
[Federal Register Volume 78, Number 230 (Friday, November 29, 2013)]
[Notices]
[Pages 71695-71700]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28572]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70924; File No. SR-FINRA-2013-050]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to 
Over-the-Counter Equity Trade Reporting and OATS Reporting

November 22, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 12, 2013, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II 
and III below, which items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    FINRA is proposing to amend FINRA rules governing the reporting of 
(i) over-the-counter (``OTC'') transactions in equity securities to the 
FINRA Facilities; \3\ and (ii) orders in NMS stocks and OTC Equity 
Securities to the Order Audit Trail System (``OATS'').
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    \3\ Specifically, the FINRA Facilities are the Alternative 
Display Facility (``ADF'') and the Trade Reporting Facilities 
(``TRF''), to which members report OTC transactions in NMS stocks, 
as defined in SEC Rule 600(b) of Regulation NMS; and the OTC 
Reporting Facility (``ORF''), to which members report transactions 
in ``OTC Equity Securities,'' as defined in FINRA Rule 6420 (i.e., 
non-NMS stocks such as OTC Bulletin Board and OTC Market 
securities), as well as transactions in Restricted Equity 
Securities, as defined in FINRA Rule 6420, effected pursuant to 
Securities Act Rule 144A.
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    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA is proposing amendments to the equity trade reporting rules 
relating to reporting (i) an additional time field for specified 
trades, (ii) execution time in milliseconds, (iii) reversals, (iv) 
trades executed on non-business days and trades that are more than one 
year old, and (v) ``step-outs.'' The proposed amendments also reflect 
changes in the processing of trades that are submitted to a FINRA 
Facility for clearing as well as technical changes to the rules 
relating to the OTC Reporting Facility (``ORF''). The proposed 
amendments also codify existing OATS guidance regarding reporting order 
event times to OATS in milliseconds.
Reporting an Additional Time Field
    FINRA rules require that trade reports submitted to the FINRA 
Facilities include the time of trade execution, except where another 
time is expressly required by rule. For some transactions, there may be 
more than one critical time associated with a trade report (for 
example, the actual time of execution

[[Page 71696]]

and a reference time on which the trade price may be based); however, 
only one time field is currently supported in FINRA trade reports. 
FINRA is proposing to require members to report an additional time 
field when reporting the following three types of transactions to 
FINRA.
    With respect to Stop Stock transactions, as defined for purposes of 
the FINRA trade reporting rules,\4\ and transactions that reflect an 
execution price that is based on a prior reference point in time (``PRP 
transactions''), current FINRA rules require that in lieu of the actual 
time the trade was executed, members report the time at which the 
member and the other party agreed to the Stop Stock price and the prior 
reference time, respectively.\5\ For example, for Stop Stock 
transactions, if the parties agree to the Stop Stock price at 10:00 
a.m. and the trade is executed at 11:00 a.m., the reporting member 
would report 10:00 a.m. in the execution time field. Similarly, for PRP 
transactions, if a member executes a market-on-open order at 10:30 
a.m., the member would report 9:30 a.m. (the time the market opened).
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    \4\ ``Stop Stock transaction'' means a transaction resulting 
from an order in which a member and another party agree that the 
order will be executed at a Stop Stock price or better, which price 
is based upon the prices at which the security is trading at the 
time the order is received by the member. See Rules 6220, 6320A, 
6320B and 6420.
    \5\ See paragraphs (F) and (G) of Rules 6282(a)(4), 6380A(a)(5), 
6380B(a)(5) and 6622(a)(5).
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    FINRA is proposing to require members to include two times when 
reporting Stop Stock transactions and PRP transactions: (1) The time 
currently required by rule (i.e., the time at which the parties agree 
to the Stop Stock price or the prior reference time), and (2) the 
actual time of execution.\6\ Thus, in the two examples above, the trade 
report would reflect times of 10:00 a.m. and 11:00 a.m. for the Stop 
Stock transaction, and 9:30 a.m. and 10:30 a.m. for the PRP 
transaction.\7\ FINRA believes that requiring members to report 
additional time-related information will ensure a more accurate and 
complete audit trail and enhance FINRA's ability to surveil on an 
automated basis for compliance with FINRA trade reporting and other 
rules.
