Current Government Securities ATSs and improve the effectiveness and
efficiency of the examination process of Government Securities ATSs and
Communication Protocol Systems that are NMS Stock ATSs by facilitating
the Commission and the ATS SRO's ability to better examine for
compliance with the Federal securities laws.
---------------------------------------------------------------------------
\1067\ Government Securities ATSs would include Currently
Exempted Government Securities ATSs, Current Government Securities
ATSs, and Communication Protocol Systems that trade government
securities.
\1068\ The filing of Form ATS-N would be a new requirement for
Government Securities ATSs. Currently, NMS Stock ATSs are required
to file Form ATS-N. See NMS Stock ATS Adopting Release, supra note
2.
---------------------------------------------------------------------------
Furthermore, the Commission's review process to declare Form ATS-N
ineffective that is set forth in the proposed amendments would help
ensure the quality of information disclosed in Form ATS-N. One
commenter on the 2020 Proposal stated that market participants are
incentivized to make disclosures that are robust, readable and
sufficient because of the competitive forces and the variety of
regulatory tools the Commission and other regulators have at their
disposal to police the quality and content of statements made on the
previously proposed Form ATS-G.\1069\ While competitive forces would
likely incentivize Government Securities ATSs to make robust, readable
and sufficient disclosures, the Commission preliminarily believes that
extending the ability for the Commission to be able to declare a
Government Securities ATS's Form ATS-N or Form ATS-N amendment
ineffective would improve the quality of information disclosed by these
ATSs as compared to the information currently filed on Form ATS by
Current Government Securities ATSs, which is not subject to the
Commission's review and effectiveness process. The Commission's recent
experience with Form ATS-N for NMS Stock ATSs informs this belief.
Since February 2019, the Commission has reviewed initial Form ATS-N
filings and amendments thereto and engaged in direct conversation with
all NMS Stock
[[Page 15620]]
ATSs about their Form ATS-N filings. The Commission believes that this
review process has helped ensure that such disclosures are complete and
comprehensible. Many NMS Stock ATSs have opted to seek the Commission
staff's input about pending material amendments prior to filing, which
has contributed to clearer and more effective disclosures. When new NMS
Stock ATSs seek to begin operations, the initial Form ATS-N provides
the Commission with detailed information about how the ATS will
operate. With this knowledge, the Commission is better able to monitor
for compliance and evaluate how NMS Stock ATSs as a group are evolving.
Requiring Communication Protocol Systems that are not NMS Stock ATSs
nor Government Securities ATSs to file confidential Form ATS would
improve the Commission oversight of those Communication Protocol
Systems and promote investor protection. The information regarding the
manner of operation, the procedures governing execution, reporting,
clearance, and settlement of transactions, types of securities traded,
and subscriber information disclosed in Form ATS would help the
Commission monitor securities markets for which Communication Protocol
Systems provide trading services, and oversee the compliance with
Federal securities laws. These benefits from requiring Form ATS, while
similar in kind, would be smaller in magnitude compared to the benefits
from requiring Form ATS-N because of the differences between the
information disclosed in Form ATS and Form ATS-N.\1070\
---------------------------------------------------------------------------
\1069\ See SIFMA Letter at 4.
\1070\ Form ATS-N requires detailed disclosure about the manner
of operations of ATSs, including display, execution and priority
procedures, order segmentation, counterparty selection, fair access,
eligibility of services, fees, and suspension of trading. See NMS
Stock ATS Adopting Release, supra note 2.
---------------------------------------------------------------------------
b. Reduction of Trading Costs and Improvements to Execution Quality
The proposed amendments would help enhance operational
transparency, reduce trading costs, and improve execution quality for
market participants \1071\ by requiring public disclosure of Form ATS-N
and applying the Fair Access Rule to certain ATSs. The public
disclosure of Form ATS-N for Government Securities ATSs and
Communication Protocol Systems that trade NMS stocks would also help
enhance operational transparency, and thus, reduce search costs and
trading costs for market participants.\1072\ The reduced search costs
and trading costs would result in better execution quality for market
participants. Specifically, based on Commission staff's experience with
its review of initial Form ATS-N filings for NMS Stock ATSs, Form ATS-N
would result in more standardized public information about Government
Securities ATSs and Communication Protocol Systems that trade NMS
stocks including how trading interests are handled, fee structures, the
ATS's interaction with related markets, liquidity providers, activities
the ATS undertakes to surveil and monitor its market, and any potential
conflicts of interest that might arise from the activities of the
broker-dealer operator or its affiliates. As a result, search costs for
market participants would be lower because consistent disclosure
requirements for all Government Securities ATSs and NMS Stock ATSs,
including Communication Protocol Systems, would facilitate market
participants' comparison of Government Securities ATSs and NMS Stock
ATSs when deciding which venue best suits their trading objectives. In
addition, based on the Commission's experience, fees can be a primary
factor for market participants in deciding where to send their
orders.\1073\ Fee disclosures on Form ATS-N and requiring consistent
and timely fee amendments on Form ATS-N would help market participants
compare and analyze the fee structures and fee ranges across Government
Securities ATSs and NMS Stock ATSs in an expedited manner and decide
which ATS offers them the best pricing according to the characteristics
of their order flow and the type of participant they are, which would
lower their search costs and hence trading costs.
---------------------------------------------------------------------------
\1071\ Market participants would include prospective subscribers
of Government Securities ATSs and Communication Protocol Systems
that trade NMS stocks. For example, prospective subscribers would
benefit from the public disclosure of Form ATS-N in their selection
of trading venues.
\1072\ One commenter on the 2020 Proposal stated that it agrees
with the Commission that the proposed public disclosure of the
operational aspects of Government Securities ATSs could improve
investors' ability to select trading venues and lower trading costs.
See FINRA Letter at 2. Another commenter stated that increasing
accessibility to and standardizing information regarding the
operations and activities of fixed income trading venues benefits
investors by helping them make more informed decisions about where
to send their orders. See MFA Letter at 9. A third commenter stated
that more operational transparency would aid investors in conducting
analysis of executions, and that transparency regarding pricing,
market activity and market quality promotes healthy competition in
the market place, supports fair and equitable access to potential
participants and offers investor protection. See SIFMA Letter at 1
and 2.
\1073\ As discussed above, market participants may select
trading venues based on factors other than fees. For example,
investors interested in effecting transactions in U.S. Treasury
Securities and corporate debt securities simultaneously may find
information regarding a trading venue's interaction with related
markets on Form ATS-N useful in the selection of trading venue.
---------------------------------------------------------------------------
Furthermore, the proposed requirement that Government Securities
ATSs \1074\ and Communication Protocol Systems that trade NMS stocks
file Form ATS-N subject to the Commission's review and effectiveness
process would help ensure the quality of information disclosed in Form
ATS-N with attendant benefits to market participants who utilize Form
ATS-N, including helping market participants select a trading venue
that best suits their trading objectives.\1075\
---------------------------------------------------------------------------
\1074\ Government Securities ATSs would include Currently
Exempted Government Securities ATSs, Current Government Securities
ATSs, and Communication Protocol Systems that trade government
securities.
\1075\ For more discussion on the impact of the effective
process on the quality of Form ATS-N disclosures, see supra Section
VIII.C.1.a.
---------------------------------------------------------------------------
With regard to the Commission's proposal to require Government
Securities ATSs and NMS Stock ATSs to file fee amendments with respect
to fee changes, under the current filing requirements of Form ATS-N,
there could be a considerable lapse of time from the actual fee change
to the public disclosure of the fee change on Form ATS-N if an NMS
Stock ATS files a fee change as an updating amendment.\1076\ If there
is such delay in the public disclosure of fee changes on Form ATS-N,
requiring NMS Stock ATSs to file a fee amendment no later than the date
it makes a change to a fee or fee disclosure would result in more
timely public disclosure of fee changes for NMS Stock ATSs. Because the
fee is an important factors in the selection of trading venues, the
proposed fee amendment on Form ATS-N would allow market participants to
use more up-to-date fee information in the selection of trading venues,
which could lower trading costs for market participants.
---------------------------------------------------------------------------
\1076\ In the Commission staff's experience reviewing Form ATS-N
amendments, some NMS Stock ATSs have filed updating amendments no
later than 30 days from the end of the calendar quarter in which the
ATS implemented the fee change. See also supra Section IV.A.
---------------------------------------------------------------------------
However, the Commission is unable to quantify these benefits to
market participants because the Commission lacks data on the amount of
information that is currently available to different market
participants regarding the operations of Government Securities ATSs and
Communication Protocol Systems that are NMS Stock ATSs operations and
the activities of their broker-dealer operators and their affiliates.
The magnitude of the anticipated benefits discussed above
[[Page 15621]]
would also depend on a number of factors, including the extent to which
market participants would change their behavior as a result of
receiving the public disclosure of more comprehensive, comparable, and
uniform information of this type in Form ATS-N. It is inherently
difficult to predict how different market participants would use the
information contained in Form ATS-N in evaluating and choosing the
Government Securities ATSs and NMS Stock ATSs that best serve their
trading objectives.
The Commission believes that applying the Fair Access Rule to
Government Securities ATSs, which would require the establishment and
objective application of fair access standards, would increase trading
venue options available to market participants who are currently
excluded. To the extent that there are market participants that wish to
trade on significant Government Securities ATSs but are currently
excluded from doing so, applying the Fair Access Rule to Government
Securities ATSs would lower their trading costs.\1077\ As discussed in
Section VIII.B.2.a.ii, market forces alone may not be sufficient to
prevent a significant Government Securities ATS from unreasonably
denying access to some market participants.\1078\ Under the proposed
amendments, if a Government Securities ATS meets certain aggregate
volume thresholds,\1079\ the ATS would be required to establish and
apply reasonable written standards for granting, limiting, and denying
access to subscribers and applicants.\1080\ As a result, for example,
there would be a mechanism to prevent a Government Securities ATS that
met the aggregate volume thresholds \1081\ from unreasonably denying
access to one institutional investor while granting access to another
similarly-situated institutional investor.\1082\
---------------------------------------------------------------------------
\1077\ The Commission estimates 8 Government Securities ATSs
would be subject to the Fair Access Rule. One commenter on the 2020
Proposal stated that registered investment companies generally are
not able to directly access liquidity on most Treasury interdealer
platforms. See ICI Letter at 4. Other commenters stated that
applying the Fair Access Rule to Government Securities ATSs would
ensure that market participants are not unreasonably denied access
from important sources of liquidity for a particular security (see
SIFMA Letter at 5) and would ensure that qualified market
participants have access to the U.S. Government Securities market
(see FIA PTG Letter at 2). Another commenter stated that including
the trading of U.S. Treasury Securities and Agency Securities in the
Fair Access Rule can prevent discriminatory actions that would
otherwise result in higher trading costs for investors and the
reduction in trading efficiency. See MFA Letter at 4.
\1078\ See also supra note 833 and accompanying text.
\1079\ The proposed Fair Access threshold for U.S. Treasury
Securities is 3 percent or more of the average weekly dollar volume
traded in the United States. The proposed Fair Access threshold for
Agency Securities is 5 percent or more of the average daily dollar
volume traded in the United States. The Fair Access threshold for
NMS stocks and equity securities are 5 percent or more of the
average daily share volume in an individual security. The Fair
Access threshold for corporate debt and municipal securities is 5
percent or more of the average daily dollar volume. See supra
Section III.B.4 for a discussion about the volume thresholds for
government securities in applying the Fair Access Rule. See also
supra Section V.A.2 for a discussion about the aggregation of volume
threshold.
\1080\ See supra Section V.A.3.
\1081\ See supra Section III.B.4 for discussion about volume
thresholds.
\1082\ One commenter on the 2020 Proposal stated that applying
fair access requirements to Government Securities ATSs would enhance
the ability of funds to onboard and participate on these platforms
directly, and that the fair access to these additional pools of
liquidity would benefit fund shareholders. See ICI Letter at 4.
---------------------------------------------------------------------------
Significant ATSs that trade NMS stocks, non-NMS stock equity
securities, corporate debt securities, or municipal securities are
subject to the Fair Access Rule of Regulation ATS.\1083\ However,
Communication Protocol Systems and passive systems that trade NMS
stocks are currently not subject to the Fair Access Rule, but would be
under the proposed amendments.\1084\ Applying the Fair Access Rule to
those significant Communication Protocol Systems would generate the
benefits discussed above for market participants in the markets for
corporate debt securities, municipal securities, and non-NMS stocks.
Additionally, the proposed amendments would help ensure that the
benefits of the Fair Access Rule would also apply if a Communication
Protocol System or passive system reached significant size and met the
aggregate volume thresholds in the future.
---------------------------------------------------------------------------
\1083\ The Commission estimates 2 Communication Protocol Systems
that trade corporate debt securities and 1 Communication Protocol
System that trades municipal securities would be subject to the Fair
Access Rule. Furthermore, the Commission estimates that 3
Communication Protocol Systems that trade non-NMS stock equity
securities would be subject to the Fair Access Rule, but that no
Communication Protocol System and no passive system that trades NMS
stocks would be subject to the Fair Access Rule.
\1084\ Communication Protocol Systems would be subject to Rule
3b-16 and Regulation ATS. See supra Section II.D. The exemption for
passive systems under Rule 301(b)(5)(iii) of Regulation ATS would be
removed. See supra Section V.A.5.
---------------------------------------------------------------------------
To the extent that there are market participants currently excluded
from trading on significant ATSs, the proposed amendments to aggregate
volume across affiliated ATSs in calculating certain volume thresholds
under the Fair Access Rule would increase the number of smaller
affiliate ATSs available to market participants who are currently
excluded, which would lower their trading costs for them. The proposed
amendments to apply certain aggregate volume thresholds would increase
the number of smaller affiliate ATSs that would be subject to the Fair
Access Rule. Smaller affiliate ATSs that would not have met the current
volume thresholds individually would be subject to the Fair Access Rule
if they meet the proposed aggregate volume thresholds. The Commission
estimates that no current smaller affiliate ATS that trades NMS stocks,
non-NMS stock equity securities, corporate debt securities, or
municipal securities and does not already currently meet the Fair
Access volume thresholds would meet the volume thresholds if volume is
aggregated across affiliated ATSs.\1085\
---------------------------------------------------------------------------
\1085\ This estimate is computed using the regulatory version of
FINRA's Trade Reporting Facility data and NYSE's TAQ data (accessed
via WRDS). See supra note 1079 for details on the Fair Access
thresholds. See supra note 310 for the application of the Fair
Access Rule on the trading of NMS stocks, non-NMS stock equity
securities, municipal securities, and corporate debt securities. See
also supra Section V.A.2 for a discussion about the aggregation of
volume threshold.
---------------------------------------------------------------------------
c. Enhancement of Price Discovery and Liquidity
Applying broker-dealer registration requirements of Regulation ATS,
Regulation SCI, and the Capacity, Integrity, and Security Rule (i.e.,
Rule 301(b)(6) of Regulation ATS) under the proposed amendments would
help enhance the price discovery process and liquidity in securities
markets.\1086\
---------------------------------------------------------------------------
\1086\ The proposed amendments would help enhance the price
discovery process and liquidity in securities markets through:
Applying the broker-dealer registration requirements of Regulation
ATS to bank-operated Currently Exempted Government Securities ATSs
and non-broker-dealer-operated Communication Protocol Systems;
applying Regulation SCI to Government Securities ATSs that meet
certain volume thresholds; applying Rule 301(b)(6) to significant
Communication Protocol Systems that trade corporate debt securities
or municipal securities; and applying Regulation SCI to significant
Communication Protocol Systems that trade NMS stocks and non-NMS
stock equity securities.
---------------------------------------------------------------------------
The proposed broker-dealer registration requirements of Regulation
ATS, including SRO membership requirements, for bank-operated Currently
Exempted Government Securities ATSs and non-broker-dealer-operated
Communication Protocol Systems would enhance the price discovery
process in securities markets. As discussed in Section II.B.3, upon
registering as broker-dealers and becoming members of an SRO, bank-
operated Currently Exempted Government Securities ATSs and non-broker-
dealer-operated Communication Protocol Systems would be required to
report certain transactions to an SRO for
[[Page 15622]]
public dissemination, which would help enhance price discovery by
providing the market with better post-trade price transparency in the
government securities market and other securities markets in which the
Communication Protocol Systems provide trading services.\1087\
---------------------------------------------------------------------------
\1087\ FINRA members are subject to transaction reporting
obligation under FINRA Rule 6730, while municipal bond dealers are
subject to transaction reporting obligations under MSRB Rule G-14.
See supra note 1060, discussing transaction reporting requirements
for fixed income securities and supra note 1061, describing the non-
broker-dealer-operated Communication Protocol Systems that are not
currently subject to reporting requirements. As discussed in supra
Section VIII.C.1.a, the Commission is unable to estimate the
magnitude of this benefit because the Commission lacks the necessary
data. Except for government securities, reported transactions in all
other TRACE-Eligible Securities (which includes Agency securities,
corporate debt securities, and ABS) are publically disseminated via
FINRA TRACE. FINRA disseminates weekly summary of U.S. Treasury
Securities transactions produced from TRACE data. See FINRA Rule
6740. Reported transactions in municipal debt securities are
publicly disseminated via EMMA, which is a service operated by the
MSRB. See supra note 658. Trades in restricted equity securities
effected pursuant to Rule 144A are reported to the FINRA's ORF for
regulatory purposes only and are not publicly disseminated.
---------------------------------------------------------------------------
The Commission believes that applying the proposed requirements of
Regulation SCI to Government Securities ATSs that meet certain volume
thresholds would help prevent systems issues from occurring and reduce
their severity when they do occur, and thus, limit interruptions to the
price discovery process and liquidity flow in the government securities
market.\1088\ As discussed in Section VIII.B.2.a.ii, market forces
alone may not be sufficient to induce significant Government Securities
ATSs to establish standards that would help significantly reduce
systems issues.\1089\ A systems outage at a significant Government
Securities ATS would not only disrupt price discovery \1090\ and
liquidity flow, but also would reduce trading venue options resulting
in higher trading costs for market participants.
---------------------------------------------------------------------------
\1088\ The Commission estimates that 4 Government Securities
ATSs would be subject to Regulation SCI. See Table VIII.1 in supra
Section VIII.B.2.a.i and Section VIII.B.2.d. See Sections VIII.B.2.a
and VIII.B.2.b for discussions about the importance of real-time
price information on Government Securities ATS and indicative quotes
on Communication Protocol Systems that trade U.S. Treasury
Securities in price discovery of various securities. The proposed
amendments to Regulation SCI would promote the establishment of more
robust systems that are less likely to experience a system
disruption by requiring Government Securities ATSs that meet the
definition of SCI entity to establish and enforce written policies
and procedures to ensure that their SCI systems have adequate levels
of capacity, integrity, resiliency, availability, and security to
maintain the SCI entity's operational capability. Furthermore, the
extension of Regulation SCI would help strengthen the infrastructure
and improve the resiliency of the automated systems of Government
Securities ATSs that are important to the government securities
markets. See also Section III.C.
\1089\ See also supra note 838 and accompanying text.
\1090\ See supra Sections VIII.B.2.a and VIII.B.2.b for
discussions about the importance of real-time price information on
Government Securities ATS and indicative quotes on Communication
Protocol Systems that trade U.S. Treasury Securities in price
discovery of various securities.
---------------------------------------------------------------------------
The Commission recognizes that one Government Securities ATS is
operated by a broker-dealer operator of an NMS Stock ATS that is a SCI
entity, and therefore, might already have modified some of the policies
and procedures of Regulation SCI as needed for systems related to
trading of U.S. Treasury Securities and Agency Securities.\1091\
However, imposing the requirements of Regulation SCI on this ATS's
systems related to trading of U.S. Treasury Securities and Agency
Securities would further strengthen these policies and procedures,
which would help improve the robustness of SCI systems and SCI indirect
systems.
---------------------------------------------------------------------------
\1091\ See supra Section VIII.B.2.a.ii for a discussion of
Government Securities ATSs of existing SCI entities.
---------------------------------------------------------------------------
Furthermore, extending Regulation SCI to significant Government
Securities ATSs would help prevent disruptions in trading of linked
fixed income securities, such as corporate debt securities, and thus,
enhance the price discovery process and liquidity in those fixed income
securities markets. U.S. Treasury Securities are used as a hedging
instrument for hedging interest rate risk. The Commission understands
that investors trading corporate debt securities simultaneously trade
U.S. Treasury Securities in the direction that offsets the interest
rate risk from the corporate debt securities trades. Systems issues at
significant Government Securities ATSs would disrupt these hedging
activities that use U.S. Treasury Securities, which in turn, would
disrupt and the price discovery process and liquidity flow in corporate
debt securities.
One commenter on the 2020 Proposal stated that it did not support
applying Regulation SCI to Government Securities ATSs because trading
venues for government securities are not interconnected.\1092\ This
commenter stated that unlike the equities markets, where linkages among
venues under Regulation NMS can cause systems issues at a single ATS
with a relatively more modest trading volume to present issues for the
broader market, the government securities market has no similar
linkages among venues.\1093\ Other commenters on the 2020 Proposal
expressed the view that application of Regulation SCI is
appropriate.\1094\
---------------------------------------------------------------------------
\1092\ See Tradeweb Letter at 3.
\1093\ See Tradeweb Letter at 3.
\1094\ See supra notes 357-362 and corresponding text. One
commenter stated that applying Regulation ATS and Regulation SCI to
interdealer Treasury platforms is appropriate and would promote
operational transparency, fair access, and system security and
resiliency and that, given the linkage between the interdealer and
the dealer-to-customer segments of the market, these benefits in
turn would help dealers and other liquidity providers better
facilitate trading with customers such as funds. See ICI Letter at 3
and 4. Other commenters on the 2020 Proposal opposed requiring
Government Securities ATSs to comply with Regulation SCI. See supra
notes 363-367 and corresponding text.
---------------------------------------------------------------------------
The Commission believes that a system outage at a significant
Government Securities ATS could disrupt trading at another significant
Government Securities ATS even if these Government Securities ATSs are
not connected. For example, if a significant Government Securities ATS
is experiencing a system outage, there could be a sudden surge in
message traffic (e.g., quoting activities) and trading at other
significant Government Securities ATSs. If a sudden surge in message
traffic and trading exceeds the system capacity of the Government
Securities ATS, this could result in systems issues and disrupt trading
at the ATS. The requirements of Regulation SCI, including the
requirements with respect to capacity planning, would help prevent such
systems issues at significant Government Securities ATSs and enhance
the price discovery process and liquidity in the government securities
market.
NMS Stock ATSs that meet certain volume thresholds are subject to
the requirements of Regulation SCI for SCI ATS.\1095\ Subjecting
significant Communication Protocol Systems that are NMS Stock ATSs to
Regulation SCI would likely generate the benefits discussed in the
Regulation SCI Adopting Release.\1096\
---------------------------------------------------------------------------
\1095\ The Commission estimates that no Communication Protocol
System that trades NMS stocks would be subject to Regulation SCI.
\1096\ See Regulation SCI Adopting Release, supra note 3.
---------------------------------------------------------------------------
Significant ATSs that trade corporate debt securities or municipal
securities are subject to Rule 301(b)(6).\1097\ The application of Rule
301(b)(6) to significant Communication Protocol Systems that trade
corporate debt securities or municipal securities would help reduce
disruptions in the price discovery process of corporate debt
[[Page 15623]]
securities and municipal securities due to failures or capacity issues
with respect to automated systems of significant Communication Protocol
Systems, and thus, enhance the price discovery process and liquidity in
those markets.
---------------------------------------------------------------------------
\1097\ See supra Section II.D.2 for a discussion about volume
threshold for Rule 301(b)(6) of Regulation ATS. The Commission
estimates that 2 Communication Protocol Systems that trade corporate
debt securities and no Communication Protocol Systems that trade
municipal securities would be subject to Rule 301(b)(6).
---------------------------------------------------------------------------
d. Electronic Filing Requirements
With respect to the filing location and data language of the
proposed disclosure requirements for Government Securities ATSs and
Communication Protocol Systems that are NMS Stock ATSs, requiring these
disclosures to be filed on Form ATS-N would benefit market participants
by improving the usability, accessibility, and reliability of the new
disclosures. Form ATS-N is filed on the EDGAR system in a structured,
machine-readable XML-based data language that is specific to Form ATS-N
(``custom XML,'' here ``ATS-N-specific XML'').\1098\ By requiring a
structured data language and a publicly accessible filing location for
the required disclosures, the Commission would allow market
participants to download the disclosed information directly into their
databases and analyze the information using various tools and
applications. This would make it easier for market participants to
aggregate the information and compare multiple ATSs to help select the
venue that best suits their trading objectives, thereby potentially
avoiding the cost of paying a third party data vendor to extract and
structure the disclosed information on their behalf.
---------------------------------------------------------------------------
\1098\ See supra Section V.B.
---------------------------------------------------------------------------
The Commission believes requiring all Government Securities ATSs
and Communication Protocol Systems that are NMS Stock ATSs to submit
the required disclosures in ATS-N-specific XML will facilitate more
effective and thorough review and analysis of those ATSs by the
Commission, which should yield greater insights into the operations of
those ATSs and the activities of their operators and affiliates.
