83 FR 40601 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change Relating to ATS Reporting to TRACE of Transactions in U.S. Treasury Securities
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 158 (August 15, 2018)
Federal Register Volume 83, Issue 158 (August 15, 2018)
| Page Range | 40601-40605 | |
| FR Document | 2018-17496 |
[Federal Register Volume 83, Number 158 (Wednesday, August 15, 2018)] [Notices] [Pages 40601-40605] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-17496] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-83815; File No. SR-FINRA-2018-023] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change Relating to ATS Reporting to TRACE of Transactions in U.S. Treasury Securities August 9, 2018. I. Introduction On June 5, 2018, the Financial Industry Regulatory Authority, Inc. (``FINRA'') filed with the Securities and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to amend FINRA Rule 6730 to require certain alternative trading systems (``ATSs'') that report transactions in U.S. Treasury Securities to the Transaction Reporting and Compliance Engine (``TRACE'') to identify non-FINRA-member subscribers on those transaction reports. The proposed rule change was published for [[Page 40602]] comment in the Federal Register on June 13, 2018.\3\ The Commission received three comment letters regarding the proposed rule change.\4\ On July 26, 2018, the Commission extended until September 11, 2018, the time period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.\5\ FINRA submitted a response to the comments on August 6, 2018.\6\ This order approves the proposed rule change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ See Securities Exchange Act Release No. 83393 (June 7, 2018), 83 FR 27643 (``Notice''). \4\ See letter to Secretary, Commission, from Stephen John Berger, Managing Director, Government and Regulatory Policy, Citadel, dated July 5, 2018 (``Citadel Letter''); letter to Robert W. Errett, Deputy Secretary, Commission, from Theodore Bragg, Chief Executive Officer, Execution Access, LLC, dated July 3, 2018 (``Execution Access Letter''); letter to Brent J. Fields, Secretary, Commission, from Tyler Gellasch, Executive Director, The Healthy Markets Association, dated July 5, 2018 (``Healthy Markets Letter''). \5\ See Securities Exchange Act Release No. 83722 (July 26, 2018), 83 FR 37544 (Aug. 1, 2018). \6\ See letter to Brent J. Fields, Secretary, Commission, from Racquel L. Russell, FINRA, dated August 6, 2018 (``FINRA Response''). --------------------------------------------------------------------------- II. Description of Proposed Rule Change As described in further detail below, FINRA has proposed to add Supplementary Material .07 to existing FINRA Rule 6730 to require an ATS, as defined in Rule 300(a) of Regulation ATS,\7\ that effects transactions in U.S. Treasury Securities above a certain volume threshold to identify in its TRACE reports any counterparty to a Treasury transaction that is a non-FINRA member, using a market participant identifier (``MPID'') assigned by FINRA.\8\ --------------------------------------------------------------------------- \7\ 17 CFR 242.300(a). \8\ FINRA Rule 6710(p) defines ``U.S. Treasury Security'' to mean ``a security, other than a savings bond, issued by the U.S. Department of the Treasury to fund the operations of the federal government or to retire such outstanding securities. The term `U.S. Treasury Security' also includes separate principal and interest components of a U.S. Treasury Security that has been separated pursuant to the Separate Trading of Registered Interest and Principal of Securities (STRIPS) program operated by the U.S. Department of Treasury.'' --------------------------------------------------------------------------- A. Background On October 18, 2016, the Commission approved a proposed rule change that required FINRA members to report secondary market transactions in U.S. Treasury Securities to TRACE.\9\ FINRA members began reporting such transactions to TRACE on July 10, 2017.\10\ Information in TRACE regarding transactions in U.S. Treasury Securities is for regulatory purposes only and is not disseminated publicly.\11\ --------------------------------------------------------------------------- \9\ See Securities Exchange Act Release No. 79116 (October 18, 2016), 81 FR 73167 (October 24, 2016) (SR-FINRA-2016-027) (``2016 Order''). \10\ See Notice, 83 FR at 27644; FINRA Regulatory Notice 16-39 (October 2016). \11\ See FINRA Rule 6750(c)(5) (providing that FINRA will not disseminate information on a transaction in a U.S. Treasury Security). See also Notice, 83 FR at 27644. --------------------------------------------------------------------------- Under FINRA's rules, each FINRA member that is a Party to a Transaction in a TRACE-Eligible Security must report the transaction.\12\ A TRACE transaction report must include, among other things, the contra-party's identifier (i.e., MPID, customer, or a non- member affiliate, as applicable).\13\ Transactions in U.S. Treasury Securities that occur on an ATS generally must be reported to TRACE by the counterparties, if they are FINRA members, and by the ATS itself.\14\ On a TRACE report, an ATS must identify a FINRA member counterparty by that counterparty's MPID.\15\ However, for a transaction involving a non-FINRA-member customer, the ATS must report the trade utilizing a generic customer identifier (``C'').\16\ --------------------------------------------------------------------------- \12\ See FINRA Rule 6730(a). See also FINRA Rules 6710(a) and (e) (defining ``TRACE-Eligible Security'' and ``Party to a Transaction,'' respectively). \13\ See FINRA Rule 6730(c)(6). \14\ See Notice, 83 FR at 27644. See also FINRA's Regulatory Notice 14-53 (November 2014) (reminding ATSs and ATS subscribers of their reporting obligations in TRACE-Eligible Securities). While there are limited exceptions to the reporting requirement that are available when all the counterparties are FINRA members, these exceptions do not apply to transactions on an ATS involving a non- FINRA member. See Notice, 83 FR at 27644, n. 6. FINRA has stated that, because each current ATS is a FINRA member, each ATS must report to TRACE all trading activity in TRACE-Eligible Securities that occurs on the ATS. See Notice, 83 FR at 27644. \15\ See Notice, 83 FR at 27644. \16\ See id. In addition, if the non-FINRA member is an affiliate, the ATS must report the trade as a generic trade with a non-member affiliate by denoting the counterparty with an ``A'' identifier. See FINRA Rule 6730(c)(6). --------------------------------------------------------------------------- A significant amount of trading activity in U.S. Treasury Securities on ATSs involves market participants that are not registered as broker-dealers or are not FINRA members, including hedge funds, banks, and principal trading firms (``PTFs'').