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    \6\ The rules provide that if the trade is executed within 10 
seconds of the time the parties agree to the Stop Stock price or 
within 10 seconds of the prior reference time, then the designated 
modifier should not be used. FINRA also is proposing to amend the 
rules to clarify that in this instance, only the actual time of 
execution should be reported.
    \7\ Upon implementation of the proposed rule change, any Stop 
Stock and PRP transactions that are reported more than 10 seconds 
following execution will be marked late.
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    In addition, FINRA is proposing to require members to include two 
times when reporting block transactions using the Intermarket Sweep 
Order (``ISO'') exception (outbound) under SEC Rule 611 (``Order 
Protection Rule'') of Regulation NMS. Current FINRA guidance requires 
members to use the time that all material terms of the transaction are 
known as the execution time in the trade report.\8\ The staff is 
proposing to adopt Supplementary Material in Rules 6282, 6380A and 
6380B to require that trade reports reflect both the time the firm 
routed ISOs and the execution time, if different. With this additional 
time in the trade report, FINRA will be able to determine better 
whether ISOs were properly sent to other trading centers in compliance 
with the ISO exception to the Order Protection Rule. The staff notes 
that many firms have requested that they be permitted to provide the 
additional time to avoid the appearance of non-compliance with the 
Order Protection Rule.
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    \8\ See NASD Member Alert: Guidance Relating to ``Execution 
Time'' for Purposes of Compliance with NASD Trade Reporting Rules 
(June 13, 2007).
     To comply with the ISO exception simultaneously with execution 
of a block transaction, the firm is required to route an ISO to 
execute against the full displayed size of any protected quotation 
with a price superior to the block transaction price (see question 
and answer 13 in NASD Notice to Members 07-23 (May 2007)). Under 
certain circumstances, fills received from the execution of routed 
ISOs may be reflected in the size of the block transaction that is 
reported to FINRA with the ISO exception. Thus, under such 
circumstances, the execution time to be reported for the block 
transaction may be different than the time the member uses to 
determine whether ISOs were properly routed to execute against any 
better-priced protected quotations.
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Reporting Time in Milliseconds
    FINRA trade reporting rules currently require members to report 
execution time to the FINRA Facilities in seconds (i.e., HH:MM:SS),\9\ 
while the execution time for exchange trades is expressed in 
milliseconds (i.e., HH:MM:SS:mmm). Similarly, Rule 7440(a)(2) of the 
OATS rules currently requires members to record order event times in 
terms of hours, minutes, and seconds.\10\ Because FINRA's audit trails 
consolidate exchange and OTC trades for regulatory purposes, sequencing 
consolidated transactions by execution time can be difficult with the 
different time formats, particularly in active stocks.\11\
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    \9\ See, e.g., Rules 6282(c)(2)(H), 6380A(c)(5), 6380B(c)(5) and 
6622(c)(5).
    \10\ Rule 7450 generally requires all applicable order 
information required to be recorded under Rule 7440 to be reported 
to OATS. Although Rule 7440(a)(2) requires order event times to be 
recorded to the second, FINRA published guidance in 2011 in 
connection with the expansion of OATS to all NMS stocks stating that 
firms that capture time in milliseconds should report time to OATS 
in milliseconds. See Regulatory Notice 11-03 (January 2011); see 
also OATS Reporting Technical Specifications, Cover Memo, at iv (May 
3, 2011 ed.). The proposed rule change codifies this guidance into 
Rule 7440(a)(2).
    \11\ FINRA also notes that the Intermarket Surveillance Group 
(``ISG'') consolidated audit trail can accommodate execution times 
expressed in milliseconds. The ISG consolidated audit trail, which 
combines data from all exchange and OTC trades, is used by all self-
regulatory organizations for regulatory purposes.
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    To enhance and help bring consistency to FINRA's audit trail, FINRA 
is proposing amendments to require members to express time in 
milliseconds when reporting trades to the FINRA Facilities or order 
information to OATS, if the member's system captures time in 
milliseconds.\12\ However, FINRA is not proposing to mandate that 
members enhance their systems to capture time in milliseconds.\13\ 
Members with systems that do not capture milliseconds will be permitted 
to continue reporting time in seconds.\14\
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    \12\ See proposed Rules 6282.04, 6380A.04, 6380B.04, 6622.04, 
7130.01, 7230A.01, 7230B.01, 7330.01, and 7440(a)(2).