Additionally, Commission staff would be better able to assemble and
review a larger pool of data regarding Government Securities ATSs and
Communication Protocol Systems that are NMS Stock ATSs. Both of these
outcomes would benefit market participants by facilitating the
Commission's examination process, and thus, would help protect
investors and ensure the sufficiency of information in the market
related to Government Securities ATSs and Communication Protocol
Systems that are NMS Stock ATSs.
Requiring all Government Securities ATSs to file the required
disclosures on EDGAR would benefit market participants by ensuring that
the disclosures are in a centralized, publicly accessible filing
location with validation capabilities. Providing a centralized filing
location would prevent market participants from incurring additional
costs to locate and retrieve Government Securities ATS disclosures from
various filing or posting locations. Similarly, because EDGAR is a
publicly accessible system, an EDGAR requirement would prevent market
participants from incurring additional costs that will arise if an
operator or other party were to place any barriers to access the
Government Securities ATS disclosures (such as a website registration
requirement). Because EDGAR provides basic validation capabilities, an
EDGAR requirement would reduce the incidence of non-discretionary
errors, thereby improving the quality of the Government Securities ATS
disclosures.
Requiring all Forms ATS and ATS-R to be filed on EDGAR would
provide a centralized filing location with validation capabilities for
submitted filings, and would also increase filing efficiencies for ATSs
by removing the need to print and mail paper versions.\1099\ All ATSs
subject to Regulation ATS are required to file a Form ATS-R, and all
ATSs that do not trade NMS stocks or government securities (which,
under the proposal, would include Communication Protocol Systems),
would file a Form ATS.
---------------------------------------------------------------------------
\1099\ See id.
---------------------------------------------------------------------------
2. Costs
The Commission has considered the costs of the proposed amendments
to Exchange Act Rule 3b-16, Regulation ATS, and Regulation SCI. The
aggregate compliance costs are presented in Table VIII.7 below.
Table VIII.7--Total Implementation Costs \a\ and Other Compliance Costs \b\
----------------------------------------------------------------------------------------------------------------
Number of
Type of entity entities Aggregate initial costs Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Communication Protocol Systems 4 $2.4 million ~ $6.6 million $2.4 million ~ $5.1
(Government Securities ATS). \c\. million.\d\
Currently Exempted Government Securities 7 $1.5 million ~ $3.5 million $1.3 million ~ $2.7
ATSs. \e\. million.\f\
Current Government Securities ATSs....... 17 $1.4 million ~ $3.5 million $1.3 million ~ $2.6
\g\. million.\h\
Communication Protocol Systems (NMS Stock 4 $209,000 \i\............... $59,000.\j\
ATS).
Current NMS Stock ATSs................... 34 $77,000 \k\................ $16,000.\l\
Other Communication Protocol Systems..... 14 $2 million \m\............. $660,000.\n\
Other Current ATSs....................... 59 $374,000 \o\............... $115,000.\p\
Subscriber............................... ........... ........................... $10,000.\q\
----------------------------------------------------------------------
Total................................ 139 $8 million ~ $16 million... $5.9 million ~ $11 million.
----------------------------------------------------------------------------------------------------------------
\a\ See infra note 1127.
\b\ See id.
\c\ See infra Table VIII.9.
\d\ See id.
\e\ See infra Table VIII.10.
\f\ See id.
\g\ See infra Table VIII.11.
\h\ See id.
\i\ See infra Table VIII.12.
\j\ See id.
\k\ See infra Table VIII.13.
\l\ See id.
\m\ See infra Table VIII.14.
\n\ See id.
\o\ See infra Table VIII.15.
\p\ See id.
\q\ This figure represents costs per ATS subscriber. See also infra note aa in Table VII.8.
[[Page 15624]]
a. Compliance Costs \1100\
---------------------------------------------------------------------------
\1100\ Compliance costs consist of implementation costs, which
are the monetized costs of PRA burdens and other compliance costs
(non-PRA based costs).
---------------------------------------------------------------------------
The proposed amendments to extend Regulation ATS to Communication
Protocol Systems, Currently Exempted Government Securities ATSs, and
Current Government Securities ATSs and Regulation SCI to significant
Government Securities ATSs and certain Communication Protocol Systems
would result in a number of compliance costs. The Commission believes
that compliance costs could be passed through (e.g., via higher fees)
to market participants, resulting in higher trading costs.
The requirements with respect to becoming a broker-dealer, filing
Form ATS and Form ATS-N, and complying with the Fair Access Rule of
Regulation ATS and Regulation SCI under the proposed amendments would
result in compliance costs.\1101\ The initial and ongoing
implementation costs and other compliance costs per entity associated
with these requirements are presented in Table VIII.8.\1102\ The
aggregates of these compliance costs are presented in Table VIII.9
through Table VIII.15.
---------------------------------------------------------------------------
\1101\ The proposed requirements would include: broker-dealer
registration requirements for non-broker-dealer-operated
Communication Protocol Systems and bank-operated Currently Exempted
Government Securities ATSs; the requirements with respect to written
safeguards and procedures for subscribers' trading information,
recordkeeping, record preservation, and Form ATS-R for Communication
Protocol Systems and Currently Exempted Government Securities ATSs;
the requirements of Form ATS for Communication Protocol Systems that
are not Government Securities ATSs nor NMS Stock ATSs; the
requirements with respect to capacity, integrity, and security of
automated systems for Communication Protocol Systems that trade
corporate debt securities or municipal securities; the requirements
of Form ATS-N for Government Securities ATSs and Communication
Protocol Systems that are NMS Stock ATSs; the requirements to amend
Form ATS-N for NMS Stock ATSs; the requirements to amend Form ATS
and Form ATS-R and such forms be filed electronically; the
requirements of the Fair Access Rule for significant Government
Securities ATSs and significant Communication Protocol Systems; and
the requirements of Regulation SCI for significant Government
Securities ATSs and significant Communication Protocol Systems.
\1102\ The Commission estimates the wage rate associated with
PRA burden hours based on salary information for the securities
information compiled by SIFMA. The estimated wage figure for
attorneys, for example, is based on published rates for attorneys,
modified to account for a 1,800 hour work-year and multiplied by
5.35 to account for bonuses, firm size, employee benefits, and
overhead yielding an effective hourly rate for 2013 of $380 for
attorneys. See Securities Industry and Financial Markets
Association, Management & Professional Earnings in the Securities
Industry--2013, available at https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013/. The 2013 professional wage rates are adjusted for an
inflation rate of 17.45 percent based on the Bureau of Labor
Statistics data on Consumer Price Index for all Urban Consumers
(CPI-U) between September 2013 and September 2021. Therefore, the
current inflation adjusted effective hourly wage rates for attorneys
are estimated at $446 ($380 x 1.1745), $570 ($485 x 1.1745) for
chief compliance managers, $332 ($283 x 1.1745) for compliance
managers, $305 ($260 x 1.1745) for senior systems analysts, $328
($279 x 1.1745) for senior marketing manager, and $75 ($64 x 1.1745)
for compliance clerks.
Table VIII.8--Per ATS Implementation Costs and Other Compliance Costs for Each Proposed Amendment
--------------------------------------------------------------------------------------------------------------------------------------------------------
Rule Compliance action Initial costs per entity Ongoing costs per entity
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reg ATS, 301(b)(1).................... Form BD filing................ $900 \a\............................... $300 \d\
Form ID filing................ 50 \b\................................. .......................................
Other compliance costs (non- 316,000 \c\............................ 57,700 \e\
PRA based).
Reg ATS, 301(b)(2).................... Form ATS filing............... 6,400 \f\.............................. 1,500 \g\
Reg ATS, 301(b)(5).................... Fair Access................... ....................................... 17,000 \h\
Reg ATS, 301(b)(6).................... Capacity, Integrity, and ....................................... 5,000 \i\
Security of automated systems.
Reg ATS, 301(b)(9).................... Form ATS-R filing............. ....................................... 6,000 \j\
....................................... 500 \k\
Reg ATS, 301(b)(10)................... Written safeguards and 3,200 \l\.............................. 1,000 \m\
procedures to protect
subscribers' trading
information.
Reg ATS, 302.......................... Recordkeeping................. ....................................... 3,400 \n\
Reg ATS, 303.......................... Record preservation........... ....................................... 1,100 \o\
Reg ATS, 304.......................... Form ATS-N filing............. 49,000 \p\............................. 3,300 \s\
43,000 \q\............................. 3,300 \t\
2,300 \r\.............................. .......................................
Reg SCI............................... Implementation costs (PRA 777,000 \u\............................ 924,000 \w\
based).
388,000 \v\............................ 924,000 \x\
Reg SCI............................... Other compliance costs (non- 320,000 ~ 2.4 million \y\.............. 214,000 ~ 1.6 million \z\
PRA based).
Reg SCI............................... Subscriber costs (non-PRA ....................................... 10,000 \aa\
based).
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Compliance Manager at $332 x 2.75 hours = $914. See also supra note 787.
\b\ Compliance Manager at $332 x 0.15 hour = $50. See also supra note 790.
\c\ See infra note 1120.
\d\ Compliance Manager at $332 x 0.95 hour = $316. See also supra note 788.
\e\ See infra note 1120.
\f\ (Attorney at $446 x 13 hours) + (Compliance Clerk at $75 x 7.5 hours) = $6,366. See also supra note 759.
\g\ (Attorney at $446 x 3 hours) + (Compliance Clerk at $75 x 2 hours) = $1,489. See also supra note 760.
\h\ Attorney at $446 x 37 hours = $16,513. See also supra note 764.
\i\ Attorney at $446 x 11.25 hours = $5,021. See also supra note 766.
\j\ ((Attorney at $446 x 3 hours) + (Compliance Manager at $332 x 0.25 hour)) x 4 times = $6,114. See also supra note 770.
\k\ ((Compliance Manager at $332 x 0.25 hour) + (Compliance Clerk at $75 x 0.5 hour)) x 4 times = $483. See also supra note 771.
\l\ (Attorney at $446 x 7 hours) + (Compliance Clerk at $75 x 1 hour) = $3,199. See also supra note 773.
\m\ (Attorney at $446 x 2 hours) + (Compliance Clerk at $75 x 2 hours) = $1,043. See also supra note 774.
\n\ Compliance Clerk at $75 x 45 hours = $3,383. See also supra note 776.
\o\ Compliance Clerk at $75 x 15 hours = $1,128. See also supra note 777.
\p\ (Attorney at $446 x 57.1 hours) + (Chief Compliance Manager at $570 x 0.5 hour) + (Compliance Manager at $332 x 36.05 hours) + (Sr. Systems Analyst
at $305 x 33.75 hours) + (Sr. Marketing Manager at $328 x 1 hour) + (Compliance Clerk at $75 x 8 hours) = $48,987. See also supra note 781.
\q\ (Attorney at $446 x 44.1 hours) + (Chief Compliance Manager at $570 x 0.5 hour) + (Compliance Manager at $332 x 36.05 hours) + (Sr. Systems Analyst
at $305 x 33.75 hours) + (Sr. Marketing Manager at $328 x 1 hour) + (Compliance Clerk at $75 x 1 hour) = $42,659. See also supra note 782.
\r\ (Attorney at $446 x 2.5 hours) + (Compliance Manager at $332 x 1.5 hours) + (Sr. Systems Analyst at $305 x 1.5 hours) + (Compliance Clerk at $75 x
2.5 hours) = $2,260. See also supra note 783.
[[Page 15625]]
\s\ ((Attorney at $446 x 5.5 hours) + (Compliance Manager at $332 x 2 hours) + (Compliance Clerk at $75 x 1.9 hours)) x 5 times = $3,262. See also supra
note 784.
\t\ See id.
\u\ The PRA burden hours are based on the 2018 SCI PRA Supporting Statement. The Commission estimates an initial PRA burden for new SCI entities of
2,034.3 hours. See also supra note 794. The PRA burden hours are monetized by applying inflation adjusted professional wage rates obtained via the
methodology presented in supra note 1102.
\v\ See id. The Commission estimates an initial PRA burden for existing SCI entities of 1,017.15 hours. See also supra note 793.
\w\ See id. The Commission estimates an ongoing PRA burden for all SCI entities of 2,458.65 hours. See also supra note 795.
\x\ See id.
\y\ See infra Section VIII.C.2.a.vi for discussion about non-PRA based initial compliance costs per entity.
\z\ See infra Section VIII.C.2.a.vi for discussion about non-PRA based ongoing compliance costs per entity.
\aa\ See infra Section VIII.C.2.a.vi for discussion about non-PRA based compliance costs per ATS subscriber.
Table VIII.9--Communication Protocol Systems That Are Government Securities ATSs
----------------------------------------------------------------------------------------------------------------
Number of
Compliance entities Aggregate initial costs Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Regulation SCI.......................... 2 $2.2 million ~ $6.4 $2.3 million ~ $5
million \a\. million.\b\
BD Registration.
Fair Access............................. 2 .......................... 33,000.\c\
Other................................... 4 209,000.\d\............... 59,000.\e\
-----------------------------------------------------------------------
Total............................... 4 2.4 million ~ 6.6 million. 2.4 million ~ 5.1 million.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is obtained by the summing initial implementation costs ($777,000) and non-PRA based
compliance costs ($320,000 ~ $2.4 million) associated with Regulation SCI presented in supra Table VIII.8 for
2 Communication Protocol Systems that trade government securities.
\b\ This cost figure is obtained by summing the ongoing implementation costs ($924,000) and non-PRA based
compliance costs ($214,000 ~ $1.6 million) associated with Regulation SCI presented in supra Table VIII.8 for
2 Communication Protocol Systems that trade government securities.
\c\ This cost figure is the ongoing implementation cost associated with Rule 301(b)(5) presented in supra Table
VIII.8 for 2 Communication Protocol Systems that trade government securities.
\d\ This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(10) and
304 ($49,000) presented in supra Table VIII.8 for 4 Communication Protocol Systems that trade government
securities.
\e\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(9)
($6,000), 301(b)(10), 302, 303, and 304 ($3,300) presented in supra Table VIII.8 for 4 Communication Protocol
Systems that trade government securities.
Table VIII.10--Currently Exempted Government Securities ATSs
----------------------------------------------------------------------------------------------------------------
Number of
Compliance entities Aggregate initial costs Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Regulation SCI.......................... 1 $1.1 million ~ $3.2 $1.1 million ~ $2.5
million \a\. million.\b\
BD Registration.
Fair Access............................. 3 .......................... 50,000.\c\
Other................................... 7 365,000 \d\............... 103,000.\e\
-----------------------------------------------------------------------
Total............................... 7 1.5 million ~ 3.5 million. 1.3 million ~ 2.7 million.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is obtained by summing the initial implementation costs ($777,000) and non-PRA based
compliance costs ($320,000 ~ $2.4 million) associated with Regulation SCI presented in supra Table VIII.8 for
1 Currently Exempted Government Securities ATS.
\b\ This cost figure is obtained by summing the ongoing implementation costs ($924,000) and non-PRA based
compliance costs ($214,000 ~ $1.6 million) associated with Regulation SCI presented in supra Table VIII.8 for
1 Currently Exempted Government Securities ATS.
\c\ This cost figure is the ongoing implementation cost associated with Rule 301(b)(5) presented in supra Table
VIII.8 for 3 Currently Exempted Government Securities ATSs.
\d\ This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(10) and
304 ($49,000) presented in supra Table VIII.8 for 7 Currently Exempted Government Securities ATSs.
\e\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(9)
($6,000), 301(b)(10), 302, 303, and 304 ($3,300) presented in supra Table VIII.8 for 7 Currently Exempted
Government Securities ATSs.
Table VIII.11--Current Government Securities ATS
----------------------------------------------------------------------------------------------------------------
Number of
Compliance entities Aggregate initial costs Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Regulation SCI.......................... 1 $708,000 ~ $2.8 million $1.1 million ~ $2.5
\a\. million.\b\
Fair Access............................. 3 .......................... 50,000.\c\
Other................................... 17 725,000 \d\............... 64,000.\e\
-----------------------------------------------------------------------
Total............................... 17 1.4 million ~ 3.5 million. 1.3 million ~ 2.6 million.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is obtained by summing the ongoing implementation costs ($924,000) and non-PRA based
compliance costs ($214,000 ~ $1.6 million) associated with Regulation SCI presented in supra Table VIII.8 for
1 Current Government Securities ATS.
\b\ This cost figure is obtained by summing the ongoing implementation costs ($924,000) and non-PRA based
compliance costs ($214,000 ~ $1.6 million) associated with Regulation SCI presented in supra Table VIII.8 for
1 Current Government Securities ATS.
\c\ This cost figure is the ongoing implementation cost associated with Rule 301(b)(5) presented in supra Table
VIII.8 for 3 Current Government Securities ATSs.
\d\ This cost figure is the initial implementation cost associated with Rule 304 ($43,000) presented in supra
Table VIII.8 for 17 Current Government Securities ATSs.
\e\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(9)
($500) and 304 ($3,300) presented in supra Table VIII.8 for 17 Current Government Securities ATSs.
[[Page 15626]]
Table VIII.12--Communication Protocol Systems That Are NMS Stock ATSs
----------------------------------------------------------------------------------------------------------------
Number of
Compliance entities Aggregate initial costs Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Regulation SCI.
Fair Access.
BD Registration.
Other................................... 4 209,000 \a\............... 59,000.\b\
-----------------------------------------------------------------------
Total............................... 4 209,000................... 59,000.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(10) and
304 ($49,000) presented in supra Table VIII.8 for 4 Communication Protocol Systems that trade NMS stocks.
\b\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(9),
301(b)(10), 302, 303, and 304 ($3,300) presented in supra Table VIII.8 for 4 Communication Protocol Systems
that trade NMS stocks.
Table VIII.13--Current NMS Stock ATSs
----------------------------------------------------------------------------------------------------------------
Number of
Compliance entities Aggregate initial costs Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Regulation SCI.
Fair Access.
Other................................... 34 77,000 \a\................ 16,000.\b\
-----------------------------------------------------------------------
Total............................... 34 77,000.................... 16,000.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is the initial implementation cost associated with Rule 304 ($2,300) presented in supra
Table VIII.8 for 34 Current NMS Stock ATSs.
\b\ This cost figure is the ongoing implementation cost associated with Rule 301(b)(9) ($500) presented in supra
Table VIII.8 for 34 Current NMS Stock ATSs.
Table VIII.14--Other Communication Protocol Systems
----------------------------------------------------------------------------------------------------------------
Number of
Compliance entities Aggregate initial costs Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Rule 301(b)(6).......................... 2 .......................... $10,000.\a\
Fair Access............................. 6 .......................... 99,000.\b\
BD Registration......................... 6 1.9 million \c\........... 360,000.\d\
Other................................... 14 133,000 \e\............... 191,000.\f\
-----------------------------------------------------------------------
Total............................... 14 2 million................. 660,000.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is the ongoing implementation cost associated with Rule 301(b)(6) presented in supra Table
VIII.8 for 2 Communication Protocol Systems that trade corporate debt securities.
\b\ This cost figure is the ongoing implementation cost associated with Rule 301(b)(5) presented in supra Table
VIII.8 for 6 Communication Protocol Systems that trade corporate debt securities or municipal securities.
\c\ This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(1)
presented in supra Table VIII.8 for 6 Communication Protocol Systems that trade neither government securities
nor NMS stocks.
\d\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(1)
presented in supra Table VIII.8 for 6 Communication Protocol Systems that trade neither government securities
nor NMS stocks.
\e\ This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(2) and
301(b)(10) presented in supra Table VIII.8 for 14 Communication Protocol Systems that trade neither government
securities nor NMS stocks.
\f\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(2),
301(b)(9) ($6,000), 301(b)(10), 302, and 303 presented in supra Table VIII.8 for 14 Communication Protocol
Systems that trade neither government securities nor NMS stocks.
Table VIII.15--Other Current ATSs
----------------------------------------------------------------------------------------------------------------
Number of
Compliance entities Aggregate initial costs Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Rule 301(b)(6).
Fair Access.
Other................................... 59 374,000 \a\............... 115,000.\b\
-----------------------------------------------------------------------
Total............................... 59 374,000................... 115,000.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is the initial implementation cost associated with Rule 301(b)(2) presented in supra Table
VIII.8 for 59 Current ATSs that trade neither government securities nor NMS stocks.
\b\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(2) and
301(b)(9) ($500) presented in supra Table VIII.8 for 59 Current ATSs that trade neither government securities
nor NMS stocks.
One commenter stated that the proposed amendments in the 2020
Proposal would require a Legacy Government Securities ATS to separate
trading activity in government securities and repos from non-NMS stock
trading activity, which could impose administrative and operational
burdens on both Government Securities ATSs
[[Page 15627]]
and subscribers.\1103\ The Commission believes that the proposed
amendments do not require separating operations, and thus, Legacy
Government Securities ATSs would not incur costs associated with
separating operations.\1104\
---------------------------------------------------------------------------
\1103\ See ICE Bonds Letter I at 3 and 4. The commenter on the
2020 Proposal stated that this separation requirement would result
in fewer venues and higher trading costs for subscribers to trade
and hedge and concentrate trading among a few large Government
Securities ATSs because smaller Legacy Government Securities ATSs
may determine to exit due to the prohibitive costs associated with
this separation requirement. This commenter also provided a list of
costs associated with separating operation. See also supra Section
III.B.1 and note 250.
\1104\ See supra Section III.B.I.
---------------------------------------------------------------------------
i. Implementation Costs: \1105\
---------------------------------------------------------------------------
\1105\ Implementation costs are the monetized costs of PRA
burdens. See also supra note 1100.
---------------------------------------------------------------------------
Currently Exempted Government Securities ATSs and Communication
Protocol Systems that would be newly subject to the requirements of
Regulation ATS would incur implementation costs associated with, among
other things, written safeguards and procedures to protect subscribers'
trading information,\1106\ recordkeeping,\1107\ record
preservation,\1108\ and Form ATS-R.\1109\ Currently Exempted Government
Securities ATSs and Communication Protocol Systems that trade NMS
stocks or government securities would incur higher implementation costs
due to the heightened requirements of filing Form ATS-N compared to
other Communication Protocol Systems that would file Form ATS.\1110\
---------------------------------------------------------------------------
\1106\ See the implementation costs associated with Rule
301(b)(10) in supra Table VIII.8.
\1107\ See the implementation costs associated with Rule 302 in
supra Table VIII.8.
\1108\ See the implementation costs associated with Rule 303 in
supra Table VIII.8.
\1109\ See the implementation costs associated with Rule
301(b)(9) in supra Table VIII.8.
\1110\ See the implementation costs associated with Rule
301(b)(2) and Rule 304 in supra Table VIII.8.
---------------------------------------------------------------------------
Current ATSs and Communication Protocol Systems that trade neither
NMS stocks nor government securities would incur implementation costs
associated with re-filing or filing the modernized Form ATS.\1111\
Current NMS Stock ATSs would incur implementation costs associated with
amending revised Form ATS-N.\1112\ Furthermore, all current ATSs,
Currently Exempted Government Securities ATSs, and Communication
Protocol Systems would incur implementation costs to re-file or file
the revised electronic Form ATS-R.\1113\
---------------------------------------------------------------------------
\1111\ The initial and ongoing implementation costs per entity
associated with Rule 301(b)(2) are approximately $6,400 and $1,500,
respectively. See supra notes f and g in Table VIII.8. See also
supra Section VII.D.1.a for a discussion about the implementation
costs associated with Rule 301(b)(2).
\1112\ The implementation cost associated with amending revised
Form ATS-N is approximately $2,300 per entity. See supra note r in
Table VII.8. See also supra Section VII.D.3 for a discussion about
the implementation costs associated with Rule 304.
\1113\ The implementation costs associated with filing or re-
filing electronic Form ATS-R is approximately $500 per entity. See
supra note k in Table VII.8. See supra Section VII.D.1.d for a
discussion about the implementation costs associated with Rule
301(b)(9).
---------------------------------------------------------------------------
Government Securities ATSs that meet certain volume thresholds
would be subject to the Fair Access Rule of Regulation ATS. The
Commission estimates 3 Currently Exempted Government Securities ATSs, 3
Current Government Securities ATSs, and 2 Communication Protocol
Systems that trade government securities would be subject to the Fair
Access Rule. These entities would incur the implementation costs per
entity presented in Table VIII.8.
Significant NMS Stock ATSs and ATSs that trade corporate debt
securities, municipal securities, or non-NMS stock equity securities
are subject to the Fair Access Rule. The Commission estimates 2
Communication Protocol Systems that trade corporate debt securities, 1
Communication Protocol System that trades municipal securities, and 3
Communication Protocol Systems that trade non-NMS stock equity
securities would be subject to the Fair Access Rule. These entities
would incur the same implementation costs per entity presented in Table
VIII.8.
Significant ATSs that trade corporate debt securities or municipal
securities are subject to Rule 301(b)(6). The Commission estimates that
2 Communication Protocol Systems that trade corporate debt securities
would be subject to Rule 301(b)(6) and incur the implementation costs
per entity presented in Table VIII.8.