\17\ The Department of the Treasury stated in its October 2017 Capital Markets Report that ``[t]rading activity [in U.S. Treasury Securities] on the major electronic interdealer platforms is dominated by PTFs, . . . and collectively they account for over half of all transaction volumes in the interdealer broker segment of the [cash Treasury] market.'' \18\ The Capital Markets Report stated that ``a significant portion of PTF activity is anonymized in the TRACE data.'' \19\ The Treasury Department recommended requiring ATSs that facilitate transactions in U.S. Treasury Securities to identify customers in their trade reports.\20\ FINRA believes that requiring additional counterparty information in ATS TRACE reports for transactions in U.S. Treasury Securities would improve the effectiveness of FINRA's surveillance patterns and help FINRA to identify potentially manipulative activity, including wash sales and prearranged trading activity.\21\ FINRA further believes that such information would facilitate a better understanding of Treasury market structure and liquidity.\22\ --------------------------------------------------------------------------- \17\ See Notice, 83 FR at 27644. \18\ Notice, 83 FR at 27644 (citing Treasury Department, A Financial System That Creates Economic Opportunities: Capital Markets, Report to President Donald J. Trump, Executive Order 13772 on Core Principles for Regulating the United States Financial System, at 79-80 (October 2017) (``Capital Markets Report''), https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf). \19\ See id. (citing Capital Markets Report at 80). \20\ See id. (citing Capital Markets Report at 80). \21\ See id. \22\ See id. --------------------------------------------------------------------------- B. Proposed Changes to ATS Reporting Obligations FINRA has proposed to add Supplementary Material .07 to existing FINRA Rule 6730 to require each ``covered ATS,'' as described below, to provide FINRA with a list of all of its non-FINRA-member subscribers and to obtain from FINRA an MPID for each such subscriber. Each covered ATS would then be required to identify a non-FINRA-member subscriber in the contra-party field of a TRACE report of a U.S. Treasury Security transaction using the MPID assigned by FINRA. A covered ATS would no longer be permitted to identify a contra-party to such a transaction using the ``customer'' or ``non-member affiliate'' identifier. Based on the list of non-FINRA-member subscribers that a covered ATS provides to FINRA, FINRA will assign each non-FINRA-member subscriber a unique MPID (to be used consistently across ATSs) and provide a list of those MPIDs to the ATS.\23\ This approach is designed to preserve the confidentiality of an individual ATS's subscriber list, because FINRA will provide a covered ATS with a list of MPIDs only for its own subscribers.\24\ --------------------------------------------------------------------------- \23\ See proposed FINRA Rule 6730, Supplementary Material .07(a). See also Notice, 83 FR at 27645. \24\ See Notice, 83 FR at 27645. --------------------------------------------------------------------------- Proposed Supplementary Material .07(b) of FINRA Rule 6730 defines a ``covered ATS'' as an ATS, as that term is defined in Rule 300 of Regulation [[Page 40603]] ATS, that executed transactions in U.S. Treasury Securities against non-FINRA-member subscribers of $10 billion or more in monthly par value, computed by aggregating buy and sell transactions, for any two months in the preceding calendar quarter.\25\ FINRA has stated that, based on a review of U.S. Treasury Security transaction data reported to FINRA during a sample period, six ATSs would currently be considered covered ATSs.\26\ According to FINRA, these ATSs currently account for over 99% of the trade reports submitted by ATSs to TRACE for transactions in U.S. Treasury Securities.\27\ FINRA believes that limiting the proposed counterparty identification requirement in this manner balances the burdens associated with complying with the proposed rule (i.e., providing FINRA a list of all non-FINRA-member subscribers, obtaining MPIDs, and using the assigned MPIDs in TRACE reporting) with the benefits sought to be achieved (i.e., obtaining additional granularity that will enhance the quality of U.S. Treasury Security transaction data).\28\ FINRA further believes that the proposal would improve the completeness of the information on U.S. Treasury Security transactions available to FINRA and the official sector, and that the absence of more detailed counterparty information from ATSs with activity levels below the proposed threshold would not materially affect the completeness of the audit trail.\29\ --------------------------------------------------------------------------- \25\ FINRA stated that any member that meets the definition of ``alternative trading system'' set forth in Rule 300(a) of Regulation ATS will be required to comply with the new counterparty reporting requirements, regardless of whether the member is excepted from the requirements applicable to ATSs provided in Rule 301(b) of Regulation ATS (e.g., the exception applicable if the ATS limits its securities activities to government securities). See Notice, 83 FR at 27644, n. 12 (citing 17 CFR 242.301(a)(4)(ii)(A)). \26\ See Notice, 83 FR at 27645, n. 13. \27\ See id. \28\ See Notice, 83 FR at 27645. \29\ See id. FINRA also noted that, if the proposal is approved, FINRA intends to monitor the continued appropriateness of the $10 billion threshold, the impact of the exception on its audit trail, and potential negative impacts or changes in ATS or non-FINRA-member subscriber behavior. See id. --------------------------------------------------------------------------- FINRA believes that the proposed rule change would result in an improvement to the effectiveness of FINRA's surveillance patterns from the standpoint of greater granularity and thus more accurate pattern detection, including the increased ability to identify potentially manipulative activity.\30\ FINRA has stated that its ability to detect wash sales or prearranged trading activity would be improved if the audit trail included the identity of the non-FINRA-member counterparty rather than the generic customer indicator received today.\31\ The identity of the particular ATS subscriber allows the surveillance pattern to narrow down the potential universe of matching trades and thus more accurately detect instances of potential manipulation.\32\ FINRA concluded that the more granular detail that would be added to transaction reports by identifying non-FINRA-member counterparties would enhance FINRA's surveillance program for U.S. Treasury Securities.\33\ --------------------------------------------------------------------------- \30\ See id., 83 FR at 27644. \31\ See id. \32\ See id. \33\ See id. --------------------------------------------------------------------------- FINRA has stated that it will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 60 days following Commission approval of the proposal, and that the effective date will be no later than 180 days following publication of that Regulatory Notice.