    \13\ Members may, however, need to update their systems for OATS 
reporting to reflect the fact that other systems in the firm utilize 
milliseconds so that the times used by those systems (if in 
milliseconds) are accurately reflected in the member's OATS reports. 
As noted above, FINRA is not requiring firms to use milliseconds or 
update existing systems to use milliseconds; however, to the extent 
a firm's system uses milliseconds, those timestamps should be to the 
millisecond when they are reported to OATS.
    \14\ FINRA expects members that have systems currently capable 
of capturing time in milliseconds to continue to do so and not to 
make systems changes to revert to seconds unless they have a 
legitimate business reason for doing so (e.g., a member wants to use 
the services of a vendor that does not capture time in 
milliseconds). FINRA may review any such systems changes in the 
course of an inquiry or a member examination.
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    FINRA believes that where trades are executed by electronic 
systems, such as alternative trading systems and automated execution 
systems, that already capture execution time in milliseconds, it should 
be relatively straightforward for members to report such trades to the 
FINRA Facilities using milliseconds. Thus, FINRA does not believe that 
the proposed requirement would be burdensome for members, nor would it 
require them to make significant systems changes. FINRA recognizes, 
however, that where trades are executed manually, e.g., by instant 
messaging or telephone, it would be more difficult for members to 
capture milliseconds for purposes of trade reporting. Accordingly, 
FINRA believes that it is appropriate not to require that all members 
capture and report time in milliseconds at this time.\15\
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    \15\ The time fields in trade reports submitted to the FINRA 
Facilities currently do not accommodate milliseconds, and therefore, 
FINRA does not know the exact number of firms that capture 
milliseconds for trade reporting purposes today. However, as noted 
above, OATS supports reporting in milliseconds. FINRA reviewed OATS 
data from October 11, 2013 through October 22, 2013, and the daily 
percentage of OATS execution reports that include time in 
milliseconds range from a low of 80.53% to a high of 82.96%. In 
addition, 189 firms submitted at least one execution report to OATS 
using milliseconds during this period. This suggests that for trade 
reporting purposes, a significant number of executing firms have 
systems that currently capture execution time in milliseconds and, 
as a result, would be subject to the proposed requirement.

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[[Page 71697]]

Reporting Reversals
    FINRA rules require that if a trade that was previously reported to 
FINRA is cancelled, members must report the cancellation to the same 
FINRA Facility to which the trade was originally reported \16\ and must 
do so within the time frames set forth in the rules.\17\ Members report 
a ``cancellation'' when trades are cancelled on the date of execution 
and a ``reversal'' when trades are cancelled on a day after the date of 
execution.\18\
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    \16\ See Rules 7130(d), 7230A(i), 7230B(h) and 7330(h).
    \17\ See, e.g., Rules 6282(j)(2), 6380A(g)(2), 6380B(f)(2), and 
6622(f)(2) and (f)(3).
    \18\ See, e.g., Trade Reporting FAQ 305.6, available at 
www.finra.org/Industry/Regulation/Guidance/p038942#305.
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    Today, when a member reports a reversal of a trade that was 
previously reported to a FINRA Facility, there is no requirement that 
the member provide information in the reversal report to identify the 
original trade.\19\ FINRA is proposing to adopt new paragraph (3) in 
Rules 6282(j), 6380A(g) and 6380B(f) and new paragraph (4) in Rule 
6622(f) to require that members identify the original trade in the 
reversal report by including the control number generated by the FINRA 
Facility and report date for the original trade report. This 
information will enable FINRA to better ``link'' reports of reversals 
with the associated previously reported trades and thereby allow FINRA 
to recreate more accurately the firm's market activity, as well as 
surveil for compliance with FINRA trade reporting rules.\20\ In 
addition, paragraph (1) of these Rules, which provides that the member 
with the trade reporting obligation is responsible for submitting the 
cancellation in accordance with the procedures set forth in paragraph 
(2), would be amended to also refer to the proposed new provision.
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    \19\ Where the cancel functionality is used on the date of 
trade, the cancellation is automatically linked by the system to the 
original trade.
    \20\ FINRA notes that the FINRA Facilities will retain historic 
trade data and the amount of data retained will vary among the 
facilities. Members must maintain sufficient records to enable them 
to identify the control number and report date for any trades that 
they reverse, to the extent such information cannot be obtained from 
the data retained by the FINRA Facility.