The Commission believes that the 2018 estimates of initial PRA
burdens for new SCI entities and ongoing PRA burdens for all SCI
entities under Regulation SCI are largely applicable to Government
Securities ATSs.\1114\ For the purpose of implementation cost
estimation, two groups of Government Securities ATSs are considered:
\1115\ Government Securities ATSs that are existing SCI entities; and
Government Securities ATSs that are entirely new SCI entities currently
not subject to Regulation SCI. For the first group (Government
Securities ATSs that are existing SCI entities), the Commission
believes that such entities would incur approximately 50 percent of the
Commission's initial PRA burden estimates for entirely new SCI
entities. Furthermore, for the second group (Government Securities ATSs
that are new SCI entities currently not subject to Regulation SCI), the
Commission believes that such entities would incur the same estimated
initial PRA burdens as those estimated for new SCI entities in the 2018
SCI PRA Supporting Statement. The Commission also believes that the
same ongoing PRA burdens for all SCI entities estimated in the 2018 SCI
PRA Supporting Statement are applicable to Government Securities ATSs
in both the first and the second group.
---------------------------------------------------------------------------
\1114\ See 2018 SCI PRA Supporting Statement, supra notes 793,
794, and 795.
\1115\ Government Securities ATSs are divided into two groups in
discussing implementation costs because Government Securities ATSs
operated by a broker-dealer operator of an NMS Stock ATS that is a
SCI entity would have lower initial implementation costs. See also
2018 SCI PRA Supporting Statement, supra note 793.
---------------------------------------------------------------------------
The Commission estimates that 4 Government Securities ATSs would be
subject to the requirements of Regulation SCI and incur the
implementation costs per entity presented in Table VIII.8. Among the
four Government Securities ATSs that satisfy the volume thresholds, the
Commission believes that one Government Securities ATS (referred as the
first group above) would incur approximately 50 percent of initial PRA
burden estimates for an entirely new SCI entity included in the 2018
SCI PRA Supporting Statement, and three Government Securities ATSs
(referred as the second group above) would incur the same estimated
initial PRA burdens as those estimated for new SCI entities included in
the 2018 SCI PRA Supporting Statement. In addition, the Commission
believes that all four Government Securities ATSs would incur the same
ongoing PRA burdens as all other SCI entities included in the 2018 SCI
PRA Supporting Statement.
Significant ATSs that trade either NMS stocks or non-NMS stock
equity securities are subject to the requirements of Regulation SCI.
The Commission estimates that no Communication Protocol System that
trades NMS stocks or non-NMS stock equity securities would be subject
to Regulation SCI. If a significant Communication Protocol System that
trades NMS stocks or equity securities that are not NMS stocks exists,
it would incur the same range of implementation costs per entity
presented in Table VIII.8.
The estimated implementation costs for Communication Protocol
Systems and Currently Exempted Government Securities ATSs associated
with Rule
[[Page 15628]]
301(b)(9) and (10), Rule 302, and Rule 303 would represent a larger
fraction of revenue for a small (measured in trading volume) ATS
relative to that for a large ATS. This is because these costs would be
fixed costs that these ATSs would incur regardless of the amount of
trading activity that takes place on them. Furthermore, regardless of
their size and transaction volume, all Government Securities ATSs and
Communication Protocol Systems that are NMS Stock ATSs would need to
ensure that their disclosures meet the requirements of Form ATS-N and
that they correctly file their Form ATS-N under Rule 304. Such
Government Securities ATSs and Communication Protocol Systems might
develop internal processes to ensure correct and complete reporting on
Form ATS-N, which would result in a fixed implementation cost. These
implementation costs would fall disproportionately on smaller (measured
in trading volume) such Government Securities ATSs and Communication
Protocol Systems in terms of implementation costs relative to trading
volume (as opposed to larger such Government Securities ATSs and
Communication Protocol Systems in terms of implementation costs
relative to trading volume), because all Government Securities ATSs and
Communication Protocol Systems that are NMS Stock ATSs would likely
incur these fixed implementation costs. However, smaller such
Government Securities ATSs and Communication Protocol Systems that are
not operated by multi-service broker-dealer operators and that
generally do not engage in other brokerage or dealing activities in
addition to their ATSs would likely incur lower implementation costs
because certain sections of revised Form ATS-N would not be applicable
to Government Securities ATSs and Communication Protocol Systems that
are NMS Stock ATSs.
The implementation costs associated with Rule 304 would also vary
across Government Securities ATSs and Communication Protocol Systems
that are NMS Stock ATSs depending on the complexity of the ATS and the
services that it offers. For example, some such ATSs might not segment
subscriber order flow or offer counterparty selection protocols. These
ATSs would not be required to complete Part III, Items 13 and 14 of
revised Form ATS-N. As a result, such Government Securities ATSs and
Communication Protocol Systems that are NMS Stock ATSs would incur
lower implementation costs because these ATSs would apply lesser burden
hours to complete their Form ATS-N.
ii. Costs Associated With Broker-Dealer Requirements
Under the proposed Rule 301(b)(1), Currently Exempted Government
Securities ATSs that are banks (i.e., bank-operated Currently Exempted
Government Securities ATSs) and Communication Protocol Systems that are
non-broker-dealers (i.e., non-broker-dealer-operated Communication
Protocol Systems) would be subject to broker-dealer registration
requirements.
The Commission believes that non-broker-dealer-operated
Communication Protocol Systems without a broker-dealer affiliate would
incur additional compliance costs related to registering with the
Commission as broker-dealers, becoming members of an SRO, such as
FINRA, and maintaining broker-dealer registration and SRO membership,
compared to those operated by broker-dealers and those with a broker-
dealer affiliate. The initial costs would include the costs associated
with filing Form BD and Form ID, FINRA membership application fees, and
any legal or consulting costs necessary for effectively completing the
application to be a member of FINRA (e.g., ensuring compliance with
FINRA rules \1116\ including drafting policies and procedures as may be
required). The ongoing costs would include the costs associated with
amending Form BD, and ongoing fees associated with FINRA membership and
legal work relating to FINRA membership.
---------------------------------------------------------------------------
\1116\ See supra Section II.D.2 for a discussion about FINRA
rules.
---------------------------------------------------------------------------
The Commission recognizes that the costs associated with obtaining
and maintaining FINRA membership would vary significantly depending on
entity characteristics, activities, and the degree of the firm's
reliance on outside legal or consulting for effectively completing the
application process and maintaining FINRA membership. The initial
registration costs for FINRA membership \1117\ would depend on, among
other things, the number of associated persons being registered. The
ongoing costs to remain a FINRA member would vary based on the scope of
brokerage activities, revenue,\1118\ size (i.e., the number of
registered persons and the number of branch offices), and trading
volume.\1119\ Thus, entities with a smaller number of registered
persons, fewer brokerage activities, smaller trading volume, and lower
revenue would face lower costs.
---------------------------------------------------------------------------
\1117\ See https://www.finra.org/registration-exams-ce/classic-crd/fee-schedule#examfees for the schedule of FINRA registration
fees.
\1118\ FINRA imposes a Gross Income Assessment as follows:
$1,200 on a Member Firm's annual gross revenue up to $1 million; a
charge of 0.1215% on a Member Firm's annual gross revenue between $1
million and $25 million; a charge of 0.2599% on a Member Firm's
annual gross revenue between $25 million and $50 million; a charge
of 0.0518% on a Member Firm's annual gross revenue between $50
million and $100 million; a charge of 0.0365% on a Member Firm's
annual gross revenue between $100 million and $5 billion; a charge
of 0.0397% on a Member Firm's annual gross revenue between $5 and
$25 billion; and a charge of 0.0855% on a Member Firm's annual gross
revenue greater than $25 billion. When a firm's annual gross revenue
exceeds $25 million, the maximum of current year's revenue and
average of the last three years' revenue is used as the basis for
the income assessment. See also https://www.finra.org/rules-guidance/notices/09-68.
\1119\ Fees for reporting trades to FINRA may depend on the
types of security, the size of trade, and the types of message
(e.g., cancellation message, correction message). For example, fees
for reporting trades to FINRA TRACE as follows: $0.475/trade for
trade size up to and including $200,000 par value; $0.000002375
times the par value of the transaction (i.e., $0.002375/$1,000) for
trade size over $200,000 and up to and including $999,999.99 par
value; $2.375/trade for trade size of $1,000,000 par value or more;
$1.50/trade for all transactions in securitized products that are
Agency Pass-Through Mortgage-Backed Securities traded to be
announced (``TBA'') or SBA-Backed ABS traded TBA (each ``TBA
transaction''); $1.50/trade for cancellation or correction; and $3/
trade for late trades. See also https://www.finra.org/rules-guidance/rulebooks/finra-rules/7730.
---------------------------------------------------------------------------
As outlined in Table VIII.8, the Commission estimates an initial
cost of approximately $317,000 to register as a broker-dealer with the
Commission and become a member of FINRA.\1120\ Additionally, the
Commission estimates an ongoing annual cost of approximately $58,000 to
maintain the broker-dealer registration and FINRA membership.\1121\ The
Commission preliminarily believes that these costs related to broker-
dealer registration and FINRA membership are relevant to non-broker-
dealer-operated Communication Protocol Systems without a broker-dealer
affiliate. However, these cost estimates are uncertain because the
[[Page 15629]]
Commission does not have information on the estimated 6 non-broker-
dealer-operated Communication Protocol Systems without a broker-dealer
affiliate, such as the number of associated persons of the broker
entity and their licensing requirements, the scope of the proposed
brokerage activities, and the degree of reliance on outside legal or
consulting expertise necessary for effectively completing the
application to be a member of FINRA. Furthermore, the Commission is
unable to provide cost estimates related to trade reporting obligations
\1122\ because these costs would depend on various factors, such as the
number of trades and the costs of updating systems for trade reporting
requirements, for which the Commission does not have information.
---------------------------------------------------------------------------
\1120\ See Exchange Act Release No. 33-9974 (October 30, 2015),
80 FR 71388, 71509 (November 16, 2015) (``Regulation Crowdfunding
Adopting Release''). These estimates are adjusted for an inflation
rate of 15.33 percent based on the Bureau of Labor Statistics data
on CPI-U between October 2015 and September 2021. In addition to the
initial costs to become a member of FINRA, this cost includes the
initial implementation costs of $950 for filing Form BD and Form ID
tabulated in Table VIII.8. The Commission recognizes that the cost
of registering and becoming a member of a national securities
association varies significantly among brokers, depending on facts
and circumstances. The Commission estimates the range of cost to be
between $57,500 and $576,500, and thus, chose the average amount of
$317,000 for purposes of this discussion.
\1121\ See id. See also Regulation Crowdfunding Adopting Release
at 71509. In addition to the ongoing annual costs to maintain a
membership with FINRA, this cost includes the ongoing annual
implementation costs of $300 to amend Form BD tabulated in Table
VIII.8.
\1122\ See supra note 1119 for fees for reporting trades to
FINRA. The Commission estimates that 2 non-broker-dealer-operated
Communication Protocol Systems without a broker-dealer affiliate
trade restricted securities, which may be subject to FINRA
transaction reporting requirements. Thus, with respect to those
restricted securities, these Communication Protocol Systems may
incur costs associated with reporting trades to FINRA.
---------------------------------------------------------------------------
In addition to the costs associated with broker-dealer registration
and FINRA membership, a non-broker-dealer-operated Communication
Protocol System without a broker-dealer affiliate could incur costs
related to restructuring its business and incorporating itself or a
separate entity (i.e., an affiliate) to be registered as a broker-
dealer. Such restructuring costs would include any costs that may be
associated with making necessary changes to its business practices,
fees for consulting and legal services, fees for incorporation and the
amendment of its certificate of incorporation and its bylaws, and tax
consequences. Fees for incorporation and amending the certificate of
incorporation and its bylaws may be minimal. For example, fees for
incorporation and amending the certificate of incorporation and its
bylaws in the state of Delaware would range approximately between $89
and $200 depending on the entity type of incorporation.\1123\ However,
certain restructuring costs, such as costs associated with making
changes to business practices to comply with the broker-dealer
registration requirements, could be significant. The Commission
estimates that up to 6 non-broker-dealer-operated Communication
Protocol Systems without a broker-dealer affiliate could be required to
restructure their business in order to comply with the broker-dealer
registration requirements. The Commission is unable to provide
estimates on certain restructuring related costs for a non-broker-
dealer-operated Communication Protocol System because the Commission
does not have information regarding the scope of its restructuring,
such as the need and the extent of required changes in current business
practices, the need and the extent of consulting services, and its
choice of entity type for incorporation.
---------------------------------------------------------------------------
\1123\ See fee schedules for incorporation and amending the
certificate of incorporation and its bylaws in the state of Delaware
at: https://corpfiles.delaware.gov/Aug09feesch.pdf.
---------------------------------------------------------------------------
Upon becoming broker-dealers, operators of these Communication
Protocol Systems would be subject to certain broker-dealer requirements
with respect to maintaining net capital, reporting, and
recordkeeping.\1124\ The compliance costs associated with maintaining
net capital, reporting, and recordkeeping would depend on the business
structure of a broker-dealer (i.e., the capital structure of a broker-
dealer and the scope of a broker-dealer's activities). For example, the
costs would vary significantly depending on the types of securities a
broker-dealer holds, the level of net capital a broker-dealer
maintains, and whether a broker-dealer carries customer accounts,
carries for other broker-dealers, is a registered investment adviser,
is affiliated with an investment adviser, or transacts in principal
capacity. However, to the extent that an operator of Communication
Protocol System limits its activities to trading operations and does
not expand into these other business activities, the operator would
incur minimal costs with respect to net capital, reporting, and
recordkeeping requirements upon registering as a broker-dealer. The
Commission is unable to estimate the costs associated with these
broker-dealer requirements because the Commission does not have
information about whether or how the current business structures of the
estimated 6 Communication Protocol Systems that are not operated by a
registered broker-dealer nor how a broker-dealer affiliate might change
upon registering as a broker-dealer.
---------------------------------------------------------------------------
\1124\ Registered Broker-dealers would be subject to
requirements under the rules, such as 17 CFR 240.15c3-1, 204.17a-1,
204.17a-3, 240.17a-4, and 240.17a-5 (Rule 15c3-1, Rule 17a-1, Rule
17a-3, Rule 17a-4, and Rule 17a-5).
---------------------------------------------------------------------------
The Commission believes that a bank-operated Currently Exempted
Government Securities ATS or a non-broker-dealer-operated Communication
Protocol System would not incur compliance costs associated with
registering as a broker-dealer and becoming a member of an SRO (e.g.,
FINRA) if it has a broker-dealer affiliate. It is the Commission's
understanding that ATSs that are banks often are operated by bank
affiliates that are themselves registered broker-dealers, rather than
by the banks themselves.\1125\ A bank-operated Currently Exempted
Government Securities ATS might adopt a similar registered affiliate
structure for its government securities trading operations. For a non-
broker-dealer-operated Communication Protocol System that is affiliated
with an existing broker-dealer, it would be more cost-effective for the
Communication Protocol System to move its operations to an existing
broker-dealer affiliate rather than restructure itself to become a
broker-dealer or create a new broker-dealer entity to comply with the
broker-dealer registration requirements. Thus, the Commission expects
that such non-broker-dealer-operated Communication Protocol Systems
would choose the more cost-effective way of moving its trading
operations to its registered broker-dealer affiliate.
---------------------------------------------------------------------------
\1125\ See supra Section III.B.2 for a discussion about ATSs
that are banks.
---------------------------------------------------------------------------
A broker-dealer affiliate that is adding ATS or Communication
Protocol System operations would incur additional ongoing costs
associated with maintaining FINRA membership if adding trading
operations increases revenue, the number of registered persons or
branch offices, trading volume, or expands the scope of brokerage
activities.\1126\ Furthermore, a broker-dealer affiliate that is adding
ATS or Communication Protocol System operations could incur additional
costs associated with maintaining adequate net capital level,
reporting, and recordkeeping depending on the changes in business
structure of the broker-dealer. For the reasons discussed above, the
Commission is unable to provide estimates on these additional costs for
the estimated 1 bank-operated Currently Exempted Government Securities
ATS and 2 non-broker-operated Communication Protocol Systems that are
affiliated with an existing broker-dealer.
---------------------------------------------------------------------------
\1126\ For an entity that may adopt a registered affiliate
structure, it is possible that it may have to file a Continuing
Membership Application with FINRA noticing material changes to
business operations resulting from adding ATS operations. See (under
material change) https://www.finra.org/registration-exams-ce/classic-crd/fee-schedule regarding the fees for the Continuing
Membership Application with FINRA.
---------------------------------------------------------------------------
iii. Costs Associated With Ineffectiveness Declaration
In addition to the implementation costs associated with filing and
amending Form ATS-N, the Commission preliminarily believes that the
proposed ability for the Commission to declare a Form ATS-N or Form
ATS-
[[Page 15630]]
N amendment ineffective could result in direct costs for Government
Securities ATSs and Communication Protocol Systems that are NMS Stock
ATSs.\1127\ If the Commission declares a Government Securities ATS's or
an NMS Stock ATS's Form ATS-N or Form ATS-N amendment ineffective, then
the ATS might have to cease operations, roll back a change in
operations, or delay the start of operations until it is able to
address the deficiencies in the previously filed form.
---------------------------------------------------------------------------
\1127\ See Rule 304(a)(1)(iv)(B).
---------------------------------------------------------------------------
An ineffective Form ATS-N could also impose indirect costs on the
overall market for government securities and NMS stock trading services
resulting from a potential reduction in competition or the removal of a
sole provider of a niche service within the market.\1128\
---------------------------------------------------------------------------
\1128\ See infra Section VIII.C.3.a.i.d for a discussion about
the impact of a declaration of ineffectiveness on competition in the
market for government securities and repo trading services.
---------------------------------------------------------------------------
However, the Commission believes that there would not be a
substantial burden imposed in connection with resubmitting Form ATS-N
or a Form ATS-N amendment or from an ineffective declaration in
general.\1129\ Because Government Securities ATSs, Communication
Protocol Systems that are NMS Stock ATSs, and market participants would
not incur these costs unless the Commission declares a Form ATS-N or
amendment ineffective, such Government Securities ATSs and
Communication Protocol Systems would be incentivized to comply with the
requirements of Form ATS-N, as well as Federal securities laws,
including the other requirements of Regulation ATS, to avoid an
ineffectiveness declaration. These incentives would encourage such
Government Securities ATSs and Communication Protocol Systems to
initially submit a more accurate and complete Form ATS-N and amendments
thereto, which would reduce the likelihood that they are declared
ineffective.
---------------------------------------------------------------------------
\1129\ One commenter on the 2020 Proposal stated that the use of
the same initial filing, amendment review, and effectiveness process
for the previously proposed Form ATS-G as is currently in place for
the Form ATS-N should reduce compliance burdens for market
participants and reduce potential market confusion. See Tradeweb
Letter at 10.
---------------------------------------------------------------------------
Additionally, Current Government Securities ATSs and Communication
Protocol Systems that are NMS Stock ATSs would not have to bear the
costs of immediately ceasing operations under the proposal without
having an effective Form ATS-N on file with the Commission because
Current Government Securities ATSs would be able to continue operations
pursuant to a previously filed initial operation report on Form ATS and
Currently Exempted Government Securities ATSs and Communication
Protocol Systems that trade NMS stocks would also be able to continue
operations pending the Commission's review of their initial Form ATS-N.
However, if after notice and opportunity for hearing, the Commission
declares an initial Form ATS-N filed by a Current Government Securities
ATS, Currently Exempted Government Securities ATS, or Communication
Protocol System ineffective, the ATS would be required to cease
operations until an initial Form ATS-N is effective.
One commenter stated that the Commission's imposition of an
``effectiveness'' regime to previously proposed Form ATS-G under the
2020 proposal is an unnecessary administrative burden on Government
Securities ATSs, and will be particularly burdensome on those
Government Securities ATSs with limited volumes in government
securities.\1130\ The implementation costs associated with the
requirements of Form ATS-N, including the costs for developing internal
processes to ensure correct and complete reporting on Form ATS-N to
avoid an ineffectiveness declaration, would be fixed costs, and thus,
would represent a larger fraction of revenue for a small (measured in
trading volume) ATS relative to that for a large ATS. However, the
Commission preliminarily believes that this adverse effect on small
ATSs would be mitigated to some extent, because, as discussed in
Section VIII.C.2.a.i, the Commission believes that certain smaller
Government Securities ATSs and Communication Protocol Systems that
trade NMS stocks would likely incur lower implementation costs.\1131\
---------------------------------------------------------------------------
\1130\ See ICE Bonds Letter I at 5.
\1131\ Smaller Government Securities ATSs and Communication
Protocol Systems that trade NMS stocks that are not operated by
multi-service broker-dealer operators and that generally do not
engage in other brokerage or dealing activities in addition to their
ATSs would likely incur lower implementation costs because certain
sections of revised Form ATS-N would not be applicable to these
ATSs. Furthermore, smaller such Government Securities ATSs and
Communication Protocol Systems that operate simpler systems would
likely incur lower implementation costs associated with the
requirements of Form ATS-N because certain sections of revised Form
ATS-N would not be applicable to these ATSs.
---------------------------------------------------------------------------
iv. Costs Associated With the Fair Access Rule
The Commission preliminarily believes that applying the Fair Access
Rule could impose compliance costs (non-PRA based) on Government
Securities ATSs, Communication Protocol Systems that trade NMS stocks,
non-NMS stock equity securities, corporate debt securities, or
municipal securities, and passive systems that trade NMS stocks. Under
the proposal, Government Securities ATSs, Communication Protocol
Systems that trade NMS stocks, non-NMS stock equity securities,
corporate debt securities, or municipal securities, and passive systems
that trade NMS stocks that meet the specified aggregate volume
thresholds could no longer treat subscribers differently with respect
to access to the services of the ATS without a reasonable basis. For
example, an ATS could not offer one class of subscriber a service
(e.g., an order interaction procedure, order type, trading protocol, or
connectivity method) without offering the service to all subscribers
unless the ATS had a reasonable basis for the differential treatment.
In addition, an ATS could not charge fees that unreasonably prohibit
certain market participants from accessing the services of the
ATS.\1132\ If ATSs must change fee structures, order interaction
procedures, trading protocols, or access provisions and adapt their
operating model due to the Fair Access Rule, those ATSs would incur
costs related to changing business operations.
---------------------------------------------------------------------------
\1132\ See supra Section V.A.3 for a discussion about
reasonableness and fees under the proposed amendments to the Fair
Access Rule.
---------------------------------------------------------------------------
The Commission, however, is unable to quantify the potential
compliance costs discussed above. In particular, the Commission lacks
data on the extent to which Communication Protocol Systems that trade
NMS stocks, non-NMS stock equity securities, corporate debt securities,
or municipal securities, passive systems that trade NMS stocks, and
Government Securities ATSs that meet the aggregate volume thresholds
currently grant access to the ATS services to all subscribers on the
same terms, and on the specific types of services and subscribers in
question. In addition, the Commission lacks similar data for other
trading venues in the government securities, corporate debt securities,
and municipal securities market, which might offer differential access
to services. Thus, the Commission is not able to estimate the costs
associated with changing fee structures and adapting operating models.
Significant ATSs that trade NMS stocks, non-NMS stock equity
securities, corporate debt securities, or municipal securities are
subject to the Fair Access
[[Page 15631]]
Rule. The proposed amendments to aggregate volume across affiliated
ATSs in calculating certain volume thresholds could increase the number
of smaller affiliate ATSs that would be subject to the Fair Access
Rule. Smaller affiliate ATSs that would not have met the current volume
thresholds individually would be subject to the Fair Access Rule if
they meet the proposed aggregate volume thresholds. As discussed above,
if ATSs must adapt their operating models as a result of being subject
to the Fair Access Rule, those ATSs would incur costs related to
changing business operations. The Commission estimates that no current
smaller affiliate ATS that trades NMS stocks, non-NMS stock equity
securities, corporate debt securities, or municipal securities and does
not already currently meet the Fair Access volume thresholds would meet
the volume thresholds \1133\ and be subject to the Fair Access Rule if
volume is aggregated across affiliated ATSs.\1134\
---------------------------------------------------------------------------
\1133\ See supra note 1079 for details on the Fair Access
thresholds. See supra note 310 for the application of the Fair
Access Rule on the trading of NMS stocks, non-NMS stock equity
securities, municipal securities, and corporate debt securities. See
also supra Section V.A.2 for a discussion about the aggregation of
volume threshold.
\1134\ See supra note 1085.
---------------------------------------------------------------------------
v. Costs Associated With Rule 301(b)(6)
In addition to the implementation costs associated with reporting
outages and recordkeeping under the proposed Rule 301(b)(6), the
Commission preliminarily believes that significant Communication
Protocol Systems that trade corporate debt securities or municipal
securities could incur compliance costs (non-PRA based) to ensure
adequate capacity, integrity, and security with respect to those
systems that support order entry, order routing, order execution,
transaction reporting, and trade comparison.\1135\ To the extent that
these significant Communication Protocol Systems currently do not meet
certain standards under the proposed Rule 301(b)(6), they would incur
compliance costs associated with, among other things, capacity
planning, and conducting periodic capacity stress tests of critical
systems that process transactions.\1136\ For example, a Communication
Protocol System would incur the costs associated with upgrading systems
(e.g., investing in computer hardware and software) if its critical
systems that process transactions do not have adequate capacity. In
addition, significant Communication Protocol Systems would incur costs
associated with the independent review of their systems on an annual
basis.