\34\ Covered ATSs will be required to submit a list of their non-FINRA-member subscribers to FINRA at least 60 days in advance of the effective date.\35\ An ATS that becomes a covered ATS in the future would be required to begin complying with the requirements of Supplementary Material .07 of FINRA Rule 6730 within 60 calendar days of the end of the calendar quarter in which it becomes a covered ATS.\36\ This 60-day period is designed to provide sufficient time for a newly covered ATS to provide FINRA with a list of, and obtain MPIDs for, its non-FINRA-member subscribers, and perform any necessary programming changes.\37\ Once an ATS is deemed a covered ATS, it must continue complying with the new counterparty reporting requirements even if its volume of executed transactions in U.S. Treasury Securities against non-FINRA-member subscribers falls below the threshold.\38\ --------------------------------------------------------------------------- \34\ See id., 83 FR at 27645. \35\ See id. \36\ See proposed FINRA Rule 6730, Supplementary Material .07(c). \37\ See Notice, 83 FR at 27645. \38\ See proposed FINRA Rule 6730, Supplementary Material .07(d). --------------------------------------------------------------------------- III. Summary of Comments and FINRA's Response The Commission received three comment letters regarding the proposal.\39\ Two commenters strongly supported the proposal.\40\ One of these commenters noted that making more Treasury market data readily available to the official sector would improve general monitoring and surveillance capabilities, including those designed to detect prohibited trading practices and potential risks to market stability.\41\ Similarly, the second commenter noted that the absence of information regarding the identity of non-FINRA-member counterparties is ``a significant limitation for effective surveillance and oversight.'' \42\ --------------------------------------------------------------------------- \39\ See supra note 4. \40\ See Citadel Letter; Healthy Markets Letter. \41\ See Citadel Letter at 1. \42\ Healthy Markets Letter at 3. --------------------------------------------------------------------------- The third commenter generally supported the goal of increased transparency in the U.S. Treasury market but did not think that the proposal ``is sufficient or even necessarily an appropriate means of facilitating transparency among non-FINRA member participants in the Treasury market.'' \43\ This commenter warned that the proposal ``may actually result in reduced transparency'' because it might cause non- FINRA members to shift their trading in U.S. Treasury Securities ``from FINRA member firms to non-FINRA member and bank affiliates that have no reporting responsibilities.'' \44\ The commenter concluded that ``Congress or the SEC should consider requiring PTFs to register as broker-dealers such that FINRA, in turn, may require them to centrally clear their transactions and report their transactions to TRACE. Until such a requirement exists, the problem of market opacity will persist.'' \45\ --------------------------------------------------------------------------- \43\ Execution Access Letter at 2. \44\ Id. Another commenter agreed that banks should be subject to reporting requirements, but expressed the view that the ``important effort'' represented by the proposal should not be delayed or limited pending action with respect to the establishment of reporting obligations for banks. See Heathy Markets at 3. \45\ Execution Access Letter at 3. --------------------------------------------------------------------------- In its response letter, FINRA acknowledged that reporting by non- FINRA members would provide a more complete picture of Treasury market activity, but believes that the proposal represents an appropriate next step to improve the usefulness of the Treasury transaction data currently reported through TRACE, given the limits of its jurisdictional authority.\46\ FINRA further noted that the Department of the Treasury, the Commission, the Federal Reserve Bank of New York, and the CFTC have stated that they are assessing effective means to ensure the collection of data regarding Treasury cash securities market transactions is comprehensive and includes information from institutions that are [[Page 40604]] not FINRA members.\47\ FINRA also noted that the Federal Reserve Board has announced that it plans to collect data from banks for secondary market transactions in U.S. Treasury Securities and is discussing with FINRA whether TRACE could be leveraged to potentially serve as the Board's collection agent for the data.\48\ --------------------------------------------------------------------------- \46\ See FINRA Response at 1-2. \47\ See id. at 2 (citing Joint Press Release, Department of the Treasury, et al., Statement Regarding Progress on the Review of the U.S. Treasury Market Structure since the July 2015 Joint Staff Report (August 2, 2016), https://www.sec.gov/news/pressrelease/2016-155.html; Joint Press Release, U.S. Department of the Treasury, et al., Statement on Trade Reporting in the U.S. Treasury Market (May 16, 2016), https://www.sec.gov/news/pressrelease/2016-90.html). \48\ See id. at 2 (citing Press Release, Board of Governors of the Federal Reserve System (October 21, 2016), https://www.federalreserve.gov/newsevents/pressreleases/other20161021a.htm). --------------------------------------------------------------------------- Similarly, this commenter believed that ``ATS participants whose trades are presently reported to TRACE only as `customer' trades-- including banks, hedge funds, and PTFs--may choose to not become an ATS subscriber or refrain from trading on ATS's to maintain anonymity and avoid regulatory oversight.'' \49\ FINRA acknowledged that the proposal could result in a change in behavior by non-FINRA members, but reiterated its understanding, expressed in the Notice, that most trading in the Treasury cash market is electronic and that member firms and non-FINRA venues do not currently have the capability to facilitate the volume of orders and trades that FINRA-member ATSs can facilitate through electronic systems.\50\ Accordingly, FINRA believes that the proposal is designed to apply to the trading venues most likely not to see a shift in volume away to other venues.\51\ FINRA also reiterated that it would monitor activity in U.S. Treasury Securities with respect to the operation of the proposal.\52\ --------------------------------------------------------------------------- \49\ Execution Access Letter at 2. \50\ See FINRA Response at 2. \51\ See id. \52\ See id. A second commenter who broadly supported the proposal also noted that the new counterparty reporting requirements ``may lead to trading shifting to non-ATS or other venues'' and observed that ``it might be valuable to further expand the reporting obligations in the future.'' Healthy Markets Letter at 3. --------------------------------------------------------------------------- The commenter also argued that the proposal ``unfairly allocates to ATSs the significant operational costs and regulatory burdens of trade reporting'' \53\ and that ``ATS's will likely need to recoup these costs by passing them through to their customers.'' \54\ FINRA responded that it is sensitive to the need to balance the regulatory objectives of a proposal with the burdens and costs imposed on member firms, and sought to narrowly tailor the proposal by establishing a minimum volume threshold below which the identification requirements would not apply.