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    FINRA is proposing several additional conforming amendments to the 
rules relating to trade cancellations.\21\
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    \21\ First, FINRA is proposing to expressly refer to 
``reversals'' and ``reversed trades,'' as applicable, in Rules 
6282(j), 6380A(g), 6380B(f), 6622(f), 7230A(f), 7230B(e) and 
7330(f). Second, FINRA is proposing to amend Rules 7230A(f)(2), 
7230B(e)(2) and 7330(f)(2) to clarify that members must comply with 
the deadlines ``and other requirements'' (i.e., the proposed new 
requirement to include the control number and report date of the 
original trade) set forth in the rules. Third, to bring consistency 
to the trade reporting rules, FINRA is proposing conforming changes 
to the ADF rules to (1) add the language ``with the exception of 
trades cancelled in accordance with the Rule 11890 Series'' in Rule 
6282(j)(1), which is identical to the language in Rules 6380A(g)(1), 
6380B(f)(1) and 6622(f)(1) relating to the other FINRA Facilities; 
(2) refer in Rule 6282(j)(1) to the member with the trade reporting 
obligation under ``Rule 6282'' (rather than the more general 
reference to the Rule 6280 Series); and (3) adopt new paragraph (e) 
in Rule 7130, which is identical to Rules 7230A(f), 7230B(e) and 
7330(f), as amended herein, relating to the other FINRA Facilities. 
Finally, FINRA is proposing to include a reference to paragraph 
(f)(3) in Rule 6622(f)(1), which currently provides that members 
must comply with the requirements of paragraph (f)(2) when 
submitting cancellations and reversals. FINRA inadvertently did not 
add this reference when paragraph (f)(3) was originally adopted.
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Reporting Non-Business Day Trades and T+365 Trades
    Due to current systems limitations, trades executed on non-business 
days (i.e., weekends and holidays) and trades reported more than 365 
days after trade date (T+365) cannot be reported to a FINRA Facility. 
Instead, these trades must be reported on ``Form T'' through FINRA's 
Firm Gateway.\22\ Because these trades are not reported to a FINRA 
Facility, they are not captured for purposes of FINRA's automated 
surveillance systems, and regulatory fees under Section 3 of Schedule A 
to the FINRA By-Laws (``Section 3'') \23\ must be assessed manually.
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    \22\ Under FINRA rules, ``Form T'' is to be used for trade 
reporting only where electronic submission to a FINRA Facility is 
not possible. See Rules 6282(a)(5), 6380A(a)(8), 6380B(a)(8) and 
6622(a)(8); see also Trade Reporting Notice 6/3/2011 (FINRA Reminds 
Firms of Their Trade Reporting Obligations and Announces New 
Submission Process for Form T).
    \23\ Pursuant to Section 31 of the Act, FINRA and the national 
securities exchanges are required to pay transaction fees and 
assessments to the SEC that are designed to recover the costs 
related to the government's supervision and regulation of the 
securities markets and securities professionals. FINRA obtains its 
Section 31 fees and assessments from its membership in accordance 
with Section 3.
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    FINRA is making systems enhancements to enable members to submit 
reports of non-business day trades and T+365 trades electronically to 
the FINRA Facilities rather than using ``Form T'' to report such 
trades. As is the case today, non-business day trades and T+365 trades 
will not be submitted to clearing by the FINRA Facility \24\ or 
disseminated. FINRA also is proposing to amend the rules to require 
that members report non-business day trades on an ``as/of'' basis by 
8:15 a.m. the next business day following execution with the unique 
trade report modifier to denote their execution outside normal market 
hours; trades not reported by 8:15 a.m. will be marked late.\25\ Thus, 
for example, a trade executed on Saturday must be reported by 8:15 a.m. 
the following Monday (since the FINRA Facilities are not open on 
Saturday to accept the trade report), and if the trade is not reported 
by that time, it will be marked late. This requirement will ensure that 
non-business day trades are properly sequenced for audit trail 
purposes. All T+365 trades will be reported on an ``as/of'' basis and 
will be marked late.
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    \24\ FINRA is proposing to expressly provide that these trades 
will not be submitted to clearing in Rules 7140(b), 7240A(b), 
7240B(b) and 7340(b).
