
[Federal Register Volume 82, Number 125 (Friday, June 30, 2017)]
[Notices]
[Pages 29956-29960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-13703]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81018; File No. SR-FINRA-2017-023]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change Relating to Reporting of Certain ATS Transactions 
in U.S. Treasury Securities

June 26, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 23, 2017, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by FINRA. FINRA has designated 
the proposed rule change as constituting a ``non-controversial'' rule 
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which 
renders the proposal effective upon receipt of this filing by the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 6730 (Transaction Reporting) 
to provide a temporary exception to permit member alternative trading 
systems (``ATSs'') and member subscribers to report aggregate trade 
information to TRACE for certain transactions in U.S. Treasury 
Securities.
    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 
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,

[[Page 29957]]

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 to amend Rule 6730 to add new Supplementary 
Material .06 (Temporary Exception for Aggregate Transaction Reporting 
of U.S. Treasury Securities Executed in ATS Trading Sessions) to 
provide members additional time to report individual transactions in 
U.S. Treasury Securities, as required by Rule 6730 (Transaction 
Reporting), that occur on member ATSs as part of a trading session, as 
described below.
Background
    FINRA Rule 6730 sets forth a member's trade reporting obligations 
with regard to transactions in TRACE-Eligible Securities, which, 
beginning July 10, 2017,\4\ will include U.S. Treasury Securities.\5\ 
Pursuant to Rule 6730, each FINRA member that is a ``Party to a 
Transaction'' \6\ in a TRACE-Eligible Security is obligated to report 
the transaction to TRACE within the prescribed period of time. The term 
``Party to a Transaction'' means an introducing broker-dealer, if any, 
an executing broker-dealer, or a customer.\7\ Thus, in a transaction in 
a TRACE-Eligible Security executed through an ATS between members, each 
member (and the ATS itself) is considered a Party to a Transaction and 
is required to report the trade.\8\ Specifically, the ATS is required 
to report two transactions to TRACE: (1) The purchase of the security 
from one counterparty and (2) the sale of the security to the other 
counterparty. In addition, each FINRA member counterparty is required 
to report a buy or a sell, as applicable, identifying the ATS as the 
counterparty to each trade.\9\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 79116 (October 18, 
2016), 81 FR 73167 (October 24, 2016) (Notice of Filing of Amendment 
No. 1 and Order Granting Accelerated Approval of File No. SR-FINRA-
2016-027). See also Regulatory Notice 16-39 (October 2016).
    \5\ Rule 6710(p) will define a ``U.S. Treasury Security'' as ``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. 
See Rule 6710(p).
    \6\ See Rule 6710(e).
    \7\ See supra note 6.
    \8\ See Question 7.4 in FINRA's Reporting of Corporate and 
Agencies Debt Frequently Asked Questions: Who reports trades 
executed through electronic trading systems that are themselves 
broker-dealers? All FINRA members that are ``parties to a 
transaction'' have a trade reporting obligation under TRACE Rules. 
Where two FINRA members effect/execute a transaction through an 
electronic trading system that is registered as a broker-dealer, 
both members, as well as the electronic trading system would have a 
trade reporting obligation. See Reporting of Corporate and Agencies 
Debt Frequently Asked Questions, available at http://www.finra.org/industry/faq-reporting-corporate-and-agencies-debt-frequently-asked-questions-faq#7-4. See also Regulatory Notice 14-53 (November 2014).
    \9\ Whether the ATS is involved in the clearance and settlement 
of a transaction does not change the TRACE trade reporting 
obligation for trades occurring through its system. Regulatory 
Notice 14-53 (November 2014).
---------------------------------------------------------------------------

    FINRA understands that ATSs that permit subscribers to trade U.S. 
Treasury Securities on their platforms may permit subscribers to 
initiate a ``trading session,'' which is a discrete or timed order-
matching event during which one or more additional subscribers can 
interact with the original order on the opposite side of the market or 
add to the initial order on the same side of the market.\10\ Although 
it is possible that some trading sessions involve a single transaction 
between two counterparties like a typical trade, FINRA understands that 
most trading sessions include multiple participants on one or both 
sides of the market during the time period the trading session is open.
---------------------------------------------------------------------------