\55\ FINRA also noted that, because firms currently must populate the counterparty field in their TRACE reports, the proposal will not require ATSs to undertake programming related to populating a new field, but rather will require them to use a FINRA- assigned MPID in place of the current generic contra-party identifiers for ``customer'' or ``non-member affiliate.'' \56\ FINRA further noted that it intends to set an effective date for the proposal of approximately 180 days from the date of the Regulatory Notice announcing a Commission approval of the proposal, which is designed to provide ATSs with enough time to determine whether they are covered and, if so, to obtain MPIDs for non-FINRA-member subscribers and make any necessary programming changes.\57\ --------------------------------------------------------------------------- \53\ Execution Access Letter at 2-3. \54\ Id. at 3. \55\ See FINRA Response at 3. \56\ See id. \57\ See id. In addition, an ATS that becomes a covered ATS in the future will have 60 calendar days from the end of the calendar quarter in which it becomes covered to begin complying with the requirements. See id. --------------------------------------------------------------------------- Finally, one of the commenters who broadly supported the proposal suggested that FINRA ultimately should require identification using the legal entity identifiers (``LEIs'') rather than MPIDs.\58\ FINRA responded that, at this time, MPIDs are the most appropriate identifier for TRACE reports because MPIDs are established and widely used by its members for purposes of reporting trade and counterparty information to FINRA.\59\ --------------------------------------------------------------------------- \58\ See Healthy Markets Letter at 3-4. \59\ See FINRA Response at 4. --------------------------------------------------------------------------- IV. Discussion and Commission Findings After carefully considering the proposal, the comments submitted, and FINRA's response to the comments, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.\60\ In particular, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Act,\61\ which requires, among other things, that FINRA's rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. --------------------------------------------------------------------------- \60\ In approving this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). \61\ 15 U.S.C. 78o-3(b)(6). --------------------------------------------------------------------------- The Commission called FINRA's 2016 proposal to expand TRACE reporting to include member transactions in U.S. Treasury Securities ``an important first step in providing the official sector with more comprehensive data about the Treasury cash market.'' \62\ Currently, TRACE reports require specific identification only of FINRA member counterparties; non-FINRA-member counterparties are reported only as ``C'' for customer or ``A'' if the counterparty is a non-member affiliate. FINRA has now proposed to require covered ATSs to specifically identify all non-FINRA-member counterparties in their TRACE reports of U.S. Treasury Security transactions. The Commission concurs with FINRA's assessment that ``the additional detail that would be added to transaction reports by identifying non-FINRA member counterparties would enhance FINRA's surveillance program for U.S. Treasury Securities.'' \63\ The Commission concludes, therefore, that expanding TRACE reporting of Treasury transactions in the manner described in the proposal is reasonably designed to help FINRA fulfill its mandate in Section 15A(b)(6) of the Act to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. --------------------------------------------------------------------------- \62\ 2016 Order, 81 FR at 73174. \63\ Notice, 83 FR at 27644. --------------------------------------------------------------------------- The Commission further believes that expanded reporting of counterparty identities in the manner described in the proposal will help to establish a more complete audit trail for transactions in U.S. Treasury Securities, thereby assisting regulators in detecting and deterring improper trading activity. More complete information regarding counterparty identity also will provide the official sector with a better understanding of the structure and characteristics of the U.S. Treasury cash market. The Commission notes that the proposal is consistent with the Treasury Department's recommendation in the Capital Markets Report that FINRA members that facilitate transactions in U.S. Treasury Securities be required to identify customers in their reports of transactions in U.S. Treasury Securities.\64\ --------------------------------------------------------------------------- \64\ See supra note 18 and accompanying text. --------------------------------------------------------------------------- The Commission acknowledges the concerns of one commenter who argued that the proposal ``does not do enough to achieve full transparency in the Treasury Market and may actually result in reduced transparency'' and that some non-FINRA-member market participants [[Page 40605]] might elect not to trade on covered ATSs ``to maintain anonymity and avoid regulatory oversight.'' \65\ The Commission believes, nevertheless, that this comment does not preclude approval of the proposal at this time. Although some Treasury transactions will continue to be outside the scope of the new requirements, the new counterparty information reported by covered ATSs should greatly enhance surveillance capabilities and provide additional insights into the Treasury cash market. The Commission notes that other public sector authorities have expressed their intention to continue to assess effective means to ensure that reported data regarding the Treasury cash market is comprehensive and includes information from institutions that are not FINRA members.\66\ Furthermore, although theoretically possible, it might not be practical for non-FINRA members to shift their trading activity away from covered ATSs if covered ATSs continue to serve as significant pools of liquidity for U.S. Treasury Securities. The Commission notes that FINRA ``intends to monitor . . . for any potential negative impacts or changes in ATS or non-member subscriber behavior.'' \67\ --------------------------------------------------------------------------- \65\ Execution Access Letter at 2. \66\ See supra notes 47-48 and accompanying text. \67\ Notice, 83 FR at 27645. --------------------------------------------------------------------------- The Commission believes that the proposal is reasonably designed to minimize burdens on ATSs while still fulfilling the important policy objectives discussed above. The new non-FINRA-member identification requirements will apply only to ATSs that exceed the $10 billion threshold. These ATS currently account for the vast majority of ATS transaction reports for transactions in U.S. Treasury Securities against non-FINRA members.