    \25\ See Rules 6282(a)(2), 6380A(a)(2), 6380B(a)(2) and 
6622(a)(2). FINRA also is proposing to delete the reference to 
``T+1'' in subparagraph (D) of these rules because, e.g., the next 
business day would be greater than T+1 for a trade that is executed 
on a Saturday.`
     FINRA also is proposing a conforming change to Rule 6622(a)(3) 
to provide that any Securities Act Rule 144A transaction in a 
Restricted Equity Security that is executed on a non-business day 
must be reported by the time the ORF closes the next business day.
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Reporting Step-Outs
    Today, members can effectuate a ``step-out'' \26\ by submitting a 
clearing-only report to a FINRA Facility. FINRA rules prohibit members 
from submitting to a FINRA Facility any non-tape report (including but 
not limited to reports of step-outs) associated with a previously 
executed trade that was not reported to that FINRA Facility.\27\ For 
every step-

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out, one member is stepping out of (or transferring) the position and 
the other member is stepping into (or receiving) the position. Where 
both members are submitting a clearing-only report to a FINRA Facility, 
each member currently must use the ``step-out'' indicator.
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    \26\ A step-out allows a member firm to allocate all or part of 
a client's position from a previously executed trade to the client's 
account at another firm. In other words, a step-out functions as a 
client's position transfer, rather than a trade; there is no 
exchange of shares and funds and no change in beneficial ownership. 
The step-out function was designed and implemented as a service to 
facilitate the clearing process for members involved in these types 
of transfers. See Trade Reporting FAQ 301.1, available at 
www.finra.org/Industry/Regulation/Guidance/p038942#301.
     Each firm is required to report its side to effectuate a step-
out; however, if the two firms have the proper agreements in place 
(i.e., an Automatic Give-Up (``AGU'') or Qualified Special 
Representative (``QSR'') agreement), the step-out can be effectuated 
with only one submission. The proposed rule change will not affect 
the process for effectuating a step-out with a single submission via 
AGU or QSR.
    \27\ See Rules 7130(d), 7230A(i), 7230B(h) and 7330(h). Thus, 
for example, a member cannot use one TRF to step out of an OTC trade 
that was originally reported to another TRF.
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    Some clearing firms have requested the ability to see whether their 
correspondents are stepping out or stepping in with respect to such 
transfers. Accordingly, FINRA is proposing to amend Rules 7130(d), 
7230A(i), 7230B(h) and 7330(h) to provide that where both sides are 
submitting a clearing-only report to effectuate a step-out, the member 
transferring out of the position must report a step-out and the member 
receiving the position must report a step-in.\28\
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    \28\ FINRA notes that the step-out and step-in indicators should 
not be used when reporting a riskless principal or agency ``flip,'' 
both of which entail a change in beneficial ownership and must be 
reported to FINRA where specified by rule.
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Trade Processing
    Rules 7140, 7240A and 7340 address the trade acceptance and 
comparison process for locking in trades submitted for clearing through 
the ADF, FINRA/Nasdaq TRF and ORF, respectively. When firms use the 
trade acceptance and comparison functionality, the reporting party 
reports the trade and the contra party subsequently either accepts or 
declines the trade.\29\ Today, any trade that has been declined by the 
contra party is purged from the system at the end of trade date 
processing.\30\
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    \29\ Alternatively, one member may submit a locked-in trade on 
behalf of the other member, if the members have the requisite 
agreements in place. In that instance, the trade acceptance and 
comparison functionality would not be used.
     FINRA notes that the FINRA/NYSE TRF currently does not offer 
trade acceptance and comparison, and as such, all trades must be 
locked-in prior to submission to this facility. See Rule 7240B.
    \30\ See Rules 7140(a), 7240A(b) and 7340(b).
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    FINRA is proposing to amend the rules to provide that rather than 
being purged, declined trades will be carried over and remain available 
for cancellation or correction by the reporting party or acceptance by 
the contra party. Declined trades that are carried over will not be 
available for the automatic lock-in process described in the rules and 
will not be sent to clearing unless the parties take action. FINRA also 
is proposing to amend paragraph (a) of Rules 7140, 7240A and 7340 to 
codify the existing requirement that the reporting member must cancel a 
declined trade that was previously reported for dissemination purposes 
to have the trade removed from the tape, i.e., the system does not 
remove the trade automatically from the tape.