---------------------------------------------------------------------------
\1135\ The Commission estimates that 2 Communication Protocol
Systems that trade corporate debt securities or municipal securities
would exceed the thresholds under the proposed Rule 301(b)(6). See
supra Section VIII.C.2.a.i.
\1136\ See supra note 157.
---------------------------------------------------------------------------
The Commission believes that the compliance costs for one of these
significant Communication Protocol Systems would depend on the extent
to which its existing policies with respect to maintaining adequate
capacity, integrity, and security of systems that support order entry,
order routing, order execution, transaction reporting, and trade
comparison already comply with the standards under the proposed Rule
301(b)(6). The Commission is unable to estimate these compliance costs
because it lacks information on the existing policies for maintaining
adequate capacity, integrity, and security of such systems for
significant Communication Protocol Systems that trade corporate debt
securities or municipal securities.\1137\ However, the Commission
believes that compliance costs associated with Rule 301(b)(6) would be
significantly less than those of Regulation SCI because the scope and
requirements of Rule 301(b)(6) would be narrower than those of
Regulation SCI.\1138\
---------------------------------------------------------------------------
\1137\ See supra note 888 (discussing commenter statements on
the extent to which fixed incomes systems already comply with the
provisions of Rule 301(b)(6)).
\1138\ For example, Rule 301(b)(6) would apply to a narrower set
of systems, as compared to Regulation SCI: Rule 301(b)(6) of
Regulation ATS applies only to systems that support order entry,
order routing, order execution, transaction reporting, and trade
comparison, which is narrower than the definition of SCI system.
Furthermore, Rule 301(b)(6) would not require significant
Communication Protocol Systems that trade corporate debt securities
or municipal securities to maintain a geographically diverse backup
facility.
---------------------------------------------------------------------------
vi. Costs Associated With Regulation SCI
Government Securities ATSs that meet certain volume thresholds
would incur compliance costs (non-PRA based costs) as SCI
entities.\1139\ The Regulation SCI Adopting Release in 2014 estimated
that an SCI entity would incur an initial cost of between approximately
$320,000 and $2.4 million. Additionally, an SCI entity would incur an
ongoing annual cost of between approximately $214,000 and $1.6 million.
The Commission believes that these compliance costs are largely
applicable to Government Securities ATSs.
---------------------------------------------------------------------------
\1139\ While NMS Stock ATSs that meet certain volume thresholds
are also subject to Regulation SCI, the Commission estimates that no
Communication Protocol Systems that trade NMS stocks would be
subject to Regulation SCI. The Commission preliminarily believes
that a Communication Protocol System that trades NMS stocks would
incur the same implementation costs and other compliance costs (non-
PRA based), including ATS's participant costs, in the same range as
those presented in Table VIII.8.
---------------------------------------------------------------------------
One commenter on the 2020 Proposal stated that Regulation SCI
imposes a specific manner in which SCI Entities must organize their
asset inventories, and that redesigning and implementing new asset
inventories to comply with Regulation SCI would require significant
investment and would impose material upfront compliance costs that may
divert resources rather than encourage meaningful investment.\1140\
Although Regulation SCI would require SCI Entities to identify systems
based on their functionality, as discussed above, the Commission
believes that Regulation SCI is designed to provide flexibility in
applying industry standards to establish policies and procedures.\1141\
This flexibility may not require SCI Entities to redesign their systems
to comply with Regulation SCI. However, to the extent that an SCI
Entity would be required to redesign its systems, the Commission
believes that the costs would be included in the compliance costs
associated with Regulation SCI discussed above.\1142\
---------------------------------------------------------------------------
\1140\ See BrokerTec Letter at 7.
\1141\ See supra note 374 and accompanying text.
\1142\ See supra Table VIII.8 for the compliance costs
associated with Regulation SCI.
---------------------------------------------------------------------------
However, the Commission is uncertain about the actual level of
costs Government Securities ATSs would incur because these costs might
differ from the types of SCI entities considered in the Regulation SCI
Adopting Release, which did not include fixed income ATSs.\1143\ The
Commission is also uncertain about the actual level of costs Government
Securities ATSs would incur because the actual costs might differ based
on various factors, such as complexity of SCI entities' systems and the
degree to which SCI entities employ third-party systems. The Commission
believes that Government Securities ATSs with relatively simpler
systems would incur lower compliance costs compared to those with more
complex systems.\1144\ Also, any SCI systems operated by a third-party
on behalf of an SCI entity would be subject to the requirements of
Regulation SCI. The Commission believes that Government Securities ATSs
with higher dependency on SCI systems operated by
[[Page 15632]]
third-party vendors might incur higher compliance costs compared to
those with lower dependency on third-party systems.\1145\
---------------------------------------------------------------------------
\1143\ See Regulation SCI Adopting Release, supra note 3. In the
Regulation SCI Adopting Release, fixed income ATSs are excluded from
the regulation.
\1144\ See id. The Regulation SCI Adopting Release explains that
compliance costs would depend on the complexity of SCI entities'
systems and they would be higher for SCI entities with more complex
systems.
\1145\ See id. The Regulation SCI Adopting Release discusses
that compliance costs could in part depend on the extent to which an
SCI entity uses third-party systems because ensuring compliance of
systems operated by a third-party with Regulation SCI may be more
costly than ensuring compliance of internal systems with Regulation
SCI.
---------------------------------------------------------------------------
In addition, the Commission believes that some Government
Securities ATSs' participants required to participate in the testing of
business continuity and disaster recovery plans would incur Regulation
SCI-related connectivity costs of approximately $10,000 apiece.\1146\
If larger members or participants of SCI Government Securities ATSs
already maintain connections to backup facilities including for testing
purposes, the compliance costs associated with the business continuity
and disaster recovery plans testing requirements in Rule 1004 for those
larger member or participants might be limited.
---------------------------------------------------------------------------
\1146\ See id. The Regulation SCI Adopting Release estimated
connectivity costs as part of business continuity and disaster
recovery plans to be approximately $10,000 per SCI entity member or
participant.
---------------------------------------------------------------------------
The Commission believes that the costs to comply with Regulation
SCI discussed above would also fall on third-party vendors employed by
Government Securities ATSs to provide services used in their SCI
systems. The costs for third-party vendors imposed by Regulation SCI
would depend on the extent to which Government Securities ATSs use
third-party systems that fall under the definition of SCI systems and
the portion of third-party vendors operating SCI systems on behalf of
large (i.e., over the volume threshold) Government Securities ATSs that
already comply with the requirements of Regulation SCI. It is possible
that some third-party vendors operating SCI systems on behalf of large
Government Securities ATSs already comply with the requirements of
Regulation SCI because they also operate the SCI systems for other SCI
(e.g., SCI ATSs, SCI SROs). The additional compliance costs from the
proposed amendments of Regulation SCI for these third-party vendors
would be minimal. However, at this time, it is difficult to estimate
the cost for third-party vendors because the Commission does not know
the extent to which Government Securities ATSs use third-party systems
that fall under the definition of SCI systems.
b. Indirect Costs
The Commission believes that the proposed amendments could result
in indirect costs for market participants and certain Government
Securities ATSs and Communication Protocol Systems.
The public disclosure requirements of Form ATS-N under the proposal
could generate indirect costs for some subscribers by causing
Government Securities ATSs and Communication Protocol Systems that are
NMS Stock ATSs to stop sharing information that they might currently
offer to only some subscribers. Form ATS-N would require Government
Securities ATSs and NMS Stock ATSs to publicly disclose any platform-
wide order execution metrics that they share with any subscriber. To
avoid publicly disclosing this information, an ATS might stop sharing
the information with subscribers. The trading costs of subscribers that
currently use this information to help make trading decisions would
increase if the information is no longer available to them. The risk of
ATSs disclosing less information than they currently do depends on
several factors, such as the commercial purpose for releasing such
information. If the subscribers who receive such information demand the
information as a condition of subscribing, ATSs would have a commercial
incentive to continue disclosing it. Thus, the Commission believes that
this risk might be low.
The Commission believes that the public disclosure of Form ATS-N
would generate indirect costs, in the form of transfers, for some
subscribers of Government Securities ATSs or Communication Protocol
Systems that are NMS Stock ATSs who might currently have more
information regarding some ATS features, such as order priority and
matching procedures, than other subscribers. The public disclosure of
these features would reduce informed subscribers' information advantage
over other subscribers on such Government Securities ATSs or
Communication Protocol Systems and increase their trading costs. In
this regard, the Commission recognizes that this effect would be a
transfer to those subscribers who would receive the proposed
information, from those subscribers currently exclusively receive such
information.
Some Government Securities ATSs and Communication Protocol Systems
that are NMS Stock ATSs would experience indirect costs from the public
disclosure of Form ATS-N to the extent that this form would reveal
information to competitors. If a Government Securities ATS or NMS Stock
ATS in part relies on certain operational characteristics (e.g., order
types, trading functionalities) to attract customer order flow and
generate trading revenues, it is possible that the public disclosure of
these characteristics in Form ATS-N would make it easier for other
trading venues to adopt the operational characteristics, which would
lower trading volume and reduce revenue of the disclosing ATS. Such
costs to the disclosing ATS would constitute transfers to competing
ATSs rather than a net cost to the market.
That said, the Commission believes that the risk of these transfers
is low because it is not likely the responsive information to the
revised Form ATS-N would include detailed enough information regarding
operational facets such that the public disclosure of the information
would allow another ATS to replicate the functionality to the extent it
would adversely affect the competitive position of the disclosing ATS
in the market.\1147\
---------------------------------------------------------------------------
\1147\ See supra note 467 and accompanying text.
---------------------------------------------------------------------------
The Commission believes that Government Securities ATSs and
Communication Protocol Systems that trade NMS stocks, non-NMS stock
equity securities, corporate debt securities, or municipal securities,
and passive systems that trade NMS stocks could indirectly experience
costs in the form of lost revenue if they meet or exceed the Fair
Access Rule thresholds and need to alter their business model to comply
with the requirements of the Fair Access Rule. If they need to alter
their terms of service or operations it may lead some subscribers that
currently trade on the venue and benefit from the existing terms of
service or operations to reduce the order flow they route to the venue
or even leave the venue entirely, which could reduce the ATS's revenue.
However, this revenue loss may be mitigated if the ATS is also able to
attract new subscribers or additional order flow that was previously
not able to access the venue.\1148\ The Commission is not able to
estimate the loss of revenues that Government Securities ATSs,
Communication Protocol Systems that trade NMS stocks, and passive
systems that meet the aggregate volume thresholds could incur as a
result of applying the Fair Access Rule, because the venues may alter
their business operations in response to being subject
[[Page 15633]]
to the requirements of the Fair Access Rule and how the venue's
existing subscribers may consequently alter their order flow or
subscription to the ATS.
---------------------------------------------------------------------------
\1148\ The Commission believes that, even if, an ATS has to
change its business operations as a result of exceeding the Fair
Access Rule threshold and is able to attract additional order flow
or subscribers, the ATS's profits will likely be lower. If an ATS
could have increased its profits by altering its business model
before it was subject to the Fair Access Requirements, it would
presumably have done so.
---------------------------------------------------------------------------
The Commission believes that market participants could incur
indirect costs related to Government Securities ATSs, Communication
Protocol Systems that trade NMS stocks, non-NMS stock equity
securities, corporate debt securities, or municipal securities, and
passive systems that trade NMS stocks being subject to the Fair Access
Rule. As discussed in Section VIII.C.1.b, applying the Fair Access Rule
could lower trading costs for market participants who are able to gain
access to a trading venue from which they were previously excluded.
This could impose costs on existing subscribers who may currently
benefit from limiting access to the trading venue, though the
Commission recognizes these costs would amount to transfers. To the
extent this occurs, it is possible that some existing subscribers may
redirect some or all of their trading interest to another trading venue
that is not subject to the Fair Access Rule in order to preserve some
of the benefits they may receive from a trading venue limiting access.
These existing subscribers may incur search costs to find other venues
to trade on as well as costs associated with administrative and
operational procedures (e.g., means of access, connectivity, order
entry) to trade on a new trading venue. To the extent that existing
subscribers shift their trading from the trading venue that is subject
to the Fair Access Rule to a trading venue that is not subject to the
rule, the benefits marker participants receive from gaining access to
trading venues subject to the Fair Access Rule could be reduced.
Furthermore, compared to larger and more established ATSs, it is
possible that younger ATSs rely more on providing catered services,
including more advantageous access, to specific clients or a clientele,
in order to grow their businesses. If being subject to the Fair Access
Rule prohibits these ATSs from doing this, these ATSs could restrict
trading on their systems when they are close to meeting the volume
thresholds under the Fair Access Rule. This may not result in a
significant increase in trading costs for market participants, because
the order flow that was being sent to those ATSs would likely be
absorbed and redistributed amongst other ATSs or non-ATS venues.
However, if an ATS that is the sole provider of a niche service limits
the trading in certain securities to avoid being subject to the Fair
Access Rule, it could be more difficult for some market participants to
find an alternative trading venue for that niche service, which would
result in a larger increase in trading costs.
Similarly, the proposed amendments to apply certain aggregate
volume thresholds to the Fair Access Rule in the markets for government
securities, corporate debt and municipal securities, and equity
securities could also cause market participants to incur similar
indirect costs. If the aggregate volume of ATSs operated by a common
broker-dealer or operated by affiliated broker-dealers approaches the
Fair Access volume thresholds, then the operators could restrict
trading in one or more securities on their systems in order to avoid
being subject to the requirements of the Fair Access Rule. However,
ATSs in the markets for government securities, corporate debt
securities, and municipal securities may be unlikely to restrict
trading in individual securities on their systems because the
aggregated volume threshold is applied categorically rather than to
individual securities.
Market participants could also incur indirect costs from the
proposed amendments to apply certain aggregate volume thresholds to the
Fair Access Rule if it causes a broker-dealer or affiliated broker-
dealers that operate multiple ATSs to shut down one or more their
smaller ATSs in order to avoid triggering the Fair Access threshold.
This could cause market participants that subscribed to one of the
shutdown platforms to incur search costs to find another venue to trade
on.
The Commission believes that market participants could incur
indirect costs related to applying Regulation SCI to Government
Securities ATSs and Communication Protocol Systems in equity securities
and with applying Rule 301(b)(6) to Communication Protocol Systems in
the market for corporate debt securities or municipal securities. If a
Government Securities ATS or Communication Protocol System that trades
NMS stocks is close to satisfying the volume thresholds of Regulation
SCI or Rule 301(b)(6), it could limit the trading in certain securities
on its systems to stay below the volume thresholds in order to avoid
being subject to Regulation SCI or Rule 301(b)(6). If this occurs for a
Government Securities ATS or Communication Protocol System that is the
sole provider of a niche service, as discussed above, some market
participants would incur higher trading costs.
Additionally, in order to stay below the volume thresholds under
Regulation SCI or Rule 301(b)(6), an ATS could break itself up into
smaller ATSs. If this results in its subscribers changing their
administrative and operational procedures (e.g., means of access,
connectivity, order entry), the subscribers would incur costs
associated with making those administrative and operational changes to
utilize the ATS, or otherwise incur search costs to find another venue
to trade.
3. Efficiency, Competition, and Capital Formation
The Commission has considered the effects of the proposed
amendments on efficiency, competition, and capital formation, and
discussed these effects below.
a. Competition
The Commission preliminarily believes that the proposed amendments
to Regulation ATS and Regulation SCI would affect competition in the
market for trading services.\1149\
---------------------------------------------------------------------------
\1149\ See supra Section VIII.C.1 for a discussion about
benefits from the requirements of Regulation ATS and Regulation SCI
and Section VIII.C.2 for a discussion about costs of the
requirements of Regulation ATS and Regulation SCI.
---------------------------------------------------------------------------
i. Regulation ATS
The Commission believes that the proposed amendments to Rule 3b-16
and Regulation ATS would promote competition by requiring current ATSs
and Communication Protocol Systems to operate on a more equal basis.
Additionally, the Commission believes that the regulatory requirements
and compliance costs associated with the proposed amendments to Rule
3b-16 and Regulation ATS could act as a deterrent or a barrier to entry
for potential ATSs or cause some smaller existing trading venues to
exit the market for trading services.\1150\ However, based on the
estimated costs in Section VIII.C.2.a.i above, the burdens imposed by
these regulatory requirements or compliance costs may not be large
enough for these effects to be significant. Even if a smaller trading
venue ceased operating, the Commission believes it may not have a
significant adverse effect on overall competition among trading venues,
because the market for trading services is competitive and the trading
volume from the venue would likely be
[[Page 15634]]
absorbed and redistributed amongst other ATSs or non-ATS venues.\1151\
---------------------------------------------------------------------------
\1150\ The expected compliance costs of Regulation SCI could act
as a barrier to entry for new entrants who expect to eventually
become SCI ATSs. If the expected compliance costs reduce the number
of potential new entrants, this would reduce the potential
competition from new entrants. However, these effects may not be
significant because the entry decision at the margin, when the venue
is small, may not be significantly influenced by what would happen
if the venue later became large enough and met the requirements of
Regulation SCI.
\1151\ The competitive effects would vary based on the types of
securities and the role that ATSs and Communication Protocol Systems
play in each securities market. See supra Sections VIII.B.2.d,
VIII.B.3.d, VIII.B.4.d, and VIII.B.5.f for a discussion about
competition in the market for trading services in different
securities markets. Furthermore, the Commission acknowledges that
the effects on competition could be greater if a smaller trading
venue that is the sole provider of a niche service were shut down.
To the extent this occurs, it could adversely impact competition
because it would require some market participants to find other
venues to trade on that may not minimize their trading costs to the
same extent. However, even in this case, the overall effects on
competition may still be limited because a competitor could create
similar business models if demand were adequate, and if it did not
do so, it seems likely new entrants would do so if demand were
sufficient.
---------------------------------------------------------------------------
Although the proposed amendments to Exchange Act Rule 3b-16 and
Regulation ATS may not significantly increase the barriers to entry for
new trading venues or cause some existing smaller trading venues to
exit the market, the Commission lacks certain information necessary to
quantify the extent to which entities that otherwise would seek to
operate as a trading venue in the markets for government securities,
repos, corporate, municipal, or equity securities would be dissuaded
from doing so. Specifically the decision for a trading venue to
continue operating or to cease operating depends on numerous factors
and the Commission lacks information about many of those factors. For
example, the Commission does not have information on the extent to
which an existing Communication Protocol Systems would potentially need
to alter its operations or business model as a result of the proposed
amendments to Rule 3b-16 and Regulation ATS.
(a) Regulatory Framework
To the extent that current ATSs and Communication Protocol Systems
compete,\1152\ the proposed changes to Exchange Act Rule 3b-16, which
would subject Communication Protocol Systems to the exchange regulatory
framework, which can include complying with Regulation ATS,\1153\ would
promote competition by requiring current ATSs and Communication
Protocol Systems to operate on a more equal basis in securities
markets. One commenter on the Concept Release stated that non-ATS
trading platforms that are neither registered as exchanges nor as ATSs
perform core market place functions in fixed income securities (e.g.,
corporate and municipal bonds) trading.\1154\ This commenter also noted
that these non-ATS trading platforms are operated by either broker-
dealers or unregulated entities. Furthermore, this commenter stated
that the significant regulatory burdens on ATSs put ATSs at a
competitive disadvantage to non-ATS trading platforms that are not
subject to the same regulatory obligations. Extending the requirements
of Regulation ATS to Communication Protocol Systems would help
eliminate a competitive disadvantage for ATSs arising from uneven
regulatory requirements in the market for trading services.\1155\ As
discussed in Section II.B.3, the proposed amendment would subject both
broker-dealer-operated and non-broker-dealer-operated Communication
Protocol Systems to the requirements of Regulation ATS. To comply with
the broker-dealer registration requirements of Regulation ATS, a non-
broker-dealer-operated Communication Protocol System would be required
to become a member of an SRO (e.g., FINRA) and comply with the
requirements of the SRO, to which ATSs are currently required.
---------------------------------------------------------------------------
\1152\ See supra Sections VIII.B.2.d, VIII.B.2.d, VIII.B.2.d,
and VIII.B.7 (discussing how current ATSs in some markets tend to be
interdealer markets and Communication Protocol Systems tend to be
dealer-to-customer markets).
\1153\ Under the proposal, Communication Protocol Systems that
choose not to register as exchanges can instead register as broker-
dealers and comply with Regulation ATS. Furthermore, under the
proposal, Communication Protocol Systems operated by non-broker-
dealers would be subject to the same regulatory requirements as
ATSs, including the broker-dealer registration requirement of
Regulation ATS. The Commission estimates that 6 non-broker-dealer-
operated Communication Protocol Systems without a broker-dealer
affiliate exist. The Commission assumes that, under the proposed
amendments, Communication Protocol Systems would choose to register
as broker-dealers and comply with Regulation ATS, rather than
register as exchanges. See supra note 1056 and accompanying text.
\1154\ See ICE Bonds Letter II at 2 and 3.
\1155\ See supra Sections VIII.B.2, VIII.B.3, VIII.B.4,
VIII.B.5, and VIII.B.6 for discussions regarding regulatory
requirements for ATSs in the government securities, corporate debt
securities, municipal securities, equities, and options market,
respectively. One commenter on the Concept Release stated that
applying a consistent regulatory framework to trading platforms that
provide equivalent services to market participants, while also
distinguishing between platforms that offer distinct trading
protocols, would level the competitive landscape and allow market
participants to choose trading platforms and protocols based on the
merits of the services provided. Furthermore, this commenter also
stated that it would not be appropriate to regulate all types of
electronic trading protocols in the same manner regardless of their
systemic risk profiles or to regulate electronic trading protocols
more strictly than equivalent non-electronic trading protocols. See
Tradeweb Letter at 4.
---------------------------------------------------------------------------
Similarly, extending Regulation ATS to Currently Exempted
Government Securities ATSs \1156\ and Communication Protocol Systems
that trade government securities would help promote competition by
eliminating a Current Government Securities ATS's competitive
disadvantage that might arise due to uneven regulatory requirements in
the market for government securities and repo trading services.\1157\
---------------------------------------------------------------------------
\1156\ Under the proposal, bank-operated Currently Exempted
Government Securities ATSs would be subject to the same regulatory
requirements as non-bank-operated Currently Exempted Government
Securities ATSs and Current Government Securities ATSs. The
Commission estimates that 1 bank-operated Currently Exempted
Government Securities ATS exists.
\1157\ Current Government Securities ATSs might be at a
competitive disadvantage to Currently Exempted Government Securities
ATSs and Communication Protocol Systems, which do not currently
incur compliance costs associated with the requirements of
Regulation ATS. As discussed above, Currently Exempted Government
Securities ATSs, bank-operated Currently Exempted Government
Securities ATSs, Communication Protocol Systems, and Current
Government Securities ATSs compete in the market for government
securities and repo trading services with different regulatory
requirements. For example, due to reporting requirements of
Regulation ATS, it would be more difficult or costly for a Current
Government Securities ATS to implement significant operational
changes to compete with Currently Exempted Government Securities
ATSs and Communication Protocol Systems if the Current Government
Securities ATS's competitive advantage is driven by operational
facets that would be reported on Form ATS. See also supra Sections
II, III, VIII.B.2.a, and VIII.B.2.b for a discussion about the
differences in regulatory requirements between Current Government
Securities ATSs, Currently Exempted Government Securities ATSs, and
Communication Protocol Systems under the current regulatory
framework.
---------------------------------------------------------------------------
The Commission acknowledges that some Government Securities ATSs
and Communication Protocol Systems could restructure their operations
to be non-ATSs to avoid being subject to Regulation ATS and Regulation
SCI if the requirements are too burdensome or impair the ability of the
trading venue to compete. However, the risk of this occurring may be
mitigated because the proposed amendments to Rule 3b-16 may make it
difficult for Government Securities ATSs and Communication Protocol
Systems to restructure their operations to be non-ATSs.\1158\ To the
extent this does occur, the benefits and enhancements to competition
discussed above would be reduced.\1159\
---------------------------------------------------------------------------
\1158\ Additionally, although non-ATS venues would compete with
ATSs in the market for government securities and repo trading
services, non-ATS venues cannot offer the same services as ATSs
without becoming ATSs.
\1159\ See supra Section VIII.C.1 for a discussion about
benefits from the requirements of Regulation ATS and Regulation SCI.
---------------------------------------------------------------------------
One commenter on the Concept Release stated that the flexibility of
the current regulatory framework allows financial technology firms
\1160\ to
[[Page 15635]]
innovate and compete fiercely.\1161\ This commenter also stated that
this structure creates relatively low costs for entry (and exit) in the
development of new technologies.\1162\ Subjecting Communication
Protocol Systems to the requirements of Regulation ATS could reduce
operational flexibility. For example, it would be more costly for a
Communication Protocol System to implement significant changes to
operational facets that would be required to be reported on Form ATS or
Form ATS-N. The Commission acknowledges that this reduction in
operational flexibility could, under certain circumstances, make it
more difficult to innovate.\1163\ That said, in addition to the other
benefits discussed above,\1164\ the Commission believes that the
proposed amendments would foster competition by requiring current ATSs
and Communication Protocol Systems to operate on a more equal basis in
the market for trading services. This, in turn, would help promote
innovation.