\68\ Furthermore, the proposal does not appear likely to require covered ATSs to undertake significant programming work because new reporting fields will not be necessary. All ATSs that report to TRACE already utilize fields for counterparty identifiers and are familiar with the use of MPIDs for FINRA member counterparties. For Treasury transactions on covered ATSs, the proposal eliminates use of the generic ``C'' and ``A'' identifiers and instead requires the ATS to populate the counterparty identifier field with an MPID in all cases, regardless of whether a particular counterparty is a FINRA member. Under the new rule, FINRA will assign MPIDs to all non- FINRA-member subscribers of covered ATSs who engage in Treasury transactions without employing a de minimis cut-off. The Commission believes that this is a reasonable means of simplifying compliance with the rule because covered ATSs will not have to analyze the transaction volume of non-FINRA-member subscribers to ascertain whether any of them become subject to or subsequently fall outside the scope of the rule. In addition, an ATS that reaches the $10 billion threshold will remain a covered ATS even if its volume of executed transactions in U.S. Treasury Securities subsequently falls below the $10 billion threshold.\69\ The Commission believes that this will simplify compliance with the new rule because an ATS will not be required to continue monitoring its volume of executions in U.S. Treasury Securities against non-FINRA-member subscribers once it has reached the $10 billion threshold. Finally, the Commission notes that the new rule will impose duties only on covered ATSs and not on any of their subscribers. --------------------------------------------------------------------------- \68\ FINRA stated that, based on a review of TRACE data over a sample period, only six ATSs that accounted for 99% of trade reports exceeded the proposed threshold. See Notice, 83 FR at 27645, at n. 13. \69\ See FINRA Rule 6730, Supplementary Material .07(d). --------------------------------------------------------------------------- Pursuant to Section 19(b)(5) of the Act,\70\ the Commission consulted with and considered the views of the Treasury Department in determining to approve the proposed rule change. The Treasury Department supports FINRA's proposal to require covered ATSs to identify non-FINRA-member counterparties in their TRACE reports of Treasury transactions.\71\ Pursuant to Section 19(b)(6) of the Act,\72\ the Commission has considered the sufficiency and appropriateness of existing laws and rules applicable to government securities brokers, government securities dealers, and their associated persons in approving the proposal. As discussed above, ATSs currently report Treasury transactions using generic identifiers that do not specifically identify non-FINRA-member counterparties. By requiring covered ATSs to identify non-FINRA-member counterparties in their TRACE reports of Treasury transactions, the new rule will enhance FINRA's surveillance program for U.S. Treasury Securities and provide the official sector with important additional information concerning activity in the U.S. Treasury cash market. --------------------------------------------------------------------------- \70\ 15 U.S.C. 78s(b)(5) (providing that the Commission ``shall consult with and consider the views of the Secretary of the Treasury prior to approving a proposed rule filed by a registered securities association that primarily concerns conduct related to transactions in government securities, except where the Commission determines that an emergency exists requiring expeditious or summary action and publishes its reasons therefor''). \71\ Telephone conversation with Treasury Department staff and Brett Redfearn, Director, Division of Trading and Markets, et al., on August 3, 2018. \72\ 15 U.S.C. 78s(b)(6). --------------------------------------------------------------------------- V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\73\ that the proposed rule change (SR-FINRA-2018-023) is approved. --------------------------------------------------------------------------- \73\ 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\74\ --------------------------------------------------------------------------- \74\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-17496 Filed 8-14-18; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 83, No. 158 / Wednesday, August 15, 2018 / Notices 40601
proposed rule change would have any Commission believes does not believe Commission and any person, other than
significant impact on inter-market that the proposal raises any novel or those that may be withheld from the
competition as the Exchange’s affiliated unique regulatory issues.21 Therefore, public in accordance with the
exchanges already allow after hours the Commission believes that waiving provisions of 5 U.S.C. 552, will be
trading until 8:00 p.m. ET, and other the 30-day operative delay is consistent available for website viewing and
markets are free to provide similar with the protection of investors and the printing in the Commission’s Public
trading hours. Furthermore, the public interest. The Commission hereby Reference Room, 100 F Street NE,
Exchange does not believe that the waives the 30-day operative delay and Washington, DC 20549, on official
proposed rule change would have any designates the proposed rule change business days between the hours of
significant impact on intra-market operative upon filing.22 10:00 a.m. and 3:00 p.m. Copies of such
competition as all Members would be At any time within 60 days of the filing will also be available for
able to enter orders later in the day due filing of the proposed rule change, the inspection and copying at the principal
to the extended After Hours Trading Commission summarily may office of the Exchange. All comments
Session. temporarily suspend such rule change if received will be posted without change.
it appears to the Commission that such Persons submitting comments are
(C) Self-Regulatory Organization’s action is: (i) Necessary or appropriate in cautioned that we do not redact or edit
Statement on Comments on the the public interest; (ii) for the protection personal identifying information from
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The Exchange has neither solicited If the Commission takes such action, the to make available publicly. All
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III. Date of Effectiveness of the change should be approved or should be submitted on or before
Proposed Rule Change and Timing for disapproved. September 5, 2018.