    In addition, FINRA is proposing technical changes to Rules 7140, 
7240A and 7340 to reorganize and clarify the provisions relating to 
locking in trades for clearing in paragraph (a) and the processing of 
T+N (also referred to ``as/of'') trades in paragraph (b).\31\
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    \31\ Specifically, FINRA is proposing to relocate the provision 
relating to carrying over and automatically locking in trades that 
is currently in paragraph (b) of Rules 7140, 7240A and 7340 to new 
paragraph (a)(2) of Rule 7140 and new paragraph (a)(3) of Rules 
7240A and 7340. The process for automatically locking in trades for 
clearing will remain essentially the same: Any T to T+21 trade that 
has not been declined and remains open (i.e., unmatched or 
unaccepted) at the end of its entry day will be carried over and 
will be automatically locked in and submitted to DTCC if it remains 
open as of 2:30 p.m. the next business day. Trades that are T+22 or 
older that remain open will be carried over, but will not be subject 
to the automatic lock-in process (today such T+22 trades are not 
subject to the automatic lock-in process and are purged from the 
FINRA Facilities, but members may subsequently resubmit them).
     FINRA also is proposing to include language in new Rule 
7240B(b) clarifying that T+N (or ``as/of'') entries may be submitted 
until the FINRA/NYSE TRF closes for the day, i.e., 8:00 p.m. This 
language conforms to the language of Rules 7140(b), 7240A(c) and 
7340(c) (as renumbered herein) relating to the other FINRA 
Facilities.
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    FINRA notes that the proposed changes to Rules 7140, 7240A, 7240B 
and 7340 will not impact the way members report to FINRA and will not 
require members to make changes to their systems.\32\
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    \32\ FINRA also is proposing several non-substantive technical 
changes to rules that are otherwise being amended by this proposed 
rule change. First, FINRA is proposing to delete or replace 
references to ``TRACS'' with ``the ADF'' in Rule 6282 and to delete 
or replace references to ``TRACS'' or the ``TRACS trade comparison 
feature'' with ``the System'' in the Rule 7100 Series heading and 
Rule 7140. FINRA intends to submit a separate proposed rule change 
proposing this technical change throughout the Rule 6200, 7100 and 
7500 Series. In addition, FINRA is proposing to (1) amend Rules 
6380A(g)(1), 6380B(f)(1), 6622(f)(1), 7230A(f)(1), 7230B(e)(1) and 
7330(f)(1) to insert ``the'' before the reference to the Rule 11890 
Series; (2) delete the unnecessary reference to ``or cancellation'' 
in Rule 6282(j)(2)(G); (3) capitalize the term ``Rule'' in Rule 
6380A(g)(2)(G); and (4) capitalize ``Eastern Time'' in Rule 
6622(a)(5)(H).
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ORF Technical Amendments
    FINRA is proposing several additional technical amendments to the 
ORF rules. First, FINRA is proposing to close the ORF at 6:30 p.m. 
Eastern Time rather than 8:00 p.m. Thus, the ORF rules (i.e., the Rule 
6620 and 7300 Series) will be amended to replace all references to 8:00 
p.m. with 6:30 p.m. Members will be required to report trades executed 
after 6:30 p.m. on an ``as/of'' basis by 8:15 a.m. the next business 
day.\33\ In addition, FINRA is proposing to delete the language in Rule 
7320 that states ``unless the member has an alternative electronic 
mechanism pursuant to FINRA rules for reporting and clearing such 
transaction.'' This language is unnecessary, given that the ORF is the 
only electronic mechanism for reporting OTC transactions in OTC Equity 
Securities and transactions in Restricted Equity Securities effected 
under Rule 144A. FINRA also is proposing a minor change in terminology 
to delete the term and references to ``Browse'' from Rules 7310 and 
7330. While the functionality remains available, the term itself does 
not apply to the ORF.
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    \33\ FINRA reviewed the volume of trades reported to the ORF 
between 6:30 p.m. and 8:00 p.m. and determined that they represent 
only a very small percentage of reported trades. For example, for 
all trades reported to the ORF between January 1, 2012 and February 
6, 2013, the percentage of tape reports submitted between 6:30 p.m. 
and 8:00 p.m. compared to the overall number of trades range from a 
low of 0% to a high of 0.5% (on a single day), while non-tape 
reports range from a low of 0.0% to a high of 3.0% (on a single 
day).