---------------------------------------------------------------------------
\1160\ For the purpose of this discussion, financial technology
firm is interpreted to be a type of Communication Protocol System
(e.g., RFQ system).
\1161\ See Bloomberg Letter at 10 and 17.
\1162\ See Bloomberg Letter at 23.
\1163\ For example, it would take longer for a Communication
Protocol System that trades government securities to implement an
innovative operational facet that required a significant change to
its systems, e.g. an innovative trading protocol, because they it
need to file a Form ATS-N material amendment 30 days before
implementing the system change. See supra IV.A.
\1164\ See supra Section VIII.C.1.
---------------------------------------------------------------------------
(b) Compliance Costs of Regulation ATS
The Commission preliminarily believes that the compliance costs
associated with the requirements of Regulation ATS would have different
effects on the competitive position of ATSs depending on their size.
However, the Commission believes that these initial and ongoing
compliance costs may not have a significant adverse impact on overall
competition in the market for trading services.
As a result of the proposed extension of Regulation ATS to
Communication Protocol Systems and Currently Exempted Government
Securities ATSs, these ATSs would be subject to Rule 301(b)(9) and
(10), Rule 302, and Rule 303. Most of the estimated compliance costs
\1165\ associated with these rules would be fixed costs to those ATSs
regardless of the amount of trading activity that takes place on them,
and thus, these compliance costs would represent a larger fraction of
revenue for a small (measured in trading volume) ATS relative to that
for a large ATS.\1166\ Furthermore, most of the estimated compliance
costs associated with the requirements of Form ATS-N under Rule 304,
which all Government Securities ATSs and Communication Protocol Systems
that trade NMS stocks would incur, would be fixed costs. This could
have an adverse impact on small ATSs in competing against larger ATSs,
which could act as a deterrent or a barrier to entry for potential ATSs
or result in small ATSs exiting the market for trading services.\1167\
However, if small Government Securities ATSs and Communication Protocol
Systems that trade NMS stocks engage in providing simpler services,
these small ATSs are likely to incur lower compliance costs.\1168\
---------------------------------------------------------------------------
\1165\ The compliance costs associated with the requirements of
Regulation ATS are generally represented by implementation costs
(the monetized costs of PRA burdens). See also supra note 1100. See
supra Section VIII.C.2.a.i for a discussion on the implementation
costs associated with Rule 301(b)(9) and (10), Rule 302, and Rule
303. Communication Protocol Systems that are not broker-dealers and
Currently Exempted Government Securities ATSs that are banks would
incur additional compliance costs associated with the broker-dealer
registration requirements under Rule 301(b)(1). See infra Section
VIII.C.3.1.i.c) for a discussion of the competitive effects of
broker-dealer registration requirements.
\1166\ See supra Section VIII.2.a.i for a discussion about the
impact of implementation costs for small ATSs.
\1167\ Based on the estimated costs in Section VIII.C.2.a.i
above, the Commission preliminarily believes that the compliance
costs may not be large enough for these effects to be significant.
See supra note 1151 and accompanying text.
\1168\ See supra Section VIII.C.2.
---------------------------------------------------------------------------
One commenter on the Concept Release stated that the regulatory
burdens associated with subjecting all electronic platforms to the
requirements of Regulation ATS could ultimately reduce the number of
different platforms available.\1169\ Another commenter on the Concept
Release stated that the changes contemplated to Rule 3b-16 could end up
raising costs for new financial technology (i.e., fintech) \1170\
entrants (liquidity solutions) to enter, stifle innovation and damage
the current ability of market participants to locate liquidity in all
illiquid security markets.\1171\ This commenter also stated that a
change in the definition of exchange would insert unnecessary
intermediation between dealers and their customers and damage liquidity
formation.\1172\
---------------------------------------------------------------------------
\1169\ See SIFMA Letter at 9 and 11. Another commenter on the
Concept Release stated that the revision of the definition of
``exchange'' in Exchange Act Rule 3b-16 (``Rule 3b-16'') to expand
the applicability of Regulation ATS to firms currently regulated as
non-ATS broker-dealers may cause disruption if not undertaken
carefully. See Tradeweb Letter at 2. An additional commenter stated
that the Commission must be careful in implementing any reforms to
the oversight of corporate bond and municipal securities trading
venues to ensure that there are no unintended consequences for
investors, such as the reduction in the availability of the types of
platforms that investors utilize to effect transactions in these
securities. See MFA Letter at 8.
\1170\ For the purpose of this discussion, fintech is
interpreted to be a type of Communication Protocol System (e.g., RFQ
system).
\1171\ See Bloomberg Letter at 3. This commenter on the Concept
Release stated that adding fintechs, such as RFQ systems, to the
definition of exchange would erect high regulatory hurdles for
innovation and new fintech entrants. See also Bloomberg Letter at
28. Another commenter on the Concept Release similarly expressed
concern that any revisions to the regulatory framework for fixed
income electronic trading should not stifle the investment and
innovation that has led to the variety of existing trading
protocols, and that it would be a mistake to interrupt this
evolution through the increased imposition of an equity-based
regulatory framework. See MarketAxess Letter at 3.
\1172\ See Bloomberg Letter at 20. This commenter also stated
that a change in the definition of exchange would threaten to
distort the market structure by creating a one-size-fits-all
approach that is biased against the trading of less-liquid
instruments, damaging liquidity formation. See id.
---------------------------------------------------------------------------
As discussed above, the compliance costs from the proposed
amendments to Regulation ATS may not significantly increase the
barriers to entry for new trading venues or cause some existing
Communication Protocol Systems and Currently Exempted Government
Securities ATSs to exit the market. Therefore, the Commission believes
that the compliance costs associated with Regulation ATS may not have a
significant adverse impact on competition in the markets for trading
services. As discussed above, while the Commission acknowledges the
proposed amendments could reduce operational flexibility, which could,
under certain circumstances, make it more difficult to innovate, the
Commission believes increased competition from the proposed amendments
providing a more equal regulatory basis would help promote
innovation.\1173\ To the extent the proposed amendments force an
innovative fintech to exit the market, it may be able to restructure
itself (rather than operate as an ATS) as a third-party vendor and
continue to provide certain innovative services, or otherwise sell its
technology to another ATS, which would mitigate to some extent any
adverse impact the proposed amendments may have on innovation.
---------------------------------------------------------------------------
\1173\ See supra Section VIII.C.3.a.i.a).
---------------------------------------------------------------------------
To the extent the proposed amendments result in a Communication
Protocol System that trades less liquid securities exiting the market
for trading services, it could increase the trading costs of its
subscribers if they need to find a new trading venue or are forced to
go through multiple intermediaries (i.e., broker-dealers) to find
counterparties. However, as discussed above, the Commission
preliminarily believes this may not result in a significant increase in
trading costs for market participants because the trading
[[Page 15636]]
interest that was being sent to the Communication Protocol System would
likely be absorbed and redistributed amongst other ATSs or non-ATS
venues.\1174\
---------------------------------------------------------------------------
\1174\ See supra Section VIII.C.2.b.
---------------------------------------------------------------------------
(c) Broker-Dealer Registration Requirements
In addition to the compliance costs associated with the
requirements of Regulation ATS, non-broker-dealer-operated
Communication Protocol Systems without a broker-dealer affiliate would
incur additional compliance costs related to registering with the
Commission as broker-dealers, becoming members of an SRO, such as
FINRA, and maintaining broker-dealer registration and SRO
membership.\1175\ Although these additional compliance costs could harm
the competitive position of these Communication Protocol Systems and
raise barriers to entry for entrants who are not broker-dealers nor
affiliated with another broker-dealer, the Commission preliminarily
believes that the compliance costs associated with the proposed broker-
dealer registration requirements may not have a significant adverse
effect on overall competition in the market for trading services.
---------------------------------------------------------------------------
\1175\ The Commission estimates there are 6 non-broker-dealer-
operated Communication Protocol Systems without a broker-dealer
affiliate. See supra Section VIII.C.2.a.ii.
---------------------------------------------------------------------------
Although the Commission acknowledges uncertainty about the
compliance costs associated with the proposed broker-dealer
registration requirements,\1176\ there are two reasons why these costs
may not be significant enough to make a non-broker-dealer-operated
Communication Protocol Systems exiting the market likely. First, the
Commission believes that the estimated average costs may not be
significant enough to make exiting the market likely.\1177\ Second, the
Commission believes that the adverse effect on competition may be
limited to existing small Communication Protocol Systems and this
adverse effect may be mitigated to some extent because small
Communication Protocol Systems would incur lower compliance costs
associated with the broker-dealer registration requirements.\1178\ To
the extent that one of these Communication Protocol Systems ceased
operating, the Commission believes it may not have a significant
adverse effect on overall competition among trading venues, because the
market for trading services is competitive and the trading volume from
the venue would likely be absorbed and redistributed amongst other ATSs
or non-ATS venues.\1179\
---------------------------------------------------------------------------
\1176\ As discussed above, the costs would vary significantly
across firms and the Commission's estimate is uncertain because it
does not have information on the non-broker-dealer-operated
Communication Protocol Systems without a broker-dealer affiliate.
See id.
\1177\ The Commission estimates an initial cost of approximately
$317,000 to register as a broker-dealer with the Commission and
become a member of FINRA and an ongoing annual cost of approximately
$58,000 to maintain the broker-dealer registration and FINRA
membership. See id.
\1178\ See id for a discussion about the costs associated with
the broker-dealer registration requirements under Rule 301(b)(1).
\1179\ See supra note 1151 and accompanying text.
---------------------------------------------------------------------------
(d) Ineffectiveness Declaration
The proposed ability for the Commission to be able to declare a
Form ATS-N or Form ATS-N amendment ineffective could result in
compliance costs for Government Securities ATSs and Communication
Protocol Systems that are NMS Stock ATSs and may affect competition in
the market for government securities, repos, and NMS stock trading
services. However, based on Commission staff's experience with NMS
Stock ATSs that filed an initial Form ATS-N, the Commission
preliminarily believes this would be an unlikely result.\1180\ To the
extent the Commission declares an initial Form ATS-N or amendment
ineffective, the ATS would either have to cease operations \1181\ or,
in the case of an amendment, roll back any changes it made and operate
pursuant to its previous Form ATS-N that is effective until it is able
to address the deficiencies and file a new Form ATS-N that becomes
effective.\1182\ To the extent the Commission declares an initial Form
ATS-N or amendment ineffective, some broker-dealer operators of
Government Securities ATSs and Communication Protocol Systems in NMS
Stocks might find that the costs of addressing deficiencies in Form
ATS-N outweigh the benefits of continuing to operate the trading venue,
particularly if the trading venue does not constitute a significant
source of profit for a broker-dealer operator.
---------------------------------------------------------------------------
\1180\ Unlike the current rules applicable to NMS Stock ATSs
under Rule 304 of Regulation ATS with respect to ineffectiveness,
the Commission does not have a process to declare a Form ATS
ineffective because of the quality of the disclosures and cause the
ATS cease operating pursuant the exemption. See Rule
304(a)(1)(iv)(B).
\1181\ See Rule 304(a)(1)(iv)(B).
\1182\ See id.
---------------------------------------------------------------------------
The ability of the Commission to declare Form ATS-N ineffective
could also raise barriers to entry for new ATSs, as it might create
uncertainty as to whether the Commission would declare its initial Form
ATS-N effective or ineffective and as to the cost of avoiding an
ineffective declaration. If a new ATS's initial Form ATS-N is declared
ineffective, it would require time and additional expenditures to
address the deficiencies delaying the commencing of operations, which
would deter some potential ATSs from entry into the market for trading
services. However, because an ineffectiveness declaration would be an
unlikely result,\1183\ the Commission believes it would not
significantly raise the barriers to entry for new ATSs.
---------------------------------------------------------------------------
\1183\ See supra Section VIII.C.2.a.iii (discussing the
Commission's belief that the potential costs of an ineffectiveness
declaration would incentivize Government Securities ATSs and
Communication Protocol Systems to initially submit a more accurate
and complete Form ATS-N and amendments, which would reduce the
likelihood that they are declared ineffective).
---------------------------------------------------------------------------
(e) Fair Access
The Commission believes that applying the Fair Access Rule to
Government Securities ATSs, Communication Protocol Systems, and passive
systems could increase competition between market participants in the
markets for government securities, repos, corporate and municipal
securities, and equity securities. As discussed above, to the extent
that there are market participants currently excluded from trading on
significant Government Securities ATSs, Communication Protocol Systems,
or passive systems, applying the Fair Access Rule to Government
Securities ATSs, Communication Protocol Systems, and passive systems
could increase trading venue options available to these market
participants, which could lower their trading costs.\1184\ This, in
turn, could increase competition among market participants trading on
these platforms, which could be significant sources of liquidity and
represent a significant portion of trading volume in their respective
markets.\1185\ However, these competitive effects may be reduced to the
extent that some existing subscribers of trading venues that are
subject to the Fair Access Rule redirect their trading interest to
other trading venues not subject to the Fair Access Rule in order to
preserve some of the benefits they may receive from a trading venue
limiting access.\1186\ If the
[[Page 15637]]
proposed amendments to apply certain aggregate volume thresholds
increase the number of smaller affiliate ATSs that would be subject to
the Fair Access Rule, it could also increase competition among market
participants, to the extent certain market participants are currently
excluded from accessing these platforms.
---------------------------------------------------------------------------
\1184\ See supra Section VIII.C.1.b.
\1185\ One commenter on the 2020 Proposal stated that, since the
bilateral fixed-income market is a heavily relationship-driven
business, the Fair Access rule would better ensure that broker-
dealers and their affiliates cannot engage in retaliatory behavior,
and thus improve access and competition for the largest, most
systemically important markets. See AFREF Letter at 3.
\1186\ See supra Section VIII.C.2.b (discussing the indirect
costs to market participants related to the requirements of the Fair
Access Rule).
---------------------------------------------------------------------------
The Commission believes that the proposed amendments to apply
certain aggregate volume thresholds to the Fair Access Rule could harm
competition among trading venues in the markets for government
securities, corporate debt and municipal securities, and equity
securities. As discussed above, if the aggregate volume of ATSs
operated by a common broker-dealer or operated by affiliated broker-
dealers approaches the Fair Access volume thresholds, then the
operators could restrict trading on their systems in one or more
securities in order to avoid being subject to the requirements of the
Fair Access Rule.\1187\ However, ATSs in the markets for government
securities and corporate debt and municipal securities may be unlikely
to restrict trading in individual securities on their systems because
the aggregated volume threshold is applied categorically rather than to
individual securities. If these venues restrict trading in some
securities, it would reduce competition among trading venues to attract
order flow in these securities.
---------------------------------------------------------------------------
\1187\ See supra Section VIII.C.2.b.
---------------------------------------------------------------------------
Additionally, the proposed amendments to apply certain aggregate
volume thresholds to the Fair Access Rule could also harm competition
among trading venues if they cause a broker-dealer or affiliated
broker-dealers that operate multiple ATSs to shut down one or more
their smaller ATSs in order to avoid triggering the Fair Access
threshold.\1188\ However, because the trading volume on these smaller
ATSs would likely be absorbed and redistributed amongst other ATSs or
non-ATS venues, the Commission believes that the overall effects on
competition among trading venues may not be significant.
---------------------------------------------------------------------------
\1188\ See id.
---------------------------------------------------------------------------
(f) Public Disclosure
The increase in transparency due to the public disclosure of Form
ATS-N would promote competition in the markets for government
securities, repos, and NMS stock trading services. The increase in
competition could result in lower venue fees, improve the efficiency in
customer trading interest or order handling procedures, and promote
innovation. For instance, because the public disclosure of Form ATS-N
would make it easier for market participants to compare fees across
ATSs,\1189\ market participants could choose to send their orders to
ATSs that offer lower fees, which in turn, could induce ATSs to lower
their fees to attract new subscribers. If non-ATS venues compete with
ATSs for trading services, the increased operational transparency of
ATSs might also incentivize non-ATS trading venues to reduce their fees
to compete with ATSs.
---------------------------------------------------------------------------
\1189\ Under the proposed amendments, Government Securities ATSs
(inclusive of Communication Protocol Systems, as proposed) and
Communication Protocol Systems that trade NMS stocks would need to
begin disclosing their Form ATS-N. Current NMS Stock ATSs already
publically disclose their Form ATS-N.
---------------------------------------------------------------------------
Because the public disclosure of Form ATS-N would make it easier
for market participants to compare the quality of trading services,
such as innovative trading functionalities, order handling procedures,
and execution statistics--if they are made available, across
venues,\1190\ market participants would be more likely to send their
trading interests or orders to ATSs that offer better trading services.
This would promote greater competition in the market for trading
services and incentivize ATSs to innovate, including, in particular,
technology related to trading services to improve the quality of such
services to attract more subscribers.
---------------------------------------------------------------------------
\1190\ See supra Section VIII.C.1.b for a discussion about
benefits from public disclosure of Form ATS-N.
---------------------------------------------------------------------------
Similarly, the public disclosure of Form ATS-N would also result in
market participants redirecting their trading interest away from ATSs
that offer lower quality trading services compared to other ATSs, which
could result in these ATSs earning less revenue. If the loss in revenue
causes these ATSs to become unprofitable, they might choose to exit the
market.\1191\
---------------------------------------------------------------------------
\1191\ See supra note 1151 and accompanying text for a
discussion on the effects of ATSs exiting the market for trading
services.
---------------------------------------------------------------------------
The proposed amendment to require timely fee change disclosure on
Form ATS-N would promote competition between current NMS Stock ATSs and
other trading venues in the market for NMS stocks, including
exchanges.\1192\ In the Commission staff's experience, NMS Stock ATSs
have taken varied approaches to the reporting of fees. Current NMS
Stock ATSs that treat fee changes as material changes in filing Form
ATS-N are required to wait 30 calendar days from the filing date to
implement a fee change.\1193\ In other cases, NMS Stock ATSs have filed
updating amendments no later than 30 days following the end of the
calendar quarter in which a fee change was made. The Commission
believes that requiring NMS Stock ATSs to file a fee amendment no later
than the date it makes the change to a fee or fee disclosure would
require those NMS Stock ATSs to provide the public with sufficient
notice about a fee change while enabling those NMS Stock ATSs to nimbly
change fees in competing against other trading venues. Furthermore,
under Section 19(b) of the Exchange Act, national securities exchanges
can implement fee changes upon filing with the Commission.\1194\ To the
extent that NMS Stock ATSs compete with exchanges in fees to attract
order flow, the proposed amendment would promote competition by helping
to level the playing field between NMS Stock ATSs and exchanges in
terms of the timeframes in which they can initiate and disclose fee
changes.\1195\
---------------------------------------------------------------------------
\1192\ Under the proposed amendments, Government Securities ATSs
would also be required to file fee amendments on Form ATS-N. This
could promote competition among Government Securities ATSs because
timely fee disclosure of fee changes by Government ATSs would make
it easier for market participants to compare fees between trading
venues. This could incentivize trading venues in the market for
Government Securities to reduce their fees to compete to attract
order flow.
\1193\ See supra Section IV.A for a discussion about fee
amendments on Form ATS-N.
\1194\ Under Section 19(b)(3), SRO rule changes that: Constitute
a stated policy, practice, or interpretation with respect to the
meaning, administration, or enforcement of an existing rule of the
SRO; establish or changing a due, fee, or other charge imposed by
the SRO; or are concerned solely with the administration of the SRO,
are immediately effective upon filing. However, the Commission may
suspend one of these SRO rule changes within 60 days of the date the
SRO rule change is filed with the Commission, if it appears to the
Commission that such action is necessary or appropriate in the
public interest, for the protection of investors, or the maintenance
of fair and orderly markets, to remove impediments to, and perfect
the mechanisms of, a national market system, or otherwise in
furtherance of the purposes of the Exchange Act. If the Commission
does suspend a SRO rule change, then it shall institute proceedings
under Section 19(b)(2)(B) to determine whether the proposed SRO rule
change should be approved or disapproved. See 15 U.S.C. 78s(b)(2)
and 15 U.S.C. 78s(b)(3).
\1195\ Currently, an amendment to a fee could result in an ATS
filing an updating amendment or a material amendment, depending on
the nature of the change and the ATS's assessment of whether such
change was material. If an NMS Stock ATS would file an updating
amendment to disclose a fee change, then the proposed amendment
would help level the playing field by reducing the amount of time
that the NMS Stock ATS would have before it had to disclose a fee
change, bringing it more in line with the disclosure timeframes of
exchanges. If an NMS Stock ATS would file a material amendment to
disclose a fee change, then the proposed amendment would help level
the playing field because the NMS Stock ATS would no longer have to
give 30 days' notice before initiating the fee change, bringing it
more in line with the notice timeline in which exchanges can
initiate fee changes.
---------------------------------------------------------------------------
[[Page 15638]]
The public disclosure of a Government Securities ATS's or
Communication Protocol System that trades NMS stock's previously non-
public information regarding innovative operational facets could
adversely impact competition in the market for trading services and
also reduce the incentives for these trading venues to innovate. If the
competitive advantage of an ATS in the market is driven by certain
operational innovations, the disclosure of this information could
result in other competing ATSs with similar operational platforms
implementing similar methodologies, which could cause market
participants to send their trading interest or orders to those other
ATSs. To the extent some ATSs may rely on these innovations to attract
trading interest, this could cause some existing ATSs to exit the
market or raise the barriers to entry for new ATSs, which could
adversely impact competition.\1196\ Additionally, it could reduce the
incentives for ATSs to innovate if publicly disclosing new innovations
results in the disclosing ATS earning less revenue from new innovations
it develops. However, the Commission believes that the risk of these
adverse effects occurring would be low, because the information
disclosed on Form ATS-N is not likely to include detailed enough
information regarding operational facets or innovations such that the
public disclosure would adversely affect the competitive position of
the disclosing ATS.\1197\
---------------------------------------------------------------------------
\1196\ See supra note 1151 and accompanying text for a
discussion on the effects of ATSs exiting the market for trading
services.
\1197\ See supra note 467 and accompanying text.
---------------------------------------------------------------------------
One commenter on the 2020 Proposal stated that the Commission
should not require making commercially sensitive information filed on
the previously proposed Form ATS-G publicly available, which the
commenter classified as information on certain fees or charges for use
of the ATS's services and on aggregate, platform-wide order flow and
execution statistics that the ATS already otherwise collects and
publishes to one or more subscribers.\1198\ The commenter stated that
the public disclosure of such information would have a negative impact
on innovation and competition among ATSs. As discussed above, the
Commission believes that the responsive information to the Form ATS-N
is not likely to include commercially sensitive or other information
the public disclosure of which would result in the disclosing ATSs
exiting the market for trading services and ultimately reduce
transparency.
---------------------------------------------------------------------------
\1198\ See Tradeweb Letter at 3, 10, and 11. Similarly, another
commenter stated that publication of compliance procedures/processes
is not commonplace and risks requiring disclosure of proprietary
information. See ICE Bonds Letter I at 6.
---------------------------------------------------------------------------
One commenter on the 2020 Proposal stated that if the disclosure
requirements of previously proposed Form ATS-G are too burdensome or
impair the ability of Government Securities ATSs to compete, it will
discourage the expansion of ATSs and potentially encourage operators of
Government Securities ATS to restructure their operations to avoid
being characterized as an ATS, which would ultimately result in less
transparency rather than more.\1199\ As discussed above, although the
Commission acknowledges that some Government Securities ATSs could
restructure their operations to be non-ATSs to avoid being subject to
the public disclosure of Form ATS-N, the risk of this occurring may be
mitigated because the proposed amendments to Rule 3b-16 may make it
difficult for them to restructure their operations to be non-
ATSs.\1200\
---------------------------------------------------------------------------
\1199\ See ICE Bonds Letter I at 5 and ICE Bonds Letter II at 4.
\1200\ See supra Section VIII.C.3.a.i.a).
---------------------------------------------------------------------------
ii. Regulation SCI
The Commission believes that the requirements imposed by Regulation
SCI may not have a significant adverse effect on competition in the
market for trading services or on market participants' trading costs.
The Commission believes that the compliance costs imposed by
Regulation SCI may not have a significant adverse effect on competition
among SCI ATSs, non-SCI ATSs, and non-ATS venues in the government
securities market due to mitigating factors.\1201\ The compliance costs
imposed by Regulation SCI would have some impact on competition in the
market for government securities trading services. Specifically,
because non-SCI ATSs do not have to incur the compliance costs
associated with Regulation SCI, non-SCI ATSs and non-ATS venues would
gain a competitive advantage in the market for trading services over
SCI ATSs, with which they compete.\1202\ If SCI ATSs pass on the
compliance costs to their subscribers in the form of higher fees, SCI
ATSs would lose order flow or their subscribers to other non-SCI ATSs
and non-ATS venues with lower fees. Adverse competitive effects,
however, would be mitigated because an SCI ATS would likely have more
robust systems, fewer disruptive systems issues, and better up-time
compared to non-SCI ATSs. Furthermore, any adverse competitive effect
may be minor if an SCI ATS is large and has a more stable and
established subscriber base than other ATSs and non-ATS venues.