Commission Action IV. Solicitation of Comments For the Commission, by the Division of
Trading and Markets, pursuant to delegated
Because the foregoing proposed rule Interested persons are invited to authority.23
change does not: (i) Significantly affect submit written data, views and Eduardo A. Aleman,
the protection of investors or the public arguments concerning the foregoing,
interest; (ii) impose any significant Assistant Secretary.
including whether the proposal is
burden on competition; and (iii) become [FR Doc. 2018–17490 Filed 8–14–18; 8:45 am]
consistent with the Act. Comments may
operative for 30 days from the date on be submitted by any of the following BILLING CODE 8011–01–P
which it was filed, or such shorter time methods:
as the Commission may designate, it has
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On June 5, 2018, the Financial
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Industry Regulatory Authority, Inc.
to immediately provide a venue for Commission process and review your
(‘‘FINRA’’) filed with the Securities and
market participants to source liquidity comments more efficiently, please use
Exchange Commission (‘‘Commission’’),
until 8:00 p.m. ET, similar to the only one method. The Commission will
pursuant to Section 19(b)(1) of the
operation of other exchanges. Because post all comments on the Commission’s
Securities Exchange Act of 1934
the proposed rules previously have been internet website (http://www.sec.gov/
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
approved by the Commission for, and rules/sro.shtml). Copies of the
proposed rule change to amend FINRA
are substantively identical to those of, submission, all subsequent
Rule 6730 to require certain alternative
another listing exchange, the amendments, all written statements
trading systems (‘‘ATSs’’) that report
with respect to the proposed rule
transactions in U.S. Treasury Securities
17 15 U.S.C. 78s(b)(3)(A). change that are filed with the
to the Transaction Reporting and
18 17 CFR 240.19b–4(f)(6). In addition, Rule 19b- Commission, and all written
Compliance Engine (‘‘TRACE’’) to
daltland on DSKBBV9HB2PROD with NOTICES
4(f)(6) requires a self-regulatory organization to give communications relating to the
the Commission written notice of its intent to file identify non-FINRA-member subscribers
the proposed rule change at least five business days proposed rule change between the
on those transaction reports. The
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the 21 Seesupra note 11.
proposed rule change was published for
Commission. The Exchange has satisfied this 22 Forpurposes only of waiving the 30-day
requirement. 23 17 CFR 200.30–3(a)(12).
operative delay, the Commission has considered the
19 17 CFR 240.19b–4(f)(6). 1 15 U.S.C. 78s(b)(1).
proposed rule’s impact on efficiency, competition,
20 17 CFR 240.19b–4(f)(6)(iii). and capital formation. See 15 U.S.C. 78c(f). 2 17 CFR 240.19b–4.
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![40602 Federal Register / Vol. 83, No. 158 / Wednesday, August 15, 2018 / Notices
comment in the Federal Register on 2017.10 Information in TRACE regarding stated that ‘‘a significant portion of PTF
June 13, 2018.3 The Commission transactions in U.S. Treasury Securities activity is anonymized in the TRACE
received three comment letters is for regulatory purposes only and is data.’’ 19 The Treasury Department
regarding the proposed rule change.4 On not disseminated publicly.11 recommended requiring ATSs that
July 26, 2018, the Commission extended Under FINRA’s rules, each FINRA facilitate transactions in U.S. Treasury
until September 11, 2018, the time member that is a Party to a Transaction Securities to identify customers in their
period within which to approve the in a TRACE-Eligible Security must trade reports.20 FINRA believes that
proposed rule change, disapprove the report the transaction.12 A TRACE requiring additional counterparty
proposed rule change, or institute transaction report must include, among information in ATS TRACE reports for
proceedings to determine whether to other things, the contra-party’s identifier transactions in U.S. Treasury Securities
disapprove the proposed rule change.5 (i.e., MPID, customer, or a non-member would improve the effectiveness of
FINRA submitted a response to the affiliate, as applicable).13 Transactions FINRA’s surveillance patterns and help
comments on August 6, 2018.6 This in U.S. Treasury Securities that occur on FINRA to identify potentially
order approves the proposed rule an ATS generally must be reported to manipulative activity, including wash
change. TRACE by the counterparties, if they are sales and prearranged trading activity.21
FINRA members, and by the ATS FINRA further believes that such
II. Description of Proposed Rule Change itself.14 On a TRACE report, an ATS information would facilitate a better
As described in further detail below, must identify a FINRA member understanding of Treasury market
FINRA has proposed to add counterparty by that counterparty’s structure and liquidity.22
Supplementary Material .07 to existing MPID.15 However, for a transaction
involving a non-FINRA-member B. Proposed Changes to ATS Reporting
FINRA Rule 6730 to require an ATS, as Obligations
defined in Rule 300(a) of Regulation customer, the ATS must report the trade
ATS,7 that effects transactions in U.S. utilizing a generic customer identifier FINRA has proposed to add
Treasury Securities above a certain (‘‘C’’).16 Supplementary Material .07 to existing
A significant amount of trading FINRA Rule 6730 to require each
volume threshold to identify in its
activity in U.S. Treasury Securities on ‘‘covered ATS,’’ as described below, to
TRACE reports any counterparty to a
ATSs involves market participants that provide FINRA with a list of all of its
Treasury transaction that is a non-
are not registered as broker-dealers or non-FINRA-member subscribers and to
FINRA member, using a market
are not FINRA members, including obtain from FINRA an MPID for each
participant identifier (‘‘MPID’’) assigned
hedge funds, banks, and principal such subscriber. Each covered ATS
by FINRA.8
trading firms (‘‘PTFs’’).17 The would then be required to identify a
A. Background Department of the Treasury stated in its non-FINRA-member subscriber in the
October 2017 Capital Markets Report contra-party field of a TRACE report of
On October 18, 2016, the Commission that ‘‘[t]rading activity [in U.S. Treasury a U.S. Treasury Security transaction
approved a proposed rule change that Securities] on the major electronic using the MPID assigned by FINRA. A
required FINRA members to report interdealer platforms is dominated by covered ATS would no longer be
secondary market transactions in U.S. PTFs, . . . and collectively they permitted to identify a contra-party to
Treasury Securities to TRACE.9 FINRA account for over half of all transaction such a transaction using the ‘‘customer’’
members began reporting such volumes in the interdealer broker or ‘‘non-member affiliate’’ identifier.
transactions to TRACE on July 10, segment of the [cash Treasury] Based on the list of non-FINRA-member
market.’’ 18 The Capital Markets Report subscribers that a covered ATS provides
3 See Securities Exchange Act Release No. 83393
to FINRA, FINRA will assign each non-
(June 7, 2018), 83 FR 27643 (‘‘Notice’’).