    \10\ Different members use varying nomenclature to describe 
trading sessions. For example, one member ATS refers to these 
sessions as ``workups'' or ``workup sessions.'' In addition, the 
length of time a session remains open and other characteristics of 
how a session is structured may change from member to member. As 
used in the proposed rule change, the term ``trading session'' is 
meant to capture all variations of such types of sessions that 
member ATSs may use.
---------------------------------------------------------------------------

    For example, suppose Subscriber A initiates a trading session to 
sell $25 million of a particular U.S. Treasury Security at a specific 
price. In a typical crossing scenario involving an ATS, the ATS would 
match the incoming sell order with a buy order from Subscriber B thus 
executing some or all of the original order. In this scenario, under 
TRACE rules, Subscriber A is required to report a sell to the ATS for 
the amount crossed, and Subscriber B would report a purchase from the 
ATS for that same amount.\11\ The ATS would report two trades: A 
purchase from Subscriber A and a sell to Subscriber B. Under current 
rules, all of the reports are required to reflect the same terms of the 
trade and the same Time of Execution.\12\
---------------------------------------------------------------------------

    \11\ Examples assume that each subscriber is a FINRA member.
    \12\ Under Rule 6710(d), the ``Time of Execution'' for a 
transaction in any TRACE-Eligible Security means ``the time when the 
Parties to a Transaction agree to all of the terms of the 
transaction that are sufficient to calculate the dollar price of the 
trade.''
---------------------------------------------------------------------------

    FINRA understands that trading sessions involving U.S. Treasury 
Securities can, and often do, work in very different ways. Using the 
above example, Subscriber A may initiate a trading session to sell $25 
million in a particular U.S. Treasury Security at a specific price. 
Subscriber B, however, may only wish to purchase $10 million. In this 
case, although there will be a sell from Subscriber A to the ATS and a 
subsequent sell from the ATS to Subscriber B (and offsetting trades for 
the purchase from the ATS by Subscriber B and the purchase from 
Subscriber A by the ATS), there may be further activity during the 
trading session. To continue the example, after Subscriber B agrees to 
purchase $10 million, Subscriber C agrees to purchase $15 million at 
the same price (meaning that, at this point, Subscriber A has sold all 
$25 million of the initial order). Subscriber D then joins the trading 
session and offers to sell $10 million of the same U.S. Treasury 
Security at the same price. Subscriber E purchases $5 million, and 
Subscriber B decides to purchase an additional $5 million. If, after 
the period of time defined by the ATS, no further interest is 
indicated, the trading session closes.
Reporting Obligations Under Rule 6730
    Using the above example, at the end of the trading session, the 
individual trades are as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                                    Amount (in
             Trade No.                   Time             Subscriber              Buy/Sell           millions)
----------------------------------------------------------------------------------------------------------------
                                      11:34:02.000  Subscriber A.........  Sell.................             $25
1.................................    11:34:03.155  Subscriber B.........  Buy..................              10
2.................................    11:34:03.483  Subscriber C.........  Buy..................              15
                                      11:34:04.003  Subscriber D.........  Sell.................              10
3.................................    11:34:05.002  Subscriber E.........  Buy..................               5

[[Page 29958]]

 
4.................................    11:34:05.877  Subscriber B.........  Buy..................               5
                                                   -------------------------------------------------------------
                                      11:34:07.877                     Trading Session Closes
----------------------------------------------------------------------------------------------------------------

    FINRA understand that, under current practices, after the close of 
the trading session an ATS will provide each subscriber with a single 
trade message indicating the subscriber's aggregate activity during the 
trading session (including, for example, an aggregate size and average 
price), and that the execution time provided to a subscriber can vary 
depending upon the convention used by the particular ATS. FINRA also 
understands that, although information on the individual transactions 
within the trading session is generally available on a real-time basis 
to the subscribers during the trading session to track the status of 
the order, this information is not included on the final trade message, 
which FINRA understands currently is the message that would be used 
systematically by the member ATS and its subscribers for transaction 
reporting purposes.
    Under Rule 6730, each individual trade that occurs during a trading 
session is a separate transaction and, as such, must be reported 
individually. For example, using the example above, at 11:34:03.155 
(``Trade No. 1''), there is a trade agreed to between Subscribers A and 
B and all of the terms of the trade that are sufficient to calculate 
the dollar price of the trade are known at that time, including the 
security, the price, and the parties to the trade (i.e., the Time of 
Execution'').\13\ Thus, under current rules and guidance, FINRA would 
expect the following trade reports for Trade No. 1:
---------------------------------------------------------------------------