---------------------------------------------------------------------------
\1201\ NMS Stock ATSs that meet certain volume thresholds are
subject to Regulation SCI. The Commission estimates that no
Communication Protocol System that is an NMS Stock ATS would be
subject to Regulation SCI. The Commission preliminarily believes
that subjecting significant Communication Protocol Systems that are
NMS Stock ATSs to Regulation SCI would affect competition as
discussed in the Regulation SCI Adopting Release.
\1202\ The expected compliance costs could act as a barrier to
entry for new entrants who expect to eventually become SCI ATSs, but
the Commission preliminarily believes this would not be a likely
possibility. See supra note 1150.
---------------------------------------------------------------------------
The compliance costs associated with participating in business
continuity and disaster recovery plan testing would affect competition
among subscribers of SCI ATSs and also would raise barriers to entry
for new subscribers. Because some subscribers would incur compliance
costs associated with Rule 1004 and others would not, it would
adversely impact the ability for those subscribers of SCI ATSs to
compete. However, it is difficult to gauge the extent of impact on
competition because the Commission does not have sufficient
information, for example, on whether certain subscribers of SCI ATSs
currently maintain connections to backup facilities, including for
testing purposes. If larger subscribers of SCI ATSs already maintain
connections to backup facilities including for testing purposes, the
adverse impact on competition would be mitigated because the
incremental compliance costs associated with the business continuity
and disaster recovery plan testing requirements under Rule 1004 would
be limited for those larger subscribers. The Commission believes that
new subscribers are less likely to be designated immediately to
participate in business continuity and disaster recovery plan testing
than are existing larger subscribers because new subscribers might not
initially satisfy the ATS's designation standards as they establish
their businesses.
It is difficult to estimate the costs of Regulation SCI for third-
party vendors that operate SCI systems or indirect SCI systems \1203\
on behalf of SCI ATSs.\1204\ If Regulation SCI imposes compliance costs
on such vendors, the compliance costs would affect the competition
[[Page 15639]]
among third-party vendors in the market for SCI systems or indirect SCI
systems. If the costs associated with Regulation SCI for third-party
vendors outweigh the benefits of continuing to operate SCI systems or
indirect SCI systems on behalf of SCI ATSs, these third-party vendors
would exit the market for SCI systems or indirect systems. In this
respect, Regulation SCI would adversely impact such vendors and reduce
the ability for some third-party vendors to compete in the market for
SCI systems and indirect SCI systems, with attendant costs to SCI ATSs.
If this happens, SCI ATSs would incur costs from having to find a new
vendor, form a new business relationship, and adapt their systems to
those of the new vendor. SCI ATSs might also elect to perform the
relevant functions internally. If the current third-party vendors are
the most efficient means of performing certain functions for SCI ATSs,
and to the extent that any third-party vendor exits the market, finding
new vendors or performing the functions internally would represent a
reduction in efficiency for SCI ATSs.
---------------------------------------------------------------------------
\1203\ See supra note 348 for the definition of indirect SCI
systems.
\1204\ See supra Section VIII.C.2.a.vi.
---------------------------------------------------------------------------
b. Efficiency and Capital Formation
The Commission believes the proposed amendments to Rule 3b-16,
Regulation ATS, and Regulation SCI could promote price efficiency and
capital formation by reducing trading costs and the potential for
systems disruptions on ATSs that capture a significant portion of
trading volume.\1205\ However, if ATSs restrict trading volume in
certain securities to stay below the Fair Access Rule, Regulation SCI,
and Rule 301(b)(6) thresholds, it could adversely affect price
efficiency and capital formation.
---------------------------------------------------------------------------
\1205\ See supra Sections VIII.B.2.a and VIII.B.2.b for
discussions about the importance of real-time price information on
Government Securities ATS and indicative quotes on Communication
Protocol Systems that trade U.S. Treasury Securities in price
discovery of various securities. See supra Section VIII.C.1.c,
discussing the benefits of reducing system disruptions through
Regulation SCI and Rule 301(b)(6).
---------------------------------------------------------------------------
As discussed above, the proposed requirement for certain
Communication Protocol Systems and Government Securities ATSs to
publically disclose Form ATS-N could help reduce trading costs for
market participants.\1206\ Additionally, subjecting significant
Communication Protocol Systems and Government Securities ATS to the
Fair Access Rule could also help reduce market participants' trading
costs.\1207\ A reduction in trading costs could, in turn, reduce limits
to arbitrage and help facilitate informed traders impounding
information into security prices, which could enhance price
efficiency.\1208\ Furthermore, extending Regulation SCI and Rule
301(b)(6) would help improve systems up-time \1209\ for ATSs and would
also promote more robust systems that directly support execution
facilities, order matching, and the dissemination of market data, which
could also enhance price efficiency.\1210\ In particular, enhanced
price efficiency in the secondary market for on-the-run U.S. Treasury
Securities might also enhance the price efficiency of risky securities
because the transaction prices of on-the-run U.S. Treasury Securities
are used as risk-free rate benchmarks to price risky securities
transactions.\1211\
---------------------------------------------------------------------------
\1206\ See supra Section VIII.C.1.b
\1207\ See id.
\1208\ See, e.g., Shleifer, A. and Vishny, R. (1997). The Limits
of Arbitrage. The Journal of Finance, 52(1), 35-55 (discussing
limits to arbitrage); Grossman, S. and Stiglitz, J. (1980). On the
impossibility of informationally efficient markets. American
Economic Review, 70, 393-408 (discussing informed traders and price
efficiency).
\1209\ Systems up-time is a measure of the time that a computer
system is running and available.
\1210\ See supra Section VIII.C.1.c.
\1211\ Based on the Commission's understanding, Government
Securities ATSs disseminate their Treasury trades via private feeds
and third-party vendors. These prices also serve as benchmarks for
pricing other financial products. See October 15 Staff Report, supra
note 188.
---------------------------------------------------------------------------
Enhanced price efficiency could also promote capital formation.
Price efficiency of securities is important because prices that
accurately convey information about fundamental value improve the
efficiency in allocating capital across projects and entities, which
helps promote capital formation.
On the other hand, the Commission believes that the proposed
amendments of the Fair Access Rule, Regulation SCI, and Rule 301(b)(6)
could also adversely affect price efficiency and capital formation if
ATSs that are close to satisfying the volume threshold limit trading
over some period restrict trading or cease operating to stay below the
volume thresholds and avoid being subject to these rules.\1212\ To the
extent that this keeps ATSs from getting larger, it would increase
fragmentation, and thus, adversely affect price efficiency in those
markets, harming capital formation.
---------------------------------------------------------------------------
\1212\ See supra Section VIII.C.2.b.
---------------------------------------------------------------------------
D. Reasonable Alternatives
The Commission considered several alternatives to the proposal: (1)
Require Currently Exempted Government Securities ATSs and certain
Communication Protocol Systems to file Form ATS, but not publicly
disclose Form ATS; (2) require differing levels of public disclosure by
Government Securities ATSs depending on their trading volume; (3)
extend the transparency requirements (i.e., Form ATS-N) of Regulation
ATS to all ATSs and Communication Protocol Systems; (4) apply Rule
301(b)(6) of Regulation ATS to Government Securities ATSs; (5) alter
the volume thresholds for the Fair Access Rule; (6) alter the
Government Securities ATS volume thresholds for Regulation SCI; (7)
exclude Communication Protocol Systems from the definition of
``exchange'' but require them to register as broker-dealers; (8)
require Forms ATS-N, ATS, and ATS-R to be submitted in Inline XBRL; and
(9) require the content of Form ATS-N to be posted on individual ATS
websites.
1. Require Government Securities ATSS To File a Non-Public Form ATS
One alternative could require Government Securities ATSs (inclusive
of Communication Protocol Systems, as proposed) to file Form ATS and
subsequent amendments with the Commission, instead of filing Form ATS-
N. This alternative would allow Current Government Securities ATSs to
continue to file current Form ATS. However, Form ATS would be deemed
confidential for all Government Securities ATSs and would not have to
be publicly disclosed. Under this alternative, compliance costs would
be lower because the costs to prepare a Form ATS for Government
Securities ATSs is less than preparing a Form ATS-N. Furthermore,
Government Securities ATSs would not incur additional costs associated
with amending Form ATS-N to address any deficiencies to avoid an
ineffectiveness determination, because Rule 304 of Regulation ATS does
not apply to Form ATS filings. However, this alternative would reduce
regulators' insight into Government Securities ATSs compared to the
proposal because Form ATS would require the disclosure of less
information about the operations of Government Securities ATSs and the
activities of their broker-dealer operators and their affiliates, as
compared to Form ATS-N.
The lack of public disclosure of Form ATS under the alternative
could result in market participants making less informed decisions
regarding where to send their orders, and thus, could result in lower
execution quality than they would obtain under the proposal.
Additionally, this alternative could result in higher search costs for
subscribers to identify potential trading venues for their orders.
Because Government Securities ATSs would not have to publicly disclose
their fees or details about their operations, there would be less
competition among Government Securities ATSs and
[[Page 15640]]
between Government Securities ATSs and non-ATS trading venues compared
to the proposal. If there is less competition for order flow in the
market for government securities and repo trading services, there could
also be less incentive for Government Securities ATSs to innovate.
2. Initiate Differing Levels of Public Disclosure Depending on
Government Securities ATS Dollar Volume
The Commission could require different levels of disclosure (i.e.,
under Rule 304) among Government Securities ATSs based on the dollar
volume in government securities traded on the platform. In particular,
this alternative would subject Government Securities ATSs with lower
dollar volumes to lower levels of disclosure on the revised Form ATS-N.
This alternative could provide smaller Government Securities ATSs with
a competitive advantage over larger ones because smaller Government
Securities ATSs would incur lower compliance costs relative to the
proposal, which could translate into lower entry barriers relative to
such barriers under the proposal. Because these small Government
Securities ATSs would not have to disclose as much information
pertaining to their operational facets to their competitors, they would
have a competitive advantage over more established Government
Securities ATSs and other trading venues. This approach therefore would
promote competition in the market. To the extent the public disclosure
of Form ATS-N would have discouraged innovation,\1213\ this alternative
also would promote innovation because these small Government Securities
ATSs would not be deterred from innovating by the possibility of having
to disclose certain operational facets, which could also benefit market
participants who trade on these ATSs by improving the execution quality
of their trades. However, because some Government Securities ATS would
not have to publicly disclose as much information on their Form ATS-N,
market participants may not be as able to compare Government Securities
ATSs to select the most appropriate venue for the their trading
objectives, which could increase market participant search costs and
trading costs relative to the proposal.\1214\ Additionally, this
alternative could incentivize small Government Securities ATSs to limit
the trading in government securities on their ATSs to stay small and
not trigger additional disclosure requirements. If this were to happen,
it could limit market participants' options for trading venues, which
could result in higher trading costs relative to the proposal.
---------------------------------------------------------------------------
\1213\ As discussed above, the risk that the public disclosure
of Form ATS-N would reduce the incentives for ATSs to is likely to
be low. See supra Section VIII.C.3.a.i.f).
\1214\ See supra Section VIII.C.1.b.
---------------------------------------------------------------------------
3. Extend the Transparency Requirements of Regulation ATS to All ATSs
and Communication Protocol Systems
As another alternative, the Commission could extend the
transparency requirements (i.e., the public disclosure on Form ATS-N
under Rule 304) of Regulation ATS to all ATSs and Communication
Protocol Systems. Under this alternative, investors would receive
information about the ATS operations and the activities of the broker-
dealer operators and affiliates of all ATSs and Communication Protocol
Systems. While the disclosure requirements of individual systems would
be similar to what is required under the proposal, investors would be
able to access detailed information on ATSs and Communication Protocol
Systems that currently do not file Form ATS-N. This could help market
participants make better-informed decisions about where to send their
orders to achieve their trading objectives as compared to under the
proposal. Compared to the proposal, the public disclosure of Form ATS-N
by all ATSs and Communication Protocol Systems would further promote
competition, which could result in lower venue fees, improve the
efficiency in handling of customer trading interest procedures, and
promote innovation.
Under this alternative, ATSs and Communication Protocol Systems
that currently do not file Form ATS-N would incur the compliance costs
discussed in Section VIII.C.2.a to comply with Regulation ATS.
Additionally, the public disclosure of details regarding the
operational facets of these ATSs and Communication Protocol Systems
could adversely impact competition and raise barriers to entry in the
market for trading services, and could also lower the incentives for
these ATSs and Communication Protocol Systems to innovate. However, the
Commission believes that the risk of this is likely to be low.\1215\
---------------------------------------------------------------------------
\1215\ See supra Section VIII.C.3.a.i.f) for a discussion about
the risk that the responsive information to the revised Form ATS-N
would include information regarding operational facets such that the
public disclosure of the information would adversely affect the
competitive position of the disclosing ATS or Communication Protocol
Systems and why the Commission believes that this risk is likely to
be low. See also supra note 467 and accompanying text.
---------------------------------------------------------------------------
4. Apply Rule 301(b)(6) of Regulation ATS to Government Securities ATSs
Another alternative for the Commission is to apply the Capacity,
Integrity, and Security Rule in Rule 301(b)(6) \1216\ of Regulation ATS
to Government Securities ATSs instead of extending Regulation SCI. The
scope and requirements of the Capacity, Integrity, and Security Rule
would be narrower than those of Regulation SCI. For example, Rule
301(b)(6) of Regulation ATS would apply to a narrower set of systems,
as compared to Regulation SCI. Rule 301(b)(6) of Regulation ATS applies
only to systems that support order entry, order routing, order
execution, transaction reporting, and trade comparison, which is
narrower than the definition of SCI system. This could result in the
establishment of less robust systems in Government Securities ATSs
compared to the proposal. This may increase the duration and severity
of any system distributions, and result in more system issues occurring
on Government Securities ATSs, which may, in turn, cause more
interruptions in the price discovery process and liquidity flows and
increase the occurrence of periods with pricing inefficiencies compared
to the proposal.\1217\ Furthermore, the Commission believes that
compliance costs associated with the Capacity, Integrity, and Security
Rule would be significantly less than those under the proposal because
the scope and requirements of the Capacity, Integrity, and Security
Rule would be narrower than those of Regulation SCI. For example, the
Capacity, Integrity, and Security Rule would not require Government
Securities ATSs to maintain a backup facility to comply with the
requirements of Regulation SCI related to business continuity and
disaster recovery plans. To the extent that Government Securities ATSs
pass on these compliance costs to their subscribers, the significantly
lower compliance costs of this alternative could result in lower
trading costs for market participants compared to the proposal.
Furthermore, the lower compliance costs of this alternative could lower
barriers to entry in the market for government securities trading
services and increase competition compared to the proposal, which would
[[Page 15641]]
also result in lower trading costs for market participants.
---------------------------------------------------------------------------
\1216\ As also explained above, Rule 301(b)(6) addresses the
capacity, integrity, and security requirements of automated systems
for ATSs that meet certain volume thresholds. See supra note 157.
\1217\ See supra Section VIII.C.1.c.
---------------------------------------------------------------------------
As another alternative, the Commission could apply the Capacity,
Integrity, and Security Rule in Rule 301(b)(6) to smaller Government
Securities ATSs and extend Regulation SCI to larger Government
Securities ATSs as proposed. For example, the Commission could require
a Government Securities ATS that falls within a volume range for U.S.
Treasury Securities of 5 percent and 10 percent to comply with Rule
301(b)(6) of Regulation ATS and a Government Securities ATS that
exceeds a 10 percent volume threshold for U.S. Treasury Securities to
comply with Regulation SCI. Under this alternative, the Commission
believes that the smaller Government Securities ATSs subject to Rule
301(b)(6) would incur significantly lower compliance costs, as compared
to the proposal, where these smaller Government Securities ATSs would
be subject to Regulation SCI.\1218\ To the extent that Government
Securities ATSs pass on the additional compliance costs associated with
Rule 301(b)(6) or Regulation ATS to their subscribers, the Commission
believes that the trading costs for subscribers to these smaller
Government Securities ATSs would be smaller, as compared to the
proposal. Furthermore, the lower compliance costs of this alternative
incurred by smaller Government Securities ATSs could lower barriers to
entry in the market for government securities trading services and
increase competition compared to the proposal, which could also result
in lower trading costs for market participants.
---------------------------------------------------------------------------
\1218\ See supra Section VIII.C.2.a.
---------------------------------------------------------------------------
5. Alter the Volume Thresholds for the Fair Access Rule
Another alternative for the Commission is to alter the volume
thresholds for the Fair Access Rule.\1219\ A higher aggregate volume
threshold for the Fair Access Rule would result in a smaller number of
ATSs and Communication Protocol Systems that are subject to the Fair
Access Rule than under the proposal. With fewer ATSs and Communication
Protocol Systems subject to the Fair Access Rule, some market
participants may not be able to trade on as many ATSs and Communication
Protocol Systems as they could have under the proposal, which could
result in these market participants experiencing higher trading costs
or worse execution quality than they would under the proposal. With a
higher aggregate volume threshold for the Fair Access Rule, fewer ATSs
and Communication Protocol Systems would incur compliance costs
discussed in Section VIII.C.2.a to comply with the Fair Access Rule
than under the proposal. This could lower the barriers to entry for new
ATSs compared to the proposal.\1220\ Additionally, a higher aggregate
volume threshold could result in fewer broker-dealers shutting down
some of their ATSs to avoid being subject to the Fair Access Rule
compared to the proposal.\1221\ Both lower barriers to entry and fewer
ATSs exiting the market could increase competition compared to the
proposal, resulting in lower trading costs for market participants.
Since the aggregate volume threshold would be higher, broker-dealers
operators would be less likely to restrict trading in certain
securities in one or more of their systems in order to avoid the
requirements of the Fair Access Rule. This would cause less order flow
to be absorbed and redistributed amongst other trading venues, which
could result in lower trading costs compared to the proposal,
especially if the sole provider of a niche service is less likely to
limit the trading in certain securities.
---------------------------------------------------------------------------
\1219\ See supra Sections VII.D.1.b and VIII.C.2.a for estimates
of the number of additional trading venues that would be subject to
the Fair Access Rule under the proposal.
\1220\ The Commission believes that this would lower the
barriers to entry compared to the proposal for both new ATSs that
are the sole ATS operated by a broker-dealer, as well as new ATSs
that are operated by a broker-dealer or affiliated broker-dealers
that already operate one or more ATSs.
\1221\ See supra Sections VIII.C.2.a.iv and VIII.C.3.a.i.e.
---------------------------------------------------------------------------
A lower aggregate volume threshold for the Fair Access Rule would
cause a greater number of small ATSs and Communication Protocol Systems
to be subject to the Fair Access Rule compared to the proposal. This
would allow market participants that currently may be restricted in
their access to access a greater number of ATSs and Communication
Protocol Systems and provide them with more options in the selection of
trading venues than under the proposal. Thus, compared to the proposal,
these market participants could better access the trading venue that
best meets their trading objectives, which result in the experiencing
lower trading costs. With a lower aggregate volume threshold for the
Fair Access Rule, ATSs and Communication Protocol Systems would incur
greater compliance costs discussed in Section VIII.C.2.a to comply with
the Fair Access Rule than under the proposal, which could increase the
barriers to entry for new ATSs. Additionally, a lower aggregate volume
threshold for the Fair Access Rule could cause a greater number of
small ATSs and Communication Protocol Systems to exit the market for
trading services compared to the proposal. Both higher barriers to
entry and more ATSs shutting down could result in less competition
compared to the proposal, which could result in market participants
facing higher trading costs. Broker-dealers operators that are near the
lower volume threshold would be more likely to restrict trading in one
or more of their systems in order to avoid the requirements of the Fair
Access Rule. This would result in more order flow being absorbed and
redistributed amongst other trading venues compared to the proposal,
which could result in higher trading costs, especially if the sole
provider of a niche service is more likely to limit the trading in
certain securities.
6. Alter the Government Securities ATS Volume Thresholds for Regulation
SCI
Another alternative for the Commission is to alter the Government
Securities ATS volume thresholds for Regulation SCI.\1222\ A higher
volume threshold for Regulation SCI would result in a smaller number of
Government Securities ATSs being subject to Regulation SCI than under
the proposal. Compared to the proposal, this could result in the
establishment of less robust systems in Government Securities ATSs that
would be subject to Regulation SCI under the proposal but fall below
the higher volume threshold. This may increase the duration and
severity of any system distributions, and result in more system issues
occurring on these Government Securities ATSs, which may, in turn,
cause more interruptions in the price discovery process and liquidity
flows and increase the occurrence of periods with pricing
inefficiencies compared to the proposal.\1223\ With a higher volume
threshold for Regulation SCI, the Commission believes that a smaller
number of Government Securities ATSs would incur compliance costs
discussed in Section VIII.C.2.a to comply with Regulation SCI
requirements than under the proposal. This could lower barriers to
entry in the market for government securities execution services
compared to the proposal, which could increase competition, resulting
in lower trading costs or better execution quality for investors.
Compared to the proposal, a higher volume threshold for Regulation
[[Page 15642]]
SCI could also lead to less Government Securities ATSs restricting
trading in certain government securities on their platform in order to
stay below the volume threshold. This would cause less order flow to be
absorbed and redistributed amongst other trading venues, which could
result in lower trading costs compared to the proposal, especially if
the sole provider of a niche service is less likely to limit the
trading in certain securities.
---------------------------------------------------------------------------
\1222\ See supra Sections VII.D.6 and VIII.C.2.a for estimates
of the number of additional trading venues that would be subject to
Regulation SCI under the proposal.
\1223\ See supra Section VIII.C.1.c.
---------------------------------------------------------------------------
A lower volume threshold for Regulation SCI would result in a
larger number of Government Securities ATSs being subject to Regulation
SCI than under the proposal. Compared to the proposal, a lower volume
threshold for Regulation SCI likely would promote the establishment of
more robust systems, help reduce the duration and severity of any
system distributions, and help prevent system issues from occurring on
smaller Government Securities ATSs that met the lower volume
thresholds. This, in turn, could help prevent interruptions in the
price discovery process and liquidity flows and thus may reduce the
chance of periods with pricing inefficiencies occurring compared to the
proposal. With a lower volume threshold for Regulation SCI, more
Government Securities ATSs would incur compliance costs discussed in
Section VIII.C.2.a to comply with Regulation SCI requirements than
under the proposal, which could increase the barriers to entry for new
Government Securities ATSs. This could decrease competition, resulting
in higher trading costs or worse execution quality for investors
compared to the proposal. Compared to the proposal, a lower volume
threshold for Regulation SCI could also lead to more Government
Securities ATSs restricting trading in certain government securities on
their platform in order to stay below the volume threshold. This would
cause more order flow to be absorbed and redistributed amongst other
trading venues, which could result in higher trading costs compared to
the proposal, especially if the sole provider of a niche service is
more likely to limit the trading in certain securities.
7. Exclude Communication Protocol Systems From the Definition of
``Exchange'' but Require Them To Register as Broker-Dealers
The proposed amendments to Exchange Act Rule 3b-16 would require
Communication Protocol Systems to either register as an exchange or
register as a broker-dealer and comply with Regulation ATS.\1224\ As an
alternative, the Commission could require Communication Protocol
Systems to register as broker-dealers, but continue to exclude them
from the definition of ``exchange'' under Rule 3b-16, and thus, the
requirements of Regulation ATS and Regulation SCI.\1225\ Under this
alternative, operators of Communication Protocol Systems would still
need to register as broker-dealers with the Commission and FINRA, so
they would still be subject to Commission and FINRA inspections and
examinations. However, the benefits of enhanced regulatory oversight
and investor protection would be less than in the proposal because
Communication Protocol Systems would not be subject to the additional
reports and requirements of Regulation ATS, which include having to
report additional information to the Commission on Form ATS and Form
ATR, or, if applicable, Form ATS-N.\1226\
---------------------------------------------------------------------------
\1224\ As discussed above, Communication Protocol Systems
function similarly to exchanges as market places and that including
them within the definition of ``exchange'', rather than only
subjecting them to the requirements of broker-dealers, would
appropriately regulate a market place that brings together buyers
and sellers of securities. See supra Section II.
\1225\ The Commission assumes that, under the proposed
amendments, Communication Protocol Systems would choose to register
as broker-dealers and comply with Regulation ATS, rather than
register as national securities exchanges. See supra note 1056 and
accompanying text.
\1226\ See supra Section VIII.C.1.a.
---------------------------------------------------------------------------
Additionally, compared to the proposal, the reduction in market
participant trading costs and improvements in their execution quality
would not be as large because Communication Protocol Systems that trade
government securities or NMS stocks would not be required to file and
publicly disclose Form ATS-N and because significant Communication
Protocol Systems would not be subject to the Fair Access Rule.\1227\
Furthermore, because significant Communication Protocol Systems would
not be subject to Regulation SCI or Rule 301(b)(6) of Regulation ATS,
the enhancements to the price discovery process and liquidity in
securities markets would be reduced relative to the proposal.\1228\
---------------------------------------------------------------------------
\1227\ See supra Section VIII.C.1.b. Under this alternative,
significant Communication Protocol Systems in the NMS stock market
would also not be required to display their best quotes in the SIP,
because they would not be subject to the order display and execution
access requirements of Rule 301(b)(3) of Regulation ATS.
