I. Introduction

On September 17, 2020, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act ( printed page 73542) of 1934 (“Act”) ^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change to require member firms, in accordance with a Commission order granting exemptive relief from certain requirements of the Consolidated Audit Trail (“CAT”) NMS Plan,^[3] to report time fields, in trade reports submitted to an equity trade reporting facility (“FINRA Facility”),^[4] using the same timestamp granularity that they use to report to the CAT. The proposed rule change was published for comment in the Federal Register on September 29, 2020.^[5] The Commission received no comment letters on the proposed rule change. This order approves the proposed rule change.

II. Description of the Proposal

A. Background

Currently, FINRA's equity trade reporting rules require a member to report all time fields—including time of trade execution and, if applicable, time of trade cancellation—to a FINRA Facility in milliseconds, if the member's system captures time in milliseconds; otherwise a report in seconds is permissible.^[6] However, FINRA's CAT Compliance Rule ^[7] requires an Industry Member ^[8] to report a timestamp for a Reportable Event,^[9] including a trade execution, to the CAT's Central Repository ^[10] in milliseconds and, if the member's system captures time in finer increments, to report in such finer increments up to nanoseconds (except as otherwise provided under FINRA Rule 6860 for Manual Order Events).^[11] Thus, currently there is a difference between the timestamp granularity requirements applicable to member firms reporting to the FINRA Facilities (up to milliseconds) and to the CAT (up to nanoseconds).

On June 11, 2020, the Commission granted the CAT NMS Plan Participants (“Participants”) exemptive relief from, in pertinent part, Section 6.4(d)(ii)(B) of the CAT NMS Plan, which states that each Participant, through its CAT Compliance Rule, must require its Industry Members to record and report to the Central Repository a cancelled trade indicator for any trade that is cancelled. In their request for exemptive relief, the Participants explained that the FINRA Facility Data,^[12] which would contain cancelled trade indicators, are required to be reported to the Central Repository in each instance currently required under the CAT NMS Plan. Industry Members would continue to be required to submit either a trade report or a trade cancellation with the requisite information to a FINRA Facility, in accordance with existing rules set by each Participant for its members. For a cancelled trade, an Industry Member would continue to be required to submit a trade cancellation to a FINRA Facility.

The Participants stated in their request for exemptive relief that they would require the Plan Processor ^[13] to link the FINRA Facility Data to Industry Member execution reports submitted to the Central Repository beginning on October 26, 2020. The Participants explained that the Compliance Rules would require an Industry Member to submit to the Central Repository an execution report submitted to a FINRA Facility for the corresponding trade report or trade cancellation, beginning on June 22, 2020. Industry Members would be required to report a unique trade identifier, beginning on October 26, 2020, that would be used by the Plan Processor to link the data, including the number of the clearing broker and cancelled trade information, with the Industry Member's execution report.^[14]

Noting the current difference in the timestamp granularity requirements for Industry Members reporting to a FINRA Facility and Industry Members reporting to the Central Repository, the Participants stated in the request for exemptive relief that FINRA would seek to amend its rules and technical specifications to require the FINRA Facilities to accept timestamps to same level of granularity required by the CAT NMS Plan (which, as noted above, is nanoseconds) and to implement such changes by December 15, 2021, for the TRFs and ADF and by December 15, 2022, for the ORF.^[15] FINRA explained in the Notice that, given the difference in timestamp granularity requirements between firms reporting to the FINRA Facilities and to the CAT, it is possible that the CAT could receive the time of trade cancellation in milliseconds from FINRA, while the time of trade cancellation for the same event might have been expressed in increments finer than milliseconds, had the firm reported such information directly to the CAT. In such instances, the CAT would not receive the same data that it would have received absent the exemptive relief.^[16]

B. Proposed Amendments to FINRA Facility Rules

To comply with the conditions set forth in the Facility Data Exemption Order, FINRA has proposed identical amendments to FINRA Facility rules ^[17] that will require an Industry Member with an obligation to report an order ( printed page 73543) execution event to the Central Repository pursuant to FINRA's CAT Compliance Rule to report the time field (including time of execution and time of cancellation, if applicable) in the trade report submitted to a FINRA Facility using the same timestamp granularity, as set forth in FINRA Rule 6860 (nanoseconds), that the member would use to report to the CAT.