4 See letter to Secretary, Commission, from
10 See Notice, 83 FR at 27644; FINRA Regulatory
FINRA-member subscriber a unique
Notice 16–39 (October 2016). MPID (to be used consistently across
Stephen John Berger, Managing Director, 11 See FINRA Rule 6750(c)(5) (providing that
Government and Regulatory Policy, Citadel, dated FINRA will not disseminate information on a ATSs) and provide a list of those MPIDs
July 5, 2018 (‘‘Citadel Letter’’); letter to Robert W. transaction in a U.S. Treasury Security). See also to the ATS.23 This approach is designed
Errett, Deputy Secretary, Commission, from
Theodore Bragg, Chief Executive Officer, Execution
Notice, 83 FR at 27644. to preserve the confidentiality of an
12 See FINRA Rule 6730(a). See also FINRA Rules
Access, LLC, dated July 3, 2018 (‘‘Execution Access individual ATS’s subscriber list,
6710(a) and (e) (defining ‘‘TRACE-Eligible Security’’
Letter’’); letter to Brent J. Fields, Secretary, and ‘‘Party to a Transaction,’’ respectively). because FINRA will provide a covered
Commission, from Tyler Gellasch, Executive 13 See FINRA Rule 6730(c)(6). ATS with a list of MPIDs only for its
Director, The Healthy Markets Association, dated
July 5, 2018 (‘‘Healthy Markets Letter’’).
14 See Notice, 83 FR at 27644. See also FINRA’s own subscribers.24
5 See Securities Exchange Act Release No. 83722
Regulatory Notice 14–53 (November 2014) Proposed Supplementary Material
(reminding ATSs and ATS subscribers of their .07(b) of FINRA Rule 6730 defines a
(July 26, 2018), 83 FR 37544 (Aug. 1, 2018). reporting obligations in TRACE-Eligible Securities).
6 See letter to Brent J. Fields, Secretary,
While there are limited exceptions to the reporting ‘‘covered ATS’’ as an ATS, as that term
Commission, from Racquel L. Russell, FINRA, dated requirement that are available when all the is defined in Rule 300 of Regulation
August 6, 2018 (‘‘FINRA Response’’). counterparties are FINRA members, these
7 17 CFR 242.300(a).
exceptions do not apply to transactions on an ATS Economic Opportunities: Capital Markets, Report to
8 FINRA Rule 6710(p) defines ‘‘U.S. Treasury involving a non-FINRA member. See Notice, 83 FR
President Donald J. Trump, Executive Order 13772
Security’’ to mean ‘‘a security, other than a savings at 27644, n. 6. FINRA has stated that, because each
on Core Principles for Regulating the United States
bond, issued by the U.S. Department of the current ATS is a FINRA member, each ATS must
Financial System, at 79–80 (October 2017) (‘‘Capital
Treasury to fund the operations of the federal report to TRACE all trading activity in TRACE-
Markets Report’’), https://www.treasury.gov/press-
government or to retire such outstanding securities. Eligible Securities that occurs on the ATS. See
Notice, 83 FR at 27644. center/press-releases/Documents/A-Financial-
The term ‘U.S. Treasury Security’ also includes System-Capital-Markets-FINAL-FINAL.pdf).
daltland on DSKBBV9HB2PROD with NOTICES
15 See Notice, 83 FR at 27644.
separate principal and interest components of a 19 See id. (citing Capital Markets Report at 80).
U.S. Treasury Security that has been separated 16 See id. In addition, if the non-FINRA member
20 See id. (citing Capital Markets Report at 80).
pursuant to the Separate Trading of Registered is an affiliate, the ATS must report the trade as a
21 See id.
Interest and Principal of Securities (STRIPS) generic trade with a non-member affiliate by
22 See id.
program operated by the U.S. Department of denoting the counterparty with an ‘‘A’’ identifier.
Treasury.’’ See FINRA Rule 6730(c)(6). 23 See proposed FINRA Rule 6730,
9 See Securities Exchange Act Release No. 79116 17 See Notice, 83 FR at 27644. Supplementary Material .07(a). See also Notice, 83
(October 18, 2016), 81 FR 73167 (October 24, 2016) 18 Notice, 83 FR at 27644 (citing Treasury FR at 27645.
(SR–FINRA–2016–027) (‘‘2016 Order’’). Department, A Financial System That Creates 24 See Notice, 83 FR at 27645.
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![Federal Register / Vol. 83, No. 158 / Wednesday, August 15, 2018 / Notices 40605
might elect not to trade on covered will assign MPIDs to all non-FINRA- new rule will enhance FINRA’s
ATSs ‘‘to maintain anonymity and avoid member subscribers of covered ATSs surveillance program for U.S. Treasury
regulatory oversight.’’ 65 The who engage in Treasury transactions Securities and provide the official sector
Commission believes, nevertheless, that without employing a de minimis cut-off. with important additional information
this comment does not preclude The Commission believes that this is a concerning activity in the U.S. Treasury
approval of the proposal at this time. reasonable means of simplifying cash market.