\1228\ See supra Section VIII.C.1.c.
---------------------------------------------------------------------------
Under this alternative, Communications Protocol Systems would still
incur the costs of registering as a broker-dealer, but would not incur
the additional costs associated with Regulation ATS, including the
costs associated with the Fair Access Rule and Regulation SCI and Rule
301(b)(6).\1229\ This could result in less Communication Protocol
Systems exiting the market and create lower barriers to entry for new
Communication Protocol Systems compared to the proposal, which,
relative to the proposal, could increase competition. Increased
competition, in turn, could lower market participant trading costs and
increase innovation among Communication Protocol Systems relative to
the proposal. Since significant Communication Protocol Systems would
not be subject to the Fair Access Rule or Regulation SCI and Capacity,
Integrity, and Security Rule, Communication Protocol Systems would not
have an incentive to restrict trading volume in certain securities to
avoid reaching the volume threshold associated with these rules. This
could cause less order flow to be absorbed and redistributed amongst
other trading venues, which could result in lower trading costs
compared to the proposal, especially if a Communication Protocol System
that is the sole provider of a niche service is less likely to limit
the trading in certain securities.\1230\
---------------------------------------------------------------------------
\1229\ See supra Section VIII.C.2.
\1230\ See supra Section VIII.C.2.b.
---------------------------------------------------------------------------
8. Require Forms ATS-N, ATS, and ATS-R To Be Submitted in Inline XBRL
The proposal would require Government Securities ATSs to file Form
ATS-N, which is submitted in ATS-N-specific XML. In addition, the
proposal would require confidential Forms ATS and ATS-R, which are
currently submitted as paper documents, to be submitted to the
Commission electronically via EDGAR in unstructured HTML or
ASCII.\1231\ As an alternative, the Commission might require Form ATS-
N, as well as Forms ATS and ATS-R, to be submitted in the Inline
eXtensible Business Reporting Language (``Inline XBRL'') data language.
Inline XBRL is a derivation of XML that is designed for business
reporting information and is both machine-readable and human-
readable.\1232\ This alternative might
[[Page 15643]]
include numerical detail tagging of quantitative disclosures (e.g.,
platform-wide statistics) and text block tagging for narrative
disclosures (e.g., trade reporting arrangements).\1233\ Compared to the
proposal, the Inline XBRL alternative for Forms ATS-N, ATS, and ATS-R
would provide more sophisticated validation, presentation, and
reference features for filers and data users. However, the Inline XBRL
alternative would also impose initial implementation costs (e.g.,
training staff to prepare filings in Inline XBRL, licensing Inline XBRL
filing preparation software) upon filers that do not have prior
experience structuring data in the Inline XBRL data language. By
contrast, because Form ATS-N may be filed using a fillable web form,
filers that lack experience structuring data in EDGAR Form-specific XML
would not incur technical implementation costs related to filing Form
ATS-N under the proposal.
---------------------------------------------------------------------------
\1231\ See supra Section V.B. The EDGAR system generally
requires filers to use ASCII or HTML for their document submissions,
subject to certain exceptions. See Regulation S-T, 17 CFR
232.101(a)(1)(iv); 17 CFR 232.301; EDGAR Filer Manual (Volume II)
version 60 (December 2021), at 5-1.
\1232\ Such a requirement would be implemented by revising
Regulation S-T (17 CFR part 232) and including an Instruction to
Forms ATS-N, ATS, and ATS-R which cites to Regulation S-T. In
conjunction with the EDGAR Filer Manual, Regulation S-T governs the
electronic submission of documents filed with the Commission.
Modifying a structured data language requirement for a Commission
filing or series of filings can generally be accomplished through
changes to Regulation S-T, and would not require dispersed changes
to the various rules and forms that would be impacted by the data
language modification.
\1233\ See supra Sections IV.D.4.y and IV.D.4.t.
---------------------------------------------------------------------------
9. Require the Content of Form ATS-N To Be Posted on Individual ATS
Websites
Under the proposal, Form ATS-N would be filed on the EDGAR system.
Alternatively, the Commission might require the content of Form ATS-N
to be posted on the individual ATSs' websites. Requiring the content of
Form ATS-N to be posted on the individual ATSs' websites rather than
EDGAR would impose additional direct costs on data users, who would
need to navigate to and manually retrieve data from different ATSs'
websites to aggregate, compare, and analyze the data. In addition,
individual websites would not provide the validation capabilities that
an EDGAR requirement would enable, and would thus, impose on data users
the indirect costs associated with lower reliability of the data. An
individual website requirement would provide a small benefit to bank-
operated Government Securities ATSs relative to the proposal's EDGAR
requirement, as those entities would not be required to incur the $50
compliance cost of submitting a Form ID to begin making EDGAR
filings.\1234\
---------------------------------------------------------------------------
\1234\ See supra Section VIII.C.2.a.i. The Commission estimates
that one Currently Exempted Government Securities ATS is operated by
a bank. See supra Section VII.C.1.
---------------------------------------------------------------------------
E. Request for Comments
The Commission is sensitive to the potential economic effects,
including costs and benefits, of the proposed Rule. The Commission has
identified certain costs and benefits associated with the proposal and
requests comment on all aspects of its preliminary economic analysis,
including with respect to the specific questions below. The Commission
encourages commenters to identify, discuss, analyze, and supply
relevant data, information, or statistics regarding any such costs or
benefits.
177. Do you agree with the Commission's characterization of the
relevant baseline against which it considered the effects of the
proposed amendments?
178. Do you agree with the Commission's characterization of
Communication Protocol Systems? Please provide any relevant details
that you believe are missing from the Commission's description.
179. Do you agree with the Commission's characterization of the
current state of the government securities market?
180. Do you agree that PTFs provide liquidity to Government
Securities ATSs?
181. Do you agree that trading in the Treasury securities market is
concentrated in a few large ATSs? Please provide data to support your
position.
182. The Commission invites comment on the role of PTFs in trading
Agency Securities. The Commission also requests comment on the
providers of liquidity in the market for Agency Securities.
183. Do you agree with the Commission's characterization of the
regulatory environment for Government Securities ATSs? Please provide
any details you feel are relevant to understanding the impact of the
variation in regulation across different ATSs in this market. Also, do
you agree that the differences in regulation across different entities
providing trading services in this market has placed some of them at a
competitive disadvantage?
184. Please provide any additional details you feel are relevant to
the role of Communication Protocol Systems in the government securities
market.
185. Do you agree with the Commission's characterization of the
role played by the RFQ indicative quote streams? Please provide any
details you feel are important to understanding their role in the
market.
186. Do you agree with the Commission's characterization of the
competition baseline for government securities trading services?
187. Do you agree with the Commission's characterization of the
state of the corporate debt market? Please provide any additional
details you believe are relevant to understanding this market.
188. Do you agree with the Commission's description of the
implications of the difference in regulation for Communication Protocol
Systems compared to ATSs in the corporate debt market?
189. Do you agree with the Commission's description of the
competition baseline for providing trading services in the corporate
debt market? Do you agree with the Commission's characterization of the
role of the existing regulatory regime in creating the current
competitive environment?
190. Do you agree with the Commission's description of the
municipal debt market?
191. Do you agree with the Commission's description of broker's
brokers and their role in the municipal bond market? Please provide any
details you feel are necessary to fully understanding this point.
192. The Commission requests any information pertaining to the role
of Communication Protocol Systems in the market for municipal debt
generally.
193. Do you agree with the Commission's description of the equity
market? In particular, please provide any additional details you feel
are relevant to understanding the role of Communication Protocol
Systems in this market.
194. The Commission requests comment on the extent to which
Communication Protocol Systems are used in the non-ATS OTC market for
NMS stocks.
195. The Commission lacks the data to estimate the number or
trading volume of IDQS or other OTC equity trading systems that operate
Communication Protocol Systems and are not registered as ATSs or with
FINRA, and requests comment on this topic.
196. Do you agree with the Commission's description of the options
market?
197. The Commission requests comment on the full role of
Communication Protocol Systems in the market for listed options.
198. Do you agree with the Commission's description of the market
for repurchase and reverse repurchase agreements?
199. The Commission requests comment on the full role of
Communication Protocol Systems in the
[[Page 15644]]
market for repurchase and reverse repurchase agreements.
200. Do you agree with the Commission's description of the market
for asset-backed securities?
201. The Commission requests comment on the full role of
Communication Protocol Systems in the asset-backed securities market.
202. The Commission requests comment on whether Communication
Protocol Systems play a role in the trading of to-be-announced
mortgage-backed securities.
203. The Commission requests comment on whether Communication
Protocol Systems play a role in asset classes besides those discussed
in Section VIII.B, and on what role they play in those asset classes.
204. Do you agree that the proposed amendments would enhance
regulatory oversight and investor protection? Do you agree that
requiring Communication Protocol Systems to register as broker-dealers
would help lead to these benefits? Do you believe that the proposed
amendments would lead to improvements in the safeguarding of
confidential information?
205. Do you agree that the proposed amendments would reduce trading
costs and improve execution quality for market participants? Do you
agree that Regulation SCI would improve the resiliency of the systems
that provide trading services in the government securities markets? Do
you agree that Rule 301(b)(6) would improve the resiliency of systems
in the applicable securities markets?
206. Do you agree with the Commission's assessment of the costs of
the proposed amendments? If not, please provide as many quantitative
estimates to support your position on costs as possible.
207. The Commission requests that commenters provide any insights
or data they may have on the costs associated with the proposed broker-
dealer requirements for Communication Protocol Systems that are
operated by non-broker-dealers?
208. Are the initial implementation cost estimates for new and
existing SCI entities and the ongoing implementation cost estimates for
all SCI entities under Regulation SCI largely applicable to Government
Securities ATSs? How would these costs vary between Current Government
Securities ATSs and Communication Protocol Systems that trade
government securities? Please explain.
209. Would Government Securities ATSs also incur direct compliance
costs (non-PRA based) as SCI entities? The Regulation SCI Adopting
Release in 2014 estimated that an SCI entity would incur an initial
cost of between approximately $320,000 and $2.4 million. Additionally,
an SCI entity would incur an ongoing annual cost of between
approximately $213,600 and $1.6 million. Are these estimated costs
applicable to Government Securities ATSs? How might the actual level of
costs Government Securities ATSs would incur differ from the estimates
in the Regulation SCI Adopting Release because they differ from
existing SCI entities? How might other factors, such as the complexity
of SCI entities' systems and the degree to which SCI entities employ
third-party systems, affect the estimated costs? How would these costs
vary between Current Government Securities ATSs and Communication
Protocol Systems that trade government securities? Please explain and
provide cost estimates or a range for cost estimates, if possible.
210. Do you agree with the Commission's assessment of the indirect
costs of applying the Fair Access rule?
211. Do you agree that ATSs could break themselves up to stay below
the volume threshold for Regulation SCI? Please explain.
212. Do you agree with the Commission's assessment of the impact of
the proposed amendments on efficiency, competition and capital
formation? Do you agree that the proposed amendments would allow for
competition among trading systems on a more equal basis? Do you agree
with the Commission's assessment as to the risks of increasing barriers
to entry and causing current trading systems to exit the market?
213. To what extent would the proposed amendments to Exchange Act
Rule 3b-16 and Regulation ATS increase the barriers to entry for new
trading venues or cause some existing trading venues to exit the
market? How would these effects vary based on the size and/or type of
trading venue and the securities market in which it operates? Please
explain in detail.
214. How would the proposed amendments affect innovation? Please
explain. If so, which provisions of the proposed amendments would
affect innovation the most and how? Please explain.
215. Do you agree with the Commission's assessment of the effects
of an alternative to require Currently Exempted Government Securities
ATSs and certain Communication Protocol Systems to file a non-public
Form ATS?
216. Do you agree with the Commission's assessment of the effects
of an alternative to initiate differing levels of public disclosure
depending on Government Securities ATS (inclusive of a Communication
Protocol System, as proposed) or other Communication Protocol System
dollar volume?
217. Do you agree with the Commission's assessment of the effects
of an alternative to extend the transparency requirements of Regulation
ATS to all ATSs and Communication Protocol Systems?
218. Do you agree with the Commission's assessment of the effects
of an alternative to apply Rule 301(b)(6) of Regulation ATS to
Government Securities ATSs?
219. Do you agree with the Commission's assessment of the effects
of an alternative to alter the volume thresholds for the Fair Access
Rule?
220. Do you agree with the Commission's assessment of the effects
of an alternative to alter the Government Securities ATS volume
thresholds for Regulation SCI?
221. Do you agree with the Commission's assessment of the effects
of an alternative to require Communication Protocol Systems to register
as broker-dealers but exempt them from the requirements of Rule 3b-16,
Regulation ATS, and Regulation SCI?
222. Do you agree with the Commission's assessment of the effects
of an alternative to require Forms ATS-N, ATS, and ATS-R to be
submitted in Inline XBRL?
223. Do you agree with the Commission's assessment of the effects
of an alternative to require the content of Form ATS-N to be posted on
individual ATS websites?
224. How would the economic effects of the proposal differ if Forms
ATS-N, ATS, and ATS-R were proposed to be submitted using the
Commission's Electronic Form Filing System/SRO Rule Tracking System
(``EFFS/SRTS'')?
IX. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\1235\ the Commission requests comment on the potential
effect of the proposed amendments on the United States economy on an
annual basis. The Commission also requests comment on any potential
increases in costs or prices for consumers or individual industries,
and any potential effect on competition, investment, or innovation.
Commenters are requested to provide empirical data and other factual
support for their views to the extent possible.
---------------------------------------------------------------------------
\1235\ 5 U.S.C. 603.
---------------------------------------------------------------------------
[[Page 15645]]
X. Regulatory Flexibility Act Certification
Section 3(a) of the Regulatory Flexibility Act of 1980 \1236\
(``RFA'') requires the Commission to undertake an initial regulatory
flexibility analysis of the impact of the proposed rule amendments on
small entities unless the Commission certifies that the rule, if
adopted, would not have a significant economic impact on a substantial
number of small entities.\1237\ For purposes of Commission rulemaking
in connection with the RFA,\1238\ a small entity includes a broker or
dealer that: (1) Had total capital (net worth plus subordinated
liabilities) of less than $500,000 on the date in the prior fiscal year
as of which its audited financial statements were prepared pursuant to
Rule 17a-5(d) under the Exchange Act,\1239\ or, if not required to file
such statements, a broker-dealer with total capital (net worth plus
subordinated liabilities) of less than $500,000 on the last day of the
preceding fiscal year (or in the time that it has been in business, if
shorter); and (2) is not affiliated with any person (other than a
natural person) that is not a small business or small
organization.\1240\
---------------------------------------------------------------------------
\1236\ 5 U.S.C. 603(a).
\1237\ 5 U.S.C. 605(b).
\1238\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10 under the Exchange
Act, 17 CFR 240.0-10. See Securities Exchange Act Release No. 18451
(January 28, 1982), 47 FR 5215 (February 4, 1982) (File No. AS-305).
\1239\ 17 CFR 240.17a-5(d).
\1240\ See 17 CFR 240.0-10(c). See also 17 CFR 240.0-10(i)
(providing that a broker or dealer is affiliated with another person
if: Such broker or dealer controls, is controlled by, or is under
common control with such other person; a person shall be deemed to
control another person if that person has the right to vote 25
percent or more of the voting securities of such other person or is
entitled to receive 25 percent or more of the net profits of such
other person or is otherwise able to direct or cause the direction
of the management or policies of such other person; or such broker
or dealer introduces transactions in securities, other than
registered investment company securities or interests or
participations in insurance company separate accounts, to such other
person, or introduces accounts of customers or other brokers or
dealers, other than accounts that hold only registered investment
company securities or interests or participations in insurance
company separate accounts, to such other person that carries such
accounts on a fully disclosed basis).
---------------------------------------------------------------------------
All Government Securities ATSs would be required to register as
broker-dealers, including those that are currently exempt from such
requirement.\1241\ In addition, all Communications Protocol Systems
that choose to comply with Regulation ATS in lieu of exchange
registration will be required to register as broker-dealers.\1242\ The
Commission examined recent FOCUS data for the 17 broker-dealers that
currently operate Legacy Government Securities ATSs and concluded that
1 of the broker-dealer operators of these ATSs had total capital of
less than $500,000 on the last day of the preceding fiscal year (or in
the time that it has been in business, if shorter). The Commission
notes that this broker-dealer operator has never reported any
transaction volume in any government security or repo to the Commission
on Form ATS-R. Given that this ATS has never reported any transaction
volume in government securities to the Commission, the Commission
believes that this ATSs is unlikely to submit a Form ATS-N if the
proposed amendments to Regulation ATS are adopted.\1243\ The Commission
has recently examined recent FOCUS data for 4 broker-dealers that the
Commission estimates are Currently Exempted Government Securities ATSs
and concluded that none of the broker-dealer operators of ATSs that
currently trade government securities had total capital of less than
$500,000 on the last day of the preceding fiscal year (or in the time
that it has been in business, if shorter). The Commission has also
recently examined recent FOCUS data for 7 systems that the Commission
estimates are Communication Protocol Systems operated by broker-dealers
or affiliates of broker-dealers and trade various securities asset
classes including, among others, government securities. The Commission
concluded that none of these broker-dealer operators of ATSs had total
capital of less than $500,000 on the last day of the preceding fiscal
year (or in the time that it has been in business, if shorter).
Consequently, the Commission certifies that the proposed amendments to
Regulation ATS would not, if adopted, have a significant economic
impact on a substantial number of small entities.
---------------------------------------------------------------------------
\1241\ See supra Section III.B.2. See also 17 CFR 242.301(b)(1).
\1242\ See supra Section II.D.2.
\1243\ In order to be as inclusive as is reasonable, the
Commission is nevertheless counting this ATS for purposes of
projecting expected costs under the PRA.
---------------------------------------------------------------------------
The Commission encourages written comments regarding this
certification. The Commission solicits comment as to whether the
proposed amendments could have impacts on small entities that have not
been considered. The Commission requests that commenters describe the
nature of any impacts on small entities and provide empirical data to
support the extent of such effect. Such comments will be placed in the
same public file as comments on the proposed amendments to Regulation
ATS. Persons wishing to submit written comments should refer to the
instructions for submitting comments in the front of this release.
XI. Statutory Authority and Text of Proposed Amendments
Pursuant to Exchange Act, 15 U.S.C. 78a et seq., and particularly
Sections 3(b), 5, 6, 11A, 15, 15C, 17(a), 17(b), 19, 23(a), and 36
thereof (15 U.S.C. 78c(b), 78e, 78f, 78o, 78o-5, 78q(a), 78q(b), 78s,
78w(a), and 78mm), the Commission proposes amendments to Form ATS-N
under the Exchange Act, Regulation ATS under the Exchange Act, and 17
CFR parts 232, 240, 242, and 249.
List of Subjects in 17 CFR Parts 232, 240, 242, and 249
Administrative practices and procedure, Brokers, Confidential
business information, Fraud, Reporting and recordkeeping requirements,
Securities.
For the reasons stated in the preamble, title 17, chapter II of the
Code of Federal Regulations is proposed to be amended as follows:
PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS
0
1. The general authority citation for part 232 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3,
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c),
80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; and 18 U.S.C. 1350,
unless otherwise noted.
* * * * *
0
2. Amend Sec. 232.101 by:
0
a. Removing the periods at the end of paragraphs (a)(1)(xiii) and (xiv)
and adding semicolons in their places;
0
b. Removing the word ``and'' at the end of paragraphs (a)(1)(xviii) and
(xix);
0
c. Removing the periods at the end of paragraphs (a)(1)(xx) and (xxi)
and adding semicolons in their places; and
0
d. Adding paragraphs (a)(1)(xxii) and (xxiii).
The additions read as follows:
Sec. 232.101 Mandated electronic submissions and exceptions.
(a) * * *
(1) * * *
(xxii) Form ATS (Sec. 249.637 of this chapter); and
(xxiii) Form ATS-R (Sec. 249.638 of this chapter).
* * * * *
[[Page 15646]]
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1934
0
3. The general authority citation for part 240 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
4. Amend Sec. 240.3b-16 by:
0
a. Revising paragraphs (a)(1) and (2) and (b)(1) and (2);
0
b. Adding paragraph (b)(3);
0
c. Redesignating paragraph (e) as paragraph (f); and
0
d. Adding new paragraph (e).
The revisions and additions read as follows:
Sec. 240.3b-16 Definitions of terms used in Section 3(a)(1) of the
Act.
(a) * * *
(1) Brings together buyers and sellers of securities using trading
interest; and
(2) Makes available established, non-discretionary methods (whether
by providing a trading facility or communication protocols, or by
setting rules) under which buyers and sellers can interact and agree to
the terms of a trade.
(b) * * *
(1) Routes trading interest to a national securities exchange, a
market operated by a national securities association, or a broker-
dealer for execution;
(2) Allows persons to enter trading interest for execution against
the bids and offers of a single dealer; and
(i) As an incidental part of these activities, matches trading
interest that is not displayed to any person other than the dealer and
its employees; or
(ii) In the course of acting as a market maker registered with a
self-regulatory organization, displays the limit orders of such market
maker's, or other broker-dealer's, customers; and
(A) Matches customer orders with such displayed limit orders; and
(B) As an incidental part of its market making activities, crosses
or matches orders that are not displayed to any person other than the
market maker and its employees; or
(3) Allows an issuer to sell its securities to investors.
* * * * *
(e) For purposes of this section, the term trading interest means
an order as the term is defined under paragraph (c) of this section or
any non-firm indication of a willingness to buy or sell a security that
identifies at least the security and either quantity, direction (buy or
sell), or price.
* * * * *
PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER
MARGIN REQUIREMENTS FOR SECURITY FUTURES
0
5. The authority citation for part 242 continues to read as follows:
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and
80a-37.
0
6. Amend Sec. 242.300 by:
0
a. In paragraph (b), removing ``orders'' and adding in its place
``trading interest'';
0
b. Revising paragraph (c);
0
c. Adding a sentence at the end of paragraph (k); and
0
d. Adding paragraphs (l) through (s).
The revision and additions read as follows:
Sec. 242.300 Definitions.
* * * * *
(c) Affiliate means, with respect to a specified person, any person
that, directly or indirectly, controls, is under common control with,
or is controlled by, the specified person.
* * * * *
(k) * * * An NMS Stock ATS shall not trade securities other than
NMS stocks.
(l) Government Securities ATS means an alternative trading system,
as defined in paragraph (a) of this section, that trades government
securities, as defined in section 3(a)(42) of the Act (15 U.S.C.
78c(a)(42)) or repurchase and reverse repurchase agreements on
government securities. A Government Securities ATS shall not trade
securities other than government securities or repurchase and reverse
repurchase agreements on government securities.
(m) Covered ATS means an NMS Stock ATS or Government Securities
ATS, as applicable.
(n) Legacy Government Securities ATS means a Government Securities
ATS operating as of [effective date of the final rule] that was either:
(1) Formerly not required to comply with this section and
Sec. Sec. 242.301 through 242.304 (Regulation ATS) pursuant to the
exemption under Sec. 240.3a1-1(a)(3) of this chapter prior to
[effective date of the final rule]; or
(2) Operating pursuant to an initial operation report on Form ATS
on file with the Commission as of [effective date of the final rule].
(o) U.S. Treasury Security means a security issued by the U.S.
Department of the Treasury.
(p) Agency Security means a debt security issued or guaranteed by a
U.S. executive agency, as defined in 5 U.S.C. 105, or government-
sponsored enterprise, as defined in 2 U.S.C. 622(8).
(q) Trading Interest means an order, as defined in paragraph (e) of
this section, or any non-firm indication of a willingness to buy or
sell a security that identifies at least the security and either
quantity, direction (buy or sell), or price.
(r) Newly Designated ATS means an alternative trading system
operating as of [effective date of the final rule] that meets the
criteria under Sec. 240.3b-16(a) of this chapter as of [effective date
of the final rule] but did not meet the criteria under Sec. 240.3b-
16(a) of this chapter in effect prior to [effective date of the final
rule].
(s) Covered Newly Designated ATS means a Newly Designated ATS that
is a Government Securities ATS or NMS Stock ATS.