Because almost all trades that must be reported to a FINRA Facility also must be reported to the CAT,^[18] a member firm with a trade reporting obligation under the FINRA Facility rules also has a CAT reporting obligation, and is therefore already subject to the timestamp granularity requirements of the CAT Compliance Rule. Given that a CAT Reporter ^[19] must have systems that capture time in at least milliseconds to comply with CAT requirements, FINRA expects that firm to report to the appropriate FINRA Facility in milliseconds under FINRA's current trade reporting rules.^[20] Once the proposed rule change is implemented, any firm capturing and reporting time to the CAT in increments finer than milliseconds would be required to report time to the FINRA Facilities in such finer increments, up to nanoseconds.^[21]

In accordance with the conditions of the Facility Data Exemption Order,^[22] FINRA has stated that the implementation date of the proposed rule change relating to the TRFs and ADF will be no later than December 15, 2021, and the implementation date of the proposed rule change relating to the ORF will be no later than December 15, 2022. FINRA has represented that it will provide advance notice of the implementation dates, including publication of a Regulatory Notice, as well as updated technical specifications and testing schedule, at least 120 days prior to the implementation dates.

III. Discussion and Commission Findings

After careful consideration, 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.^[23] In particular, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Act,^[24] which requires, among other things, that FINRA 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.

On June 11, 2020, the Commission issued the Facility Data Exemption Order, which among other things granted an exemption from certain provisions of the CAT NMS Plan relating to the reporting of cancelled trade indicators.^[25] As a result of that Order, FINRA Facility Data submitted to the Central Repository can be the source of canceled trade indicators rather than records submitted to the Central Repository directly by Industry Members. However, the granularity of timestamps that the Industry Members are required to report to the Central Repository differs from the granularity that FINRA members are currently required to report to the FINRA Facilities. Therefore, the Commission conditioned the Order on FINRA amending the FINRA Facility rules to accept timestamps up to the granularity required by the CAT NMS Plan.^[26]

The Commission previously has found that the CAT NMS Plan is consistent with the Act because, among other things, it will help ensure that regulators can sequence order and execution events with a reasonable degree of accuracy.^[27] When approving the CAT NMS Plan, the Commission stated that, given the speed with which the industry currently handles orders and executes trades, it is important that the CAT utilize a timestamp that will enable regulators to reasonably sequence the order in which Reportable Events occur.^[28] The Commission believed that timestamps in increments greater than a millisecond would undermine the improved ability to sequence events with any reasonable degree of reliability.^[29] The Commission concluded that this approach will improve the accuracy of order event records, particularly those occurring rapidly across multiple markets, without imposing undue burdens on market participants.^[30]

The Commission finds that the proposed rule change is consistent with the Act because it satisfies a condition that the Commission imposed in the Facility Data Exemption Order. As a result of the proposed rule change, the granularity of time stamps reported to the FINRA Facilities will match the granularity of time stamps reported by Industry Members directly to the CAT. Thus, the proposed rule change will facilitate the sequencing event reports in the CAT, thereby improving the ability of SROs and the Commission to utilize the CAT to oversee the securities markets. By supporting the efficient implementation of the CAT NMS Plan, the proposed rule change furthers the principles of the Act identified by the Commission when approving the CAT NMS Plan.^[31]

The proposal also is consistent with the Act because the implementation schedule proposed by FINRA complies with Facility Data Exemption Order.^[32] Pursuant to the terms of that Order, FINRA has represented that the implementation date of the proposed rule change relating to the TRFs and ADF will be no later than December 15, 2021, and the implementation date relating to the ORF will be no later than December 15, 2022. Moreover, FINRA has represented that it will provide advance notice of the implementation date at least 120 days prior to the ( printed page 73544) implementation date. This schedule appears reasonably designed to afford members sufficient time to come into compliance with the proposed rule change while adhering to the conditions set forth in the Facility Data Exemption Order.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,^[33] that the proposed rule change (SR-FINRA-2020-029) is approved.