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    FINRA believes that the amendments proposed herein will enhance 
FINRA's audit trail and automated surveillance program, promote more 
consistent trade reporting by members and detect violations of FINRA 
trade reporting and other rules.
    FINRA staff discussed the proposed rule change with several of 
FINRA's industry advisory committees in developing its approach. The 
committees supported the proposed amendments and did not believe that 
compliance would be particularly burdensome for firms. However, the 
committees noted the following specific comments and questions: (1) 
Several committee members requested that members be provided sufficient 
time to implement the necessary systems changes (FINRA has proposed an 
extended implementation period herein); (2) one committee member raised 
the possibility that members that currently capture execution time in 
milliseconds could revert their systems to seconds and still be in 
compliance with the rule (see note 14 herein); (3) one committee member 
asked if there would be instances where the control number for the 
original trade might not be available for purposes of reporting a 
reversal (see note 20 herein); (4) one committee member asked whether 
FINRA intends to mandate that firms capture execution time in 
milliseconds (FINRA notes that there is currently no intention to adopt 
such a requirement; moreover, any such proposal would be subject to a 
separate rule filing and notice and comment); and (5) with respect to 
the proposal to close the ORF at 6:30 p.m., a committee member asked 
whether FINRA would grant an extension beyond 6:30 in the event of

[[Page 71699]]

market-wide systems problems or trading halts where members may need 
additional time to report (FINRA typically does not extend operating 
hours for the FINRA Facilities in such circumstances; however, FINRA 
takes unusual market conditions, such as extreme volatility in a 
security, or in the market as a whole, into consideration in 
determining whether a pattern or practice of late trade reporting 
exists).
    FINRA believes that the proposed amendments reflect the least 
burdensome approach to obtaining the additional trade report 
information that FINRA needs for its audit trail and automated 
surveillance program. For example, with respect to the proposed 
additional time field, a possible alternative would be to retain a 
single time field in trade reports and require that members report the 
actual execution time for Stop Stock transactions and PRP transactions. 
In that instance, however, a number of false positives could 
potentially be generated (i.e., members would appear to have violated 
FINRA and other rules), requiring members to respond to FINRA inquiries 
and investigations. The current approach of requiring members to report 
the reference time instead of the actual execution time is cumbersome 
for FINRA staff and members alike, because the actual execution time 
must be reviewed during member examinations. Having both times 
reflected in the trade report will streamline member reviews and 
facilitate members' ability to demonstrate compliance with FINRA and 
other rules.
    Furthermore, with respect to the millisecond requirement, requiring 
only those members with systems that capture time in milliseconds to 
report in milliseconds is less burdensome for members than mandating 
that all members capture and report time in milliseconds. With respect 
to the linking requirement, FINRA does not believe that there is a 
viable alternative to requiring that members include the control number 
and report date for the original trade. The member that reports the 
trade is also required to report the reversal, and as such, should have 
this information available for reporting purposes. FINRA also believes 
that requiring members to report trades executed on non-business days 
and T+365 trades to the FINRA Facilities is more efficient for members 
than retaining the current ``Form T'' reporting process.
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice. FINRA proposes that the effective date of the 
proposed rule changes to the trade reporting rules will be no earlier 
than April 15, 2014, and no later than September 30, 2014, and the 
effective date of the proposed rule change to the OATS rules will be no 
later than 45 days after Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\34\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.
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    \34\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that the proposed change to require members to 
report additional time-related information for Stop Stock transactions, 
PRP transactions and block transactions using the ISO (outbound) 
exception under Regulation NMS is consistent with the Act because it 
will ensure a more accurate and complete audit trail and enhance 
FINRA's ability to surveil on an automated basis for compliance with 
FINRA trade reporting and other rules.
    FINRA believes that the proposed change to require members to 
report to OATS and the FINRA Facilities in milliseconds if their 
systems capture time in milliseconds is consistent with the Act because 
it will enhance and help bring consistency to FINRA's audit trail. 
FINRA believes that it is appropriate not to require that all members 
capture and express time in milliseconds, in light of the difficulty 
that members may face in capturing time for certain order events and 
trades in milliseconds, such as manually executed trades. FINRA does 
not believe that the proposed change would be burdensome or require 
members with execution systems that capture time in milliseconds to 
make significant systems changes to comply, and FINRA's industry 
advisory committees did not raise concerns about the proposed 
requirement.