Although some Treasury transactions compliance with the rule because
will continue to be outside the scope of covered ATSs will not have to analyze V. Conclusion
the new requirements, the new the transaction volume of non-FINRA- It is therefore ordered, pursuant to
counterparty information reported by member subscribers to ascertain Section 19(b)(2) of the Act,73 that the
covered ATSs should greatly enhance whether any of them become subject to proposed rule change (SR–FINRA–
surveillance capabilities and provide or subsequently fall outside the scope of 2018–023) is approved.
additional insights into the Treasury the rule. In addition, an ATS that
cash market. The Commission notes that reaches the $10 billion threshold will For the Commission, by the Division of
other public sector authorities have remain a covered ATS even if its Trading and Markets, pursuant to delegated
authority.74
expressed their intention to continue to volume of executed transactions in U.S.
assess effective means to ensure that Treasury Securities subsequently falls Eduardo A. Aleman,
reported data regarding the Treasury below the $10 billion threshold.69 The Assistant Secretary.
cash market is comprehensive and Commission believes that this will [FR Doc. 2018–17496 Filed 8–14–18; 8:45 am]
includes information from institutions simplify compliance with the new rule BILLING CODE 8011–01–P
that are not FINRA members.66 because an ATS will not be required to
Furthermore, although theoretically continue monitoring its volume of
possible, it might not be practical for executions in U.S. Treasury Securities SECURITIES AND EXCHANGE
non-FINRA members to shift their against non-FINRA-member subscribers COMMISSION
trading activity away from covered once it has reached the $10 billion
ATSs if covered ATSs continue to serve threshold. Finally, the Commission [Release No. 34–83814; File No. SR–
as significant pools of liquidity for U.S. notes that the new rule will impose PEARL–2018–17]
Treasury Securities. The Commission duties only on covered ATSs and not on
notes that FINRA ‘‘intends to monitor any of their subscribers. Self-Regulatory Organizations: Notice
. . . for any potential negative impacts Pursuant to Section 19(b)(5) of the of Filing and Immediate Effectiveness
or changes in ATS or non-member Act,70 the Commission consulted with of a Proposed Rule Change by MIAX
subscriber behavior.’’ 67 and considered the views of the PEARL, LLC To Amend the MIAX
The Commission believes that the Treasury Department in determining to PEARL Fee Schedule
proposal is reasonably designed to approve the proposed rule change. The
minimize burdens on ATSs while still Treasury Department supports FINRA’s August 9, 2018.
fulfilling the important policy objectives proposal to require covered ATSs to Pursuant to the provisions of Section
discussed above. The new non-FINRA- identify non-FINRA-member 19(b)(1) of the Securities Exchange Act
member identification requirements will counterparties in their TRACE reports of of 1934 (‘‘Act’’) 1 and Rule 19b–4
apply only to ATSs that exceed the $10 Treasury transactions.71 Pursuant to thereunder,2 notice is hereby given that
billion threshold. These ATS currently Section 19(b)(6) of the Act,72 the on August 1, 2018, MIAX PEARL, LLC
account for the vast majority of ATS Commission has considered the (‘‘MIAX PEARL’’ or ‘‘Exchange’’) filed
transaction reports for transactions in sufficiency and appropriateness of with the Securities and Exchange
U.S. Treasury Securities against non- existing laws and rules applicable to Commission (‘‘Commission’’) a
FINRA members.68 Furthermore, the government securities brokers, proposed rule change as described in
proposal does not appear likely to government securities dealers, and their Items I, II, and III below, which Items
require covered ATSs to undertake associated persons in approving the have been prepared by the Exchange.
significant programming work because proposal. As discussed above, ATSs The Commission is publishing this
new reporting fields will not be currently report Treasury transactions notice to solicit comments on the
necessary. All ATSs that report to using generic identifiers that do not proposed rule change from interested
TRACE already utilize fields for specifically identify non-FINRA- persons.
counterparty identifiers and are familiar member counterparties. By requiring
with the use of MPIDs for FINRA covered ATSs to identify non-FINRA- I. Self-Regulatory Organization’s
member counterparties. For Treasury member counterparties in their TRACE Statement of the Terms of Substance of
transactions on covered ATSs, the reports of Treasury transactions, the the Proposed Rule Change
proposal eliminates use of the generic
‘‘C’’ and ‘‘A’’ identifiers and instead 69 See FINRA Rule 6730, Supplementary Material The Exchange is filing a proposal to
requires the ATS to populate the .07(d). amend the MIAX PEARL Fee Schedule
counterparty identifier field with an
70 15 U.S.C. 78s(b)(5) (providing that the
(the ‘‘Fee Schedule’’).
Commission ‘‘shall consult with and consider the
MPID in all cases, regardless of whether views of the Secretary of the Treasury prior to The text of the proposed rule change
a particular counterparty is a FINRA approving a proposed rule filed by a registered is available on the Exchange’s website at
member. Under the new rule, FINRA securities association that primarily concerns http://www.miaxoptions.com/rule-
conduct related to transactions in government
filings/pearl at MIAX PEARL’s principal
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securities, except where the Commission
65 Execution Access Letter at 2. determines that an emergency exists requiring office, and at the Commission’s Public
66 See supra notes 47–48 and accompanying text. expeditious or summary action and publishes its Reference Room.
67 Notice, 83 FR at 27645. reasons therefor’’).
68 FINRA stated that, based on a review of TRACE 71 Telephone conversation with Treasury
73 15 U.S.C. 78s(b)(2).
data over a sample period, only six ATSs that Department staff and Brett Redfearn, Director,
74 17 CFR 200.30–3(a)(12).
accounted for 99% of trade reports exceeded the Division of Trading and Markets, et al., on August
3, 2018. 1 15 U.S.C. 78s(b)(1).
proposed threshold. See Notice, 83 FR at 27645, at
n. 13. 72 15 U.S.C. 78s(b)(6). 2 17 CFR 240.19b–4.
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Document Created: 2018-08-15 01:26:52
Document Modified: 2018-08-15 01:26:52
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 83 FR 40601 |
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