0
7. Amend Sec. 242.301 by:
0
a. Removing and reserving paragraphs (a)(4)(ii)(A) through (C);
0
b. Revising paragraphs (b)(1) and (b)(2)(i);
0
c. In paragraph (b)(2)(vi), adding the words ``and information filed
pursuant to paragraph (b)(9) of this section'' after the words
``pursuant to this paragraph (b)(2)'';
0
d. Revising paragraphs (b)(2)(vii) and (viii) and (b)(5)(i)
introducotry text;
0
e. In paragraph (b)(5)(i)(A), adding the word ``share'' after the
phrase ``average daily'';
0
f. In paragraph (b)(5)(i)(B), adding the word ``share'' after the
phrase ``average daily trading'';
0
g. In paragraphs (b)(5)(i)(C):
0
i. Adding the word ``dollar'' after the phrase ``average daily'';
0
ii. Adding the phrase ``as provided by the self-regulatory organization
to which such transactions are reported'' after the phrase ``in the
United States''; and
0
iii. Removing the word ``or'' at the end of the paragraph;
0
h. In paragraph (b)(5)(i)(D):
0
i. Adding the word ``dollar'' after the phrase ``average daily'';
0
ii. Adding the phrase ``as provided by self-regulatory organizations to
which such transactions are reported'' after the phrase ``in the United
States''; and
0
iii. Removing the period and adding a semicolon in its place;
0
i. Adding paragraphs (b)(5)(i)(E), (F), and (G);
[[Page 15647]]
0
j. Removing paragraph (b)(5)(iii);
0
k. Redesignating paragraph (b)(5)(ii) as paragraph (b)(5)(iii) and
revising the newly redesiganted paragraph;
0
l. Adding new paragraph (b)(5)(ii);
0
m. In paragraphs (b)(6)(i)(A) and (B), adding the word ``dollar'' after
the phrase ``average daily'';
0
n. Removing paragraph (b)(6)(iii);
0
o. In paragraph (b)(9)(i):
0
i. Removing the words ``Separately file'' and adding ``File'' in their
place; and
0
ii. Removing the phrase ``for transactions in NMS stocks, as defined in
paragraph (g) of this section, and transactions in securities other
than NMS stocks''; and
0
p. In paragraph (b)(9)(ii):
0
i. Removing the words ``Separately file'' and adding ``File'' in their
palce; and
0
ii. Removing the phrase ``for transactions in NMS stocks and
transactions in securities other than NMS stocks''.
The revisions and additions read as follows:
Sec. 242.301 Requirements for alternative trading systems.
* * * * *
(b) * * *
(1) Broker-dealer registration. The alternative trading system
shall register as a broker-dealer under section 15 of the Act (15
U.S.C. 78o) or section 15C(a)(1)(A) of the Act (15 U.S.C. 78o-
5(a)(1)(A)). Notwithstanding the preceding sentence, provided that it
complies with the applicable conditions in Sec. 240.3a1-1(a)(2) of ths
chapater, an alternative trading system that is not registered as a
broker-dealer and is either:
(i) A Legacy Government Securities ATS that was formerly not
required to comply with Sec. Sec. 242.300 through 242.304 (Regulation
ATS) pursuant to the exemption under Sec. 240.3a1-1(a)(3) of this
chapter prior to [effective date of the final rule]; or
(ii) A Newly Designated ATS, may provisionally operate pursuant to
the exemption under Sec. 240.3a1-1(a)(2) of this chapter, until the
earlier of:
(A) The date the alternative trading system registers as a broker-
dealer under section 15 of the Act or section 15C(a)(1)(A) of the Act
and becomes a member of a national securities association; or
(B) [date 210 calendar days after the effective date of the final
rule].
(2) * * *
(i) The alternative trading system (other than a Covered ATS) shall
file an initial operation report on Form ATS, Sec. 249.637 of this
chapter, in accordance with the instructions therein, at least 20 days
prior to commencing operation as an alternative trading system.
Notwithstanding the preceding sentence, a Newly Designated ATS (other
than a Covered Newly Designated ATS) shall file an initial operation
report on Form ATS, in accordance with the instructions therein, no
later than [date 30 calendar days after the effective date of the final
rule].
* * * * *
(vii) An ATS must file a Form ATS or Form ATS-R in accordance with
the instructions therein. The reports provided for in paragraphs (b)(2)
and (9) of this section shall be filed on Form ATS or Form ATS-R, as
applicable, and include all information as prescribed in Form ATS or
Form ATS-R, as applicable, and the instructions thereto. Any such
document shall be executed at, or prior to, the time Form ATS or Form
ATS-R is filed and shall be retained by the ATS in accordance with
Sec. 242.303 and Sec. 232.302 of this chapter, and the instructions
in Form ATS or Form ATS-R, as applicable. Duplicates of the reports
provided for in paragraphs (b)(2)(i) through (v) of this section must
be filed with surveillance personnel designated as such by any self-
regulatory organization that is the designated examining authority for
the alternative trading system pursuant to Sec. 240.17d-1 of this
chapter simultaneously with filing with the Commission. Duplicates of
the reports required by paragraph (b)(9) of this section shall be
provided to surveillance personnel of such self-regulatory authority
upon request. All reports filed pursuant to this paragraph (b)(2) and
paragraph (b)(9) of this section (except for types of securities traded
provided on Form ATS and Form ATS-R) will be accorded confidential
treatment subject to applicable law.
(viii) A Legacy Government Securities ATS operating pursuant to an
initial operation report on Form ATS on file with the Commission as of
[effective date of the final rule] shall be subject to the requirements
of paragraphs (b)(2)(i) through (vii) of this section until that ATS
files an initial Form ATS-N with the Commission pursuant to Sec.
242.304(a)(1)(iv)(A). Thereafter, the Legacy Government Securities ATS
shall file reports pursuant to Sec. 242.304 and shall not be subject
to the requirements of paragraphs (b)(2)(i) through (vii) of this
section. A Legacy Government Securities ATS that was formerly not
required to comply with Regulation ATS pursuant to the exemption under
Sec. 240.3a1-1(a)(3) of this chapter prior to [effective date of the
final rule], or a Covered Newly Designated ATS, shall file reports
pursuant to Sec. 242.304 and shall not be subject to the requirements
of paragraphs (b)(2)(i) through (vii) of this section. As of [effective
date of the final rule], an entity seeking to operate as a Government
Securities ATS shall not be subject to the requirements of paragraphs
(b)(2)(i) through (vii) of this section and shall file reports pursuant
to Sec. 242.304. An NMS Stock ATS or entity seeking to operate as an
NMS Stock ATS shall not be subject to the requirements of paragraphs
(b)(2)(i) through (vii) of this section and shall file reports pursuant
to Sec. 242.304. An ATS that is not a Covered ATS shall be subject to
paragraph (b)(2) of this section. Each Covered ATS that is operated by
a broker-dealer that is the registered broker-dealer for more than one
ATS must comply with Regulation ATS, including the filing requirements
of Sec. 242.304.
* * * * *
(5) Fair access. (i) An alternative trading system shall comply
with the requirements in paragraph (b)(5)(iii) of this section, if
during at least 4 of the preceding 6 calendar months, such alternative
trading system had:
* * * * *
(E) With respect to U.S. Treasury Securities, 3 percent or more of
the average weekly dollar volume traded in the United States as
provided by the self-regulatory organization to which such transactions
are reported; or
(F) With respect to Agency Securities, 5 percent or more of the
average daily dollar volume traded in the United States as provided by
the self-regulatory organization to which such transactions are
reported.
(G) Provided, however, that a Newly Designated ATS or Legacy
Government Securities ATS shall not be required to comply with the
requirements in paragraph (b)(5)(iii) of this section until one month
after initially satisfying any of the paragraphs (b)(5)(i)(A) through
(F) of this section.
(ii) For purposes of calculating the volume thresholds of paragraph
(b)(5)(i) of this section, the average transaction volume for a
security or security category of alternative trading systems that are
operated by a common broker-dealer, or alternative trading systems
operated by affiliated broker-dealers, will be aggregated.
(iii) An alternative trading system shall:
(A) Establish and apply reasonable written standards for granting,
limiting, and denying access to the services of the
[[Page 15648]]
alternative trading system that, at a minimum:
(1) Provide the date that each standard is adopted, effective, and
modified;
(2) Set forth any objective and quantitative criteria upon which
each standard is based;
(3) Identify any differences in access to the services of the
alternative trading system by an applicant and current participants;
(4) Justify why each standard, including any differences in access
to the services of the alternative trading system, is fair and not
unreasonably discriminatory; and
(5) Provide the information required by paragraphs
(b)(5)(iii)(A)(1) through (4) of this section about any standards for
granting, limiting, or denying access to the alternative trading system
services that are performed by a person other than the broker-dealer
operator.
(B) Make and keep records of:
(1) All grants of access including, for all participants, the
reasons for granting such access under the standards provided in
paragraph (b)(5)(iii)(A) of this section; and
(2) All denials or limitations of access and reasons, for each
applicant and participant, for denying or limiting access to the
services of the alternative trading system under the standards provided
in paragraph (b)(5)(iii)(A) of this section; and
(C) Report the information required on Form ATS-R (Sec. 249.638 of
this chapter) regarding grants, denials, and limitations of access.
* * * * *
Sec. 242.302 Recordkeeping requirements for alternative trading
systems.
0
8. Amend Sec. 242.302 by:
0
a. In the introductory text to paragraph (c), removing ``order'' and
adding in its place ``trading interest'';
0
b. In paragraphs (c)(1), (3), (5), and (8) through (15), removing
``order'' wherever it appears and adding in its place ``trading
interest''; and
0
c. In paragraph (c)(5), removing ``a'' before the phrase ``buy or
sell''.
Sec. 242.303 Record preservation requirements for alternative trading
systems.
0
9. Amend Sec. 242.303 by:
0
a. In paragraph (a)(1)(iii), adding ``, including each version,'' after
the phrase ``at least one copy'' and adding ``written'' before the word
``standards'';
0
b. In paragraph (a)(1)(iv), adding ``, including each version,'' after
the phrase ``At least one copy''; and
0
c. In paragraph (a)(1)(v), adding ``, including each version,'' after
the phrase ``At least one copy''.
0
10. Amend Sec. 242.304 by:
0
a. Revising the section heading;
0
b. In the introductory text to paragraph (a), removing ``an NMS Stock
ATS'' and adding in its place ``a Covered ATS'';
0
c. In paragraphs (a)(1)(i) through (iii):
0
i. Removing ``an NMS Stock ATS'' wherever it appears and adding in its
place ``a Covered ATS''; and
0
ii. Removing ``NMS Stock ATS'' wherever it appears and adding in its
place ``Covered ATS'';
0
d. In paragraph (a)(1)(i), adding a sentence at the end of the
paragraph;
0
e. In paragraph (a)(1)(ii)(A)(1), removing the phrase ``the Form ATS-N
is unusually lengthy or raises novel or complex issues that require
additional time for review'' and adding in its place ``the Commission
determines that a longer period is appropriate'';
0
f. In paragraph (a)(1)(ii)(B), removing the phrase ``paragraphs
(a)(2)(i)(B) and (C)'' and adding in its place ``paragraphs
(a)(2)(i)(B), (C), and (E)'';
0
g. In paragraph (a)(1)(iv):
0
i. Revising the paragraph heading; and
0
ii. Removing ``Legacy NMS Stock ATS'' wherever it appears and adding in
its place ``Legacy Government Securities ATS or Covered Newly
Designated ATS'';
0
h. Revising paragraph (a)(1)(iv)(A) introductory text;
0
i. In the introductory text to paragraph (a)(1)(iv)(B), removing
``120'' and adding in its place ``180'';
0
j. In paragraph (a)(1)(iv)(B)(1), removing ``the initial Form ATS-N is
unusually lengthy or raises novel or complex issues that require
additional time for review'' and ``initial 120-calendar day'' and
adding in their places ``the Commission determines that a longer period
is appropriate'' and ``initial 180-calendar day'', respectively;
0
k. In the introductory text to paragraph (a)(2)(i), removing ``An NMS
Stock ATS'' and adding ``A Covered ATS'' in its place;
0
l. In paragraph (a)(2)(i)(A), removing ``except as provided by
paragraph (a)(2)(i)(D) of this section,'' and ``NMS Stock ATS'' and
adding in their places ``or the length of any extended review period
pursuant to paragraph (a)(2)(ii)(A) of this section,'' and ``Covered
ATS'', respectively;
0
m. In paragraph (a)(2)(i)(B), removing ``or (D)'' and adding ``(D), or
(E)'' in its place;
0
n. In paragraph (a)(2)(i)(C), removing ``or'' at the end of the
paragraph;
0
o. In paragraph (a)(2)(i)(D):
0
i. Removing ``Items 24 and 25'' and ``Order Display and Fair Access
Amendment'' and adding in their places ``Items 23 and 24'' and
``Contingent Amendment'', respectively; and
0
ii. Removing the period at the end of the paragraph and adding ``; or''
in its place;
0
p. Adding paragraph (a)(2)(i)(E);
0
q. Revising paragraph (a)(2)(ii);
0
r. In paragraphs (a)(3) and (4), (b), and (c):
0
i. Removing ``An NMS Stock ATS'' and ``an NMS Stock ATS'' and adding in
their places ``A Covered ATS'' and ``a Covered ATS'', respectively; and
0
ii. Removing ``NMS Stock ATS'' wherever it appears and adding in its
place ``Covered ATS'';
0
s. In paragraph (b)(2)(iii)(A):
0
i. Removing the colon at the end of the paragrpah heading and adding a
period in its place; and
0
ii. Adding ``, or any extended review period,'' after ``the expiration
of the review period''; and
0
t. In paragraph (b)(2)(iii)(B):
0
i. Revising the heading; and
0
ii. In the first sentence, removing ``Updating, Correcting, and Order
Display and Fair Access Amendments'' and adding ``Updating, Correcting,
Fee, and Contingent Amendments'' in it place.
The revisions and addition read as follows:
Sec. 242.304 Covered ATSs.
(a) * * *
(1) * * *
(i) * * * Notwithstanding the preceding sentence, a Legacy
Government Securities ATS that was formerly not required to comply with
Sec. Sec. 242.300 through 242.304 (Regulation ATS) pursuant to the
exemption under Sec. 240.3a1-1(a)(3) of this chapter prior to
[effective date of the final rule] or Covered Newly Designated ATS, may
continue to operate pursuant to the exemption under Sec. 240.3a1-
1(a)(2) of this chapter until its initial Form ATS-N becomes effective.
* * * * *
(iv) Transition for Legacy Government Securities ATSs and Covered
Newly Designated ATSs--(A) Initial Form ATS-N filing requirements. A
Legacy Government Securities ATS or a Covered Newly Designated ATS
shall file with the Commission an initial Form ATS-N, in accordance
with the conditions of this section, no later than [date 90 calendar
days after the effective date of the final rule]. An initial Form ATS-N
filed by a Legacy Government Securities ATS operating pursuant to an
initial operation report on Form ATS on file with the Commission as of
[effective date of the final rule] shall supersede and replace for
purposes of the exemption the previously filed Form ATS of the Legacy
Government Securities ATS. A Legacy Government
[[Page 15649]]
Securities ATS or Covered Newly Designated ATS may operate, on a
provisional basis, pursuant to the filed initial Form ATS-N, and any
amendments thereto, during the review of the initial Form ATS-N by the
Commission. An initial Form ATS-N filed by a Legacy Government
Securities ATS or Covered Newly Designated ATS, as amended, will become
effective, unless declared ineffective, upon the earlier of:
* * * * *
(2) * * *
(i) * * *
(E) No later than the date that the information required to be
disclosed in Part III, Item 18 on Form ATS-N has become inaccurate or
incomplete (``Fee Amendment'').
(ii) Commission review period; ineffectiveness determination. (A)
The Commission will, by order, declare ineffective any Form ATS-N
amendment filed pursuant to paragraphs (a)(2)(i)(A) through (E) of this
section, no later than 30 calendar days from filing with the
Commission, or, if applicable, the end of the extended review period,
if the Commission finds that such action is necessary or appropriate in
the public interest, and is consistent with the protection of
investors. The Commission may extend the amendment review period for:
(1) An additional 30 calendar days, if the Commission determines
that a longer period is appropriate; or
(2) Any extended review period to which a duly authorized
representative of the Covered ATS agrees in writing.
(B) A Form ATS-N amendment declared ineffective shall prohibit the
Covered ATS from operating pursuant to the ineffective Form ATS-N
amendment. A Form ATS-N amendment declared ineffective does not prevent
the Covered ATS from subsequently filing a new Form ATS-N amendment.
(C) During review by the Commission of a Material Amendment, the
Covered ATS shall amend the Material Amendment pursuant to the
requirements of paragraphs (a)(2)(i)(B) through (C) of this section. To
make material changes to a filed Material Amendment during the
Commission review period, an ATS shall withdraw its filed Material
Amendment and must file the new Material Amendment pursuant to
(a)(2)(i)(A) of this section.
* * * * *
(b) * * *
(2) * * *
(iii) * * *
(B) Updating, Correcting, Fee, and Contingent Amendments. * * *
* * * * *
0
11. Amend Sec. 242.1000 by:
0
a. Adding, in alphabetical order, a definition for ``Agency
Securities'';
0
b. In the definition of ``SCI alternative trading system or SCI ATS'':
0
i. Removing the word ``or'' at the end of paragraph (1)(ii);
0
ii. Redesignating paragraph (3) as paragraph (5);
0
iii. Adding a new paragraph (3) and paragraph (4); and
0
iv. In newly redesignated paragraph (5), removing ``paragraphs (1) or
(2)'' and adding in its place ``paragraph (1), (2), (3), or (4)''; and
0
c. Adding, in alphabetical order, a definition for ``U.S. Treasury
Securities''.
The additions read as follows:
Sec. 242.1000 Definitions.
* * * * *
Agency Security has the meaning set forth in Sec. 242.300(p).
* * * * *
SCI alternative trading system or SCI ATS * * *
(3) Had with respect to U.S. Treasury Securities, five percent (5%)
or more of the average weekly dollar volume traded in the United States
as provided by the self-regulatory organization to which such
transactions are reported; or
(4) Had with respect to Agency Securities, five percent (5%) or
more of the average daily dollar volume traded in the United States as
provided by the self-regulatory organization to which such transactions
are reported.
* * * * *
U.S. Treasury Security has the meaning set forth in Sec.
242.300(o).
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
12. The general authority citation for part 249 continues to read as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b) Pub. L. 111-203, 124 Stat.
1904; Sec. 102(a)(3) Pub. L. 112-106, 126 Stat. 309 (2012), Sec. 107
Pub. L. 112-106, 126 Stat. 313 (2012), Sec. 72001 Pub. L. 114-94,
129 Stat. 1312 (2015), and secs. 2 and 3 Pub. L. 116-222, 134 Stat.
1063 (2020), unless otherwise noted.
* * * * *
0
13. Amend Form ATS (referenced in Sec. 249.637) by:
0
a. In the General Instructions, Item A.2, after ``commencing
operation'' adding ``and a Newly Designated ATS (other than a Covered
Newly Designated ATS, as defined in Rule 300(s) of the Exchange Act (17
CFR 242.300(s))) must file an initial operation report on Form ATS no
later than [date 30 calendar days after the date of effective date of
the final rule].''.
0
b. In the General Instructions, revising Items A.3 through A.6.
0
c. In the General Instructions, revising the fifth and seventh
paragraphs of Item A.7.
0
d. In the General Instructions, adding new paragraph A.8.
0
e. In the Explanation of Terms, in the definition of ``Subscriber'',
removing the word ``order'' and adding ``trading interest'' in its
place.
0
f. In the Explanation of Terms, adding the definition of ``Trading
Interest'' and ``Newly Designated ATS'' in alphabetical order.
0
g. At the top of page 1 of the form, removing ``INITIAL OPERATION
REPORT'', ``AMENDMENT TO INITIAL OPERATION REPORT'', ``CESSATION OF
OPERATIONS REPORT'' and accompanying check boxes and adding text under
a new heading ``Type of Filing (select one)''.
0
h. At the top and side of page 1 to the Form removing:
0
i. ``Form ATS Page 1 Execution Page'';
0
ii. ``Date filed (MM/DD/YY)''; and
0
ii. ``[OFFICIAL USE ONLY]''.
0
i. Revising Items 2 through 5.
0
j. Removing Items 6 through 11.
0
k. Removing the text on page 1 of the form beginning ``EXECUTION'', the
signature block below, the instruction that states ``This page must
always be completed in full with original, manual signature and
notarization. Affix notary stamp or seal where applicable.'' and ``DO
NOT WRITE BELOW THIS LINE--FOR OFFICIAL USE ONLY''.
0
l. On page 2 of the form, removing the following text:
Alternative trading system name:---------------------------------------
Filing date:-----------------------------------------------------------
CRD Number:------------------------------------------------------------
SEC File Number: 8-----------------------------------------------------
0
m. At the top and side of page 2 to the Form removing:
0
i. ``Form ATS Page 2 Execution Page'';
0
ii. ``Date filed (MM/DD/YY)''; and
0
iii. ``[OFFICIAL USE ONLY]''.
The revisions and additions read as follows:
Note: The text of Form ATS does not and this amendment will not
appear in the Code of Federal Regulations.
BILLING CODE 8011-01-P
[[Page 15650]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.038
[[Page 15651]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.039
[[Page 15652]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.040
[[Page 15653]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.041
[[Page 15654]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.042
[[Page 15655]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.043
BILLING CODE 8011-01-C
* * * * *
0
14. Amend Form ATS-R (referenced in Sec. 249.638) by:
0
a. In the General Instructions, revising Items A.3 through A.6.
0
b. In the General Instructions, revising the fifth and seventh
paragraphs of Item A.7.
0
c. In the Explanation of Terms, removing the definitions of ``Nasdaq
National Market Securities'' and ``Nasdaq SmallCap Market Securities''.
0
d. In the Explanation of Terms, adding the definitions of ``Agency
Securities,'' ``Foreign Sovereign Debt Securities,'' ``U.S. Treasury
Securities,'' and ``Trading Interest''.
0
e. In the Explanation of Terms, in the definition of ``Subscriber,''
removing the word ``order'' and adding in its place the word ``trading
interest''.
0
f. On page 1 of the form, immediately before Section 1, adding text
under a new heading ``Type of Filing''.
0
g. At the top and side of page 1 to the Form removing:
0
i. ``Form ATS Page 1 Execution Page'';
0
ii. ``Date filed (MM/DD/YY)''; and
0
iii. ``[OFFICIAL USE ONLY]''.
0
h. Revising Item 1.
0
i. Removing the text on page 1 of the form beginning ``EXECUTION'', the
signature block below, the instruction that states ``This page must
always be completed in full with original, manual signature and
notarization. Affix notary stamp or seal where applicable.'' and ``DO
NOT WRITE BELOW THIS LINE--FOR OFFICIAL USE ONLY''.
0
j. On pages 2 and 3 of the form, removing the following text:
DO NOT WRITE BELOW THIS LINE--FOR OFFICIAL USE ONLY
Alternative trading system name:---------------------------------------
Filing date:-----------------------------------------------------------
CRD Number:------------------------------------------------------------
SEC File Number: 8-----------------------------------------------------
0
k. At the top and side of page 2 to the Form removing:
0
i. ``Form ATS Page 2 Execution Page'';
0
ii. ``Date filed (MM/DD/YY)''; and
0
iii. ``[OFFICIAL USE ONLY]''.
0
l. At the top and side of page 3 to the Form removing:
0
i. ``Form ATS Page 3 Execution Page'';
0
ii. ``Date filed (MM/DD/YY)''; and
0
iii. ``[OFFICIAL USE ONLY]''.
0
m. Revising Item 4.
0
n. Adding Item 5.C.
0
o. Revising Item 6.
0
p. Adding Item 8.
0
q. Adding a signature block at the end of the form.
The additions and revisions read as follows:
Note: The text of Form ATS-R does not and this amendment will
not appear in the Code of Federal Regulations.
BILLING CODE 8011-01-P
[[Page 15656]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.044
[[Page 15657]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.045
[[Page 15658]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.046
[[Page 15659]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.000
[[Page 15660]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.047
[[Page 15661]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.001
[[Page 15662]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.048
0
15. Revise Form ATS-N (referenced in Sec. 249.640).
Note: Form ATS-N is attached as Appendix A to this document.
Form ATS-N will not appear in the Code of Federal Regulations.
Dated: January 26, 2022.
Vanessa A. Countryman,
Secretary.
Note: The following appendix will not appear in the Code of
Federal Regulations.
APPENDIX A--MARKED FORM ATS-N
Deleted text is [bracketed]. New text is italicized.
[[Page 15663]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.002
[[Page 15664]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.003
[[Page 15665]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.004
[[Page 15666]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.005
[[Page 15667]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.006
[[Page 15668]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.007
[[Page 15669]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.008
[[Page 15670]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.009
[[Page 15671]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.010
[[Page 15672]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.011
[[Page 15673]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.012
[[Page 15674]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.013
[[Page 15675]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.014
[[Page 15676]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.015
[[Page 15677]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.016
[[Page 15678]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.017
[[Page 15679]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.018
[[Page 15680]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.019
[[Page 15681]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.020
[[Page 15682]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.021
[[Page 15683]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.022
[[Page 15684]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.023
[[Page 15685]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.024
[[Page 15686]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.025
[[Page 15687]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.026
[[Page 15688]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.027
[[Page 15689]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.028
[[Page 15690]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.029
[[Page 15691]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.030
[[Page 15692]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.031
[[Page 15693]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.032
[[Page 15694]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.033
[[Page 15695]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.034
[[Page 15696]]
[GRAPHIC] [TIFF OMITTED] TP18MR22.035
[FR Doc. 2022-01975 Filed 3-17-22; 8:45 am]
BILLING CODE 8011-01-C