    \13\ See supra note 12.
---------------------------------------------------------------------------

     Subscriber A reports a sell to the ATS for $10 million in 
the security with a Time of Execution of 11:34:03.155.
     Subscriber B reports a purchase from the ATS for $10 
million in the security with a Time of Execution of 11:34:03.155.
     The ATS submits two reports, a buy from Subscriber A and a 
sell to Subscriber B for $10 million in the security, both with a Time 
of Execution of 11:34:03.155.

The same analysis would apply for each of the other individual trades 
that occurred during the trading session. Thus, under current TRACE 
reporting rules, the following reports would be required by all Parties 
to a Transaction with respect to the trades during the trading session 
in the above example:

----------------------------------------------------------------------------------------------------------------
                                                                                   Quantity (in       Time of
                 Trade No.                              TRACE reports                millions)       execution
----------------------------------------------------------------------------------------------------------------
1..........................................  Subscriber A sell to ATS...........             $10    11:34:03.155
                                             ATS buy from Subscriber A..........              10    11:34:03.155
                                             ATS sell to Subscriber B...........              10    11:34:03.155
                                             Subscriber B buy from ATS..........              10    11:34:03.155
2..........................................  Subscriber A sell to ATS...........              15    11:34:03.483
                                             ATS buy from Subscriber A..........              15    11:34:03.483
                                             ATS sell to Subscriber C...........              15    11:34:03.483
                                             Subscriber C buy from ATS..........              15    11:34:03.483
3..........................................  Subscriber D sell to ATS...........               5    11:34:05.002
                                             ATS buy from Subscriber D..........               5    11:34:05.002
                                             ATS sell to Subscriber E...........               5    11:34:05.002
                                             Subscriber E buy from ATS..........               5    11:34:05.002
4..........................................  Subscriber D sell to ATS...........               5    11:34:05.877
                                             ATS buy from Subscriber D..........               5    11:34:05.877
                                             ATS sell to Subscriber B...........               5    11:34:05.877
                                             Subscriber B buy from ATS..........               5    11:34:05.877
----------------------------------------------------------------------------------------------------------------

Proposed Temporary Relief
    The proposed rule change will, until July 10, 2018, permit members 
the flexibility to report trades that occurred in a U.S. Treasury 
Security executed within discrete ATS trading sessions (sometimes 
referred to as ``work-up sessions'') on an aggregate, rather than 
individual, basis. The proposed rule change is intended to provide 
members with additional time to complete systems changes necessary to 
report each individual transaction in the trading session as required 
by Rule 6730, as discussed below.
    FINRA understands that certain ATSs that are active in the market 
for U.S. Treasury Securities currently are set up to deliver aggregate 
trading session transaction information to each subscriber that 
participated in the trading session through a single trade message 
generated at the conclusion of a trading session. The ATSs use this 
final trade message for purposes of back office processes (which would 
include generating trade reports) and believe their subscribers use the 
final trade messages similarly. As a result, FINRA understands that 
significant systems changes would be required by the ATSs to create and 
generate the individual trade information within a trading session in a 
form that could be integrated into the ATSs', as well as their 
subscribers', back office processes to enable the reporting of 
individual, rather than aggregate, trading session transaction 
information to TRACE, and that these changes cannot be made by July 10, 
2017. As a result, FINRA is proposing to provide a temporary exception 
by adopting Supplementary Material .06 to permit members to report to 
TRACE aggregate, rather than individual, transaction information 
reflecting the aggregate size and average price of such transactions, 
and to permit trade reports to use a Time of Execution communicated by 
the ATS to each Party to a Transaction.\14\
---------------------------------------------------------------------------

    \14\ FINRA notes that, even where aggregation is not necessary 
because only the ATS and two subscribers ultimately participated in 
a trading session resulting in a single cross, the proposed rule 
change permits members the flexibility to report a Time of Execution 
that is communicated by the ATS to each party. Thus, even where the 
trading session involves only one cross, member TRACE reports may 
reflect a Time of Execution that is, for example, the beginning of 
the trading session or the end of the trading session.