    FINRA believes that the proposed change to require members to 
provide information to identify the original trade when reporting 
reversals to FINRA is consistent with the Act because it will enable 
FINRA to recreate more accurately members' market activity and surveil 
for compliance with FINRA trade reporting rules.
    FINRA believes that the proposed changes relating to reporting 
trades executed on non-business days and T+365 trades are consistent 
with the Act because these trades are required to be reported today, 
and the changes would make the reporting process more efficient for 
members. In addition, the proposed change to require that non-business 
day trades be reported by 8:15 a.m. the next business day following 
execution is consistent with the Act because it is consistent with the 
existing reporting requirements for trades that are executed on 
business days during the hours that the FINRA Facilities are closed and 
also will ensure that the trades are properly sequenced for audit trail 
purposes.
    FINRA believes that the proposed change to require members to use a 
new ``step-in'' indicator is consistent with the Act because it will 
more accurately reflect the transfer (in that only one member steps out 
of, and one member steps into, the position) and will provide greater 
transparency for clearing firms whose correspondents effect these 
transfers.
    FINRA believes that the proposed changes to Rules 7140, 7240A, 
7240B and 7340 are consistent with the Act because they will update the 
rules to reflect changes in the processing of trades by the FINRA 
Facilities and will not impact the way members report to FINRA or 
require them to make changes to their systems.
    Similarly, FINRA believes that the proposed technical changes to 
the ORF rules (i.e., to reflect the closing at 6:30 p.m., and to delete 
terms and language that are inapplicable to the ORF) are consistent 
with the Act because they will ensure that the rules accurately reflect 
the operation of the ORF.
    Finally, FINRA believes that those aspects of the proposed rule 
change that make technical or conforming changes to the rules are 
consistent with the Act because they are non-substantive and are 
designed to bring clarity and, to the extent practicable, uniformity to 
the trade reporting rules relating to the FINRA Facilities.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. Not all of the proposed 
amendments will impact the way members report to FINRA or require 
members to make systems changes. For example, the changes to trade 
processing will not require members to change the way they report to 
FINRA, and the proposed millisecond requirement will not require 
members to begin capturing time in milliseconds.

[[Page 71700]]

    To the extent that the proposed amendments will change the way 
members report to FINRA, they will affect only those members that 
execute and report OTC equity trades to FINRA.\35\ For example, many 
firms, including smaller firms, route their order flow to another firm, 
e.g., their clearing firm, for execution, and as the routing firm, they 
do not have the trade reporting obligation. Today, on average, only 
several hundred members regularly report trades to the FINRA 
Facilities. For example, for the eight-month period from August 2012 
through April 2013, 456 firms reported at least one trade, and of those 
firms, 186 reported fewer than 10 trades. Thus, the amendments will 
have no impact on many members.
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    \35\ FINRA trade reporting rules require that for transactions 
between members, the ``executing party'' report the trade to FINRA. 
For transactions between a member and a non-member or customer, the 
member must report the trade. ``Executing party'' is defined under 
FINRA rules as the member that receives an order for handling or 
execution or is presented an order against its quote, does not 
subsequently re-route the order, and executes the transaction. See 
Rules 6282(b), 6380A(b), 6380B(b) and 6622(b).
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    Nonetheless, some members will need to make systems programming 
changes to comply with the proposed amendments (e.g., members that 
execute the types of transactions for which two times will be required, 
members that execute trades on non-business days, etc.). FINRA believes 
these changes will enhance FINRA's audit trail and surveillance 
capabilities and will not significantly burden competition as all firms 
that report OTC trades to FINRA will be subject to the same standard. 
The staff proposes to provide members a sufficient implementation 
period to accommodate such changes and may phase in implementation, if 
appropriate, to lessen the impact on members, as well as any potential 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2013-050 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-FINRA-2013-050. 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 
Web site (http://www.sec.gov/rules/sro.shtml). Copies of the 
submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for Web site viewing and printing in the 
Commission's Public Reference Room on official business days between 
the hours of 10:00 a.m. and 3:00 p.m., located at 100 F Street NE., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal offices of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2013-050, and should 
be submitted on or before December 20, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-28572 Filed 11-27-13; 8:45 am]
BILLING CODE 8011-01-P