---------------------------------------------------------------------------

[[Page 29959]]

    FINRA believes it is appropriate to provide the proposed relief in 
recognition of the fact that impacted members are unable to implement 
necessary changes by the July 10, 2017 effective date for TRACE 
reporting of transactions in U.S. Treasury Securities. FINRA believes 
the proposal strikes an appropriate balance in that FINRA will continue 
to receive transaction information for purchases and sales that occur 
as part of an ATS trading session, albeit aggregated. A member ATS 
availing itself of this exception must provide individual transaction 
information for each trade in a U.S. Treasury Security occurring in a 
trading session to FINRA upon request. In addition, FINRA notes that 
transparency will not be impacted by the proposed temporary relief 
because transaction information in U.S. Treasury Securities currently 
is not subject to dissemination.
    FINRA has filed the proposed rule change for immediate 
effectiveness. The operative date of the proposed rule change will be 
July 10, 2017 and it will sunset on July 10, 2018, which FINRA believes 
will provide members with the additional time necessary to complete 
necessary systems changes and result in a more orderly implementation 
of the TRACE reporting requirements for Treasury securities.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\15\ 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. Based on discussions with multiple member ATSs, FINRA 
believes that additional time is necessary to permit members to program 
systems to comply with Rule 6730, which, beginning on July 10, 2017, 
will require that members report to TRACE each individual transaction 
in a U.S. Treasury Security.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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.
    The proposed rule change should benefit members whose trades are 
executed on member ATSs as part of a trading session, as it provides 
members with additional time to build or upgrade systems to enable 
reporting of individual transactions in the trading section. While the 
proposed rule change will temporarily lessen the requirements on ATSs 
and their subscribers as compared to other market participants, FINRA 
believes the proposed rule change is appropriate to allow sufficient 
time to make the technological changes necessary to comply with the 
rule and such accommodation will be limited in duration. Moreover, 
FINRA retains the right to require a member ATS availing itself of this 
exception to provide individual transaction information for each trade 
in a U.S. Treasury Security occurring in a trading session upon 
request.
    The proposed temporary relief is not expected to undermine the 
potential benefits of Rule 6730, as the transaction information 
reflecting the aggregate size and average price of such transactions 
should still assist the regulators to conduct monitoring and 
surveillance of the U.S. Treasury Securities markets, in order to 
detect potential disruptive trading practices and risks to market 
stability.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \16\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\17\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Commission has waived the five-day prefiling requirement in this 
case.
---------------------------------------------------------------------------

    FINRA has asked the Commission to waive the 30-day operative delay 
so that the proposal will become operative immediately upon filing. 
FINRA represents that it only recently was made aware of the 
significant technological changes to member systems that will be 
necessary to comply with FINRA's requirements to report transactions in 
U.S. Treasury Securities to TRACE. FINRA also represented that it was 
informed by members that these systems changes cannot be completed by 
July 10, 2017, the date on which the new reporting requirements come 
into force. The proposed rule change appears to be a reasonable 
accommodation for members who are affected by unforeseen difficulties 
associated with systems reprogramming because it is of reasonably short 
duration and FINRA will still be able to request full transaction 
information from an ATS that benefits from the accommodation. 
Therefore, to facilitate orderly application of the TRACE reporting 
rules on July 10, 2017, the Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest and designates the proposal operative upon filing.\18\
---------------------------------------------------------------------------

    \18\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or 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-2017-023 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange

[[Page 29960]]

Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2017-023. 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, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of FINRA. 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-2017-023 and should be 
submitted on or before July 21, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-13703 Filed 6-29-17; 8:45 am]
 BILLING CODE 8011-01-P


